SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                    FORM 20-F

|_|      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 |X|  Item 18:|_|


<PAGE>


<TABLE>
<CAPTION>
                                TABLE OF CONTENTS
<S>           <C>                                                                               <C>
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.................................................7
             C.  Reasons for the Offer and Use of Proceeds.......................................7
  Item 4.    Information On The Company.........................................................13
             A.  History and Development of the Company.........................................13
             B.  Business Overview..............................................................14
             C.  Organizational Structure.......................................................23
  Item 5.    Operating and Financial Review and Prospects.......................................23
             A.  Results of Operations..........................................................27
             B.  Liquidity and Capital Resources................................................30
             C.  Research and Development, Patents and Licenses.................................31
             D.  Trend Information..............................................................32
             E.  Off-Balance Sheet Arrangements.................................................32
             F.  Tabular Disclosure of Contractual Obligations..................................32
  Item 6.    Directors, Senior Management and Employees.........................................33
             A.  Directors......................................................................33
             B.  Compensation of Directors and Officers.........................................35
             C.  Board Practices................................................................35
             D.  Employees......................................................................39
             E.  Share Ownership................................................................40
  Item 7.    Major Shareholders and Related Party Transactions..................................41
             A.  Major Shareholders.............................................................41
  Item 8.    Financial Information..............................................................42
             A.  Consolidated  Statements and Other Financial Information.......................42
  Item 9.    Offer and Listing..................................................................42
             A.  Listing Details................................................................42
  Item 10.   Additional Information.............................................................44
             A.  Memorandum and Articles of Association.........................................44
  Item 11.   Quantitative and Qualitative Disclosures About Market Risk.........................54
  Item 12.   Description of Securities Other Than Equity Securities.............................55

Part II.........................................................................................55

  Item 13.   Defaults, Dividend Arrearages and Delinquencies....................................55
  Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds.......55
  Item 15.   Controls and Procedures............................................................55
  Item 16.   [Reserved].........................................................................56
  Item 16A.  Audit Committee Financial Expert...................................................56
  Item 16B.  Code of Ethics.....................................................................56
  Item 16C.  Principal Accounting Fees and Services.............................................56
  Item 16D.  Exemptions from The Listing Requirements and Standards for Audit Committee.........57
  Item 16E.  Purchase of Equity Securities by the Issuer and Affiliates and Purchasers..........57

Part III........................................................................................57
</TABLE>


                                       2
<PAGE>


<TABLE>
<CAPTION>

<S>           <C>                                                                               <C>
 Item 17.     Financial Statements...............................................................57
 Item 18.     Financial Statements...............................................................57
 Item 19.     Exhibits...........................................................................57

SIGNATURES.......................................................................................58
</TABLE>


                                        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 generally accepted accounting
principles in Israel, or Israeli GAAP, which differ in certain material respects
from those followed in the United States, US GAAP. The main difference relates
to the accounting for preferred shares of a subsidiary. 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 as of
December 31, 2002 and 2003 and for the three years ended December 31, 2003, are
derived from the Company's audited consolidated financial statements which are
included in this annual report and have been prepared in accordance with Israeli
GAAP. The selected consolidated financial data as of December 31, 1999, 2000 and
2001 and for the years ended December 31, 1999 and 2000 have been derived from
audited consolidated financial statements not included in this annual report and
have also been prepared in accordance with Israeli GAAP. The selected financial
data set forth below should be read in conjunction with and are qualified by
reference to "Item 5. Operating and Financial Review and Prospects", and the
Consolidated Financial Statements included elsewhere in this Annual Report.

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

<TABLE>
<CAPTION>
                                                  1999         2000          2001         2002         2003
                                               ----------   ----------    ----------   ----------   ----------
STATEMENT OF OPERATIONS DATA:                          (in thousands, except share and per share data)
                                               ---------------------------------------------------------------
<S>                                            <C>          <C>           <C>          <C>          <C>
Israeli GAAP:
Revenues.....................................  $       --   $       --    $       --   $      465   $    1,756
Operating loss...............................      (1,164)      (6,019)       (9,766)     (15,875)     (10,327)
Loss from continuing operations..............        (555)      (1,831)         (443)      (6,728)      (2,897)
Net profit (loss)............................      (7,484)      (6,600)          350       (6,677)      (2,897)

PER SHARE DATA:
Loss from operations.........................       (0.18)       (0.88)        (1.33)       (2.04)       (1.19)
Net loss from continuing operations..........       (0.09)       (0.27)        (0.06)       (0.87)       (0.33)
Net earnings (loss) per share from continuing
   operations................................       (1.16)       (0.97)         0.05        (0.86)       (0.33)

U.S. GAAP:
Net loss.....................................      (7,410)     (10,637)       (7,570)     (15,126)     (10,580)
Net loss from continuing operations                  (481)      (5,868)       (8,363)     (15,177)     (10,580)
Net loss per share from continuing operations       (0.07)       (0.86)        (1.15)       (1.95)       (1.25)
</TABLE>


