SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 20-F/A

                                 AMENDMENT NO. 3

[_]   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, 2003

                                       OR

[_]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934

             FOR THE TRANSITION PERIOD FROM __________ TO __________

                         Commission file number 0-20860

                                 LANOPTICS LTD.
             ------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

                                     Israel
                 -----------------------------------------------
                 (Jurisdiction of incorporation or organization)

                                1 Hatamar Street
                                   PO Box 527
                              Yokneam 20692 Israel
                     (Address of Principal Executive Office)

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
                                      NONE

SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

                     ordinary shares, nominal value NIS 0.02
                                (Title of Class)

 SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d)
                                OF THE ACT: NONE

         Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by the
annual report: 9,250,535 ordinary shares

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

                              Yes _X_             No___

Indicate by check mark which financial statement item the registrant has elected
to follow.
                              Item 17 ___   Item 18 _X_

<PAGE>

                                EXPLANATORY NOTE


This Amendment No. 3 to LanOptics Ltd.'s ("LanOptics") Annual Report on Form
20-F for the fiscal year ended December 31, 2003 (this "Amendment"), which was
filed with the U.S. Securities and Exchange Commission on April 1, 2004 (the
"Form 20-F"), is being filed by LanOptics to amend Item 17, and where necessary,
various other Items of the Form 20-F to reflect the change in presentation of
the financial statements from Israeli GAAP to U.S. GAAP. It is anticipated that
this Amendment will be incorporated by reference into a Form F-3 Registration
Statement covering the resale of the registrant's ordinary shares by certain
selling shareholders..

For the convenience of the reader, this Amendment includes the complete text of
all Items of the Form 20-F, including the complete text of Item 17, as amended,
and the various other amended Items. However, other than the amendments
described above, no changes have been made to these or any other Items as
originally filed. This Amendment continues to speak as of the date of the
original filing of the Form 20-F and does not purport to amend, update or
restate (other than as described above) the information contained in the Form
20-F filed on April 1, 2004 or reflect any events that have occurred after the
Form 20-F was filed.


                                       2
<PAGE>

                                TABLE OF CONTENTS

Part I........................................................................ 5

   Item 1.      Identity of Directors, Senior Management and Advisors......... 5
   Item 2.      Offer Statistics and Expected Timetable....................... 5
   Item 3.      Key Information............................................... 5
                A.  Selected Consolidated Financial Data:..................... 5
                B.  Capitalization and Indebtedness........................... 6
                C.  Reasons for the Offer and Use of Proceeds................. 6
   Item 4.      Information On The Company....................................12
                A.  History and Development of the Company....................12
                B.  Business Overview.........................................13
                C.  Organizational Structure..................................22
   Item 5.      Operating and Financial Review and Prospects..................22
                A.  Results of Operations.....................................25
                B.  Liquidity and Capital Resources...........................29
                C.  Research and Development, Patents and Licenses............30
                D.  Trend Information.........................................30
                E.  Off-Balance Sheet Arrangements............................31
                F.  Tabular Disclosure of Contractual Obligations.............31
   Item 6.      Directors, Senior Management and Employees....................31
                A.  Directors.................................................32
                B.  Compensation of Directors and Officers....................34
                C.  Board Practices...........................................34
                D.  Employees.................................................38
                E.  Share Ownership...........................................39
   Item 7.      Major Shareholders and Related Party Transactions.............40
                A.  Major Shareholders........................................40
   Item 8.      Financial Information.........................................41
                A.  Consolidated  Statements and Other Financial Information..41
   Item 9.      Offer and Listing.............................................41
                A.  Listing Details...........................................41
   Item 10.     Additional Information........................................42
                A.  Memorandum and Articles of Association....................42
   Item 11.     Quantitative and Qualitative Disclosures About Market Risk....53
   Item 12.     Description of Securities Other Than Equity Securities........54

Part II.......................................................................54

   Item 13.     Defaults, Dividend Arrearages and Delinquencies...............54
   Item 14.     Material Modifications to the Rights of Security Holders
                and Use of Proceeds...........................................54
   Item 15.     Controls and Procedures.......................................54
   Item 16.     [Reserved]....................................................54
   Item 16A.    Audit Committee Financial Expert..............................54
   Item 16B.    Code of Ethics................................................54
   Item 16C.    Principal Accounting Fees and Services........................55
   Item 16D.    Exemptions from The Listing Requirements and Standards for
                Audit Committee...............................................55
   Item 16E.    Purchase of Equity Securities by the Issuer and Affiliates
                and Purchasers................................................56

Part III......................................................................56

   Item 17.     Financial Statements..........................................56
   Item 18.     Financial Statements..........................................56
   Item 19.     Exhibits......................................................57

SIGNATURES....................................................................58


                                       3
<PAGE>

                                  INTRODUCTION

         LanOptics Ltd. was incorporated as a limited liability company under
the laws of the State of Israel in 1989. Until 1999, our principal business was
the development, manufacturing and marketing of solutions and Internet
applications that improve connectivity and performance of corporate Local Area
Networks, or LANs, and Wide Area Networks, or WANs. Our business now consists of
the development and marketing of high performance network processors through our
independent business unit, E.Z. Chip Technologies Ltd., or EZchip, an Israeli
company in which we currently have a 53% ownership interest. As used in this
Annual Report, the terms "we," "us" "our" and the "Company" mean LanOptics and
its EZchip subsidiary taken together, unless otherwise expressly stated. Our
ordinary shares are traded on the Nasdaq SmallCap Market, and on the Tel Aviv
Stock Exchange under the symbol LNOP.

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

            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 ("US GAAP"). Commencing January 1,
2004, we adopted generally accepted accounting principles in the United States
("U.S. GAAP") for preparation of our consolidated financial statements.
Previously, our consolidated financial statements were prepared in accordance
with generally accepted accounting principles in Israel ("Israeli GAAP") and
included a note describing the major differences between Israeli GAAP and US
GAAP, as applicable to our company. The consolidated financial statements for
all prior periods presented have been restated and are presented in accordance
with U.S. GAAP.

         All references in this Annual Report to "dollars" or "$" are to U.S.
dollars and all references in this annual report to "NIS" are to New Israeli
Shekels. The representative exchange rate between the NIS and the dollar as
published by the Bank of Israel on December 31, 2003 was NIS 4.379 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.


                                       4
<PAGE>

PART I

ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

                  Not applicable.

ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE

                  Not applicable.

ITEM 3.  KEY INFORMATION

A.       SELECTED CONSOLIDATED FINANCIAL DATA:

         The following selected consolidated financial data of the Company have
been prepared in accordance with US GAAP, and are derived from the Company's
audited consolidated financial statements and accompanying notes. The selected
financial data set forth below should be read in conjunction with and are
qualified by reference to "Item 5. Operating and Financial Review and
Prospects", and the Consolidated Financial Statements included elsewhere in this
Annual Report.

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

<TABLE>
<CAPTION>
                                                 1999           2000           2001           2002           2003
                                             -----------    -----------    -----------    -----------    -----------
STATEMENT OF OPERATIONS DATA:                            (in thousands, except share and per share data)
<S>                                          <C>            <C>            <C>            <C>            <C>
REVENUES .................................   $        --    $        --    $        --    $       465    $     1,756
OPERATING LOSS ...........................        (1,164)        (6,019)        (9,766)       (14,992)        (9,986)
LOSS FROM CONTINUING OPERATIONS ..........           406         (5,868)        (8,363)       (14,354)       (10,404)
NET LOSS .................................         (7410)       (10,637)        (7,570)       (14,303)       (10,404)
PER SHARE DATA:
NET LOSS (BASIC AND DILUTED) .............         (1.15)         (1.56)         (1.04)         (1.85)         (1.23)
 NET LOSS FROM CONTINUING OPERATIONS
   (BASIC AND DILUTED ....................         (0.06)         (0.86)         (1.15)         (1.85)         (1.23)
 NET PROFIT (LOSS) FROM DISCONTINUING
   OPERATIONS (BASIC AND DILUTED) ........         (1.09)         (0.70)          0.11             --             --

 WEIGHTED AVERAGE NUMBER OF SHARES USED IN
   COMPUTING NET EARNINGS (LOSS) PER SHARE     6,423,932      6,804,043      7,287,715      7,744,593      8,484,120

BALANCE SHEET DATA:

WORKING CAPITAL ..........................         8,757         25,684         19,220          9,149         18,093
TOTAL ASSETS .............................   $    16,095    $    34,568    $    24,220    $    15,515    $    23,965
LONG-TERM LIABILITIES ....................           859            830            990          1,196          2,919
PREFERRED SHARES OF A SUBSIDIARY .........            --         25,179         25,179         20,991         32,423
SHAREHOLDERS' EQUITY (DEFICIENCY) ........        11,026          3,075         (4,361)        (9,688)       (14,320)
DIVIDENDS DECLARED PER SHARE .............            --             --             --             --             --
</TABLE>


                                       5
<PAGE>

EXCHANGE RATE INFORMATION

The following tables sets forth, for the periods and dates indicated, certain
information regarding the Bank of Israel representative rate of exchange for
U.S. dollars, expressed in New Israeli Shekels per dollar.

                                            AVERAGE                   AT PERIOD
PERIOD                                        (1)      HIGH     LOW      END
------                                       -----    -----    -----    -----
Twelve months ended December 31, 1999 ...    4.140    4.290    4.020    4.153
Twelve months ended December 31, 2000 ...    4.077    4.198    3.967    4.041
Twelve months ended December 31, 2001 ...    4.206    4.416    4.067    4.416
Twelve months ended December 31, 2002 ...    4.738    4.994    4.416    4.737
Twelve months ended December 31, 2003 ...    4.548    4.924    4.283    4.379

---------
(1)  Calculated based on the average of the representative exchange rates on the
     last business day of each month during the relevant period.


PERIOD                                                    HIGH     LOW
------                                                   -----    -----
DECEMBER 2003 ...................................        4.441    4.352
JANUARY 2004 ....................................        4.483    4.371
FEBRUARY 2004 ...................................        4.493    4.437
MARCH 2004 (AS OF MARCH 30) .....................        4.535    4.483

At March 30, 2004, the representative rate of exchange was NIS 4.516 = $1.00, as
published by the Bank of Israel.

B.       CAPITALIZATION AND INDEBTEDNESS

         Not applicable.
C.       REASONS FOR THE OFFER AND USE OF PROCEEDS

         Not applicable.


                                       6
<PAGE>

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

EZchip HAS A LIMITED OPERATING HISTORY, AND ITS FUTURE FINANCIAL RESULTS ARE
DIFFICULT TO PREDICT.

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

         -  expand and enhance its product offerings;

         -  diversify its sources of revenue;

         -  maintain adequate control of its expenses;

         -  respond to technological changes; and

         -  respond to competitive market conditions.

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

WE ARE DEPENDENT ON THE NETWORKING EQUIPMENT MARKET FOR OUR GROWTH AND IF IT
DOES NOT GROW, THEN WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS.

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


                                       7
<PAGE>

MANY OF OUR COMPETITORS AND POTENTIAL COMPETITORS ARE MUCH LARGER THAN US AND IF
WE ARE UNABLE TO COMPETE EFFECTIVELY, WE COULD LOSE OUR MARKET SHARE AND
REVENUE.

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

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

OUR PRODUCTS MAY HAVE DEFECTS, WHICH COULD DAMAGE OUR REPUTATION, DECREASE
MARKET ACCEPTANCE OF OUR PRODUCTS, CAUSE US TO LOSE CUSTOMERS AND REVENUE,
INCREASE PRODUCTION COSTS AND RESULT IN LIABILITY.

         Highly complex products such as network processors may contain hardware
or software defects or bugs. Often, these defects and bugs are not detected
until after the products have been shipped. If any of our products 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 upgrades or patches,
we could also incur product recall, repair or replacement costs. These problems
might also result in claims against us by our customers or others. In addition,
these problems might divert technical and other resources from other development
efforts. Moreover, we would likely lose, or experience a delay in, market
acceptance of the affected product or products, and we could lose credibility
with our current and prospective customers. This is particularly significant as
we are a new entrant to a market dominated by large, well-established companies.

WE MAY HAVE TO REDESIGN OUR PRODUCTS TO MEET RAPIDLY EVOLVING INDUSTRY STANDARDS
AND CUSTOMER SPECIFICATIONS, WHICH COULD DELAY OUR PRODUCTION AND INCREASE OUR
OPERATING COSTS.

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

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


                                       8
<PAGE>

BECAUSE OUR PRODUCTS HAVE LENGTHY DESIGN AND DEVELOPMENT CYCLES, WE COULD
EXPERIENCE DELAYS IN GENERATING REVENUES OR CANCELLATION OF CUSTOMER CONTRACTS.

         We may never generate significant revenues from our 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 its equipment for a period of up to two years, if at
all. Due to this lengthy design and development cycle, we may experience delays
from the time we begin incurring expenses until the time we generate revenue
from our products. We have no assurances that our customers will ultimately
market and sell their equipment or that such efforts by our customers will be
successful.

THE LOSS OF PERSONNEL COULD AFFECT OUR ABILITY TO DESIGN AND MARKET OUR
PRODUCTS.

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

IF WE ARE NOT ABLE TO ADEQUATELY PROTECT OUR TECHNOLOGY OR OTHER INTELLECTUAL
PROPERTY THROUGH PATENTS, COPYRIGHTS, TRADE SECRETS, TRADEMARKS AND OTHER
MEASURES, OUR COMPETITORS COULD USE OUR PROPRIETARY INFORMATION AND WE COULD
LOSE OUR COMPETITIVE ADVANTAGE.

         To compete effectively, we must protect our proprietary information. We
rely on and intend to rely on a combination of patents, trademarks, trade secret
laws, confidentiality procedures and licensing arrangements to protect our
respective intellectual property rights. Failure to adequately protect our
technology or other intellectual property from use by our competitors could
jeopardize our competitive advantage, and result in a loss of customers. We have
a number of issued and pending patent applications. We might not succeed in
obtaining patents from any of our pending applications. 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 TECHNOLOGY THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF
THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION AND PREVENT US FROM SELLING OUR
PRODUCTS.

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


                                       9
<PAGE>

BECAUSE THE PROCESSES USED TO MANUFACTURE OUR PRODUCTS ARE COMPLEX, CUSTOMIZED
TO OUR SPECIFICATIONS AND CAN ONLY BE PERFORMED BY A LIMITED NUMBER OF
MANUFACTURING FACILITIES, WE MAY EXPERIENCE DELAYS IN PRODUCTION AND INCREASED
COSTS IF WE ARE FORCED TO REPLACE OUR MANUFACTURER.

         If our manufacturing suppliers are unable or unwilling to provide us
with adequate manufacturing capacity, we would have to identify and qualify one
or more substitute suppliers for a substantial majority of our products. Our
manufacturers may experience unanticipated events that could inhibit their
abilities to provide us with adequate manufacturing capacity on a timely basis,
or at all. Introducing new products or transferring existing products to a new
third party manufacturer would require significant development time to adapt our
designs to their manufacturing processes and could cause product shipment
delays. In addition, the costs associated with manufacturing our products may
increase if we are required to use a new third party manufacturer. If we fail to
satisfy our manufacturing requirements, our business would be materially harmed.

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

IF INTERNALLY GENERATED FUNDS ARE INSUFFICIENT AND EZchip IS UNABLE TO PROCURE
FUNDING ON FAVORABLE TERMS, IT WOULD NOT BE ABLE TO GROW ITS BUSINESS, WHICH
COULD NEGATIVELY AFFECT OUR REVENUES.

         EZchip is a developing company and we expect that significant funding
will be required in order to continue to develop its products and to expand its
business. Given the state of development of EZchip's products and the present
economic environment, we believe that we have sufficient funding resources to
finance our operations through the end of 2005. The capital markets have
experienced severe downturns over the last couple of years, especially relating
to technology companies, and access to capital has been both difficult and
expensive. Unless there is an improvement in this situation, when we do require
additional funding we may encounter difficulty in raising such funding through
the capital markets or otherwise. If internally generated funds are insufficient
and we do not obtain enough funding to support our future development when
needed, our business will suffer. Even if we are successful in obtaining funding
through the capital markets or otherwise, such funding may not be on terms
favorable to us.

IF WE ARE UNABLE TO PROCURE FUNDING ON FAVORABLE TERMS, WE MAY NOT BE ABLE TO
MAINTAIN OUR OWNERSHIP PERCENTAGE IN EZchip.

         We presently own approximately 53.4% of EZchip. In any future EZchip
financing rounds, our holdings in EZchip would be diluted unless we invest
additional funds to preserve our equity position. We may not have the cash
available to make an investment in order to retain control of EZchip.
Furthermore, even if we have funds available to invest in EZchip, it is possible
that additional funding from other investors would still dilute our ownership
interest in EZchip or cause us to lose control of EZchip.


                                       10
<PAGE>

FLUCTUATIONS IN THE EXCHANGE RATE BETWEEN THE UNITED STATES DOLLAR AND FOREIGN
CURRENCIES MAY AFFECT OUR OPERATING RESULTS.

         A significant portion of the cost of our Israeli operations, mainly
personnel and facility-related, is incurred in NIS. Therefore, our NIS related
costs, as expressed in US dollars, are influenced by the exchange rate between
the US Dollar and the NIS. In addition, If the rate of inflation in Israel will
exceed the rate of devaluation of the NIS in relation to the US dollar, or if
the timing of such devaluations were to lag considerably behind inflation, our
cost as expressed in US dollars may increase.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
may not be able to eliminate the effects of currency fluctuations. Thus,
exchange rate fluctuations could have a material adverse impact on our operating
results and share price.

RISKS RELATING TO OUR LOCATION IN ISRAEL

POTENTIAL POLITICAL, ECONOMIC AND MILITARY INSTABILITY IN ISRAEL MAY DISRUPT OUR
OPERATIONS AND NEGATIVELY AFFECT OUR SALES.

         We were organized under the laws of the State of Israel and a
substantial portion of our assets, and our principal operations, are located in
Israel. Consequently, our operations, financial condition and results of
operations are directly influenced by economic, political and military
conditions in and affecting Israel. Our operations could be adversely affected
if major hostilities break out in the Middle East or if trade between Israel and
its present trading partners is curtailed.

         Since the establishment of the State of Israel in 1948, a state of
hostility has existed between Israel and the Arab countries in the region. Peace
talks between Israel and the Palestinian Authority began in the early 1990s, but
they broke down in mid-2000. Attacks on Israel by Palestinian terrorists, and
military responses by Israel, have accelerated considerably since late 2000. We
cannot predict whether or when a peace process will resume, whether a full
resolution of these problems will be achieved, the nature of any such resolution
or any consequences that any of these factors may have on us. Any future armed
conflicts or political instability in the region could negatively affect our
business or harm our results of operations.

         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. Our operations could be disrupted by the absence for a significant
period of one or more of our key employees due to military service. Any
disruption in our operations would harm our business.

CHANGES TO TAX LAWS MAY RESULT IN OUR RECEIVING FEWER BENEFITS THAN WE HOPE TO
RECEIVE.

         In the past, we received tax benefits under Israeli law for capital
investments in facilities and equipment that are designated as "approved
enterprises." We expect to receive these benefits in the future when EZchip
attains volume sales levels and becomes profitable. To maintain our eligibility
for these tax benefits, we must continue to meet several conditions including
making required investments in fixed assets. . From time to time, we may submit
requests for expansion of our Approved Enterprise programs or for new programs.
These requests might not be approved. The law and regulations prescribing the
benefits provide for an expiration date for the grant of new benefits. The
expiration date has been extended several times in the past. The expiration date
currently in effect is June 30, 2004 (which may be extended by ministerial
decision until December 31, 2004), and no new benefits will be granted after
that date unless the expiration date is again extended. There can be no


                                       11
<PAGE>

assurance that new benefits will be available after June 30, 2004, or that
existing benefits will be continued in the future in their current level or at
any level. The termination or reduction of certain programs and tax benefits
(particularly benefits available to the Company as a result of the approved
enterprise status of the Company's facilities and programs) could have a
material adverse effect on our future business, operating results and financial
condition.

IT MAY BE DIFFICULT TO ENFORCE A U.S. JUDGMENT AGAINST US OR OUR OFFICERS AND
DIRECTORS OR TO ASSERT U.S. SECURITIES LAWS CLAIMS IN ISRAEL OR SERVE PROCESS ON
SUBSTANTIALLY ALL OF OUR OFFICERS AND DIRECTORS.

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

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE DIFFICULT A CHANGE OF
CONTROL AND THEREFORE DEPRESS THE PRICE OF OUR SHARES.

         Some of the provisions of Israeli law could:

         o    discourage potential acquisition proposals;
         o    delay or prevent a change in control; and
         o    limit the price that investors might be willing to pay
         o    in the future for our ordinary shares.