                                        5
<PAGE>


<TABLE>
<CAPTION>
                                                  1999         2000          2001         2002         2003
                                               ----------   ----------    ----------   ----------   ----------
<S>                                            <C>          <C>           <C>          <C>          <C>
Weighted average number of shares used in
   computing net loss per share..............   6,423,932    6,804,043     7,287,715    7,744,593    8,484,120

BALANCE SHEET DATA:
Israeli GAAP:
Total assets.................................     $16,095      $34,568      $ 24,220     $ 17,580      $25,689
Net assets...................................      11,123       27,558        20,818       13,368       19,827
Share capital ...............................      24,176       24,833        24,848       33,803      $39,580
Dividends declared per share.................          --           --            --           --           --

U.S. GAAP:
Total assets.................................     $15,946      $34,585      $ 24,220     $ 17,640      $25,914
Net assets...................................      10,899       28,374        20,818       13,428       20,052
Share capital ...............................      24,176       24,833        24,848       33,803      $39,580
Dividends declared per share.................          --           --            --           --           --
</TABLE>

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.

<TABLE>
<CAPTION>

                                                                       At period
Period                                    Average (1)   High    Low       End
------                                    -----------  ------  ------  ---------
<S>                                             <C>     <C>     <C>       <C>
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
</TABLE>


__________________________

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


<TABLE>
<CAPTION>

Period                                          High               Low
------                                         ------             -----
<S>                                             <C>               <C>
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
</TABLE>



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


                                        6
<PAGE>


B.    CAPITALIZATION AND INDEBTEDNESS

      Not applicable.

C.    REASONS FOR THE OFFER AND USE OF PROCEEDS

      Not applicable.


                                        7
<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.


                                        8
<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.


                                        9
<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.


                                       10
<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.


                                       11
<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
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.


                                       12
<PAGE>


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.


                                       13
<PAGE>


      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
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.


                                       14
<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
           will supply the "switch on a chip" that forms the backbone of
           networking equipment.


                                       15
<PAGE>


      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.

      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).


                                       16
<PAGE>


      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
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.


                                       17
<PAGE>


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 product's 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
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.


                                       18
<PAGE>


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>                                                             <S>         <C>         <C>
Research and development costs, excluding amortization          $ 6,892     $ 7,605     $ 7,207
Amortization of prepaid development and production costs*           542         548         142
Research and development, including amortization                  7,434       8,153       7,349
</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
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:


                                       19
<PAGE>


          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.

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.


                                       20
<PAGE>


      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
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.


                                       21
<PAGE>


      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
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.


                                       22
<PAGE>


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
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.


                                       23
<PAGE>


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 $8,956 (determined, based on the average price of
LanOptics' ordinary shares two day before and after the announcement date of the
transaction). The transaction was accounted for according to the purchase method
of accounting, and accordingly, the purchase price has been allocated to the
assets acquired and liabilities assumed based upon their estimated fair values
at the date of acquisition.

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

           EZchip series A and B preferred shares acquired           $   1,440
           Intangible assets acquired:
              In-process research and development                        4,655
              Technology (1)                                             1,425
              Goodwill (2)                                               1,634
           Liabilities assumed                                            (198)
                                                                     ---------
           Total consideration                                       $   8,956
                                                                     =========
           ___________
          (1)   The technology is amortized using a straight-line method over
                the useful life of the technology, which is 5 years.
          (2)   The goodwill is amortized over a period of 10 years, using the
                straight-line method.


                                       24
<PAGE>


RECENT ACCOUNTING PRONOUNCEMENTS

RECENT ACCOUNTING PRONOUNCEMENTS IN ISRAEL

      During October 2001, the Israel Accounting Standards Board published
Accounting Standard No. 12 with respect to the discontinuation of the adjustment
of financial statements, and Accounting Standard No. 13 with respect to the
effect of the changes in the exchange rates for foreign currencies. In December
2002, Accounting Standard No. 17 was published with respect to the deferral of
the implementation of Accounting Standards No. 12 and No. 13 until January 1,
2004.

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

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

      We do not expect the adoptions of these new standards to have a material
impact on our results of operation or financial positions.

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.


                                       25
<PAGE>


      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
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.

DIFFERENCES BETWEEN US AND ISRAELI GAAP

      Our consolidated financial statements conform to generally accepted
accounting principles in Israel, or Israeli GAAP, which differ in certain
material respects from those followed in the United States, or US GAAP. The main
difference relates to the accounting for preferred shares of a subsidiary. As a
result, the net loss for the twelve month period ended December 31, 2003, and
deficiency in shareholders' equity as of that date in accordance with US GAAP
were US$ 10,580,000 and US$ 12,370,000, respectively, as compared with net loss
and shareholders' equity in accordance with Israeli GAAP of US$ 2,897,000 and
US$ 10,681,000, respectively. See Note 18 of Notes to the Consolidated Financial
Statements.


                                       26
<PAGE>


A.    RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>

                                                         1999         2000         2001         2002          2003
                                                       ---------  -----------  -----------  -----------   -----------
<S>                                                      <C>          <C>          <C>         <C>           <C>
Revenues..........................................            --           --           --  $       465   $     1,756
Costs of revenues.................................            --           --           --          164           625
Amortization of developed technology..............                                                  107           284
                                                      ----------  -----------  -----------  -----------   -----------
Gross profit......................................            --           --           --          194           847

Operating expenses:

Research and development .........................           801        4,530        7,434        8,153         7,349
In-process research and development write-off.....                                                4,655
Selling, general and administrative, net..........           363        1,489        2,332        3,201         3,660
Amortization of Goodwill..........................                                                   60           165
                                                      ----------  -----------  -----------  -----------   -----------
Total operating expenses .........................         1,164        6,019        9,766       16,069        11,174

Operating loss....................................        (1,164)      (6,019)      (9,766)     (15,875)      (10,327)

Financial (expenses) income, net..................           609          726        1,427          659          (420)
Other income/(expenses)...........................                        465          814           --            (3)
                                                      ----------  -----------  -----------  -----------   -----------
Loss before minority share........................          (555)      (4,828)      (7,525)     (15,216)      (10,750)

Minority interest in loss from subsidiaries.......                      2,997        7,082        8,488         7,853

Net loss from continuing operations...............          (555)      (1,831)        (443)      (6,728)       (2,897)

Income/(loss) from discontinued operation.........        (6,929)      (4,769)         793           51            --

Net income (loss).................................        (7,484)      (6,600)         350       (6,677)       (2,897)
</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.

COST OF REVENUES

      For the twelve months ended December 31, 2003, our cost of revenues
increased by $461,000, or 281%, to $625,000 (36% of revenues) from $164,000 (35%
of revenues) in the same period in 2002. The increase in cost of revenues is the
result of the increase in revenues.


                                       27
<PAGE>


GROSS PROFIT

      For the twelve months ended December 31, 2003, gross profit increased by
$653,000, or 337%, to $847,000 (48% of revenues) from $194,000 (42% 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 $804,000, or 10%, to $7,349,000 from $8,153,000
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 $1,079,000, or 164%, to $(420,000) from net
financial income of $659,000 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.

MINORITY INTEREST IN LOSS

      Minority interest in loss of $7,853,000 reflects the share of EZchip's
minority shareholders in EZchip's loss for the twelve months ended December 31,
2003. In the twelve months ended December 31, 2002 minority interest in our
subsidiary's loss was $8,488,000. The loss is allocated among the various
classes and series of EZchip shares according to their respective ownership
level as determined by liquidation preference. The decrease is primarily the
result of.a lower participation rate in EZchip's loss by the minority in 2003
compared to 2002.


                                       28
<PAGE>


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
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, 2003 our cost of revenues totaled
$164,000 (35% of sales).

RESEARCH AND DEVELOPMENT COST, NET

      For the twelve months ended December 31, 2002, research and development
costs increased by $719,000, or 10%, to $8,153,000 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 $769,000, or 54%, to $658,000 from $1,427,000 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.

MINORITY INTEREST IN LOSS

      Minority interest in loss of $8,488,000 reflects the share of EZchip's
minority shareholders in EZchip's loss for the twelve months ended December 31,
2002. In the twelve months ended December 31, 2001 minority interest in our
subsidiary's loss was $7,082,000. The loss is allocated among the various
classes and series of EZchip shares according to their respective ownership
level as determined by liquidation preference. The increase is primarily the
result of increased losses in EZchip in 2002 compared to 2001.

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.


                                       29
<PAGE>


      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
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%.


                                       30
<PAGE>


      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.

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    $ 7,605    $ 7,207
Amortization of prepaid development and production costs *    $   542    $   548    $   142
Research and development, including amortization              $ 7,434    $ 8,153    $ 7,349
</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.


                                       31
<PAGE>


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
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 5
                                                  Total           year         1-3 years      3-5 years        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 under Israeli
   GAAP (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.


                                       32
<PAGE>


(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.

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.


                                       33
<PAGE>


      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,
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.


                                       34
<PAGE>


      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:

      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.


                                       35
<PAGE>


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.

      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.


                                       36
<PAGE>


      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 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.


                                       37
<PAGE>


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

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


                                       38
<PAGE>


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.

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.

<TABLE>
<CAPTION>

                                               As of december 31,
                                            ------------------------
                                            2001      2002      2003
                                            ----      ----      ----
<S>                                            <C>       <C>       <C>
            LanOptics employees........        9         3         3
            EZchip employees...........       84        90        77
                                            ----      ----      ----
                Total employees........       93        93        80
</TABLE>



      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.


                                       39
<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.


                                       40
<PAGE>

      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.

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:


<TABLE>
<CAPTION>

                                                          Number of
    Name                                                 shares(1)(2)   Percent
    ----                                                 ------------   -------
<S>                                                        <C>            <C>
    Apax Israel Partners II, L.P.                          601,567        6.5%
      and funds of which it is general partner(3) .......
    Eli Fruchter ........................................  610,596        6.6%
    Deutsche Bank........................................  750,000        8.1%
</TABLE>



(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.