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

ITEM 4.  INFORMATION ON THE COMPANY

A.       HISTORY AND DEVELOPMENT OF THE COMPANY

         We were incorporated as a limited liability company under the laws of
the State of Israel in 1989. Until 1999, our principal business was the
development, manufacturing and marketing of solutions and Internet applications
that improve connectivity and performance of corporate LANs and WANs. Our
business now consists of the development and marketing of high performance
network processors through our independent business unit, E.Z. Chip Technologies
Ltd., or EZchip, in which we currently have a 53.4% ownership interest. Our
principal executive offices are located at 1 Hatamar street, P.O. box 527,
Yokneam 20692 Israel, and our telephone number is +972-4-959-6666. Puglisi &
Associates, located at 859 Library Avenue, Suite 204, P.O. Box 885, Newark,
Delaware 19715, serves as our agent for service of process.

         Our business initially consisted of developing, marketing and producing
LAN equipment, such as hubs and switches, based on the Token Ring protocol.
Beginning in 1995, the Ethernet protocol became increasingly dominant in the LAN
market. Products based on the Token Ring protocol, which formed the core of our
business, suffered from declining market share. In response to the changing


                                       12
<PAGE>

market environment, we started to develop Ethernet protocol-based LAN products.
In addition, we started new business initiatives in areas different from our
core business. One of these businesses, which in 1996 was incorporated as
LanOptics' NetXchange subsidiary, operated in the fax over Internet Protocol
market. We decided to cease the operations of NetXchange in 1998, after
sustaining significant losses. The other business, which in 1997 was
incorporated as our NetGuard subsidiary, dealt with Internet security solutions.
During the first quarter of 2001, we closed the operations of NetGuard Ltd., our
subsidiary which provided security solutions for the Internet. Our sales levels
for the legacy networking products have become immaterial. As a result, the
related assets, liabilities and results of operations for the reported periods
have been reclassified as "discontinued operations. The reclassification does
not result in any changes to net assets or net income (loss) for the reported
periods

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

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

B.       BUSINESS OVERVIEW

THE NETWORK PROCESSOR INDUSTRY

BACKGROUND

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

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


                                       13
<PAGE>

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

MARKET TRENDS

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

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

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

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

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


                                       14
<PAGE>

               will supply the "switch on a chip" that forms the backbone of
               networking equipment.

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

OUR SOLUTION

         We design and produce task-optimized network processors for high-speed
networking equipment. We are a fabless semiconductor company, which means that
we do not have our own semiconductor manufacturing plant but rather we utilize
outside fabrication facilities. Our first product, which was introduced in April
2002, is the NP-1, a merchant silicon network processor that forms the core of a
seven-layer, 10-Gigabit networking equipment. The NP-1c, an improved and less
expensive version of the NP-1, which uses a 0.11-micron chip manufacturing
process is commercially available since December 2003. The NP-1c's design is
compatible with the NP-1, so that our NP-1 customers can complete design and
testing with the NP-1 and then migrate to the NP-1c for volume production. In
January 2003, we introduced a 10-Gigabit traffic manager, the QX-1, which
complements the NP-1 network processor for added traffic management
functionality and expanding its quality of service features. We are also
developing an additional network processor product line - the NP-2 Network
Processors family, based on the same core technology, which will integrate the
functionality of several co-processors with the network processor onto a single
chip. The architecture and features of these products offer the flexibility,
scalability and price performance that are sought by communications equipment
vendors. Networking equipment vendors use EZchip's network processors to form
the silicon core of next-generation networking equipment, such as switches and
routers, for voice, video and data integration in a variety of applications.

PRODUCTS

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


                                       15
<PAGE>

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

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

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

         In order to facilitate our customers' adaptation of our products, we
offer toolkits that assist our customers in creating, verifying and implementing
solutions based on our network processors. We released the first tool kit,
EZdesign, in January 2001. It is a comprehensive software development toolset
for writing, testing and debugging programs for our network processorsto
implement a wide range of applications and reduce time to market of
next-generation networking products. It includes a hardware-software simulator,
a library of pre-coded subroutines, a high-level language compiler and a
functional tester. We continuously release subsequent versions of the EZdesign
toolset, providing functional enhancements.

         EZdriver is a toolset that facilitates the development of the control
path software for NP-1 and NP-1c based systems. It enables applications that run
on the control CPU to communicate with our network processors. EZdriver consists
of routines that execute on the control CPU and provide an API for interfacing
the NP-1 and NP-1c. It includes NP-1/NP-1c chip configuration, microcode
loading, creation and maintenance of NP-1/NP-1c lookup structures, sending and
receiving frames to and from the NP-1/NP-1c, as well as configuration and access
to the NP-1/NP-1c statistics block. EZdriver along with EZdesign provide
extensive debugging capabilities, and enable software-driven debugging features
(e.g. breakpoints, single step, register and memory access) to be performed on
both the NP-1/NP-1c simulator and the actual chip. In April 2002, with the
arrival of the first NP-1 processors, we began delivering evaluation boards to
customers, to enable them to test their NP-1 based systems. Evaluation boards
are available with three different interfaces: eight ports of 1-Gigabit
Ethernet, one 10-Gigabit Ethernet port or one OC-192 port for Packet Over SONET
(POS). Evaluation boards for the NP-1c are available with two different
interfaces: ten ports of 1-Gigabit Ethernet or one 10-Gigabit Ethernet port.
Evaluation boards supporting the QX-1 are also available.

         In November 2003, we announced a new evaluation system for the NP-1c
network processor. The system is compliant with the new Advanced
Telecommunications Computing Architecture (AdvancedTCA(R)) and is provided as a
blade that can be plugged into an AdvancedTCA chassis or as a stand-alone,
self-contained box. The EZchip board enables ten network-processor driven
1-Gigabit ports on a single AdvancedTCA board. AdvancedTCA is the PCI Industrial
Computer Manufacturers Group (PICMG) specifications for Advanced
Telecommunications Computing Architecture and forms the basis for standard
compliant hardware for next generation telecommunications equipment. The compact
NP-1c AdvancedTCA evaluation board features ten 1-Gigabit Ethernet ports and a


                                       16
<PAGE>

complete data plane and control plane solution. The NP-1c provides 10-Gigabit
data plane processing and classifying while a PrPMC mezzanine card provides
control plane processing. A comprehensive software environment with support for
the Linux(R) and VxWorks(R) operating systems is provided. EZchip also provides
customers with a broad library featuring tested source code for a wide range of
applications. These include MPLS, VPLS and Draft Martini, IPv4, IPv6, ACL
(Access Control Lists), Server Load Balancing and URL filtering.

FUTURE PRODUCTS

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

TECHNOLOGY

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

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

         In most applications, a significant portion of the resources of a
network processor are devoted to searching through large routing and policy
tables resident in the memory. The process of accessing and searching memory for
the appropriate instructions can be a significant hindrance to performance. Our
products address these shortcomings by integrating both the packet processing
functionality along with the classification search engines onto a single chip.
By integrating both these functions on the same chip, we improve performance and
eliminate the latency associated with having to go off-chip for lookup
functions. EZchip's TOPcore technology is presently featured in its NP-1 and
NP-1c products, which is capable of serving a 10-Gigabit, seven-layer network.
The TOPcore technology can be scaled for larger bandwidth applications, such as
40-Gigabit/OC-768, and greater. The nature of the TOPcore technology permits the
network processor to be scaled to a very high throughput rate simply by
integrating more task optimized processors within the network processor. This
simplifies customer designs and provides a smooth migration path from 10-Gigabit
to 40-Gigabit systems. In addition, since the software developed to implement


                                       17
<PAGE>

specific applications is transparent to the number of integrated task optimized
processors, the software can be reused in the future when designing networking
equipment using higher throughput rates.

RESEARCH AND PRODUCT DEVELOPMENT

         Currently, 58 employees, representing about 74% of EZchip's employees,
are engaged in research and development. EZchip's senior executives devote a
substantial portion of their time to frequently communicate with its customers
to determine product needs that should be addressed. The Office of the Chief
Scientist of Israel's Ministry of Industry and Trade, or OCS, does not provide
any funding for EZchip's research and development costs, and consequently we do
not have any obligation to the OCS.

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                             --------------------------
                                                              2001      2002      2003
                                                             ------    ------    ------
<S>                                                          <C>       <C>       <C>
RESEARCH AND DEVELOPMENT COSTS, EXCLUDING AMORTIZATION       $6,892    $7,570    $7,099
AMORTIZATION OF PREPAID DEVELOPMENT AND PRODUCTION COSTS*       542       505       120
RESEARCH AND DEVELOPMENT, INCLUDING AMORTIZATION              7,434     8,075     7,219
</TABLE>

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

SALES AND MARKETING

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

         To facilitate marketing efforts, EZchip has built on its extensive
industry exposure through trade shows and similar events and has established
sales offices in California and Massachusetts. In Israel and North America, we
have our own direct sales force. Currently, our sales and marketing staff
includes 11 marketing professionals and administrative personnel. The direct
sales force consists of persons with technical training and significant
background in the semiconductor industry. Sales efforts are augmented by the
direct involvement of EZchip's senior executives, who work closely with
customers to determine product needs. In the rest of the world, our strategy is
to work with local marketing channels, including sales agents, resellers and
distributors. These channels are assigned territories of primary responsibility,
with exclusive rights in some cases. We will consider the need for local sales


                                       18
<PAGE>

offices when justified by the circumstances. The in-house sales and marketing
force and the external marketing channels are also responsible for providing
local technical support. Our marketing activities include:

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

          o    public relations activities and customer events;

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

          o    communication on the Internet.

         During 2002 and 2003, the NP-1 network processor gained industry
recognition, including being voted finalist of the 2002 World Technology Award
for Communications Technology, being awarded the 2002 Comet Award from
Communication Systems Design Magazine, being chosen as both Best Overall Product
and Best Network Processor at the 2002 Network Processor Conference West and
being awarded the Microprocessor Report Analysts' Choice Award for Best Network
Processor in February 2003, and being awarded the analogZONE 2003 Product of the
Year in January 2004.

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

CUSTOMERS AND CUSTOMER SUPPORT

         We currently have over 30 customers for the NP-1 and NP-1c network
processors, over 10 of which are large networking vendors. Publicly announced
customers include Nokia Networks, ZTE corporation, BATM/Telco Systems, ETRI (
Korea's Electronics and Telecommunications Research Institute) ECI Telecom and
Crescendo Networks. All the revenues we derived from these customers are
designated as "design wins revenues." This means that customers are purchasing
sample products and development kits in order to perform the development work
necessary to integrate our products into the customers' future
telecommunications product offerings. Our first customers have now completed
their product development and are moving to production with systems based on
EZchip's NP-1 network processor. Our customers' shift to volume production is
expected to translate into more meaningful revenues for LanOptics. The exact
timing, speed and volume of the ramp up will depend on market acceptance of our
customers' products and on the pace of the recovery in the telecommunications
market generally.

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

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


                                       19
<PAGE>

COMPETITION

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

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

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

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

INTELLECTUAL PROPERTY RIGHTS

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

         As a general matter, the semiconductor industry is characterized by
substantial litigation regarding patent and other intellectual property rights.
Third parties may claim that we are infringing their intellectual property
rights. We have certain indemnification obligations to customers with respect to
the infringement of third party intellectual property rights by our products.
There can be no assurance that infringement claims by third parties or claims
for indemnification by customers or end users of our products resulting from
infringement claims will not be asserted in the future or that such assertions,
if proven to be true, will not materially adversely affect our business,
financial condition or operating results. In the event of any adverse ruling in
any such matter, we could be required to pay substantial damages, which could
include treble damages, cease the manufacturing, use and sale of infringing
products, discontinue the use of certain processes or obtain a license under the
intellectual property rights of the third-party claiming infringement. There can


                                       20
<PAGE>

be no assurance that a license would be available on reasonable terms or at all.
Any limitations on our ability to market our products, any delays and costs
associated with redesigning our products or payments of license fees to third
parties or any failure by us to develop or license a substitute technology on
commercially reasonable terms could have a material adverse effect on our
business, financial condition and operating results.

         The Company holds three United States patents, No. 6,532,457, No.
6,594,655 and No. 6,625,612. In addition, the Company holds a pending patent
application in the United States (Serial No. 09/609,221), for which we have yet
to receive an Official Action from the USPTO. There can be no assurance that the
Company's pending application will ultimately be issued either at all or within
the scope of the claims sought by the Company. Furthermore, there can be no
assurance that others will not develop technologies that are similar or superior
to the Company's technology, or design around any patents issued to the Company.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may copy aspects of the Company's products or obtain and use information
that the Company regards as proprietary. Policing any of such unauthorized uses
of the Company's products is difficult, and although the Company is unable to
determine the extent to which piracy of its software products exists, software
piracy can be expected to be a persistent problem. In addition, the laws of some
foreign countries do not protect the Company's proprietary rights as fully as do
the laws of the United States or Israel. There can be no assurance that the
Company's efforts to protect its proprietary rights will be adequate or that the
Company's competitors will not independently develop similar technology.

MANUFACTURING

         While we engineer and design our products, we do not own or operate a
semiconductor fabrication facility and we do not have the resources to
manufacture our products internally. In November 2000, we entered into an
agreement with IBM to manufacture our NP-1 and NP-1c network processor. A third
party manufacturer has also been secured for the QX-1 Traffic Manager and we
intend to use the Taiwan Semiconductor Manufacturing Co.(TSMC) fabrication
facility to manufacture our forthcoming NP-2 line of products, using the 0.13
micron 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.

         The NP-1 network processors are being manufactured using IBM's SA-27E
0.18-micron ASIC technology, while NP-1c network processors utilize IBM's
0.11-micron Cu-11 ASIC template. Use of this new manufacturing technology
enables enhanced performance while reducing manufacturing costs significantly.

         We expect that all of our fabrication facilities will be of single
sources, and any late delivery or failure to deliver products could result in
delays in satisfying customer demand, increased costs and loss of revenues.

LEGACY OPERATIONS

         Our original business concentrated on the development, manufacturing
and marketing of solutions and Internet applications to improve the connectivity
and performance of corporate LANs. Beginning in 1999, we carried out plans to
focus exclusively on the high speed network processor market, through our
subsidiary, EZchip, resulting in the cessation of the operations of our Internet
applications business segment principally consisted of NetGuard and, prior to


                                       21
<PAGE>

that also included NetXchange. As a result of the closure of NetGuard's
operations in 2001, and the cessation of LanOptics legacy operations, the
related assets, liabilities and results of operations for 2001, 2002 and 2003
have been reclassified on our financial statements as "discontinued operations".

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

C.       ORGANIZATIONAL STRUCTURE

         In mid-1999 we decided to focus on our internal application-specific
integrated circuit, or ASIC. This new business initiative was incorporated as
E.Z. Chip Technologies Ltd. in December 1999. Through EZchip, we are engaged in
the development and marketing of high performance network processors. Since it's
inception EZchip has raised $51 million in three private financing rounds, of
that amount $11.6 million was invested by LanOptics and the balance by EZchip
minority shareholders. We currently have a 53.4% ownership interest in EZchip.

         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 $1,105,000 in 2001, $435,000 in 2002 and $265,000 in 2003. Our
capital expenditures in 2001, 2002 and 2003 were spent primarily for the
procurement of EZchip research and development hardware equipment and software
tools.

         We do not own any real property. Our principal development, marketing
and administrative facilities occupy approximately 25,000 square feet of a
building in Yokneam, Israel which is leased through January 2007.

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

ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS.

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

GENERAL

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

         We maintain our accounts in U.S. dollars. Because the U.S. dollar is
the currency of the primary economic environment in which our operations are
conducted. The majority of sales are made outside of Israel in U.S. dollars and
the majority of purchases of materials and components are invoiced and paid in


                                       22
<PAGE>

U.S. dollars. In addition, a majority of other expenses, principally marketing
expenses, are incurred outside Israel in U.S. dollars or paid in U.S. dollars.
See Note 2b to our Consolidated Financial Statements.

CRITICAL ACCOUNTING ESTIMATES

         The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. On an on-going basis, management evaluates its estimates
and judgments. Management bases its estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Under different assumptions or conditions, actual
results may differ from these estimates.

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

         PREPAID DEVELOPMENT AND PRODUCTION COSTS

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

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

         OTHER ASSETS

         On August 19, 2002, we acquired 2,777,778 series A preferred shares and
737,462 series B preferred shares of EZchip, in consideration of the issuance of
1,153,508 our ordinary shares. The total fair value of the ordinary shares
issued for the acquisition is $8,955 (determined, based on the average price of
LanOptics' ordinary shares two day before and after the announcement date of the
transaction). The transaction was accounted for according to the purchase method
of accounting, and accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based upon their estimated fair values
at the date of acquisition.

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

               EZchip series A and B preferred shares acquired   $ 4,188
               Intangible assets acquired:
                  In-process research and development              3,928
                  Technology (1)                                   1,203
               Property and equipment                               (204)
               Prepaid development and production cost              (160)
                                                                 -------
               Total consideration                               $ 8,955
                                                                 =======
               ----------
               (1)  The technology is amortized using a straight-line method
                    over the useful life of the technology, which is 5 years.


                                       23
<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS IN THE U.S.

         In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities", or FIN 46. The objective of FIN 46 is to improve
financial reporting by companies involved with variable interest entities. A
variable interest entity is a corporation, partnership, trust, or any other
legal structure used for business purposes that either (a) does not have equity
investors with voting rights or (b) has equity investors that do not provide
sufficient financial resources for the entity to support its activities. FIN 46
requires a variable interest entity to be consolidated by a company if that
company is subject to a majority of the risk of loss from the variable interest
entity's activities or entitled to receive a majority of the entity's residual
returns or both. FIN 46 also requires disclosures about variable interest
entities that the company is not required to consolidate but in which it has a
significant variable interest. The consolidation requirements of FIN 46 apply
immediately to variable interest entities created after January 31, 2003. The
consolidation requirements apply to older entities in the first fiscal year or
interim period ending after March 15, 2004. Certain of the disclosure
requirements apply in all financial statements issued after January 31, 2003,
regardless of when the variable interest entity was established. As of December
31, 2003, we do not expect the adoption of FIN 46 to have a material impact on
our consolidated financial statements.

         In April 2003, the FASB issued SFAS No. 149, or SFAS 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." SFAS 149 amends
and clarifies (1) the accounting guidance on derivative instruments (including
certain derivative instruments embedded in other contracts) and (2) hedging
activities that fall within the scope of FASB Statement No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 149 amends
SFAS 133 to reflect decisions made (1) as part of the Derivatives Implementation
Group, or DIG, process that effectively required amendments to SFAS 133, (2) in
connection with other projects dealing with financial instruments, and (3)
regarding implementation issues related to the application of the definition of
a derivative. SFAS 149 is effective (1) for contracts entered into or modified
after June 30, 2003, with certain exceptions, and (2) for hedging relationships
designated after June 30, 2003. The guidance is to be applied prospectively.

         Generally, SFAS 149 improves financial reporting by (1) requiring that
contracts with comparable characteristics be accounted for similarly and (2)
clarifying when a derivative contains a financing component that warrants
special reporting in the statement of cash flows. SFAS 149 is not expected to
have a material impact on our financial statements.

         In May 2003, the FASB issued SFAS 150, "Accounting For Certain
Financial Instruments with Characteristics of Both Liabilities and Equity" which
establishes standards for how an issuer of financial instruments classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances) if, at
inception, the monetary value of the obligation is based solely or predominantly
on a fixed monetary amount known at inception, variations in something other
than the fair value of the issuer's equity shares or variations inversely
related to changes in the fair value of the issuer's equity shares. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim


                                       24
<PAGE>

period beginning after June 15, 2003. The adoption of SFAS 150 is not expected
to have a material impact on the Company's financial position or results of
operations.

         In December 2003, the SEC issued Staff Accounting Bulletin, or SAB, No.
104, "Revenue Recognition," or SAB No. 104, which revises or rescinds certain
sections of SAB No. 101, "Revenue Recognition," in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB No.
104 did not have a material effect on our consolidated results of operations,
consolidated financial position or consolidated cash flows.