                                       41
<PAGE>


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

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


                                       42
<PAGE>


      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.


<TABLE>
<CAPTION>

                                        Nasdaq          Tel aviv stock exchange
                                        ------          -----------------------
                                  High         Low          High          Low
                                  ----         ---          ----          ---
YEAR
----
<C>                             <C>           <C>          <C>           <C>
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
</TABLE>



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:


<TABLE>
<CAPTION>

                                        Nasdaq          Tel aviv stock exchange
                                        ------          -----------------------
 2002                             High          Low        High           Low
 ----                             ----          ---        ----           ---
<S>                             <C>           <C>       <C>             <C>
 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
</TABLE>




                                       43
<PAGE>


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.

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.


                                       44
<PAGE>


ANNUAL AND EXTRAORDINARY GENERAL MEETINGS

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

      The quorum required for a meeting of shareholders consists of at least two
shareholders present in person or by proxy who hold 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.


                                       45
<PAGE>


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,
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.


                                       46
<PAGE>


TAXATION

ISRAELI TAX CONSIDERATIONS

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

TAX REFORM

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

STATUTORY CORPORATE TAX RATE

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

TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS,
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.


                                       47
<PAGE>


      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 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.


                                       48
<PAGE>


      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
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.


                                       49
<PAGE>


U.S. FEDERAL INCOME TAX CONSIDERATIONS

      The following summary sets forth the material U. S. federal income tax
consequences applicable to the following persons who purchase, hold or dispose
of the ordinary shares ("U.S. Shareholders"): (i) citizens or residents (as
defined for U.S. federal income tax purposes) of the United States; (ii)
corporations, or other entities taxable as corporations for U.S. federal income
tax purposes, created or organized in or under the laws of the United States or
any political subdivision thereof; (iii) estates, the income of which is subject
to U. S. federal income taxation regardless of its source; and (iv) trusts, if
(a) a U.S. court is able to exercise primary supervision over its administration
and (b) one or more U.S. persons have the authority to control all of its
substantial decisions. This discussion is based on the provisions of the U. S.
Internal Revenue Code of 1986, as amended, or the Code, U. S. Treasury
Regulations promulgated thereunder and administrative and judicial
interpretations thereof, all as in effect as of the date of this Annual Report,
and all of which are subject to change. 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.


                                       50
<PAGE>


CREDIT FOR ISRAELI TAXES WITHHELD

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


                                       51
<PAGE>


RECENT TAX LEGISLATION

      The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act"),
enacted on May 28, 2003, generally reduces the maximum rate of tax imposed on
certain dividends received by U.S. Shareholders that are individuals to 15
percent (5 percent for individuals in the lower tax brackets and 0 percent for
such individuals in 2008) (the "Reduced Rate"). The Reduced Rate applies to
dividends received after December 31, 2002 and before January 1, 2009, provided
that certain holding period requirements are met. In order for dividends paid by
a foreign corporation to be eligible for the Reduced Rate, the foreign
corporation must be a "qualified foreign corporation" within the meaning of the
Act and cannot be a passive foreign investment company or a foreign personal
holding company. We believe that we will be considered a "qualified foreign
corporation" within the meaning of the Act because our ordinary shares are
listed on The Nasdaq Small Cap Market. 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.


                                       52
<PAGE>


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

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


                                       53
<PAGE>


BACKUP WITHHOLDING AND INFORMATION REPORTING.

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

DOCUMENTS ON DISPLAY

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


                                       54
<PAGE>


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 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.


                                       55
<PAGE>


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
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.


<TABLE>
<CAPTION>

                                          Year Ended December 31,
                                ---------------------------------------------
                                       2002                    2003
                                ---------------------   ---------------------
        Services Rendered         Fees    Percentages    Fees     Percentages
   --------------------------   -------   -----------   -------   -----------
<S>                            <C>                <C>    <C>             <C>
   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%
</TABLE>



      ________________________

      (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.


                                       56
<PAGE>


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.

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.

ITEM 19.    EXHIBITS.

<TABLE>
<CAPTION>
  EXHIBIT NUMBER     DESCRIPTION
  <S>                <C>
       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.
</TABLE>


                                       57
<PAGE>


                       LANOPTICS LTD. AND ITS SUBSIDIARIES


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2003


                                 IN U.S. DOLLARS




                                      INDEX

<TABLE>
<CAPTION>

                                                       Page
                                                       ----
<S>                                                  <C>
 REPORT OF INDEPENDENT AUDITORS                         F-2

 CONSOLIDATED BALANCE SHEETS                         F-3 - F-4

 CONSOLIDATED STATEMENTS OF OPERATIONS                  F-5

 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY          F-6

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

 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS          F-9 - F-42
</TABLE>


                                   ----------

<PAGE>

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

                         REPORT OF INDEPENDENT AUDITORS

                             TO THE SHAREHOLDERS OF

                                 LANOPTICS LTD.