A.       RESULTS OF OPERATIONS

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


                                       25
<PAGE>

INCOME STATEMENT DATA:

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                           --------------------------------------------------------
                                                               1999       2000      2001       2002       2003
                                                           --------------------------------------------------------
<S>                                                          <C>         <C>         <C>        <C>          <C>
Revenues ...............................................         --          --          --    $    465        1756
Costs of revenues ......................................         --          --          --         163         624
Amortization of developed technology ...................         --          --          --          90         239
                                                           --------------------------------------------------------
Gross profit ...........................................         --          --          --         212         893

Operating expenses:
Research & development cost, net .......................        801       4,530       7,434        8075       7,219
In-process research and development write-off ..........         --          --          --       3,928          --
Selling, general and administrative, net ...............        363       1,489       2,332       3,201       3,660
                                                           --------------------------------------------------------
Total operating expenses ...............................      1,164       6,019       9,766      15,204      10,879

Operating loss .........................................     (1,164)     (6,019)     (9,766)    (14,992)     (9,986)

Financial income (expenses), net .......................        758         709        1308         638        (415)
Other expenses (income) ................................         --        (673)        (15)         --           3
                                                           --------------------------------------------------------
Loss from continuing operations before minority interest       (406)     (5,983)     (8,443)    (14,354)    (10,404)
Minority interest is loss of a subsidiary ..............         --         115          80          --          --
                                                           --------------------------------------------------------
  loss from continuing operations ......................       (406)     (5,868)     (8,363)    (14,354)    (10,404)

Income (loss) from discontinued
  operations of a segment of a business ................     (7,004)     (4,769)        793          51          --
                                                           --------------------------------------------------------

Net loss ...............................................     (7,410)    (10,637)     (7,570)    (14,303)    (10,404)

Dividends declared per share ...........................         --          --          --          --          --

Net loss per share (basic and diluted) .................      (1.15)      (1.56)      (1.04)      (1.85)      (1.23)
Net loss per share from continuing operations
  (basic and diluted) ..................................      (0.06)      (0.86)      (1.15)      (1.85)      (1.23)
Net earnings (loss) per share from discontinued
  operations (basic and diluted) .......................      (1.09)      (0.70)       0.11          --          --
</TABLE>


YEARS ENDED DECEMBER 31, 2003 AND 2002

REVENUES

         For the twelve months ended December 31, 2003, revenues increased by
$1,291,000, or 278%, to $1,756,000 from $465,000 in the same period in 2002.
This increase is attributable to the increasing number of customers choosing
EZchip for the development of their future networking products. EZchip started
to generate revenues during the second quarter of 2002, when its first network
processor, the NP-1, became commercially available. Therefore, revenues for the
twelve months ended December 31, 2002 represent only approximately seven months
of revenues, generated from only a few customers, while the revenues for the
twelve months ended December 31, 2003 represent revenues for the full period
generated from approximately 30 customers.


                                       26
<PAGE>

COST OF REVENUES

         For the twelve months ended December 31, 2003, our cost of revenues
increased by $461,000, or 283%, to $624,000 (36% of revenues) from $163,000 (35%
of revenues) in the same period in 2002. The increase in cost of revenues is the
result of the increase in revenues.

GROSS PROFIT

         For the twelve months ended December 31, 2003, gross profit increased
by $681,000, or 321%, to $893,000 (51% of revenues) from $212,000 (46% of
revenues) in the same period in 2002. This increase was primarily attributable
to the increase in revenues.

RESEARCH AND DEVELOPMENT COST, NET

         Research and development costs consist mainly of the salary and
benefits of engineers. Reported figures consist entirely of EZchip's research
and development costs. For the twelve months ended December 31, 2003, research
and development costs decreased by $856,000, or 11.0%, to $7,219,000 from
$8,075,000 in the same period in 2002. This decrease was primarily due to higher
non-recurring engineering expenses that were incurred during the 2002 period
with respect to the development of the NP-1 network processor and the QX-1
traffic manager and also due to the higher level of amortization of prepaid
development costs during 2002.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         Selling, general and administrative expenses consist primarily of
salaries, advertising expenses, participation in trade shows and marketing
materials. For the twelve months ended December 31, 2003, these expenses
increased by $459,000, or 14%, to $3,660,000 from $3,201,000 in the same period
in 2002 This increase was primarily due to increased sales and marketing efforts
by EZchip and also due to of non-recurring legal and accounting expenses of
approximately $340,000 in 2003.

FINANCIAL INCOME, NET

         Financial income reflects the income or expenses both from traditional
investment income or financing expenses and from exchange rate fluctuations and
currency translation. For the twelve months ended December 31, 2003, net
financial expenses decreased by $1,053,000, or 165%, to $(415,000) from net
financial income of $638,000 in the same period in 2002. This decrease is
composed of (i) $575,000 that is attributable to significantly lower average
interest rates on our investments portfolio in 2003 compared to 2002,
fluctuations in currency translation as a result of the change in the value of
the NIS compared to the US dollar during 2003 and interest expenses associated
with the $1.5 million credit line drawn by EZchip in May 2003; and (ii) $504,000
that is attributable to accrued interest expense, related to EZchip's preferred
C redeemable shares.


YEARS ENDED DECEMBER 31, 2002 AND 2001

REVENUES

         2002 was the first year in which we generated revenues from network
processors. All the revenues generated in the past have been classified as
discontinued operations. Therefore, there are no revenues presented in previous
years. Our revenues, totaling $465,000 in 2002, were derived solely from the


                                       27
<PAGE>

sale of EZchip's products, which in 2002, included mainly the sale of sample
network processors chips, evaluation systems and software tools.

COST OF REVENUES

         For the twelve months ended December 31, 2002 our cost of revenues
totaled $163,000 (35% of sales).

RESEARCH AND DEVELOPMENT COST, NET

         For the twelve months ended December 31, 2002, research and development
costs increased by $641,000, or 8%, to $8,075,000 from $7,434,000 in the same
period in 2001. This increase is mainly attributable to higher non-recurring
engineering expenses that were incurred during 2002 with respect to the
development of the NP-1 network processor and the QX-1 traffic manager.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

         For the twelve months ended December 31, 2002, selling, general and
administrative expenses increased by $839,000, or 37%, to $3,201,000 from
$2,332,000 in the same period in 2001 This increase was primarily due to
increased sales and marketing efforts by EZchip.

FINANCIAL INCOME, NET

         For the twelve months ended December 31, 2002, net financial income
decreased by $670,000, or 51%, to $638,000 from $1,308,000 in the same period in
2001. This decrease is attributable to the drop in the interest bearing cash,
cash equivalents, short-term deposits and marketable securities levels,
resulting from operational losses.

EFFECTIVE CORPORATE TAX RATE

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

         As of December 31, 2003, we had approximately $45 million in tax loss
carry-forwards, that can be offset against future income without time
limitation. Subsidiaries in the U.S. have approximately $2.7 million of tax loss
carry-forwards that can be offset against taxable income in the future for a
period of 19 to 20 years. In addition, we have accumulated capital losses in the
amount of $ 21.7 million. We have not established a deferred tax asset resulting
from temporary differences between the basis of assets for financial and tax
reporting purposes, as it has been determined that it is more likely than not
that such deferred tax assets will not be realized.

IMPACT OF CURRENCY FLUCTUATION AND OF INFLATION

         A significant portion of the cost of our Israeli operations, mainly
personnel and facility-related, is incurred in NIS. Therefore, our NIS related
costs, as expressed in US dollars, are influenced by the exchange rate between
the US Dollar and the NIS. In addition, If the rate of inflation in Israel will
exceed the rate of devaluation of the NIS in relation to the US dollar, or if


                                       28
<PAGE>

the timing of such devaluations were to lag considerably behind inflation, our
cost as expressed in US dollars may increase. NIS linked balance sheet items,
may also 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 may not be able to eliminate the effects of currency
fluctuations. Thus, exchange rate fluctuations could have a material adverse
impact on our operating results and share price. The caption "Financial income
(expenses), net" in our Financial Statements includes the impact of these
factors as well as traditional interest income or expense. See Note 14a to the
Company's Financial Statements.

         The following table sets forth, for the periods indicated, (i)
devaluation of the NIS against the most important currencies for our business,
the U.S. dollar, and (ii) inflation as reflected in changes in the Israeli
consumer price index.

                                                FISCAL YEAR
                                             ENDED DECEMBER 31,
                               ----------------------------------------------
                                 1999      2000      2001     2002      2003
                                ------    ------    -----    -----     ------
U.S. dollar ................    (0.2)%    (2.7)%     9.3%     7.3%     (7.6)%
Israeli consumer price index     1.3%       --       1.4%     6.5%     (1.9)%

B.       LIQUIDITY AND CAPITAL RESOURCES

         Historically we have satisfied our financial requirements primarily
through equity investments, funds provided by operations and, through research
and development grants. EZchip's research and development has not been funded by
Israel's Office of Chief Scientist, but rather has been funded through the
proceeds of third party investments, combined with contributions by LanOptics.
In 2000, we conducted two rounds of financing for EZchip, raising $25.2 million
through the private placement of EZchip's preferred shares. The amount of
investments by third parties was recorded as preferred shares of a subsidiary in
our Financial Statements. In addition, we made a $4 million investment in EZchip
during 2000. In early 2003, EZchip raised $13.5 million in a private placement
of series C preferred shares, of which amount we invested $2.3 million. In
addition, EZchip obtained a $3 million credit facility, of which $1.5 million
was drawn down. The terms of the series C equity financing also provided the
investors in the private placement with an option to invest up to another $8
million in the future. This option was exercised on March 9, 2004, resulting in
a follow-on series C investment in EZchip in the amount of $8 million, of which
we invested $5.3 million. On December 16, 2003, we concluded a $6 million
private placement of our ordinary shares to Deutsche Bank AG, London Branch.
$5.3 million of the proceeds were used to fund the exercise of our option to
purchase EZchip series C preferred shares, which increased our ownership
interest in EZchip to 53.4%.

         As of December 31, 2003 we had $18.1 million in working capital and
$19.6 million in cash, cash equivalents and marketable securities.

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


                                       29
<PAGE>

C.       RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

         Currently, 58 employees, representing about 74% of EZchip's employees,
are engaged in research and development. EZchip's senior executives devote a
substantial portion of their time to stay in frequent communications with its
customers to determine product needs that should be addressed.

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

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                            ----------------------------
                                                             2001       2002       2003
                                                            ------     ------     ------
<S>                                                         <C>        <C>        <C>
RESEARCH AND DEVELOPMENT COSTS, EXCLUDING AMORTIZATION      $6,892     $7,570     $7,099
AMORTIZATION OF PREPAID DEVELOPMENT AND PRODUCTION COSTS*   $  542     $  505     $  120
RESEARCH AND DEVELOPMENT, INCLUDING AMORTIZATION            $7,434     $8,075     $7,219
</TABLE>

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

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

         We hold three United States patents, No. 6,532,457, No. 6,594,655 and
No. 6,625,612. In addition, the Company holds a pending patent application in
the United States (Serial No. 09/609,221), for which we have yet to receive an
Official Action from the USPTO. There can be no assurance that the Company's
pending application will ultimately be issued either at all or within the scope
of the claims sought by the Company.

D.       Trend Information

         We currently have over 30 customers for the NP-1 and NP-1c network
processors, over 10 of which are large networking vendors. Publicly announced
customers include Nokia Networks, ZTE corporation, BATM/Telco Systems, ETRI (
Korea's Electronics and Telecommunications Research Institute) ECI Telecom and
Crescendo Networks. All the revenues we derived from these customers are
designated as "design wins revenues". This means that customers are purchasing
sample products and development kits in order to perform the development work
necessary to integrate our products into the customers' future
telecommunications product offerings. Our first customers have now completed
their product development and are moving to production with systems based on
EZchip's NP-1 network processor. As we begin to fill these production orders and
as additional customers enter the production stage, we expect a further increase


                                       30
<PAGE>

in revenues throughout 2004. The exact timing, speed and volume of the increase
will depend on market acceptance of our customers' products and on the pace of
the recovery in the telecommunications and related markets generally.

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 minimum contractual obligations and
commercial commitments, including obligations of discontinued operations, as of
December 31, 2003 and the effect we expect them to have on our liquidity and
cash flow in future periods.

<TABLE>
<CAPTION>
------------------------------------------ ---------------------------------------------------------------------------
           Contractual Obligations                                   Payments due by period
------------------------------------------ --------------- -------------- ------------- ---------------- -------------
                                                            less than 1                                    more than
                                               Total           year        1-3 years       3-5 years        5 years
------------------------------------------ --------------- -------------- ------------- ---------------- -------------
<S>                                        <C>               <C>           <C>           <C>                   <C>
Long-term debt obligations (1)............ $ 1,500,000           --        $1,500,000          --              --
------------------------------------------ --------------- -------------- ------------- ---------------- -------------

------------------------------------------ --------------- -------------- ------------- ---------------- -------------
Operating lease obligations............... $ 1,363,000       $537,000      $  798,000    $    28,000           --
------------------------------------------ --------------- -------------- ------------- ---------------- -------------

------------------------------------------ --------------- -------------- ------------- ---------------- -------------
Other long-term liabilities reflected
   on the company's balance sheet (2)..... $11,704,000          --             --        $11,704,000           --
------------------------------------------ --------------- -------------- ------------- ---------------- -------------
Total..................................... $14,567,000       $537,000      $2,298,000    $11,732,000           --
------------------------------------------ --------------- -------------- ------------- ---------------- -------------
</TABLE>

---------
(1) In April 2003, EZchip signed a loan agreement with a third party to provide
EZchip with a $ 1,500,000 revolving credit facility. The loan bears annual
interest of LIBOR + 4.5% per annum. The loan shall be repaid at the earlier of
(i) March 14, 2005; (ii) the consummation of an investment of at least $ 15
million, or (iii) an initial public offering.

(2) During March 2003, EZchip issued to Lanoptics and to third parties
16,542,267 Series C Preferred shares, in consideration of $ 13,500,000. The net
amount of $ 10,928,000, which was invested by third parties, was recorded as
redeemable preferred shares in a subsidiary. After four years from the issuance
date and subject to the request of the majority holders of Series C Preferred
shares, EZchip may be required to redeem the Series C Preferred shares at a
price per share equal to the greater of (i) the original Series C per share
issue price plus an amount equal to any accrued and unpaid dividends thereon
plus 6% coupon interest compounded annually or (ii) the fair market value of
such shares. The amount specified represents the original Series C per share
issue price plus 6% accrued interest.


ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

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


                                       31
<PAGE>

A.       DIRECTORS

         The following individuals served on our Board of Directors throughout
the year ended December 31, 2003, and are currently the members of our Board of
Directors:

         Dr. Meir D. Burstin, 62, is Chairman of the Board of Directors of the
Company as well as the Chairman of the Board of Directors of its subsidiary
EZchip. Dr. Burstin was the Chairman and founder of ART, Advanced Recognition
Technologies Inc., a leader of embedded speech and handwriting recognition. Dr.
Burstin was a founder and chairman of the Board of Ornet, a data switching
company founded in 1996 and acquired by Siemens two years later. Dr. Burstin was
a director of several other high-tech start up companies and the Chairman of the
Jerusalem software greenhouse. Previously, in 1969, Dr. Burstin was a founder of
Advanced Technology Ltd. (ATL), one of Israel's largest software companies, and
served as its president until 1982. From 1982 to 1984 Dr. Burstin was a Visiting
Scholar at the Computer Science Department at UCLA and Vice President,
Technologies of Tadiran US. In this position he was in charge of the acquisition
of technologies and technology companies for Tadiran. Upon his return to Israel
in 1984 he became a Corporate Vice President of Tadiran Ltd., then one of
Israel's largest electronics companies, and President of Tadiran's Systems
Division. In 1986 he also became President of Elisra Systems, an electronic
warfare company acquired by Tadiran, and organized the acquisition. In addition,
Dr. Burstin served as a Chairman or Director of several Tadiran subsidiaries
including ATL (software), Contahal (software), Mazlat (mini RPV) and Simtech
(simulation systems). Dr. Burstin holds a PhD in Information Systems from Tel
Aviv University. He received B.Sc. degrees in Physics and Mathematics and a
M.Sc. degree in Physics from the Hebrew University of Jerusalem.

         Eli Fruchter, 49, is the President and Chief Executive Officer of the
Company's subsidiary EZchip, a position that he has held since EZchip's
inception, and has been a director of the Company since its inception. He served
as General Manager of the Company from its inception until May 1999, and as
President, Chief Executive Officer and General Manager of the Company from May
1999 through September 1999. From March 1995 until September 1999 he was the
Chairman of the Board of Directors of the Company. Mr. Fruchter was among the
founders of Adacom Technologies Ltd., a manufacturer of data communications
products for the IBM 3270 environment. From April 1985 until December 1987 he
served as a research and development manager at Adacom, and from January 1988
until November 1989 he was the Manager of Adacom's Marketing Department. Before
helping to found Adacom in 1985, Mr. Fruchter was Manager - Research and
Development Group of Fibronics Ltd., a manufacturer of data communications and
fiberoptics systems. Mr. Fruchter holds a B. Sc. degree in Electrical
Engineering from the Technion - Israel Institute of Technology.

         Benjamin (Benny) D. Gaon, 68, has been a director of the Company since
1995. Mr. Gaon is President and Chairman of Israel-registered B. Gaon Holdings
Ltd., whose activities encompass four main sectors: financial and other
services; hi-tech and communications; agro-industries; and wholesale and retail.
Previously, Mr. Gaon served as President and Chief Executive Officer of Koor
Industries Ltd., Israel's largest industrial enterprise. Mr. Gaon is an active
Chairman and Board member of various companies in Israel, including Alrov
(Israel) Ltd., Or-Alon Ltd., MG/CAIB Future Markets Ltd., Gaon Assets Management
(1999) Ltd., Hamashbir Fashion Warehouse Ltd., Hamashbir Holdings Ltd., B. Gaon
Holdings Ltd., Or Assaf Investments Ltd., Business Channel (T.T.V.) Ltd., Genius
Technologies Internet (1999) Ltd., B. Gaon Investments (1998) Ltd., Gaon Agro
Industries Ltd., Menorah Gaon Investment Company Ltd., Menora Gaon Capital
Markets Ltd., B. Gaon Productions Ltd. and Alon Technology Ventures Ltd. He was
the Chairman of the Board of Co-Op Blue Square Consumers' Cooperative Society
Ltd. and of Delek Israel Fuel Corporation Ltd. Among his other public positions,


                                       32
<PAGE>

Mr. Gaon serves as Chairman of the Israel-Jordan Chamber of Commerce and as
President of Israel Cancer Association. He also serves on the Board of Trustees
of the Hebrew University of Jerusalem and of Tel Aviv University.

         Zvi Zur, 81, has been a director of the Company since February 1993.
Mr. Zur was Chairman of Carmel Olefins Ltd. and Chairman of Israel
Petrochemicals Ltd. until March 2000. He is a Lieutenant General (res.) in the
Israel Defense Forces, in which he served between 1948 and 1963, and was Chief
of the General Staff of the Israel Defense Forces between 1961 and 1963. Between
1963 and 1967 Mr. Zur was the Managing Director of Mekoroth Water Company and
between 1967 and 1974 he served as Assistant Minister of Defense. Mr. Zur was
Managing Director of Clal Industries Ltd., and subsequently Vice President of
Clal (Israel) Ltd., between 1974 and 1985. During this period he also served on
the Boards of Directors of various subsidiaries of Clal, and was Chairman of the
Board of ECI Telecom Ltd. Between 1986 and 1987 Mr. Zur was Chairman of the
Board of Directors of Bezeq - The Israel Telecommunication Corp. Ltd. Between
1987 and 1992 he was the Deputy and Acting Chairman of The Israel Corporation,
and Chairman of the Board of Directors of Zim Israel Navigation Co. Ltd. Between
1993 and 1996, Mr. Zur was Chairman of Israel Aircraft Industries Ltd. Mr. Zur
is also a member of the Board of Directors of Israel General Bank Ltd.

         Dr. Ran Giladi, 49, has been a director of the Company since December
2001. Dr. Giladi is a faculty member at Ben-Gurion University of the Negev,
Beersheba, where he founded and was the Head of the Department of Communication
Systems Engineering from 1992 until 2000. Dr. Giladi is also the active Chairman
of DiskSites, Inc. and of InfoCyclone Inc., a company he co-founded in September
2000, which produces storage appliances for owners of massively accessed
repositories and of which he was President and Chief Executive Officer from 2000
until 2002. Dr. Giladi taught at the Business School and at the Electrical
Engineering Department of Tel-Aviv University from 1987 until 1993. Dr. Giladi
co-founded Ramir Ltd., which was later acquired by Harris-Adacom, and served as
Vice President Research & Development in both companies from 1984 until 1986.
Dr. Giladi also founded the Israeli Consortia for research on network management
systems (NMS), and served as the Chairman of the Consortia Board of Directors.
His research interests include computer and communications systems performance,
data networks and communications, and network management systems. Dr. Giladi
received a B.A. in Physics and an M.Sc. in Biomedical Engineering from the
Technion - Israel Institute of Technology, and a Ph.D. in Computers and
Information Systems from Tel Aviv University.

         Karen Sarid, 54, is Chief Operating Officer and Chief Financial Officer
of Orex Computed Radiography Ltd. (advanced radiography systems for the digital
x-ray market), a position she has held since September 2000. From September 1999
until September 2000 she was Chief Financial Officer and a member of the Board
of Directors of Forsoft Ltd. (software solution), a subsidiary of the Formula
Group. From 1996 until August 1999 Ms. Sarid was Chief Financial Officer and a
member of the Board of Directors of ESC Medical Systems Ltd. (medical lasers), a
public company that is traded on NASDAQ. She was Chief Financial Officer of the
Company from 1993 through 1996. Ms. Sarid received a B.A. in Economics and
Accounting from Haifa University, and was awarded the CFO of the Year award in
1998 by the Association of Chief Financial Officers in Israel.

         Michal Sultan, a director since July 2000 resigned as a director in
January 2004.

SENIOR MANAGEMENT

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


                                       33
<PAGE>

         Dror Israel, 35, has been the our Chief Financial Officer since June
2001. Prior to that he was the Company's financial controller from January 2000
through May 2001 and a financial analyst of the Company from August 1997 through
December 1999. Prior to joining LanOptics, Mr. Israel was employed by Hi Group,
a holdings company, as a financial analyst. Mr. Israel holds a B.A. degree in
economics from Haifa University and a MBA cum laude from the Technion - Israel
Institute of Technology.

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

B.       COMPENSATION OF DIRECTORS AND OFFICERS

         The aggregate amount of compensation paid during 2003 to all of our
directors and officers as a group for services in all capacities was
approximately $342,000. The aggregate amount set aside or accrued during 2003 to
provide pension, retirement or similar benefits for directors and officers of
our company, pursuant to any existing plan provided or contributed to by us, was
approximately $12,000.

         During 2003, we granted 90,000 options to five of our executive
officers and directors. The options have an exercise price of $6.93per share. In
2003, two of our executive officers were awarded options to purchase shares of
EZchip at an average exercise price of $0.86 per share.

C.       BOARD PRACTICES

APPOINTMENT OF DIRECTORS AND TERM OF OFFICE

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

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 who is not a director or an alternate
director may act as an alternate director, but the same person may not act as an
alternate for several directors. 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

         In accordance with the Israeli Companies Law and the regulations
promulgated under the Companies Law, the Company must have two outside
directors. The outside directors must meet certain statutory requirements of
independence. The term of office of an outside director is three years, which
can be extended for one additional term of three years. An outside director can
be removed from office only under very limited circumstances. Both of the
outside directors must serve on the company's statutory audit committee, and at
least one outside director must serve on each committee of the board of
directors. We have appointed Benjamin (Benny) D. Gaon and Zvi Zur as our outside
directors under the Israeli Companies Law.


                                       34
<PAGE>

         Pursuant to the current listing requirements of the Nasdaq Stock
Market, we are required to have at least two independent directors on our board
of directors. Under the new corporate governance rules adopted by Nasdaq, the
majority of the members of the board directors will need to be independent as of
July 31, 2005.

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

AUDIT COMMITTEE

         The Israeli Companies Law requires public companies to appoint an audit
committee. The responsibilities of the audit committee include identifying
irregularities in the management of the company's business and approving related
party transactions as required by law. An audit committee must consist of at
least three directors ncluding both of the outside directors. The chairman of
the board of directors, any director employed by or otherwise providing services
to the company, and a controlling shareholder or any relative of a controlling
shareholder may not be a member of the audit committee.

         Under Israeli law, an audit committee may not approve an action or a
transaction with a controlling shareholder, or with an office holder, unless at
the time of approval two outside directors are serving as members of the audit
committee and at least one of the outside directors was present at the meeting
in which an approval was granted.

         Pursuant to the current listing requirements of the Nasdaq Stock
Market, we are required to establish an audit committee, at least a majority of
whose members are independent of management. Pursuant to the Sarbanes-Oxley Act
of 2002, the Securities and Exchange Commission, or the SEC, has issued new
rules which required Nasdaq to impose independence requirements on each member
of the audit committee. Nasdaq has adopted such rules that will be applicable to
us as of July 31, 2005. Among the corporate governance rules that will be
applicable to us as of July 31, 2005 is the requirement that we have an audit
committee consisting of at least three independent members, all of whom are
financially literate and one whom has accounting or related financial management
expertise.

         The new Nasdaq rules implement two basic criteria for determining
independence: (i) audit committee members are barred from accepting any
consulting, advisory or other compensatory fee from the issuer or an affiliate
of the issuer, other than in the member's capacity as a member of the board of
directors and any board committee, and (ii) audit committee members may not be
an "affiliated person" of the issuer or any subsidiary of the issuer apart from
his or her capacity as a member of the board and any board committee.

         Under the final rules adopted by the SEC, an issuer is required to
disclose in its annual report, beginning with the annual report for 2003,
whether or not such issuer has at least one audit committee financial expert. If
it does, the issuer must disclose the name of the expert. If not, the issuer
must disclose why it does not have an audit committee financial expert.

         Our Audit Committee currently consists of Benjamin D. Gaon, Karen Sarid
and Zvi Zur. We believe that these appointments comply with the requirements of
the Companies Law and with the SEC and Nasdaq rules, and that Karen Sarid
qualifies to serve as the audit committee's financial expert, as required by the
SEC and Nasdaq.

         Our Audit Committee reviewed our audited financial statements for the
year ended December 31, 2003 and members of the Committee met with both
management and our external auditors to discuss those financial statements.
Management and the external auditors have represented to the Audit Committee
that the financial statements were prepared in accordance with the generally


                                       35
<PAGE>

accepted accounting principles. Members of the Audit Committee have received
from and discussed with the external auditors their written disclosure and
letter regarding their independence from our company as required by Independence
Standards Board Standard No. 1. Members of the Audit Committee also discussed
with the external auditors any matters required to be discussed by Statement on
Auditing Standards No. 61. Based upon these reviews and discussions, the Audit
Committee has recommended to the Board of Directors that the audited financial
statements be included in our Annual Report on Form 20-F for the year ended
December 31, 2003.

APPROVAL OF CERTAIN TRANSACTIONS; OBLIGATIONS OF DIRECTORS, OFFICERS AND
SHAREHOLDERS

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

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

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

         The Israeli Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company, which includes a shareholder that
holds 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in the company. Extraordinary transactions with a
controlling shareholder or in which a controlling shareholder has a personal
interest, and the terms of compensation of a controlling shareholder who is an
office holder, require the approval of the audit committee, the board of


                                       36
<PAGE>

directors and the shareholders of the company. The shareholder approval must
either include at least one-third of the votes of disinterested shareholders who
are present, in person or by proxy, at the meeting or, alternatively, the total
shareholdings of the disinterested shareholders who vote against the transaction
must not represent more than one percent of the voting rights in the company.

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

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

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

INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATIONS ON LIABILITY

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

INTERNAL AUDITOR

         The Israeli Companies Law also requires the board of directors of a
public company to appoint an internal auditor nominated by the audit committee.
A person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. 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.


                                       37
<PAGE>

D.       EMPLOYEES

         On March 30, 2004, we had 81 employees: 3 LanOptics employees, and 78
EZchip employees. Six of EZchip's employees are in the U.S., involved in sales
and marketing. Fifty-eight of EZchip's employees are engaged in research and
development. We believe that our company has good relations with its employees
and we have never experienced a labor dispute, strike or work stoppage.

                                                 As of December 31,
                                              -----------------------
                                              2001      2002     2003
                                              ----      ----     ----
            LanOptics employees........         9         3        3
            EZchip employees...........        84        90       77
                                              ----      ----     ----
                Total employees........        93        93       80

         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 the Company's employees in Israel pursuant to
administrative orders extending them to all private sector employees. According
to such administrative orders, all Israeli employers are required to provide
certain escalations of the wages in relation to the increases in the Israeli
consumer price index as well as to provide minimum annual payments so as to
cover vacation expenses. All of our employees are covered by comprehensive life
and pension insurance policies.

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

         Pursuant to Israeli law, we are legally required to pay severance
benefits upon certain circumstances, including the retirement or death of an
employee or the termination of employment of an employee without due cause. All
of our employees are covered by life and/or pension insurance policies providing
customary benefits to employees, including retirement and severance benefits.
Most We contribute between 13.3% of base wages to such plans and employees
contribute between 5.0% to 5.5% of base wages. We also contribute between 5.0%
and 7.5% of base wages to certain "professional advancement" funds for managers,
engineers and others and such employees contribute 2.5% of base wages. Our
contribution is limited, up to the maximum amounts which 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. In the fiscal year ended
December 31, 2003, the aggregate payments to the National Insurance Institute
amounted to approximately 16.31% of base wages, with the employee contributing
10.38 % (of which approximately 4.80 % relates to payments for national health
insurance) and the employer contributing the remainder. All such contributions
to the National Insurance Institute are subject to minimum amount.


                                       38
<PAGE>

E.       SHARE OWNERSHIP

BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS

         As of March 30. 2004, all the directors and executive officers as a
group beneficially held 852, 585 of our ordinary shares (approximately 8.9% of
our outstanding shares). This figure includes 610,596 shares beneficially owned
by Eli Fruchter, representing approximately 6.6% of our outstanding shares. Mr.
Fruchter is the only director or officer who holds 1% or more of our outstanding
shares as of March 30, 2004.


STOCK OPTION PLANS

LANOPTICS OPTION PLANS

         Since 1993, LanOptics has granted options to purchase ordinary shares
to key employees, directors and shareholders pursuant to the LanOptics 1992
Stock Option Plan as an incentive to attract and retain qualified personnel.
Under the terms of these grants, options, generally, become exercisable ratably
over a four-year period commencing with the date of grant. The options generally
expire no later than six years from the date of the grant, and are
non-transferable, except under the laws of succession. LanOptics' 1992 Israeli
Stock Option Plan expired in November 2002. There were approximately 140,000
options for ordinary shares that remained unissued upon the expiration of the
1992 Plan.

         On October 2003 LanOptics adopted the 2003 Israeli Share Option Plan
(the "2003 Israel Plan"), under which a total of 90,000 ordinary shares of the
Company were reserved and authorized for the purpose of the option plan. The
2003 Israel Plan is administered by the Board of Directors, which has broad
discretion, subject to certain limitations, to determine the persons entitled to
receive options, the terms and conditions on which options are granted and the
number of shares subject to each grant. Options under the 2003 Israel Plan are
issued 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
that receive options under the 2003 Israel Plan are afforded certain tax
benefits (excluding controlling shareholders of the Company or those who are not
employees or directors of the Company). The Company has 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 options in the name of a trustee (the "Trustee") for each of the
employees who is granted options. Each option, and any ordinary shares acquired
upon the exercise of the option, must be held by the Trustee for a period
commencing on the date of grant and ending no earlier than 24 months after the
end of the tax year in which the option was granted and deposited in trust with
the Trustee. The 2003 Israel Plan provides for the options granted to have a
maximum exercise period of ten years from the date of grant. Options granted
under the 2003 Israel Plan are generally exercisable over __four years. Options
that are not exercised will become available for further grant by the Board
under the 2003 Israel Plan.

         As of March 30, 2004, there were outstanding options to purchase
313,989 ordinary shares. Of these options, 248,989 options were exercisable at
exercise prices ranging from $2.50 to $6.93 per share. The number of options
held by directors and officers of the Company as a group was 306,989, including
options to purchase 194,739 ordinary shares held by Mr. Burstin.


                                       39
<PAGE>

EZchip OPTION PLANS

         Since 2000, EZchip has granted options to purchase its ordinary shares
to key employees, shareholders and directors pursuant to the Israeli and the
U.S. stock option plans (the "2000 Section 102 Share Option Plan", the "2003
Section 102 Share Option Plan" and the "2001 U.S. Stock Option Plan"), as an
incentive to attract and retain qualified personnel. Under these plans a total
of 9,500,000 ordinary shares of EZchip are reserved and authorized for issuance.
Under the terms of these grants, options generally become exercisable over a
four-year period, commencing with the date of grant. The options generally
expire 7 to 10 years from the date of the grant, and are non-transferable,
except under the laws of succession. The 2003 Section 102 Share Option Plan is
similar in all material respect to the 2003 Israel Plan. As of March 30, 2004,
there were outstanding options to purchase ordinary shares of EZchip
representing approximately 10.8% of the share capital of EZchip on an as
converted and fully diluted basis. Approximately 20% of these options were held
by directors and officers of our company.

ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

A.       MAJOR SHAREHOLDERS

         The following table sets forth certain information as of March 30, 2004
concerning the only persons or entities known to us to own beneficially more
than 5% of our company's outstanding ordinary shares:

                                                        NUMBER OF
    NAME                                               SHARES(1)(2)     PERCENT
    ----                                               ------------     -------
    Apax Israel Partners II, L.P.
      and funds of which it is general partner(3) ...    601,567           6.5%
    Eli Fruchter ....................................    610,596           6.6%
    Deutsche Bank....................................    750,000           8.1%

(1) The number of ordinary shares beneficially owned includes the shares
issuable pursuant to stock options that are exercisable within 60 days of March
31, 2004. Shares issuable pursuant to stock options are deemed outstanding for
computing the percentage of the person holding such options but are not
outstanding for computing the percentage of any other person.
(2) Based on the most recent 13G and 13D filings.
(3) The funds that hold the shares directly, of which Apax Israel Partners II,
L.P. is a general partner, are Apax Israel II, L.P., Apax Israel II (Israel),
L.P., Apax Israel II Entrepreneur's Club, L.P., and Apax Israel II
Entrepreneur's Club (Israel), L.P.

         According to our transfer agent, as of March 30, 2004, there were 45
holders of record of our ordinary shares, including 35 holders of record
residing in the United States holding 8,141,368 ordinary shares, or 88.0% of the
aggregate number of ordinary shares outstanding. We believe that as of such date
we have over 6,000 beneficial shareholders.

RELATED PARTY TRANSACTIONS

         During the years ended December 31, 2001, 2002 and 2003 we paid
$59,000, $79,000 and $123,000, respectively to Naschitz, Brandes & Co., a law
firm in which Mr. Hanina Brandes, who was a principal shareholder of the Company
until December 2003, is a senior partner. See Interests of Experts and Counsel


                                       40
<PAGE>

ITEM 8.  FINANCIAL INFORMATION

A.       CONSOLIDATED  STATEMENTS AND OTHER FINANCIAL INFORMATION

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

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

LEGAL PROCEEDINGS

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

DIVIDEND POLICY

         We anticipate that we will retain any future earnings to support
operations and to finance the growth and development of our business. In
addition, tax-exempt income attributable to our status as an approved enterprise
under Israeli tax law can be distributed to shareholders without subjecting us
to taxes only upon the complete liquidation of our company. Tax will be levied
if we decide to distribute such income in the future. Currently, we intend to
reinvest the amount of its tax-exempt income.

SIGNIFICANT CHANGES

         Except as otherwise disclosed in this Annual Report, there has been no
material change in our financial position since December 31, 2003.

ITEM 9.  OFFER AND LISTING.

A.       LISTING DETAILS

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

         Set forth below for each of the years indicated are the range of high
and low Nasdaq sales prices for our ordinary shares as reported by Nasdaq, and
the high and low sales prices (in U.S. dollars) on the Tel Aviv Stock Exchange
since April 1, 2002. Stock prices on the Tel Aviv Stock Exchange are quoted in
New Israeli Shekels (NIS); the stock prices set forth below in U.S. dollars
reflect the translation into U.S. dollars based on the rate of exchange
published by the Bank of Israel on the dates in question.


                                       41
<PAGE>

                                     NASDAQ          TEL AVIV STOCK EXCHANGE
                              -------------------    -----------------------
YEAR                           HIGH         LOW         HIGH         LOW
----                          -------     -------      -------     -------
1999 ....................     $ 7.188     $ 1.750           --          --
2000 ....................     $43.750     $ 5.500           --          --
2001 ....................     $19.250     $  2.70           --          --
2002 ....................     $ 16.45     $  3.97      $14.864     $ 6.160
2003 ....................     $ 11.20     $  3.88      $ 11.10     $  4.78

QUARTERLY STOCK 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 Market and the Tel Aviv Stock Exchange:

                                     NASDAQ          TEL AVIV STOCK EXCHANGE
                              -------------------    -----------------------
2002                           HIGH         LOW         HIGH         LOW
----                          -------     -------      -------     -------
First quarter ...........     $ 14.00     $  6.07
Second quarter ..........       16.45        5.02      $14.864     $ 8.995
Third quarter ...........        8.98        5.95        9.569       6.836
Fourth quarter ..........        7.60        3.79        7.080       6.160

2003
----
First quarter ...........     $   6.2     $  3.88      $  6.86     $  4.78
Second quarter ..........        8.33        4.47         8.17        4.86
Third quarter ...........        9.80        6.41        10.05        7.23
Fourth quarter ..........       11.20        8.50        11.10        8.94

MONTHLY STOCK INFORMATION

2003
----
October .................     $ 11.20     $  8.60      $ 11.10     $  9.47
November ................       11.97        8.50        10.66        8.94
December ................       10.75        9.01        10.55        9.72

2004
----
January .................     $ 12.17     $  9.25      $ 12.12     $  9.78
February ................       10.42        7.95        10.66        9.14
March (thru March 30) ...         9.4        8.02         9.24        7.95


ITEM 10. ADDITIONAL INFORMATION.

A.       MEMORANDUM AND ARTICLES OF ASSOCIATION

OBJECTS AND PURPOSES OF THE COMPANY

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


                                       42
<PAGE>

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 6. Directors, Senior Management and
Employees; Directors and Senior Management; Approval of Certain Transactions."
The power of our directors to enter into borrowing arrangements on our behalf is
limited to the same extent as any other transaction by us.

RIGHTS ATTACHED TO ORDINARY SHARES

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

TRANSFER OF SHARES AND NOTICES

         Fully paid ordinary shares are issued in registered form and may be
freely transferred under our articles of association unless the transfer is
restricted or prohibited by another instrument. Under Israeli law and our
articles of association, each shareholder of record is entitled to receive at
least 21 days' prior notice of any shareholders' meeting. For purposes of
determining the shareholders entitled to notice and to vote at such meeting, the
Board of Directors may fix the record date, which shall be not more than forty
nor less than four days prior to the date of the meeting.

DIVIDEND AND LIQUIDATION RIGHTS

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

ANNUAL AND EXTRAORDINARY GENERAL MEETINGS

         We must hold our annual general meeting of shareholders each year no
later than 15 months from the last annual meeting, at a time and place
determined by the board of directors, upon at least 21 days' prior notice to our


                                       43
<PAGE>

shareholders. A special meeting may be convened by request of two directors or
by written request of one or more shareholders holding at least 5% of our issued
share capital and 1% of the voting rights or one or more shareholders holding at
least 5% of the voting rights. Shareholders requesting a special meeting must
submit their proposed resolution with their request.

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

VOTING RIGHTS

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

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

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

LIMITATIONS ON THE RIGHTS TO OWN SECURITIES

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

ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW

         The Israeli Companies Law provides that an acquisition of shares in a
public company must be made by means of a tender offer if as a result of the
acquisition the purchaser would hold more than 25% of the voting rights in the
company. This rule does not apply if 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 50% or more of the voting rights in the company. These rules do
not apply if the acquisition is made by way of a merger. Regulations promulgated
under the Companies Law provide that these tender offer requirements do not
apply to companies whose shares are listed for trading outside of Israel if,


                                       44
<PAGE>

according to the law in the country in which the shares are traded, including
the rules and regulations of the stock exchange or which the shares are traded,
either:

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

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

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

EXEMPTION FROM NASDAQ CORPORATE GOVERNANCE RULES

         In accordance with Rule 4350(a)(1) of the Rules of Corporate Governance
of The Nasdaq Stock Market, Inc., we have received an exemption from the
requirement to distribute an annual report to our shareholders prior to our
annual general meeting of shareholders. The basis for the exemption is the fact
that the generally accepted business practice in Israel, where we are
incorporated, is not to distribute an annual report to shareholders. We post our
Annual Report on Form 20-F on our Website (www.lanoptics.com) promptly following
the filing of the Annual Report with the Securities and Exchange Commission.

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.

TAXATION

ISRAELI TAX CONSIDERATIONS

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


                                       45
<PAGE>

Tax Reform

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

Statutory Corporate Tax Rate

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

Tax benefits under the Law for the Encouragement of Capital Investments,
5719-1959

         EZchip's facilities have been granted approved enterprise status
pursuant to the Law for the Encouragement of Capital Investments, 5719-1959 (the
"Investment Law"), which provides certain tax and financial benefits to
investment programs that have been granted such status.

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

         A company owning an approved enterprise may elect to receive either
governmental grants or an alternative package of tax benefits. Under the
alternative package, a company's undistributed income derived from an approved
enterprise will be exempt from corporate tax for a period of two to ten years
(depending on the geographic location of the approved enterprise within Israel).
The exemption commences in the first year of taxable income, and taxed at a
reduced corporate tax of 10% to 25% for the following five to eight years,
depending on the extent of foreign shareholders' ownership of the company's
ordinary shares. The benefits period is limited to twelve years from completion
of the investment under the approved plan or fourteen years from the date of
approval, whichever is earlier. A Foreign Investors Company ("FIC"), defined in
the Investment Law as a company of which more than 25% of its shareholders are
non-Israeli residents, may enjoy benefits for a period of up to ten years, or
twelve years if it complies with certain export criteria stipulated in the
Investment Law (the actual length of the benefits period is graduated based on
the percentage of foreign ownership).The tax benefits relate only to taxable
income attributable to specific approved enterprises. If a company has more than
one approval or only a portion of its capital investments are approved, its
effective tax rate is the result of a weighted combination of the applicable
rates.