         We have audited the accompanying consolidated balance sheets of
 LanOptics Ltd. ("the Company") and its subsidiaries as of December 31, 2003 and
 2002, and the related consolidated statements of operations, changes in
 shareholders' equity and cash flows for each of the three years in the period
 ended December 31, 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 auditing standards generally
 accepted in the United States and in Israel, including those prescribed by the
 Auditors' Regulations (Auditor's Mode of Performance), 1973. Those standards
 require that we plan and perform the audit to obtain reasonable assurance about
 whether the financial statements are free of material misstatement. An audit
 includes examining, on a test basis, evidence supporting the amounts and
 disclosures in the financial statements. An audit also includes assessing the
 accounting principles used and significant estimates made by management, as
 well as evaluating the overall financial statement presentation. We believe
 that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to
 above, present fairly, in all material respects, the consolidated financial
 position of the Company and its subsidiaries as of December 31, 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 Israel which differ in certain
 respects from those followed in the United States (see Note 18 to the
 consolidated financial statements).

 Tel-Aviv, Israel                                KOST FORER GABBAY & KASIERER
 February 17, 2004                             A Member of Ernst & Young Global
 (except Note 17, which is dated March 8, 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
   Marketable securities                                         5,414     6,644
   Trade receivables                                               438       362
   Other accounts receivable and prepaid expenses (Note 3)         353       532
   Inventories (Note 4)                                            404       377
                                                               -------   -------
TOTAL current assets                                            20,757    11,951
                                                               -------   -------
LONG-TERM INVESTMENTS:
   Prepaid development and production costs (Note 5)               620       777
   Severance pay fund                                            1,249       939
                                                               -------   -------
TOTAL long-term investments                                      1,869     1,716
                                                               -------   -------
PROPERTY AND EQUIPMENT, NET (NOTE 6)                               620     1,021
                                                               -------   -------
OTHER ASSETS (NOTE 1D, 7):
   Technology, net                                               1,034     1,318
   Goodwill, net                                                 1,409     1,574
                                                               -------   -------
                                                                 2,443     2,892
                                                               -------   -------
TOTAL assets                                                   $25,689   $17,580
                                                               =======   =======

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)

                                                              December 31,
                                                          ---------   ---------
                                                             2003        2002
                                                          ---------   ---------
     LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
   Trade payables                                         $     202   $     506
   Other accounts payable and accrued expenses (Note 8)       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 9)                                    1,383           -
                                                          ---------   ---------
                                                              2,919       1,196
                                                          ---------   ---------
PREFERRED SHARES IN A SUBSIDIARY                                  -       5,567
                                                          ---------   ---------
REDEEMABLE PREFERRED SHARES IN A SUBSIDIARY (NOTE 1D)         9,146           -
                                                          ---------   ---------
WARRANTS ISSUED BY A SUBSIDIARY                                 176           -
                                                          ---------   ---------
LIABILITIES ATTRIBUTED TO DISCONTINUED OPERATIONS               103         214
                                                          ---------   ---------

COMMITMENTS AND CONTINGENT LIABILITIES (NOTE 10)

SHAREHOLDERS' EQUITY:
   Share capital (Note 11):
     Ordinary shares of NIS 0.02 par value -
     Authorized: 10,000,000 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 deficit                                      (28,899)    (26,002)
                                                          ---------   ---------
TOTAL shareholders' equity                                   10,681       7,801
                                                          ---------   ---------
TOTAL liabilities and shareholders' equity                $  25,689   $  17,580
                                                          =========   =========

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

    February 17, 2004
--------------------------  ------------------------- -----------------------
  Date of approval of the          Dror Israel             Meir D. Burstin
   financial statements        Chief Financial Officer     Chairman of the
                                                          Board of Directors


                                       F-4
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
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 13)                                                       $      1,756    $        465    $          -
Costs of revenues                                                                 625             164               -
Amortization of developed technology                                              284             107               -
                                                                         ------------    ------------    ------------
Gross profit                                                                      847             194               -
                                                                         ------------    ------------    ------------
Operating expenses:
   Research and development                                                     7,349           8,153           7,434
   In-process research and development write-off                                    -           4,655               -
   Selling and marketing, net                                                   2,191           1,913           1,327
   General and administrative                                                   1,469           1,288           1,005
   Amortization of goodwill                                                       165              60               -
                                                                         ------------    ------------    ------------
                                                                               11,174          16,069           9,766
                                                                         ------------    ------------    ------------
Operating loss                                                                (10,327)        (15,875)         (9,766)
Financial income (expenses), net (Note 14a)                                      (420)            659           1,427
Other income (expenses), net (Note 14b)                                            (3)              -             814
                                                                         ------------    ------------    ------------
Loss from continuing operations, before minority interest                     (10,750)        (15,216)         (7,525)
Minority interest in losses of a subsidiary                                     7,853           8,488           7,082
                                                                         ------------    ------------    ------------
Loss from continuing operations                                                (2,897)         (6,728)           (443)
                                                                         ------------    ------------    ------------
Discontinued operations:
   Income from discontinued operations of a segment of a business                   -              51             793
                                                                         ------------    ------------    ------------
Net income (loss)                                                        $     (2,897)   $     (6,677)   $        350
                                                                         ============    ============    ============
Net loss per share from continuing operations                            $      (0.33)   $      (0.87)   $      (0.06)
                                                                         ============    ============    ============