         All dividends are considered to be attributable to the entire
enterprise and their effective tax rate is the result of a weighted combination
of the applicable tax rates. A company that has elected the alternative package
of benefits and pays a dividend out of income derived from the approved
enterprise during the exemption period will be subject to tax on the amount
distributed, at the rate that would have been applicable had it not elected the
alternative package of benefits (generally, 10%-25% depending on the extent of
foreign investment in the company). The Company currently intends to reinvest
the amount of its tax-exempt income and not to distribute such income as a


                                       46
<PAGE>

dividend. Dividends from approved enterprises are taxable at the reduced rate of
15% if distributed during the tax exemption period or within twelve years
thereafter (this time limit does not apply to an FIC).

         EZchip has derived, and expects to continue to derive, a substantial
portion of its operating income from its approved enterprise facilities. The tax
benefits attributable to the current approved enterprise is scheduled to expire
in 2013.

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

Special Provisions Relating to measurement of taxable income

         We measures our taxable income in accordance with the Income Tax Law
(Inflationary Adjustments), 5745-1985, or the Inflationary Adjustments Law,
which represents an attempt to overcome the problems presented to a traditional
tax system by an economy undergoing rapid inflation. Results of the Company for
tax purpose are measured in terms of earning in NIS after certain adjustments
for changes in the Israeli consumer price index. The Inflationary Adjustments
Law is highly complex.

Capital Gains Tax Applicable to Shareholders

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

         Regulations promulgated under the Israeli Income Tax Ordinance provided
for an exemption from Israeli capital gains tax for gains accrued before January
1, 2003 and derived from the sale of shares of an "industrial company," as
defined by the Law for the Encouragement of Industry (Taxation), 5729-1969, that
are traded on specified non-Israeli markets, including The Nasdaq National
Market. We believe that beginning with the 2002 tax year we may no longer have
been classified as an "industrial company." Another exemption may be available,
however, because our shares became dual listed on the Tel-Aviv Stock Exchange in
2002. Shareholders are advised to consult their tax advisors regarding the
availability of the exemption.

         On January 1, 2003, the Law for Amendment of the Income Tax Ordinance
(Amendment No.132), 2002, known as the tax reform, came into effect thus
imposing capital gains tax at a rate of 15% on gains derived on or after January
1, 2003 from the sale of shares in Israeli companies publicly traded on a
recognized stock exchange outside of Israel. The tax basis of shares acquired
prior to January 1, 2003 will be determined as the higher between the original
price paid for the share and the average closing share price in the three
trading days preceding January 1, 2003. Non-Israeli residents shall be exempt
from Israeli capital gains tax on any gains derived from the sale of shares
publicly traded on a stock exchange recognized by the Israeli Ministry of
Finance, provided such shareholders did not acquire their shares prior to an
initial public offering. The Israeli Minister of Finance has not yet issued a
decree determining the list of such stock exchanges. In any event, the


                                       47
<PAGE>

provisions of the tax reform shall not affect the exemption from capital gains
tax for gains accrued before January 1, 2003, as described in the previous
paragraph.

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

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

Taxation of Non-Resident Shareholders on Ordinary Income

         Non-residents of Israel are subject to Israeli income tax on ordinary
income accrued or derived from sources in Israel, including passive income such
as dividends, royalties and interest. On distributions of dividends, other than
bonus shares and stock dividends, income tax at the rate of 25% is withheld at
the source, unless a different rate is provided in a treaty between Israel and
the shareholder's country of residence. If the dividends are distributed out of
approved enterprise earnings, the applicable tax rate would be 15%. Under the
United States-Israel Tax Treaty, the maximum tax on dividends paid to a holder
of ordinary shares who is a Treaty United States Resident will be 25%, however,
the tax rate is reduced to 12.5% for dividends not generated by an approved
enterprise to a corporation which holds 10% or more of the company's voting
power during a certain period preceding the distribution of the dividend.
Dividends derived from an approved enterprise will still be subject to 15% tax
withholding.

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

U.S. FEDERAL INCOME TAX CONSIDERATIONS

         The following summary sets forth the material U. S. federal income tax
consequences applicable to the following persons who purchase, hold or dispose
of the ordinary shares ("U.S. Shareholders"): (i) citizens or residents (as
defined for U.S. federal income tax purposes) of the United States; (ii)
corporations, or other entities taxable as corporations for U.S. federal income
tax purposes, created or organized in or under the laws of the United States or
any 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


                                       48
<PAGE>

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. This discussion generally considers only
U.S. Shareholders that will hold the ordinary shares as capital assets for U.S.
federal income tax purposes and does not consider (a) all aspects of U.S.
federal income taxation that may be relevant to particular U.S. Shareholders by
reason of their particular circumstances (including potential application of the
alternative minimum tax), (b) U.S. Shareholders subject to special treatment
under the U.S. federal income tax laws, such as financial institutions,
insurance companies, broker-dealers, tax-exempt organizations, (c) U.S.
Shareholders owning, directly or by attribution, 10% or more of the LanOptics'
outstanding voting shares, (d) U.S. Shareholders who hold the ordinary shares as
part of a hedging, straddle or conversion transaction, or appreciated financial
position, (e) U.S. Shareholders who acquire their ordinary shares in a
compensatory transaction, (f) U.S. Shareholders whose functional currency is not
the U.S. dollar, or (g) any aspect of state, local or non-U. S. tax law.

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

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

Distributions Paid on the Ordinary Shares

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

Credit for Israeli Taxes Withheld

         Subject to certain conditions and limitations, any Israeli tax withheld
or paid with respect to dividends on the ordinary shares will generally be
eligible for credit against a U.S. Shareholder's U. S. federal income tax
liability at such U.S. Shareholder's election. The Code provides limitations on
the amount of foreign tax credits that a U.S. Shareholder may claim, including
extensive separate computation rules under which foreign tax credits allowable


                                       49
<PAGE>

with respect to specific categories of income cannot exceed the U. S. federal
income taxes otherwise payable with respect to each such category of income.
U.S. Shareholders that do not elect to claim a foreign tax credit may instead
claim a deduction for Israeli income tax withheld or paid, but only for a year
in which such U.S. Shareholders elect to do so for all non-U.S. income taxes.
Dividends with respect to the ordinary shares will generally be classified as
foreign source "passive income" for the purpose of computing a U.S.
Shareholder's foreign tax credit limitations for U.S. foreign tax credit
purposes. Further, there are special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends subject to a reduced tax rate
under the recently enacted amendments to the Code, see discussion above. The
rules relating to foreign tax credits are complex, and each U.S. Shareholder
should consult his or her tax advisor to determine whether he or she would be
entitled to this credit.

Sale, Exchange or Other Disposition of the Ordinary Shares

         The sale, exchange or other disposition of ordinary shares will
generally result in the recognition of capital gain or loss in an amount equal
to the difference between the amount realized on the sale or exchange 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 United States-
Israel Tax Treaty and Israel, gain derived from the sale, exchange or other
disposition of ordinary shares by a holder who is a resident of the United
States for purposes of the treaty and who sells the ordinary shares within
Israel may be treated as foreign source income for U.S. foreign tax credit
purposes.

         In the case of a cash basis U.S. Shareholder who receives Israeli
shekels in connection with the sale or disposition of ordinary shares, the
amount realized will be based on the U.S. dollar value of the Israeli shekels
received with respect to the ordinary shares as determined on the settlement
date of such exchange. A U.S. Shareholder who receives payment in Israeli
shekels and converts Israeli shekels 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.

Recent Tax Legislation

         The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act"),
enacted on May 28, 2003, generally reduces the maximum rate of tax imposed on
certain dividends received by U.S. Shareholders that are individuals to 15
percent (5 percent for individuals in the lower tax brackets and 0 percent for
such individuals in 2008) (the "Reduced Rate"). The Reduced Rate applies to
dividends received after December 31, 2002 and before January 1, 2009, provided
that certain holding period requirements are met. In order for dividends paid by


                                       50
<PAGE>

a foreign corporation to be eligible for the Reduced Rate, the foreign
corporation must be a "qualified foreign corporation" within the meaning of the
Act and cannot be a passive foreign investment company or a foreign personal
holding company. We believe that we will be considered a "qualified foreign
corporation" within the meaning of the Act because our ordinary shares are
listed on The Nasdaq Small Cap Market. Thus, any distributions we make that are
treated as taxable dividends should qualify for the Reduced Rate. There can be
no assurance, however, that we will continue to be considered a "qualified
foreign corporation" and that we will not become a passive foreign investment
company or foreign personal holding company in the future.

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

Passive Foreign Investment Company Status

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

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


                                       51
<PAGE>

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

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

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

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

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

Backup Withholding and Information Reporting.

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


                                       52
<PAGE>

Documents on Display

         We are subject to certain of the information reporting requirements of
the Securities and Exchange Act of 1934, as amended. We, as a "foreign private
issuer," are exempt from the rules and regulations under the Securities Exchange
Act prescribing the furnishing and content of proxy statements, and our
officers, directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the
Securities Exchange Act, with respect to their purchase and sale of the ordinary
shares. In addition, we are not required to file reports and financial
statements with the Securities and Exchange Commission as frequently or as
promptly as U.S. companies whose securities are registered under the Securities
Exchange Act. However, we will file with the Securities and Exchange Commission
an annual report on Form 20-F containing financial statements audited by an
independent accounting firm. We will also furnish quarterly reports on Form 6-K
containing unaudited financial information after the end of each of the first
three quarters. In accordance with Rules of Corporate Governance of The Nasdaq
Stock Market, Inc., we have received an exemption from the requirement to
distribute an annual report to our shareholders prior to our annual general
meeting of shareholders. We post our Annual Report on Form 20-F on our Website
(www.lanoptics.com) promptly following the filing of our Annual Report with the
Securities and Exchange Commission

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

ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

GENERAL

         The currency of our primary economic environment is the dollar.
However, we have balances and activities in other currencies, mainly NIS. We are
therefore exposed to market risks arising from changes in currency exchange
rates. We are also exposed to market risks arising from changes in interest
rates.

EXCHANGE RATE RISK MANAGEMENT

         Our functional currency and that of EZchip is the dollar. Accordingly,
we attempt to protect ourselves against exposure arising from the difference
between assets and liabilities in NIS and the dollar, or "Balance Sheet
Exposure". We strive to limit our exposure through "natural" hedging, i.e.,
attempting to maintain similar levels of assets and liabilities in any given
currency, to the extent possible. However, this method of "natural" hedging is
not always achievable.

Interest RATE Risk Management

         Due to the existence of assets with different interest rates and
maturity dates, we are exposed to changes in interest rates. Currently Our
portfolio is composed mainly of (i) fixed income assets, including U.S.
Government and Corporate Obligations, rated A-AAA and bearing annual interest


                                       53
<PAGE>

rates in the range of 1.5% - 2.7%, with maturities in the range of 3 to 18
months; and (ii) short term managed liquidity funds bearing annual interest
rates in the range of 0.8% - 1.2%.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

         Not applicable.

PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

         Not applicable.

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

         Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

         During the year 2003, we carried out an evaluation, under the
supervision our chief executive officer and chief financial officer, of the
effectiveness of the design and operation of our company's disclosure controls
and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934.
Based upon that evaluation, our chief executive officer and chief financial
officer concluded that our company's disclosure controls and procedures are
effective in timely alerting them to material information relating to our
company required to be included in our company's periodic SEC filings.

         There have been no significant changes in our internal controls or
other factors which could significantly affect internal controls subsequent to
the date we carried out the evaluation.

         It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions.

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 in Item 401 of
Regulation S-K.

ITEM 16B. CODE OF ETHICS

         We have adopted a code of ethics that applies to our chief executive
officer and all senior financial officers of our company, including the chief
financial officer, chief accounting officer or controller, or persons performing
similar functions. Written copies are available upon request. If we make any


                                       54
<PAGE>

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.

ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES

FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS

         The following table sets forth, for each of the years indicated, the
fees paid to our independent public accountants and the percentage of each of
the fees out of the total amount paid to the accountants.

                                              Year Ended December 31,
                                   -------------------------------------------
                                            2002                   2003
                                   --------------------    -------------------
            Services Rendered        Fees   Percentages     Fees   Percentages
        ------------------------   -------- -----------    ------- -----------
        Audit (1)...............   $ 35,000      26%       $35,000     58%
        Audit-related (2).......   $ 99,000      72%       $20,000     33%
        Tax (3).................   $  3,000       2%       $ 5,000      9%
        Total ..................   $137,000     100%       $60,000    100%

        ------------
        (1)      Audit fees consist of services that would normally be provided
                 in connection with statutory and regulatory filings or
                 engagements, including services that generally only the
                 independent accountant can reasonably provide.

        (2)      Audit-related fees relate to assurance and associated services
                 that traditionally are performed by the independent accountant,
                 including: attest services that are not required by statute or
                 regulation; accounting consultation and audits in connection
                 with mergers, acquisitions and divestitures; employee benefit
                 plans audits; and consultation concerning financial accounting
                 and reporting standards.

        (3)      Tax fees relate to services performed by the tax division for
                 tax compliance, planning, and advice.

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 requires specific pre-approval by our audit committee. The policy
prohibits retention of the independent public accountants to perform the
prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act
or the rules of the SEC, and also requires the audit committee to consider
whether proposed services are compatible with the independence of the public
accountants.

ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR AUDIT
          COMMITTEE

          Not applicable.


                                       55
<PAGE>

ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
          PURCHASERS

ISSUER PURCHASE OF EQUITY SECURITIES

         There were no shares purchased by us or on our behalf or by any
affiliated purchaser during 2003.


PART III

ITEM 17. FINANCIAL STATEMENTS.

              Not applicable

ITEM 18. FINANCIAL STATEMENTS.

         See pages F-1 - F-42 incorporated herein..



                                       56
<PAGE>



                       LANOPTICS LTD. AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2003


                                 IN U.S. DOLLARS




                                      INDEX


                                                                         PAGE
                                                                         ----

 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 F-2

 CONSOLIDATED BALANCE SHEETS                                           F-3 - F-4

 CONSOLIDATED STATEMENTS OF OPERATIONS                                    F-5

 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)               F-6

 CONSOLIDATED STATEMENTS OF CASH FLOWS                                 F-7 - F-8

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                           F-9 - F-34


                                - - - - - - - -


                                      F-1
<PAGE>

[ERNST & YOUNG LOGO]


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             TO THE SHAREHOLDERS OF

                                 LANOPTICS LTD.


         We  have  audited  the  accompanying  consolidated  balance  sheets  of
LanOptics Ltd. ("the Company") and its  subsidiaries as of December 31, 2003 and
2002,  and  the  related  consolidated  statements  of  operations,  changes  in
shareholders'  deficiency  and cash  flows  for each of the  three  years in the
period  ended   December  31,  2003.   These   financial   statements   are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial statements based on our audits.

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

         In our  opinion,  the  consolidated  financial  statements  referred to
above,  present fairly,  in all material  respects,  the consolidated  financial
position of the Company and its  subsidiaries  as of December 31, 2003 and 2002,
and the consolidated  results of their operations and cash flows for each of the
three years in the period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States.



Tel-Aviv, Israel                                KOST FORER GABBAY & KASIERER
February 17, 2004                               A Member of Ernst & Young Global
(except as to Note 18, which is dated
March 8, 2004 and as to Note 1b
dated December 21, 2004)



                                      F-2
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS


                                                                 DECEMBER 31,
                                                             ------------------
                                                               2003       2002
                                                             -------    -------
    ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                  $14,148    $ 4,036
  Available-for-sale securities (Note 3)                       5,414      6,644
  Trade receivables                                              438        362
  Other accounts receivable and prepaid expenses (Note 4)        353        532
  Inventories (Note 5)                                           404        377
                                                             -------    -------

Total current assets                                          20,757     11,951
                                                             -------    -------

LONG-TERM INVESTMENTS:
  Prepaid development and production costs (Note 6)              522        656
  Severance pay fund                                           1,249        939
                                                             -------    -------

Total long-term investments                                    1,771      1,595
                                                             -------    -------

PROPERTY AND EQUIPMENT, NET (Note 7)                             564        857
                                                             -------    -------

OTHER ASSETS: (Note 1d, 8)
  Technology, net                                                873      1,112
                                                             -------    -------

Total assets                                                 $23,965    $15,515
                                                             =======    =======




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


                                      F-3
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                   DECEMBER 31,
                                                              ---------------------
                                                                2003         2002
                                                              --------     --------
<S>                                                           <C>          <C>
    LIABILITIES AND SHAREHOLDERS' DEFICIENCY

CURRENT LIABILITIES:
  Trade payables                                              $    202     $    506
  Other accounts payable and accrued expenses (Note 9)           2,462        2,296
                                                              --------     --------

Total current liabilities                                        2,664        2,802
                                                              --------     --------
LONG-TERM LIABILITIES:
  Accrued severance pay                                          1,536        1,196
  Long-term loan (Note 10)                                       1,383           --
                                                              --------     --------

                                                                 2,919        1,196
                                                              --------     --------

LIABILITIES ATTRIBUTED TO DISCONTINUED OPERATIONS                  103          214
                                                              --------     --------

PREFERRED SHARES IN A SUBSIDIARY                                20,991       20,991
                                                              --------     --------

REDEEMABLE PREFERRED SHARES IN A SUBSIDIARY (Note 1d)           11,432           --
                                                              --------     --------

WARRANTS ISSUED BY A SUBSIDIARY                                    176           --
                                                              --------     --------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 11)

SHAREHOLDERS' DEFICIENCY:
  Share capital (Note 12):
    Ordinary shares of NIS 0.02 par value -
    Authorized: 30,000,000 shares at December 31, 2003 and
    2002; Issued and outstanding: 9,250,535 and 8,465,535
    shares at December 31, 2003 and 2002, respectively              64           60
  Additional paid-in capital                                    39,516       33,743
  Accumulated other comprehensive income                            16           21
  Accumulated deficit                                          (53,916)     (43,512)
                                                              --------     --------

Total shareholders' deficiency                                 (14,320)      (9,688)
                                                              --------     --------

Total liabilities and shareholders' deficiency                $ 23,965     $ 15,515
                                                              ========     ========
</TABLE>

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


                                      F-4
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE AND PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                             -------------------------------------------
                                                                 2003            2002            2001
                                                             -----------     -----------     -----------
<S>                                                          <C>             <C>             <C>
Revenues (Note 14)                                           $     1,756     $       465     $        --
Costs of revenues                                                    624             163              --
Amortization of developed technology                                 239              90              --
                                                             -----------     -----------     -----------

Gross profit                                                         893             212              --
                                                             -----------     -----------     -----------
Operating expenses:
  Research and development                                         7,219           8,075           7,434
  In-process research and development write-off                       --           3,928              --
  Selling and marketing, net                                       2,191           1,913           1,327
  General and administrative                                       1,469           1,288           1,005
                                                             -----------     -----------     -----------

                                                                  10,879          15,204           9,766
                                                             -----------     -----------     -----------

Operating loss                                                    (9,986)        (14,992)         (9,766)
Financial income (expenses), net (Note 15)                          (415)            638           1,308
Other income (expenses), net                                          (3)             --              15
                                                             -----------     -----------     -----------

Loss from continuing operations, before minority interest        (10,404)        (14,354)         (8,443)
Minority interest in losses of a subsidiary                           --              --              80
                                                             -----------     -----------     -----------

Loss from continuing operations                                  (10,404)        (14,354)         (8,363)
                                                             -----------     -----------     -----------
Discontinued operations:
  Income from discontinued operations of a segment of
    a business                                                        --              51             793
                                                             -----------     -----------     -----------

Net loss                                                     $   (10,404)    $   (14,303)    $    (7,570)
                                                             ===========     ===========     ===========

Net loss per share from continuing operations                $     (1.23)    $     (1.85)    $     (1.15)
                                                             ===========     ===========     ===========

Net earnings per share from discontinued operations          $        --     $        --     $      0.11
                                                             ===========     ===========     ===========

Net loss per share                                           $     (1.23)    $     (1.85)    $     (1.04)
                                                             ===========     ===========     ===========
Weighted average number of Ordinary shares used in
  computing net earnings (loss) per share                      8,484,120       7,744,593       7,287,715
                                                             ===========     ===========     ===========
</TABLE>


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


                                      F-5
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS (EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                        ACCUMULATED
                          NUMBER OF SHARES                                 OTHER                                        TOTAL
                        ---------------------              ADDITIONAL  COMPREHENSIVE                     TOTAL       SHAREHOLDERS'
                         ORDINARY    DEFERRED    SHARE      PAID-IN        INCOME       ACCUMULATED   COMPREHENSIVE     EQUITY
                          SHARES      SHARES     CAPITAL    CAPITAL        (LOSS)         DEFICIT         LOSS       (DEFICIENCY)
                        ----------  ---------  ----------  ----------   -----------     -----------   ------------   -----------
<S>                      <C>        <C>         <C>         <C>            <C>           <C>           <C>            <C>
Balance as of
  January 1, 2001        7,284,652     1,000    $    56     $ 24,777       $   119       $ (21,639)                   $   3,313

Exercise of options          6,125        --      (* --           15                            --                           15
Comprehensive loss:
Other comprehensive
  loss - unrealized
  losses on
  available-for-sale
  securities                    --        --         --           --          (119)             --           (119)         (119)
Net loss                        --        --         --           --            --          (7,570)        (7,570)       (7,570)
                        ----------  ---------  ----------  ----------   -----------     -----------   ------------   -----------
Total comprehensive
  loss                                                                                                 $   (7,689)
                                                                                                      ============
Balance as of
  December 31, 2001      7,290,777     1,000         56        24,792           --         (29,209)                      (4,361)

Issuance of shares,
  net                    1,153,508        --          4        8,898            --              --                        8,902
Exercise of options         21,250        --      (* --           53            --              --                           53
Retirement of
  deferred shares               --    (1,000)        --           --            --              --                           --
Comprehensive loss:
Other comprehensive
  gain unrealized
  gain on
  available-for-sale
  securities                                                                    21                     $       21            21
Net loss                        --        --         --           --            --         (14,303)       (14,303)      (14,303)
                        ----------  ---------  ----------  ----------   -----------     -----------   ------------   -----------
Total comprehensive
  loss                                                                                                 $  (14,282)
                                                                                                      ============
Balance as of
  December 31, 2002      8,465,535        --         60        33,743           21         (43,512)                      (9,688)

Issuance of shares,
  net                      750,000        --          4        5,637            --              --                        5,641
Exercise of options         35,000        --      (* --           93            --              --                           93
Compensation related
  to options granted
  to employees                  --        --         --           43            --              --                           43
Comprehensive loss:
Other comprehensive
  loss - unrealized
  losses on
  available-for-sale
  securities                    --        --         --           --            (5)             --     $       (5)           (5)
Net loss                        --        --         --           --            --         (10,404)       (10,404)      (10,404)
                        ----------  ---------  ----------  ----------   -----------     -----------   ------------   -----------
Total comprehensive
  loss                                                                                                 $  (10,409)
                                                                                                      ============
Balance as of
  December 31, 2003      9,250,535        --    $     64    $ 39,516       $    16       $ (53,916)                   $ (14,320)
                        ==========  =========  ==========  ==========   ===========     ===========                  ===========
</TABLE>

*) Represents an amount lower than $ 1.


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


                                      F-6
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                                     ----------------------------------
                                                                       2003         2002          2001
                                                                     --------     --------     --------
<S>                                                                  <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                             $(10,404)    $(14,303)    $ (7,570)
Adjustments to reconcile net loss to net cash used in operating
  activities:
  Income from discontinued operations                                      --          (51)        (793)
  Depreciation and amortization                                           784          746          468
  Amortization of prepaid production and development costs                134          509          542
  Write-off of in-process research and development                         --        3,928           --
  Gain on sale of available-for-sale securities                          (126)        (566)      (1,189)
  Minority interest in losses of a subsidiary                              --           --          (80)
  Accrued interest on Redeemable Preferred shares in a subsidiary         504           --           --
  Loss (gain) on sale of property and equipment                             3           --           (5)
  Accrued severance pay, net                                               30          (47)         129
  Accretion of discount on long-term loan                                  59           --           --
  Stock-based compensation related to options granted to
    employees                                                              43           --           --
  Increase in trade receivables                                           (76)        (362)          --
  Decrease (increase) in other accounts receivable and prepaid
    expenses                                                              179         (236)        (178)
  Increase in inventory                                                   (27)        (377)          --
  Increase (decrease) in trade payables                                  (304)         184         (116)
  Increase in other accounts payable and accrued expenses                 166          876        1,095
                                                                     --------     --------     --------

Net cash used in continuing operating activities                       (9,035)      (9,699)      (7,697)
Net cash used in discontinued operations                                 (111)        (244)      (1,846)
                                                                     --------     --------     --------

Total net cash used in operating activities                            (9,146)      (9,943)      (9,543)
                                                                     --------     --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in available-for-sale securities                            (6,493)      (3,142)     (12,523)
Proceeds from short-term bank deposits                                     --           --       10,997
Proceeds from sale of available-for-sale securities                     7,844       14,758       10,248
Purchase of property and equipment                                       (265)        (435)      (1,105)
Proceeds from sale of property and equipment                               10           --           70
                                                                     --------     --------     --------

Net cash provided by investing activities                               1,096       11,181        7,687
                                                                     --------     --------     --------
</TABLE>


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


                                      F-7
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                                ---------------------------------------
                                                                   2003          2002           2001
                                                                ----------    ----------     ----------
<S>                                                             <C>           <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares, net                                              5,641            --             --
Issuance of Redeemable Preferred shares in a subsidiary, net        10,928            --             --
Proceeds from exercise of options                                       93            53             15
Issuance expenses                                                       --           (53)            --
Proceeds from long-term loan                                         1,324            --             --
Proceeds from issuance of warrants by a subsidiary                     176            --             --
                                                                ----------    ----------     ----------

Net cash provided by financing activities                           18,162            --             15
                                                                ----------    ----------     ----------

Increase (decrease) in cash and cash equivalents                    10,112         1,238         (1,841)
Cash and cash equivalents at the beginning of the year               4,036         2,798          4,639
                                                                ----------    ----------     ----------

Cash and cash equivalents at the end of the year                $   14,148    $    4,036     $    2,798
                                                                ==========    ==========     ==========

NON-CASH ACTIVITIES:

Investment in a subsidiary in consideration for the
  issuance of shares (Note 1c):
  Property and equipment                                        $       --    $      204     $       --
  Prepaid development and production costs                              --           160             --
  Technology                                                            --        (1,203)            --
  Preferred shares in a subsidiary                                      --        (4,188)            --
  In-process research and development                                   --        (3,928)            --
                                                                ----------    ----------     ----------

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

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:

Cash paid during the period for:
  Interest                                                      $       54    $       --     $       --
                                                                ==========    ==========     ==========
</TABLE>


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


                                      F-8
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 1:- GENERAL

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

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

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

         b.       On January 1, 2004,  the Company  adopted  generally  accepted
                  accounting  principles in the United  States ("U.S.  GAAP") as
                  its primary basis of accounting, marking the completion of its
                  transition  from  accounting and reporting in accordance  whit
                  Israeli GAAP, with  supplemental  reporting under US GAAP on a
                  reconciliation  basis,  to  reporting on a full US GAAP basis.
                  Accordingly,  the Company's  consolidated financial statements
                  included  herein are presented for the first time on a full US
                  GAAP basis.

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


                                      F-9
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 1:- GENERAL (CONT.)

                  As a result of the NetGuard's  closure as mentioned above, the
                  results of operations  of NetGuard was reported  separately as
                  discontinued  operations in the  statements of operations  for
                  the  year  ended  December  31,  2001,  and is  summarized  as
                  follows:

                                                                    YEAR ENDED
                                                                    DECEMBER 31,
                                                                        2001
                                                                   -------------

                  Revenues                                         $      1,092
                  Cost of revenues                                         (260)
                  Research and development expenses                        (126)
                  Selling, general and administrative expenses             (504)
                  Financial income                                           19
                                                                   -------------

                  Net income                                       $        221
                                                                   =============

         d.       On  December  31,  2002,  following  two  quarters  of minimal
                  operations  related  to  the  networking   solutions  products
                  ("legacy products),  and based on management  expectations for
                  minimal   future   operations   related  to  these   products,
                  management  decided to account for its legacy  operations as a
                  discontinuation  of a business in accordance with Statement of
                  Financial  Accounting  Standard No. 144,  "Accounting  for the
                  Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"),
                  in  the   financial   statements  as  of  December  31,  2002.
                  Accordingly,   the  results  of   operations   of  the  legacy
                  operations  for the two years ended  December 31,  2002,  have
                  been  reported  separately as  discontinued  operations in the
                  statements  of  operations.   In  addition,   the  liabilities
                  attributed to the  discontinued  operations have been reported
                  separately  in the balance  sheets as of December 31, 2001 and
                  2002.

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

<TABLE>
<CAPTION>
                                                                    YEAR ENDED DECEMBER 31,
                                                                  --------------------------
                                                                      2002           2001
                                                                  -----------    -----------
<S>                                                                <C>            <C>
                  Revenues                                         $     61       $  1,449
                  Cost of revenues                                       (5)        (1,049)
                  Selling, general and administrative expenses           (5)          (197)
                  Other income, net                                      --            346
                  Minority interest in losses of a subsidiary            --             23
                                                                  -----------    -----------

                  Net income                                       $     51       $    572
                                                                  ===========    ===========
</TABLE>


                                      F-10
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 1:- GENERAL (CONT.)

         e.       On August 19, 2002, the Company acquired 2,777,778 Preferred A
                  shares  and  737,462   Preferred   B  shares  of  EZchip,   in
                  consideration of the issuance of 1,153,508  Ordinary shares of
                  the  Company.  The total  fair  value of the  Ordinary  shares
                  issued for the acquisition is $ 8,955,  (determined,  based on
                  the average price of LanOptics' Ordinary shares two day before
                  and  after  the  announcement  date of the  transaction).  The
                  transaction was accounted for according to the purchase method
                  of accounting,  and  accordingly,  the purchase price has been
                  allocated to the assets  acquired  based upon their  estimated
                  fair values at the date of  acquisition.  Since the fair value
                  of the  identifiable net assets acquired exceeds the cost, the
                  excess over cost (i.e.,  negative goodwill) reduced,  on a pro
                  rata basis,  amounts  assigned to all of the acquired  assets,
                  including  purchased research and development that was written
                  off in accordance with FIN4.

                  The purchase price allocation is as follows:

                   EZchip Preferred A and B shares acquired        $    4,188
                   Intangible assets acquired:
                     In-process research and development                3,928
                     Technology (1)                                     1,203
                     Property and equipment                              (204)
                     Prepaid development and production costs            (160)
                                                                   ----------

                   Total consideration                             $    8,955
                                                                   ==========

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

                  During March 2003,  EZchip  issued to  Lanoptics  and to third
                  parties 16,542,267 Series C Preferred shares, in consideration
                  of $ 13,500. The net amount of $ 10,928, which was invested by
                  third parties,  was recorded as Redeemable Preferred shares in
                  a subsidiary.

                  As of  December  31,  2003,  the  Company  holds 51% of EZchip
                  shares and 57% of the voting rights.

                  In May  2003,  Lanoptics  signed an  agreement  with all major
                  EZchip   shareholders   upon   which   Lanoptics   grants  the
                  shareholders the option to exchange their shares in EZchip for
                  Ordinary  shares of Lanoptics.  The exchange is subject to the
                  fulfillment of certain conditions.

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

         g.       As for  percentage of ownership  and control in  subsidiaries,
                  see Note 17.


                                      F-11
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

         The Company's  consolidated  financial statements have been prepared in
         accordance with Generally Accepted Accounting  Principles in the United
         States.

         a.       Use of estimates:

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

         b.       Financial statements in U.S. dollars:

                  The functional  currency of the Company is the U.S. dollar, as
                  the  U.S.  dollar  is the  primary  currency  of the  economic
                  environment  in which the Company has  operated and expects to
                  continue to operate in the foreseeable future. The majority of
                  the Company's  operations  are currently  conducted in Israel,
                  and most of the Israeli  expenses  are  currently  paid in New
                  Israeli  Shekels  ("NIS");  however,  most of the expenses are
                  denominated  and  determined  in U.S.  dollars.  Financing and
                  investing  activities,  including equity transactions and cash
                  investments, are made in U.S. dollars.

                  The subsidiary's  revenues are generated in U.S.  dollars.  In
                  addition, financing and investing activities, including loans,
                  equity  transactions  and cash  investments,  are made in U.S.
                  dollars. The subsidiary's  management believes that the dollar
                  is the primary  currency of the economic  environment in which
                  the  subsidiary  operates.  Thus, the functional and reporting
                  currency of the subsidiary is the U.S. dollar.

                  Accordingly,  monetary accounts maintained in currencies other
                  than the dollar are remeasued into U.S.  dollars in accordance
                  with the Statement of Financial  Accounting Standard Board No.
                  52,  "Foreign  Currency  Translation"  ("SFAS  No.  52").  All
                  transacation  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.       Principles 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:

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


                                      F-12
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

         e.       Marketable securities:

                  Management   determines  the   classification   of  marketable
                  securities  at the  time  of  purchase  and  reevaluates  such
                  designations  as of each  balance  sheet date.  As of December
                  2003 and 2002, all marketable  securities  were  designated as
                  available-for-sale.  Available-for-sale securities are carried
                  at fair value, with the unrealized gains and losses,  reported
                  as a separate component of shareholders'  equity,  accumulated
                  other comprehensive  income (loss).  Realized gains and losses
                  on  sales  of   investments,   as  determined  on  a  specific
                  identification   basis,   are  included  in  the  consolidated
                  statements of operations.

         f.       Inventories:

                  Inventories  are stated at the lower of cost or market  value.
                  Inventory  write-offs  are provided for  slow-moving  items or
                  technological obsolescence.

                  Cost is determined as follows:

                  Raw materials - using the weighted average method.

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

         g.       Property and equipment:

                  Property and  equipment are stated at cost,  less  accumulated
                  depreciation.  Depreciation is calculated by the straight-line
                  method over the  estimated  useful  lives of the  assets.  The
                  annual depreciation rates are as follows:

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

                  The  Company's  long-lived  assets  and  certain  identifiable
                  intangibles  are reviewed for  impairment in  accordance  with
                  SFAS No.  144,  whenever  events or changes  in  circumstances
                  indicate  that the  carrying  amount  of an  asset  may not be
                  recoverable.  Recoverability  of assets to be held and used is
                  measured by a comparison of the carrying amount of an asset to
                  the future undiscounted cash flows expected to be generated by
                  the assets. If such assets are considered to be impaired,  the
                  impairment to be recognized is measured by the amount by which
                  the  carrying  amount of the assets  exceeds the fair value of
                  the assets. Assets to be disposed of are reported at the lower
                  of the carrying amount or fair value less costs to sell.

                  During 2003,  2002 and 2001, the Company  recorded  impairment
                  losses in the amount of $ 0, $ 0 and $ 210, respectively.  The
                  impairment in 2001 is related to the  Company's  plan to focus
                  on the  network  processor  market  and  was  recorded  in the
                  statements of operations as discontinued operations loss.


                                      F-13
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

         h.       Other assets:

                  Intangible assets acquired in a business combination for which
                  date is on or after July 1,  2001,  are  amortized  over their
                  useful life 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
                  Statement of Financial  Accounting Standards No. 142 "Goodwill
                  and Other  Intangible  Assets",  ("SFAS  No.  142").  Acquired
                  technology is amortized  over a weighted  average  period of 5
                  years.

         i.       Redeemable  Preferred  shares in a  subsidiary  and  Preferred
                  shares in a subsidiary:

                  The investment by third parties in Redeemable Preferred shares
                  in a  subsidiary  and  Preferred  shares  in a  subsidiary  is
                  presented  as a  separate  component  in  the  balance  sheet,
                  Redeemable  Preferred  shares in a  subsidiary  and  Preferred
                  shares in a subsidiary, respectively.

                  The Redeemable  Preferred  shares bear annual  interest at the
                  rate of 6%.  Such  interest  is accrued  and will be paid only
                  upon redemption of such shares.

         j.       Research and development costs:

                  Research  and  development  costs are  charged to  expenses as
                  incurred.

         k.       Severance pay:

                  The  liability  of  the  Company  and  its   subsidiaries  for
                  severance pay is calculated pursuant to Israel's Severance Pay
                  Law  based  on  the  most  recent   salary  of  the  employees
                  multiplied  by the  number of years of  employment,  as of the
                  balance sheet date and is presented on an undiscounted  basis.
                  Employees are entitled to one month's  salary for each year of
                  employment or a portion thereof.  The liability for all of the
                  employees,   is  fully  provided  by  monthly   deposits  with
                  insurance  policies  and by an  accrual.  The  value  of these
                  policies  is  recorded  as an asset in the  Company's  balance
                  sheet.

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

                  Severance  expenses  (income) for the years ended December 31,
                  2003, 2002 and 2001 were $ 18, $ (25) and $ 107, respectively.

         l.       Income taxes:

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


                                      F-14
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

         m.       Net earnings (loss) per share:

                  Basic net earnings  (loss) per share are computed based on the
                  weighted average number of Ordinary shares  outstanding during
                  each year.  Diluted net earnings per share are computed  based
                  on the weighted average number of Ordinary shares  outstanding
                  during each year,  plus  dilutive  potential  Ordinary  shares
                  considered  outstanding  during the year, in  accordance  with
                  Statement of Financial  Accounting  Standard No. 128 "Earnings
                  Per share"("SFAS No. 128").

                  For the years ended  December  31,  2003,  2002 and 2001,  all
                  outstanding stock options and warrants have been excluded from
                  the  calculation  of the diluted net loss per  Ordinary  share
                  because all such stock  options were  antidilutive.  The total
                  weighted  average number of Ordinary shares related to options
                  and warrants excluded from the calculation of diluted net loss
                  per share were  313,989,  258,739  and  294,989  for the years
                  ended December 31, 2003, 2002 and 2001, respectively.

         n.       Accounting for stock based compensation:

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

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

                  Under SFAS No. 123, pro forma information regarding net income
                  (loss) and net earnings (loss) per share is required,  and has
                  been  determined  as if the  Company  had  accounted  for  its
                  employee  stock  options  under the fair value  method of that
                  Statement.  The fair value for these  options was estimated at
                  the date of grant using the Black-Scholes valuation model with
                  the following  assumptions:  risk-free interest rates of 3.00%
                  and 1.98% for 2001 and 2003, respectively.  dividend yields of
                  0% for each  year,  expected  life for an option of four years
                  and excepted  volatility of 1.287 and 0.836 for 2001 and 2003.
                  No options were granted during 2002.

                  The fair value for the  subsidiary's  options was estimated at
                  the date of grant  using the  Black-Scholes  valuation  model,
                  with the following  assumptions  for 2001, 2002 and 2003: risk
                  free interest rates of 3%, 4% and 2.98%, divided yields of 0%,
                  expected  life  for an  options  of four  years  and  excepted
                  volatility of 0.5.

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


                                      F-15
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  Pro forma information under SFAS 123:

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                     ------------------------------------------------
                                                                          2003              2002              2001
                                                                     --------------    -------------    -------------
<S>                                                                   <C>               <C>              <C>
                  Loss from continuing operations as reported         $   (10,404)      $  (14,354)      $   (8,363)
                                                                     ==============    =============    =============

                  Income from discontinued operations as reported     $        --       $       51       $      793
                                                                     ==============    =============    =============

                  Net loss as reported                                $   (10,404)      $  (14,303)      $   (7,570)
                                                                     ==============    =============    =============
                  Add: stock-based employee compensation expense
                    determined under fair value based method          $      (387)      $     (204)      $     (174)
                                                                     ==============    =============    =============
                  Deduct: stock-based employee compensation
                    expense included in reported net loss             $        43       $       --       $       --
                                                                     ==============    =============    =============

                  Pro forma loss from continuing operations           $   (10,748)      $  (14,558)      $   (8,537)
                                                                     ==============    =============    =============

                  Pro forma income from discontinued operations       $        --       $       51       $      793
                                                                     ==============    =============    =============

                  Pro forma net loss                                  $   (10,748)      $  (14,507)      $   (7,744)
                                                                     ==============    =============    =============
                  Pro forma net loss per share from continuing
                    operations                                        $     (1.27)      $    (1.87)      $    (1.17)
                                                                     ==============    =============    =============
                  Pro forma net earnings per share from
                    discontinued operations                           $        --       $       --       $     0.11
                                                                     ==============    =============    =============

                  Pro forma net loss per share                        $     (1.27)      $    (1.87)      $    (1.06)
                                                                     ==============    =============    =============
</TABLE>

         o.       Warranty costs:

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

         p.       Revenue recognition:

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

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


                                      F-16
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  Revenues from product sales are recognized in accordance  with
                  Staff  Accounting  Bulletin  No. 104 "Revenue  Recognition  in
                  Financial Statements" ("SAB 104"), when persuasive evidence of
                  an agreement exists, delivery of the product has occurred, the
                  fee is fixed or determinable and  collectibility  is probable.
                  Generally,   the  Company   does  not  have  any   significant
                  obligations after delivery. The Company does not grant a right
                  of return to its customers.