Net earnings per share from discontinued operations                      $          -    $       0.01    $       0.11
                                                                         ============    ============    ============

Net earnings (loss) per share                                            $      (0.33)   $      (0.86)   $       0.05
                                                                         ============    ============    ============
Weighted average number of Ordinary shares used in computing
   net earnings(loss) per share                                             8,702,109       7,782,593       7,350,027
                                                                         ============    ============    ============
</TABLE>

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


                                       F-5
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
 CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
 U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>

                                      Number of shares
                                    ----------------------                 Additional                    Total
                                    Ordinary    Deferred        Share        paid-in   Accumulated   shareholders'
                                     shares       shares       capital      capital      deficit        equity
                                    ---------  -----------   -----------  -----------  -----------   -------------
<S>                                 <C>        <C>           <C>          <C>          <C>           <C>
Balance as of January 1, 2001       7,284,652        1,000   $        56  $    24,777  $   (19,675)  $       5,158
Net income                                  -            -             -            -          350             350
Exercise of options                     6,125            -   (*        -           15            -              15
                                    ---------  -----------   -----------  -----------  -----------   -------------
Balance as of December 31,
   2001                             7,290,777        1,000            56       24,792      (19,325)          5,523

Net loss                                    -            -             -            -       (6,677)         (6,677)
Issuance of shares, net             1,153,508            -             4        8,898            -           8,902
Exercise of options                    21,250            -   (*        -           53            -              53
Retirement of deferred shares               -       (1,000)            -            -            -               -
                                    ---------  -----------   -----------  -----------  -----------   -------------
Balance as of December 31,
   2002                             8,465,535            -            60       33,743      (26,002)          7,801

Net loss                                    -            -             -            -       (2,897)         (2,897)
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
                                    ---------  -----------   -----------  -----------  -----------   -------------
Balance as of
       December 31, 2003            9,250,535            -   $        64  $   39,516   $   (28,899)  $      10,681
                                    =========  ===========   ===========  ===========  ===========   =============
</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 BALANCE SHEETS
--------------------------------------------------------------------------------
 U.S. DOLLARS IN THOUSANDS

<TABLE>
<CAPTION>
                                                                                        Year ended december 31,
                                                                                   -----------------------------------
                                                                                     2003         2002         2001
                                                                                   ---------    ---------    ---------
<S>                                                                                <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)                                                                  $  (2,897)   $  (6,677)   $     350
Adjustments to reconcile net income (loss) to net cash used in operating
   activities:
   Income from discontinued operations                                                     -          (51)        (793)
   Depreciation and amortization                                                       1,102          862          468
   Amortization of prepaid production and development costs                              157          548          542
   Write-off of in-process research and development                                        -        4,655            -
   Gain on sale of marketable securities and short-term bank deposits                   (125)        (587)      (1,308)
   Minority interest in losses of a subsidiary                                        (7,853)      (8,488)      (7,082)
   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
   Amortization 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                 183         (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          296
                                                                                   ---------    ---------    ---------

Net cash used in continuing operating activities                                      (9,035)      (9,700)      (7,697)
Net cash used in discontinued operations                                                (111)        (243)      (1,846)
                                                                                   ---------    ---------    ---------
Total net cash used in operating activities                                           (9,146)      (9,943)      (9,543)
                                                                                   ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities                                                   (6,493)      (3,142)     (12,523)
Proceeds from short-term bank deposits                                                     -            -       10,997
Proceeds from sale of marketable 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)          -
Long-term loan                                                        1,324          -           -
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 against issuance of shares:
   Other assets                                                    $      -   $ (3,060)   $      -
   Preferred shares in a subsidiary                                       -     (1,240)          -
   In-process research and development                                    -     (4,655)          -
                                                                   --------   --------    --------
Issuance of shares                                                 $      -   $ (8,955    $      -
                                                                   ========   ========    ========
</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


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 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

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
                                                                 ==============

          c.   On December 31, 2002, following two quarters of minimal
               operations related to the networking solutions products ("legacy
               products), and based on management expectations for minimal
               future operations related to these products, management decided
               to account for its legacy operations as a discontinuation of a
               business in accordance with Accounting Standard No. 8 of the
               Israel Accounting Standards Board, "Discontinuing Operations" in
               the financial statements as of December 31, 2002. Accordingly,
               the results of operations of the legacy operations for the 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:

                                                                  Year ended
                                                                 december 31,
                                                             ------------------
                                                               2002      2001
                                                             --------  --------
               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
                                                             ========  ========


                                      F-10
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 1:-  GENERAL (CONT.)

          d.   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 and liabilities assumed based upon their estimated fair
               values at the date of acquisition.