                  Revenues  from  maintenance  are  recognized  ratably over the
                  service period.  Deferred  revenue  includes  unearned amounts
                  received under maintenance.

         q.       Non-royalty bearing grants:

                  The Company's subsidiary received  non-royalty-bearing  grants
                  from the Fund for the  Encouragement of Marketing  Activity in
                  the amount of $ 0, $ 75 and $ 25 during  2003,  2002 and 2001,
                  respectively.  These  grants  are  recognized  at the time the
                  Company is  entitled  to such grants on the basis of the costs
                  incurred and  included as a reduction  in sales and  marketing
                  expenses.

         r.       Advertising expenses:

                  Advertising   expenses   are  charged  to  the   statement  of
                  operations,  as incurred.  Advertising  expenses for the years
                  ended  December 31, 2003,  2002 and 2001  amounted to $ 169, $
                  121 and $ 48, respectively.

         s.       Concentrations of credit risk:

                  Financial instruments that potentially subject the Company and
                  its  subsidiaries  to  concentrations  of credit risk  consist
                  principally   of  cash   and  cash   equivalents,   marketable
                  securities and trade receivables.

                  The Company's cash and cash equivalents are mainly invested in
                  major banks in Israel and the United States.  Such deposits in
                  U.S.  banks  may be in excess of  insured  limits  and are not
                  insured in other  jurisdictions.  Management believes that the
                  financial institutions that hold the Company's investments are
                  financially sound, and accordingly, minimal credit risk exists
                  with respect to these investments.

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

                  The Company's  marketable  securities  include  investments in
                  U.S. corporations and government debts securities.  Management
                  believes that those  corporations  are financially  sound, the
                  portfolio is well diversified, and accordingly, minimal credit
                  risk exists with respect to these marketable securities.


                                      F-17
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  The Company  and its  subsidiaries  have no  off-balance-sheet
                  concentrations   of  credit  risk  such  as  foreign  exchange
                  contracts,   option   contracts  or  other   foreign   hedging
                  arrangements.

         t.       Fair value of financial instruments:

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

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

                  The fair  value of  marketable  securities  is based on quoted
                  market prices. If the market value is lower than the amortized
                  cost for an  other-than-temporary  period, then the marketable
                  securities  are  amortized to their market  value.  As for the
                  fair value of the marketable securities see Note 3e.

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

                  In  January  2003,  the FASB  issued  Interpretation  No.  46,
                  "Consolidation of Variable Interest  Entities" ("FIN 46"). The
                  objective  of  FIN 46 is to  improve  financial  reporting  by
                  companies involved with variable interest entities. A variable
                  interest entity is a corporation,  partnership,  trust, or any
                  other legal  structure used for business  purposes that either
                  (a) does not have equity  investors  with voting rights or (b)
                  has equity investors that do not provide sufficient  financial
                  resources  for the entity to support  its  activities.  FIN 46
                  requires a variable  interest  entity to be  consolidated by a
                  company if that  company is subject to a majority  of the risk
                  of loss from the  variable  interest  entity's  activities  or
                  entitled  to  receive  a  majority  of the  entity's  residual
                  returns  or  both.  FIN 46  also  requires  disclosures  about
                  variable interest entities that the company is not required to
                  consolidate  but  in  which  it  has  a  significant  variable
                  interest.  The  consolidation  requirements  of FIN  46  apply
                  immediately  to  variable   interest  entities  created  after
                  January 31,  2003.  The  consolidation  requirements  apply to
                  older  entities  in the first  fiscal  year or interim  period
                  ending  after  March  15,  2004.  Certain  of  the  disclosure
                  requirements  apply in all financial  statements  issued after
                  January 31, 2003,  regardless  of when the  variable  interest
                  entity was established.

                  As of  December  31,  2003,  the  Company  does not expect the
                  adoption  of  FIN  46  to  have  a  material   impact  on  its
                  consolidated financial statements.


                                      F-18
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

                  In April  2003,  the FASB  issued  SFAS No. 149 ("SFAS  149"),
                  "Amendment  of Statement  133 on  Derivative  Instruments  and
                  Hedging  Activities."  SFAS 149 amends and  clarifies  (1) the
                  accounting  guidance  on  derivative   instruments  (including
                  certain  derivative  instruments  embedded in other contracts)
                  and (2) hedging  activities that fall within the scope of FASB
                  Statement No. 133 ("SFAS  133"),  "Accounting  for  Derivative
                  Instruments and Hedging  Activities." SFAS 149 amends SFAS 133
                  to  reflect  decisions  made  (1) as part  of the  Derivatives
                  Implementation Group ("DIG") process that effectively required
                  amendments to SFAS 133, (2) in connection  with other projects
                  dealing  with   financial   instruments,   and  (3)  regarding
                  implementation  issues  related  to  the  application  of  the
                  definition  of a  derivative.  SFAS 149 is  effective  (1) for
                  contracts  entered into or modified after June 30, 2003,  with
                  certain   exceptions,   and  (2)  for  hedging   relationships
                  designated  after June 30, 2003. The guidance is to be applied
                  prospectively.

                  Generally,  SFAS  149  improves  financial  reporting  by  (1)
                  requiring that contracts with  comparable  characteristics  be
                  accounted for similarly and (2)  clarifying  when a derivative
                  contains a financing component that warrants special reporting
                  in the  statement  of cash flows.  SFAS 149 is not expected to
                  have a material impact on the Company's financial statements.

                  In May 2003, the FASB issued SFAS 150, "Accounting For Certain
                  Financial Instruments with Characteristics of Both Liabilities
                  and Equity" which  establishes  standards for how an issuer of
                  financial   instruments   classifies   and  measures   certain
                  financial instruments with characteristics of both liabilities
                  and equity.  It requires  that an issuer  classify a financial
                  instrument  that is  within  its scope as a  liability  (or an
                  asset in some  circumstances)  if, at inception,  the monetary
                  value of the obligation is based solely or  predominantly on a
                  fixed  monetary  amount  known  at  inception,  variations  in
                  something  other  than the fair value of the  issuer's  equity
                  shares or variations  inversely related to changes in the fair
                  value  of  the  issuer's  equity  shares.  This  Statement  is
                  effective for financial  instruments  entered into or modified
                  after  May  31,  2003,  and  otherwise  is  effective  at  the
                  beginning of the first interim period beginning after June 15,
                  2003.  The  adoption  of SFAS  150 is not  expected  to have a
                  material impact on the Company's financial position or results
                  of operations.

                  In December  2003,  the SEC issued Staff  Accounting  Bulletin
                  ("SAB") No. 104, "Revenue  Recognition," ("SAB No. 104") which
                  revises or rescinds certain sections of SAB No. 101,  "Revenue
                  Recognition,"  in order  to make  this  interpretive  guidance
                  consistent with current authoritative  accounting and auditing
                  guidance and SEC rules and  regulations.  The changes noted in
                  SAB No.  104 did not have a material  effect on the  Company's
                  consolidated  results of  operations,  consolidated  financial
                  position or consolidated cash flows.


                                      F-19
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 3:- MARKETABLE SECURITIES

<TABLE>
<CAPTION>
                                                        2003                                   2002
                                       ------------------------------------     ------------------------------------
                                                       GROSS                                   GROSS
                                       AMORTIZED    UNREALIZED      MARKET      AMORTIZED    UNREALIZED      MARKET
                                          COST         GAINS        VALUE         COST         GAINS         VALUE
                                       ---------    ----------     --------     ---------     --------      --------
<S>                                    <C>           <C>           <C>          <C>           <C>           <C>
         AVAILABLE-FOR-SALE:
         U.S. and European corporate
           debts securities            $  5,398      $     16      $  5,414     $  6,623      $     21      $  6,644
                                       ========      ========      ========     ========      ========      ========

<CAPTION>
                                                                                               2003
                                                                                ------------------------------------
                                                                                  AMORTIZED              MARKET
                                                                                     COST                 VALUE
                                                                                ---------------      ---------------
<S>                                                                             <C>                   <C>
         Available-for-sale:
         Matures in one year                                                    $     2,075           $      2,073
         Matures after one year                                                       3,344                  3,341
                                                                               ----------------      ---------------

         Total                                                                  $     5,419           $      5,414
                                                                               ================      ===============
</TABLE>

         The  gross  realized  gains  on sale of  available-for-sale  securities
         totaled $ 126, $ 566 and $ 1,189 in 2003, 2002 and 2001, respectively.

         As of December 31, 2003,  2002 and 2001, the  unrealized  gain (losses)
         amounted to $ (5), $ 21 and $ 119, respectively.


NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

                                                        DECEMBER 31,
                                               ----------------------------
                                                   2003            2002
                                               ------------    ------------
         Government authorities                $         46    $        209
         Employees                                       46              71
         Prepaid expenses                               232             198
         Unbilled receivables                            25              25
         Others                                           4              29
                                               ------------    ------------

                                               $        353    $        532
                                               ============    ============

NOTE 5:- INVENTORIES

         Raw materials                         $        159    $         94
         Work in progress                                24               3
         Finished products                              221             280
                                               ------------    ------------

                                               $        404    $        377
                                               ============    ============


                                      F-20
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 6:- PREPAID DEVELOPMENT AND PRODUCTION COSTS

         During 2000, the Company  recorded  prepaid  development and production
         costs in the amount of $ 2,134 pursuant to an agreement  signed between
         EZChip and IBM. According to the agreement,  EZChip issued to IBM fully
         vested non-forfeitable  Ordinary shares and is also obligated to future
         payments   according  to  achievements  of  milestones  and  production
         quantities,  in consideration of development and production services to
         be provided by IBM,  which  consists of the  following:  Development  -
         Access to unique  semiconductor  communications cores and technologies,
         such   as   Cu-11,   Production   -  IBM   will   develop   specialized
         high-performance  embedded DRAM cores,  which meet the  requirements of
         EZChip's  10-Gigabit  wire-speed  processing.  The fair  value of these
         services was measured in  accordance  with EITF 96-18  "Accounting  for
         Equity  Investments  That  Are  Issued  to  Other  Than  Employees  for
         Acquiring or in  Conjunction  with Selling,  Goods or Services"  ("EITF
         96-18")  and  recorded  as an asset in  accordance  with  EITF  00-18 "
         Accounting   Recognition  for  Certain  Transactions  involving  Equity
         Instruments Granted to Other Than Employees" ("EITF 00-18").

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

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

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

         For the year  ended  December  31,  2003,  2002 and 2001,  amortization
         expenses related to the development  costs amounted to $ 122, $ 505 and
         $ 542,  respectively  and  the  amortization  expenses  related  to the
         production cost amounted to $ 12, $ 4 and $ 0, respectively.

         At each balance sheet date, the unamortized capitalized development and
         production  costs  are  compared  to the net  realizable  value  of the
         prepaid  development  and  production  costs.  The  amount by which the
         unamortized  capitalized  costs exceed the net realizable value of that
         asset is written-off.  The net realizable value is the estimated future
         gross income from that product reduced by the estimated future costs of
         completing and selling that product.  As of December 31, 2003, no write
         off was deemed necessary.


                                      F-21
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 7:- ROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                           ------------------------
                                                               2003          2002
                                                           ----------    ----------
<S>                                                        <C>           <C>
         Cost:
           Office furniture and equipment                  $        5    $        7
           Computers, software and electronic equipment         2,781         2,520
           Motor vehicles                                          62            82
           Leasehold improvements                                  47            42
                                                           ----------    ----------

                                                                2,895         2,651
                                                           ----------    ----------
         Accumulated depreciation:
           Office furniture and equipment                           1             1
           Computers, software and electronic equipment         2,286         1,756
           Motor vehicles                                          31            31
           Leasehold improvements                                  13             6
                                                           ----------    ----------

                                                                2,331         1,794
                                                           ----------    ----------

         Depreciated cost                                  $      564    $      857
                                                           ==========    ==========
</TABLE>

         Depreciation  expenses for the years ended December 31, 2003,  2002 and
         2001, amounted to approximately $ 545, $ 655 and $ 468, respectively.


NOTE 8:- OTHER ASSETS

                                                               DECEMBER 31,
                                                        ------------------------
                                                            2003          2002
                                                        ----------    ----------
         Cost:
           Technology                                   $    1,203    $    1,203
                                                        ----------    ----------

         Accumulated amortization                              330            91
                                                        ----------    ----------

         Amortized cost                                 $      873    $    1,112
                                                        ==========    ==========

         Amortization  expenses for the years ended December 31, 2003,  2002 and
         2001, amounted to approximately $ 239, $ 91 and $ 0, respectively.


NOTE 9:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                               DECEMBER 31,
                                                        ------------------------
                                                            2003          2002
                                                        ----------    ----------
         Employees and payroll accruals                 $    1,199    $    1,060
         Accrued expenses                                      843           766
         Deferred revenues                                     420           468
         Others                                                 --             2
                                                        ----------    ----------

                                                        $    2,462    $    2,296
                                                        ==========    ==========


                                      F-22
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 10:- LONG-TERM LOAN

         In April 2003,  EZchip signed a loan  agreement  with a third party for
         providing EZchip with a $ 1,500 revolving  credit facility.  The credit
         facility  may be  increased  by an  additional  $ 1,500  upon  Ezchip's
         achievement of certain milestones.

         The loan bears  annual  interest  of LIBOR + 4.5% per  annum.  The loan
         shall  be  repaid  at the  earlier  of (1)  March  14,  2005;  (2)  the
         consummation  of an investment of at least $ 15,000,  or (3) an Initial
         Public Offering ("IPO").

         EZchip granted to the third party a first priority  floating  charge on
         all of its tangible and intangible assets, to reserve the loan.

         In  addition,  EZchip  granted  the third  party a warrant to  purchase
         551,409  Preferred C shares at an exercise price of $ 0.8161 per share.
         The warrant is exercisable until the earlier of March 2011 or an IPO.

         The warrant was  accounted  for  according to APB 14,  "Accounting  for
         Convertible  Debt and Debt Issued with Stock Purchase  Warrants"  ("APB
         14"). Under APB 14, the fair value of the warrants was calculated using
         the  Black-Scholes  valuation model with the following  assumptions:  a
         risk-free  interest rate of 1.38%, a dividend yield of 0%, a volatility
         of 0.5 and a weighted  average  expected life of eight years.  The fair
         value  of  the  warrants  was  presented  as  "warrants   issued  by  a
         subsidiary", and accordingly as a discount on the loan. The discount is
         recorded as financial expenses over a period of two years, based on the
         assumption that the loan will be repaid in March 2005.


NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES

         a.       Royalty commitments:

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

                  The  Company  is  committed  to pay  royalties  at the rate of
                  3%-4.5% to the Chief  Scientist  with  respect to  products in
                  which the Chief  Scientist  participates in their research and
                  development  costs,  up to an amount equal to 100%-150% of the
                  grants  received.  Repayment of such grants is not required in
                  the  event  that  there  are no  sales of  products  developed
                  through such grants.  As of December 31, 2003, the Company has
                  a contingent  obligation to pay royalties  with respect to the
                  aforementioned  grants  in the  amount  of $ 7,802  (excluding
                  accrued   interest),   which  is   related   to   discontinued
                  operations. Therefore, the Company does not anticipate that it
                  will pay additional royalties in respect of these grants.

                  Royalties paid or accrued during 2003,  2002 and 2001,  were $
                  0, $ 0 and $ 63,  respectively,  and  recorded  as part of the
                  cost of revenues.


                                      F-23
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 11:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

         b.       Lease commitments:

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

                                               YEAR ENDED
                                              DECEMBER 31,
                                              ------------
                              2004            $        339
                              2005                     339
                              2006                     339
                              2007                      28
                                              ------------
                                              $      1,045
                                              ============

                           In case the  Company  will  decide to  terminate  the
                           operating lease agreement  earlier,  the Company will
                           pay compensation in an amount of $ 20 to $ 60.

                           The  Company's  subsidiary  leases two offices in the
                           U.S.  under lease  agreement,  which renews every six
                           months for a monthly payment of $ 5.

                           Rent expenses for the years ended  December 31, 2003,
                           2002 and 2001,  amounted  to $ 370,  $ 410 and $ 383,
                           respectively.

                  (2)      The Company and its  subsidiary  lease motor vehicles
                           under operating lease  agreements,  which will expire
                           in   2006.   The   minimum   lease   payments   under
                           non-cancelable operating leases are as follows:

                                               YEAR ENDED
                                              DECEMBER 31,
                                              ------------
                              2004            $        198
                              2005                      85
                              2006                      35
                                              ------------
                                              $        318
                                              ============

                           Rent expenses for the years ended  December 31, 2003,
                           2002 and 2001,  amounted  to $ 443,  $ 549 and $ 414,
                           respectively.


                                      F-24
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 12:- SHAREHOLDERS' EQUITY

         a.       1.       Company's shares:

                           Ordinary  shares confer on their holders the right to
                           receive  notice to  participate  and vote in  general
                           meetings of the Company,  the right to a share in the
                           excess of assets upon liquidation of the Company, and
                           the right to receive dividends, if declared.

                           In December 2003, the Company issued 750,000 Ordinary
                           shares  for a  total  consideration  of $  6,000.  In
                           addition,  the Company granted the investor  warrants
                           to  purchase  up to  187,500  Ordinary  shares  at an
                           exercise  price of $ 11.39 per  Ordinary  share.  The
                           warrants are exercisable until December 2008.

                           The warrants  may not be  exercised if the  investors
                           together with its  affiliates,  would own a number of
                           Ordinary  shares  that  would  exceed  9.99%  of  the
                           Company's  outstanding Ordinary shares following such
                           exercise. As of December 31, 2003, the shareholder is
                           holding 8.1% of the  Company's  outstanding  Ordinary
                           shares.

                           In 2002,  as part of the  listing  on the  TASE,  the
                           Company retired all of its Deferred shares (1,000) at
                           their nominal value that is lower than $ 1.

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

                  2.       Subsidiary's shares:

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

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

                            b)     Voting rights:

                                   Every holder of  Preferred  shares shall have
                                   one vote for each  Ordinary  share into which
                                   the  Preferred  shares  held by him  could be
                                   converted.

                            c)     Conversion:

                                   Each Preferred  share shall be convertible at
                                   the  option  of  the  holder  into   EZchip's
                                   Ordinary  shares  on a 1:1 basis  subject  to
                                   adjustment.

                                   The Preferred  shares shall  automatically be
                                   converted  into EZchip  Ordinary  shares on a
                                   1:1  basis,  subject  to  adjustment  upon  a
                                   qualified  IPO or by  decision of the holders
                                   of a majority  of the  outstanding  Preferred
                                   shares at any time.


                                      F-25
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

                  d)       Dividend preference:

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

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

                  e)       Anti-dilution:

                           In the  event  that at any time  after  the  original
                           issuance date of Preferred A, B and C shares,  EZchip
                           issues  additional shares at a price which reflects a
                           price per share  that is lower  than the price of the
                           Preferred  A or  Preferred  B or  Preferred C shares,
                           then the conversion  price for each  Preferred  share
                           shall be adjusted to reflect such price reduction, in
                           accordance with determined formula for each Series of
                           Preferred shares.

                  f)       Liquidation preference:

                           (a)  First,  each  Series  C  Preferred  share  shall
                           entitle its holder to the original Series C per share
                           issue  price;  (b)  second,  each  Series B Preferred
                           share shall entitle its holder to the original Series
                           B per share  issue  price;  (c) Third,  each Series A
                           Preferred  share  shall  entitle  its  holder  to the
                           original Series A per share issue price;  (d) fourth,
                           each  Series C  Preferred  share  shall  entitle  its
                           holder to one and a half times the original  Series C
                           per share  issue  price;  (e)  fifth,  each  Series B
                           Preferred share shall entitle its holder to one and a
                           half  times the  Original  Series B per  share  issue
                           price and,  (f)  sixth,  in the event that the assets
                           available for distribution  shall equal or exceed the
                           amount  necessary  to pay the full  Series C, B and A
                           liquidation    preference,     then    after    those
                           distributions,  all of the remaining  assets shall be
                           distributed  to  the  holders  of  Series  A, B and C
                           Preferred shares and Ordinary shares in proportion to
                           the respective  percentage holdings,  assuming all of
                           the outstanding  Preferred shares have been converted
                           into Ordinary shares.

                           Each  holders of Series C  Preferred  and or Series B
                           Preferred Shares shall receive,  with respect to each
                           Series C Preferred  and or Series B Preferred  Shares
                           held  by  such  holder,  the  greater  of  (1)  the C
                           Preference  or B  Preference  as  applicable  to such
                           Preferred  Shares, or (2) the amount that such holder
                           would   receive   pursuant   to  the   abovementioned
                           distribution.  The  holders  of  Series  A  Preferred
                           shares  shall  not  be  entitled  to  receive  the  A
                           Preference  if upon a  distribution  of the assets of
                           the   Company   pursuant   to   the    abovementioned
                           distribution,   without   giving   effect  to  the  A
                           Preference,  such holder would receive, in respect of
                           each Series A Preferred  share an amount  equal to or
                           greater than three times the original A issue price.