               The preliminary purchase price allocation is as follows:

               EZchip Preferred A and B shares acquired          $ 1,440
               Intangible assets acquired:
                  In-process research and development              4,655
                  Technology (1)                                   1,425
                  Goodwill (2)                                     1,634
               Liabilities assumed                                  (199)
                                                                 -------
               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.
               (2)  The goodwill is amortized over a period of 10 years,
                    using the straight-line method.

               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.

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

          f.   As for percentage of ownership and control in subsidiaries, see
               Note 16.


                                      F-11
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES

          The Company's consolidated financial statements have been prepared in
          accordance with Generally Accepted Accounting Principles in Israel
          ("Israeli GAAP"). Israeli GAAP and Accounting Principles Generally
          Accepted in the United States ("U.S. GAAP") differ in certain respects
          as applicable to the consolidated financial statements of the Company
          (see Note 18).

          a.   Use of estimates:

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

          b.   Financial statements in U.S. dollars:

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

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

          c.   Principles of consolidation:

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

          d.   Cash equivalents:

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

          e.   Marketable securities:

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

          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.


                                      F-12
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

               Cost is determined as follows:

               Raw materials - using the 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                 33
                  equipment
               Motor vehicles                                     15
               Leasehold improvements                 Over the term of the lease

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

               During 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 discontinuing operations loss.

          h.   Other assets:

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

          i.   Preferred shares in a subsidiary:

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

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

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


                                      F-13
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          k.   Research and development costs:

               Research and development costs are charged to expenses as
               incurred.

          l.   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.

          m.   Deferred income taxes:

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

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

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

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

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

          n.   Net earnings (loss) per share:

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


                                      F-14
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

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

          o.   Accounting for stock based compensation:

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

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

               In December 2002, the FASB issued SFAS No. 148, "Accounting for
               Stock-Based Compensation - Transition and Disclosure - An
               Amendment of SFAS No. 123" ("SFAS No. 148"). SFAS No. 148 permits
               two additional transition methods for entities that adopt the
               fair value based method of accounting for stock-based employee
               compensation. The transition guidance and annual disclosure
               provisions of SFAS No. 148 are effective for fiscal years ending
               after December 15, 2002, with earlier application permitted in
               certain circumstances. As at the balance sheet date, the Company
               continues to apply APB No. 25.

               Under SFAS No. 123, "Accounting for Stock-Based Compensation",
               pro forma information regarding net income (loss) and net
               earnings (loss) per share is required, and has been determined as
               if the Company had accounted for its employee stock options under
               the fair value method of that Statement. The fair value for these
               options was estimated at the date of grant using the
               Black-Scholes valuation model with the following assumptions:
               risk-free interest rates of 3.00% and 4.4% 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.


                                      F-15
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

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

               Pro forma information under SFAS 123:

<TABLE>
<CAPTION>
                                                                                      Year ended december 31,
                                                                         -----------------------------------------------
                                                                              2003             2002             2001
                                                                         -------------    ------------    -------------
               <S>                                                       <C>              <C>             <C>
               Loss from continuing operations as reported according
                  to U.S. GAAP (see Note 18b1)                           $     (10,076)   $    (15,177)   $      (8,363)
                                                                         =============    ============    =============

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

               Net loss as reported                                      $     (10,076)   $    (15,126)   $      (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                 $     (10,420)   $    (15,330)   $      (7,744)
                                                                         =============    ============    =============

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

               Pro forma net loss                                        $     (10,420)   $    (15,279)   $      (6,951)
                                                                         =============    ============    =============

               Pro forma net loss per share from continuing operations   $        (1.2)   $      (1.97)   $       (1.05)
                                                                         =============    ============    =============

               Pro forma net earnings per share from discontinued
                  operations                                             $           -    $       0.01    $        0.11
                                                                         =============    ============    =============
               Pro forma net loss per share                              $        (1.2)   $      (1.96)   $       (0.94)
                                                                         =============    ============    =============
</TABLE>

          p.   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.


                                      F-16
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          q.   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.

               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.

          r.   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.

          s.   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.

          t.   Concentrations of credit risk:

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

                                      F-17
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)


               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.

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

          u.   Fair value of financial instruments:

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

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

               The fair value of marketable securities is based on quoted market
               prices. If the market value is permanently lower than the
               amortized cost then the marketable securities are amortized to
               their market value. As for the fair value of the marketable
               securities see Note 18a6.

          v.   Effects of new accounting standards on the financial statements:

               During October 2001, the Israel Accounting Standards Board
               published Accounting Standard No. 12 with respect to the
               discontinuation of the adjustment of financial statements, and
               Accounting Standard No. 13 with respect to the effect of the
               changes in the exchange rates for foreign currencies. In December
               2002, Accounting Standard No. 17 was published with respect to
               the deferral of the implementation of Accounting Standards No. 12
               and No. 13 until January 1, 2004.