                                      F-26
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

                  g)       Redemption:

                           At the  request of the  holders of Series C Preferred
                           shares  after  four  years  from the  issuance  date,
                           EZchip  will be  required  to  redeem  the  Series  C
                           Preferred  shares at a price  per share  equal to the
                           greater of (a) the original  Series C per share issue
                           price plus an amount  equal to any accrued and unpaid
                           dividends thereon plus 6% coupon interest  compounded
                           annually or (b) the fair market value of such shares.
                           EZchip will be required to redeem  Preferred C Shares
                           subject  to  approval  of  a  majority  of  Series  C
                           Preferred shareholders.

                  h)       Required consent:

                           EZchip's  articles of incorporation  require approval
                           by a simple  majority  of its board of  directors  or
                           shareholders   actions  in  the  ordinary  course  of
                           business.

                           The  consent of  holders  of a  majority  of Series C
                           Preferred shares shall be required to:

                                o    Change   the  rights  and
                                     terms  of  the  Series  C
                                     Preferred shares;

                                o    Issue any security either
                                     senior  to or on a parity
                                     with    the    Series   C
                                     Preferred shares;

                                o    Sell or merge  EZchip (or
                                     any    other    corporate
                                     reorganization)  or  sell
                                     or exclusively  license a
                                     substantial   portion  of
                                     its  assets;

                                o    Pay  any  dividend  to or
                                     redeem    any    existing
                                     Preferred    shares    or
                                     Ordinary shares;

                                o    Change  EZchip's  by-laws
                                     or       articles      of
                                     incorporation.

         b.       Stock option plans:

                  Under the 1992 and 2003 option plans,  the Company has granted
                  options  to  purchase   Ordinary   shares  to  key  employees,
                  directors and  consultants of the Company.  Under the terms of
                  these plans,  options,  generally become  exercisable  ratably
                  over a four-year period commencing with the date of grant. The
                  options  generally  expire no later  than 5-10  years from the
                  date of the grant, and are non-transferable,  except under the
                  laws of succession.

                  As of December 31, 2003, no Ordinary shares of the Company are
                  still available for future grant.

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


                                      F-27
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 12:-     SHAREHOLDERS' EQUITY (CONT.)

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

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                      ----------------------------------------------------------------------------------
                                                 2003                       2002                        2001
                                      --------------------------- --------------------------  --------------------------
                                                      WEIGHTED                   WEIGHTED                    WEIGHTED
                                                      AVERAGE                     AVERAGE       NUMBER        AVERAGE
                                         NUMBER       EXERCISE       NUMBER      EXERCISE         OF         EXERCISE
                                       OF OPTIONS      PRICE       OF OPTIONS      PRICE        OPTIONS        PRICE
                                      ------------  ------------  ------------  ------------  ------------  ------------
<S>                                    <C>           <C>           <C>           <C>           <C>           <C>
                  Outstanding at
                   beginning of year   258,739       $    4.01     294,989       $    3.92     313,614       $  3.95
                   Granted              90,250       $    6.93          --       $      --      20,000       $  4.15
                   Exercised           (35,000)      $    2.68     (21,250)      $    2.5       (6,125)      $  2.50
                   Forfeited                --       $      --     (15,000)      $    4.25     (32,500)      $  4.65
                                      ------------                ------------                ------------
                  Outstanding at                                                                             $  3.92
                    end of year        313,989       $    5.00     258,739       $    4.01     294,989
                                      ============  ============  ============  ============  ============  ============
                  Exercisable
                   options at end
                   of year             238,989       $    4.45     247,239       $    4        231,660       $  3.87
                                      ============  ============  ============  ============  ============  ============
</TABLE>

                  The options  outstanding as of December 31, 2003, have been
                  separated into exercise prices, as follows:

<TABLE>
<CAPTION>
                                                                                                              WEIGHTED
                                        OPTIONS          WEIGHTED                            OPTIONS          AVERAGE
                                      OUTSTANDING         AVERAGE         WEIGHTED         EXERCISABLE       EXERCISE
                                         AS OF           REMAINING         AVERAGE            AS OF          PRICE OF
                   EXERCISE           DECEMBER 31,      CONTRACTUAL       EXERCISE        DECEMBER 31,        OPTIONS
                   PRICE                  2003             LIFE             PRICE             2003          EXERCISABLE
                  ---------------   -----------------  -------------    --------------   ----------------   ------------
                                                           YEARS
                                                       -------------
<S>                                      <C>              <C>            <C>                  <C>             <C>
                   $   2.5               7,000            3.13           $   2.5              7,000           $   2.5
                   $   4.15             16,250            2.87           $   4.15            11,250           $   4.15
                   $   4.234           194,739            0.82           $   4.234          194,739           $   4.234
                   $   6                 6,000            0.99           $   6                6,000           $   6
                   $   6.93             90,000            9.85           $   6.93            20,000           $   6.93
                                    -----------------                                    ----------------
                                       313,989                           $   5.00           238,989           $   4.45
                                    =================                   ==============   ================   ============
</TABLE>

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

<TABLE>
<CAPTION>
                                                                       FOR EXERCISE PRICES ON THE DATE OF GRANT THAT
                                                                                     EQUAL MARKET PRICE
                                                                      -------------------------------------------------
                                                                                        DECEMBER 31,
                                                                      -------------------------------------------------
                                                                           2003             2002             2001
                                                                      ---------------- ---------------  ---------------
<S>                                                                    <C>              <C>              <C>
                  Weighted average exercise price                      $      6.93      $     --         $      4.15
                  Weighted average fair value on date of grant         $      3.43      $     --         $      3.62
</TABLE>


                                      F-28
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

                  Stock options of subsidiary:

                  Under the EZchip's  Stock Option  Plans,  options for Ordinary
                  shares may be granted to officers,  directors,  employees  and
                  consultants of EZchip.

                  Pursuant to the plans,  EZchip reserved for issuance 9,500,000
                  Ordinary  shares.  As of December  31,  2003,  an aggregate of
                  1,304,526  options  of EZchip are still  available  for future
                  grant.

                  The options  generally expire during the period of seven to 10
                  years  from  the  date of  grant.  The  exercise  price of the
                  options  granted  under  the  plan  may not be less  than  the
                  nominal  value of the  shares  into  which  such  options  are
                  exercised.  The options vest  primarily  over four years.  Any
                  options  that are  canceled  or  forfeited  before  expiration
                  become available for future grant.

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

<TABLE>
<CAPTION>
                                                                YEAR ENDED DECEMBER 31,
                                     ----------------------------------------------------------------------------------
                                                2003                       2002                        2001
                                     --------------------------- --------------------------  --------------------------
                                                     WEIGHTED                   WEIGHTED                    WEIGHTED
                                                     AVERAGE                     AVERAGE                     AVERAGE
                                        NUMBER       EXERCISE       NUMBER      EXERCISE       NUMBER       EXERCISE
                                      OF OPTIONS      PRICE       OF OPTIONS      PRICE       OF OPTIONS      PRICE
                                     ------------- ------------- ------------- ------------  ------------  ------------
<S>                                   <C>           <C>           <C>            <C>          <C>           <C>
                  Outstanding at
                   beginning of
                   year               5,475,024     $    0.66     5,492,211      $    0.65    3,516,500     $    0.45

                   Granted            2,810,732     $    0.82        90,000      $    1.0     2,078,711     $    1.00
                   Exerceised           (26,250)    $    1               --      $      --           --     $      --
                   Forfeited            (79,032)    $    0.94      (107,187)     $    0.79     (103,000)    $    0.61
                                     -------------               -------------               ------------
                  Outstanding at
                   end of year        8,180,474     $    0.71     5,475,024      $    0.66    5,492,211     $    0.65
                                     ============= ============= ============= ========== == ============  ============
                  Exercisable
                   options at end
                   of year            4,653,275     $    0.6      3,236,149      $    0.53    1,654,375     $    0.40
                                     ============= ============= ============= ========== == ============  ============
</TABLE>

                  The options  outstanding  as of December 31,  2003,  have been
                  separated into exercise prices as follows:

<TABLE>
<CAPTION>
                                                                                                           WEIGHTED
                                     OPTIONS           WEIGHTED                           OPTIONS           AVERAGE
                                   OUTSTANDING          AVERAGE         WEIGHTED        EXERCISABLE        EXERCISE
                                      AS OF            REMAINING        AVERAGE            AS OF           PRICE OF
                  EXERCISE         DECEMBER 31,       CONTRACTUAL       EXERCISE        DECEMBER 31,        OPTIONS
                  PRICE                2003              LIFE            PRICE              2003           EXERCISABLE
                  -------------- -----------------   --------------   -------------   -----------------   ------------
                                                         YEARS
                                                     --------------
<S>                                  <C>                 <C>            <C>              <C>                <C>
                  $   0.4            2,930,938           3.43           $   0.4          2,930,313          $    0.4
                  $   0.72             416,344           3.4            $   0.72           370,531          $    0.72
                  $   0.82           2,732,481           9.78           $   0.82            26,250          $    0.82
                  $   1              2,100,711           5.47           $   1            1,326,181          $    1
                             -----------------                                       --------------
                                     8,180,474           6.04           $   0.71         4,653,275          $    0.6
                             =================                          ========     ==============       ============
</TABLE>


                                      F-29
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 12:- SHAREHOLDERS' EQUITY (CONT.)

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

<TABLE>
<CAPTION>
                                                                   FOR EXERCISE PRICES ON THE DATE OF GRANT THAT
                                                                                 EQUAL MARKET PRICE
                                                                  -------------------------------------------------
                                                                                    DECEMBER 31,
                                                                  -------------------------------------------------
                                                                       2003             2002             2001
                                                                  ---------------- ---------------  ---------------
<S>                                                                 <C>              <C>              <C>
                  Weighted average exercise price                   $      0.82      $      1.00      $      1.00
                  Weighted average fair value on date of grant      $      0.35      $      0.41      $      0.45
</TABLE>

                  The  subsidiary's  outstanding  options to  consultants  as of
                  December 31, 2003, are as follows:

<TABLE>
<CAPTION>
                                   OPTIONS FOR           EXERCISE
                  ISSUANCE           ORDINARY           PRICE PER          OPTIONS        EXERCISABLE
                  DATE                SHARES              SHARE          EXERCISABLE        THROUGH
                  -------------- -----------------   -----------------  --------------  -----------------
<S>                                  <C>                 <C>               <C>               <C>
                  May 2000           15,000              $   0.72          15,000            May 2007
</TABLE>

         c.       Repurchase of Ordinary shares:

                  The Company has received all necessary  approvals in Israel to
                  allow the  repurchase of up to 10% of its  outstanding  shares
                  (up to approximately  600,000 shares) in the open market, from
                  time to time, at prevailing  prices.  As of December 31, 2003,
                  418,855 shares have been repurchased.

         d.       Dividends:

                  Dividends,  when declared, will be paid in NIS. Dividends paid
                  to shareholders outside Israel will be converted into dollars,
                  on the basis of the exchange  rate  prevailing  at the date of
                  payment.   The  Company  has  determined   that  it  will  not
                  distribute dividends out of tax-exempt profits (see Note 13b).


NOTE 13:- INCOME TAXES

         a.       Tax laws applicable to the companies:

                  The  provisions of the Income Tax  (Inflationary  Adjustments)
                  Law,  1985 apply to the  Company  and  certain of its  Israeli
                  investees.  According to the law, the results for tax purposes
                  are measured based on the changes in Israel's CPI. In November
                  2001,   an   amendment   to  the  Income   Tax   (Inflationary
                  Adjustments)  Law  (Amendment  No. 14), 2001 was passed by the
                  "Knesset"  (Israeli  parliament),   pursuant  to  which  until
                  February 28 of the year  following the reported tax year,  the
                  Minister  of  Finance,   with  the  approval  of  the  finance
                  committee of the Knesset, is entitled to determine by an order
                  that the provisions of the aforesaid law, in whole or in part,
                  will not apply with  respect to a certain tax year if Israel's
                  CPI in that year did not increase by more than 3%. In February
                  2004,  the  Minister  of  Finance  and the  finance  committee
                  decided  that  the   Inflationary   Adjustments  Law  will  be
                  implemented with respect to 2003.


                                      F-30
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 13:- INCOME TAXES (CONT.)

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

                  In 2000 EZchip Ltd. was granted "Approved  Enterprise"  status
                  under the above Law and has elected to enjoy the  "alternative
                  benefits  track"  -  waiver  of  grants  in  return  for a tax
                  exemption and, accordingly, EZchip's income from the "Approved
                  Enterprise"  will  be  tax-exempt  for a  period  of 10  years
                  commencing  with the year in  which  it  first  earns  taxable
                  income.  In 2002,  EZchip submitted a request for an expansion
                  program.

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

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

                  The  entitlement  to the above  benefits is  conditional  upon
                  EZchip fulfilling the conditions  stipulated by the above law,
                  regulations  published  thereunder and the letters of approval
                  for the specific investments in "Approved Enterprises". In the
                  event of failure to comply with these conditions, the benefits
                  may be  canceled  and  EZchip  may be  required  to refund the
                  amount  of  the  benefits,  in  whole  or in  part,  including
                  interest.  As of the  balance  sheet  date,  EZchip's  benefit
                  period has not yet commenced.

                  As of December 31, 2003,  EZchip  complies with the conditions
                  set forth by the Investment Center.

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

         c.       Available carry forward tax losses:

                  The Company and its subsidiaries  have accumulated  losses and
                  deductions  for tax  purposes as of  December  31, 2003 in the
                  amount  of  approximately  $ 47,749  as  follows:  $ 45,054 in
                  Israel and $ 2,695 in the U.S..  In addition,  the Company has
                  capital losses in the amount of $ 21,711.

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

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


                                      F-31
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 13:-     INCOME TAXES (CONT.)

         d.       Deferred tax assets consist of the following:

<TABLE>
<CAPTION>
                                                                         DECEMBER 31,
                                                                     -------------------
                                                                       2003        2002
                                                                     -------     -------
<S>                                                                  <C>         <C>
                  Accrued vacation pay and severance pay             $    50     $    37
                  Loss carryforward                                    6,925       5,860
                                                                     -------     -------

                  Deferred tax assets before valuation allowance       6,975       5,897
                  Less - valuation allowance                          (6,975)     (5,897)
                                                                     -------     -------

                  Net deferred tax assets                            $    --     $    --
                                                                     =======     =======
</TABLE>

                  During the year ended  December 31, 2003,  the Company and its
                  subsidiaries in Israel and in the U.S. have provided valuation
                  allowances of $ 1,078 and increased the valuation allowance to
                  $ 6,975 in respect of deferred tax assets  resulting  from tax
                  loss carryforward and other temporary differences.  Management
                  currently  believes  that it is more  likely than not that the
                  deferred tax assets regarding the loss  carryforward and other
                  temporary  differences will not be realized in the foreseeable
                  future.

         e.       Loss from continuing operations, before the minority interest,
                  is comprised as follows:

                                            YEAR ENDED DECEMBER 31,
                               -------------------------------------------------
                                    2003             2002             2001
                               ---------------   --------------   --------------

                  Domestic     $      (9,121)      $ (13,236)       $    (8,237)
                  Foreign             (1,283)         (1,118)              (206)
                               ---------------   --------------   --------------

                               $     (10,404)      $ (14,354)       $    (8,443)
                               ===============   ==============   ==============


NOTE 14:- 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.



                                      F-32
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 14:-     SEGMENTS AND GEOGRAPHIC INFORMATION (CONT.)

         b.       Total  revenues are  attributed to  geographic  areas based on
                  location of end customers.

                  The  following  presents  total  revenues  for the years ended
                  December 31, 2003, 2002 and 2001 and long-lived  assets, as of
                  December 31, 2003, 2002 and 2001:

<TABLE>
<CAPTION>
                                                 2003                       2002                      2001
                                       -------------------------  ------------------------- --------------------------
                                          TOTAL      LONG-LIVED     TOTAL       LONG-LIVED     TOTAL      LONG-LIVED
                                        REVENUES      ASSETS       REVENUES      ASSETS      REVENUES       ASSETS
                                       ------------ ------------  -----------  ------------ ------------ -------------
<S>                                     <C>          <C>           <C>          <C>          <C>          <C>
                  Israel                $     271    $   1,955     $    185     $   2,615    $    --      $  2,597
                  Far East                    993           --          275            --         --            --
                  North America               434            4            5            10         --             9
                  Others                       58           --           --            --         --            --
                                       ------------ ------------  -----------  ------------ ------------ -------------

                                        $   1,756    $   1,959     $    465     $   2,625    $    --      $  2,606
                                       ============ ============  ===========  ============ ============ =============
</TABLE>

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

                                                         YEAR ENDED
                                                        DECEMBER 31,
                                            ------------------------------------
                                                 2003                 2002
                                            -------------        ---------------

                     Customer A                    -                  11%
                     Customer B                    -                  37%
                     Customer C                   13%                  -
                     Customer D                   9%                  10%
                     Customer E                   22%                 14%


NOTE 15:- FINANCIAL INCOME (EXPENSES)

<TABLE>
<CAPTION>
                                                                     YEAR ENDED DECEMBER 31,
                                                         -------------------------------------------
                                                             2003            2002            2001
                                                         -----------     -----------     -----------
<S>                                                      <C>             <C>             <C>
         Income:
           Interest income                               $       207     $       566     $     1,225
           Foreign currency translation adjustments                3              76              96
                                                         -----------     -----------     -----------

                                                                 210             642           1,321
                                                         -----------     -----------     -----------
         Expenses:
           Interest and bank charges                              (8)             (4)            (13)
           Interest on a long-term loan                          (54)             --              --
           Interest on Redeemable Preferred shares in
             a subsidiary                                       (504)             --              --
           Amortization of discount on long-term loan            (59)             --              --
                                                         -----------     -----------     -----------

                                                                (625)             (4)            (13)
                                                         -----------     -----------     -----------

                                                         $      (415)    $       638     $     1,308
                                                         ===========     ===========     ===========
</TABLE>


                                      F-33
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA


NOTE 16:- BALANCE AND TRANSACTIONS WITH RELATED PARTIES

<TABLE>
<CAPTION>
                                                                          YEAR ENDED DECEMBER 31,
                                                             -----------------------------------------
                                                                  2003          2002           2001
                                                             -----------   ------------   ------------
<S>                                                          <C>           <C>            <C>
           Legal expenses:
             Accrued legal expenses                          $      --     $     178      $     107
                                                            ============  =============  =============
             Professional fees to an entity controlled
               by a shareholder                              $     123     $      79      $      59
                                                            ============  =============  ================
</TABLE>


NOTE 17:- SUBSIDIARIES

<TABLE>
<CAPTION>
                                                                       PERCENTAGE       JURISDICTION OF
                                                                      OF OWNERSHIP       INCORPORATION
                                                                    ----------------   -----------------
                                                                            %
                                                                    ----------------
<S>                                                                        <C>              <C>
           EZchip Ltd. (1)                                                  51              Israel
           EZchip Inc. (2)                                                 100              U.S.A.
           LanOptics Inc. - inactive as of February 2002                   100              U.S.A.
           LanOptics Plc. - inactive as of June 2000                       100               U.K.
           NetGuard Ltd. - inactive as of February 2001                     92.5            Israel
           NetGuard Inc.(3) - inactive as of November 2000                 100              U.S.A.
           NetGuard Plc. (3) - inactive as of February 2001                100               U.K.
           NetExchange Ltd. - inactive as of December 1998                  90              Israel
           NetExchange Inc. (4) - inactive as of September 1998            100              U.S.A.
</TABLE>

          (1)  Represents the aggregate percentage of holdings in different
               classes of EZchip securities.
          (2)  Represents  the percentage of holdings of EZchip Ltd.
          (3)  Represents the percentage of holdings of NetGuard Ltd.
          (4)  Represents the percentage of holdings of NetExchange Ltd.


NOTE 18:- SUBSEQUENT EVENT

          In March 2004,  EZchip  issued to Lanoptics  and to third  parties
          9,802,825 Series C Preferred shares, in consideration of $ 8,000.


                                      F-34

<PAGE>

ITEM 19. EXHIBITS.

      Exhibit Number       Description
      --------------       -----------

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

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

           23.1            Consent of Kost Forer Gabbay & Kasierer.

           31.1            Certification of Chief Executive Officer pursuant to
                           Rule 13a-14(a) and Rule 15d-14(a) of the Securities
                           Exchange Act, as amended.

           31.2            Certification of Chief Financial Officer pursuant to
                           Rule 13a-14(a) and Rule 15d-14(a) of the Securities
                           Exchange Act, as amended

           32.1            Certification of Chief Executive Officer pursuant to
                           18 U.S.C. 1350, as adopted pursuant to Section 906 of
                           the Sarbanes-Oxley Act of 2002

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



                                       57
<PAGE>


                                   SIGNATURES


         The registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.


                                        LANOPTICS LTD.


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

Dated:    December 23, 2004



                                       58