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


                                      F-18
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:-  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

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

               The effect of the adoption of Accounting Standard No. 13 is
               depends on the changes in the exchange rates.


                                      F-19
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 3:-  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 4:-  INVENTORIES

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

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

NOTE 5:-  PREPAID DEVELOPMENT AND PRODUCTION COSTS

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


                                      F-20
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 5:-  PREPAID DEVELOPMENT AND PRODUCTION COSTS (CONT.)

          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 $ 143, $ 542 and
          $ 542, respectively and the amortization expenses related to the
          production cost amounted to $ 14, $ 6 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.


NOTE 6:-  PROPERTY AND EQUIPMENT
                                                                  December 31,
                                                               ----------------
                                                                 2003     2002
                                                               -------  -------
          Cost:
             Office furniture and equipment                    $     5  $     7
             Computers, software and electronic equipment        2,985    2,724
             Motor vehicles                                         62       82
             Leasehold improvements                                 47       42
                                                               -------  -------
                                                                 3,099    2,855
                                                               -------  -------
          Accumulated depreciation                               2,479    1,834
                                                               -------  -------
          Depreciated cost                                     $   620  $ 1,021
                                                               =======  =======

          Depreciation expenses for the years ended December 31, 2003, 2002 and
          2001, amounted to approximately $ 653, $ 695 and $ 468, respectively.


NOTE 7:-  OTHER ASSETS
                                        December 31,
                                      ----------------
                                        2003     2002
                                      -------  -------
          Cost:
          Technology                  $ 1,425  $ 1,425
          Goodwill                      1,634    1,634
                                      -------  -------

                                        3,059    3,059
          Accumulated depreciation        616      167
                                      -------  -------
          Amortized cost              $ 2,443  $ 2,892
                                      =======  =======

          Depreciation expenses for the years ended December 31, 2003, 2002 and
          2001, amounted to approximately $ 449, $ 167 and $ 0, respectively.


                                      F-21
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 8:-  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
                                          =======  =======

 NOTE 9:- 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". 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 for as "warrants issuance 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.


                                      F-22
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 10:- 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.

          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.


                                      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 10:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

               (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.


NOTE 11:- 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.


                                      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 11:- SHAREHOLDERS' EQUITY (CONT.)

               b)   Voting rights:

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

               c)   Conversion:

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

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

               d)   Dividend preference:

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

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


                                      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 11:- SHAREHOLDERS' EQUITY (CONT.)


                    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.

               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.


                                      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 11:- SHAREHOLDERS' EQUITY (CONT.)

               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.

                    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                     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          258,739   $   4.01      294,989    $   3.92       313,614    $   3.95
                      beginning of year


                        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
                         end of year          313,989   $   5.00      258,739    $   4.01       294,989    $   3.92
                                            =========   ========    =========    ========     =========    ========

                      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>


                                      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 11:- SHAREHOLDERS' EQUITY (CONT.)

                    Weighted average fair values and weighted average exercise
                    prices of options whose exercise price is equal to or less
                    than 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            Less than market price
                                                          --------------------------   ----------- --------------
                                                               December 31,                   December 31,
                                                          --------------------------   ----------- -----   ------
                                                           2003     2002        2001    2003      2002       2001
                                                          ------   ------   --------   --------  ------    ------
                     <S>                                  <C>      <C>      <C>           <C>    <C>        <C>

                     Weighted average exercise price      $    -   $    -   $   4.15   $  6.93   $    -     $   -
                     Weighted average fair value on
                         date of grant                    $    -   $    -   $   3.62   $  3.43   $    -     $   -
</TABLE>

                    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>


                                      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 11:- SHAREHOLDERS' EQUITY (CONT.)

                    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>

                    Weighted average fair values and weighted average exercise
                    prices of options whose exercise price is equal to or less
                    than 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               Less Than Market Price
                                                      -------------------------------    -----------------------------
                                                                 December 31,                   December 31,
                                                      -------------------------------    -----------------------------
                                                        2003        2002       2001       2003      2002       2001
                                                      --------    --------    -------    -------   -------    --------
                    <S>                               <C>         <C>         <C>        <C>      <C>         <C>
                    Weighted average exercise price   $  0.835    $   1.00    $  1.00    $      1  $    -     $    -

                    Weighted average fair value on
                       date of grant                  $  0.35     $   0.41    $  0.45    $   0.42  $    -     $    -
                   </TABLE>

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

<TABLE>
<CAPTION>
                                       Options for      Exercise price    Options       Exercisable
                     Issuance date    ordinary shares     per 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. The Company
               did not purchase its own shares during the reporting
               periods. 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
               12b).


                                      F-29
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 12:- 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.

               The tax liability for 2003 is computed according to the law,
               while taking into account the decrease in the Israeli CPI in that
               year.


          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.


                                      F-30
<PAGE>

                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 12:- INCOME TAXES (CONT.)

               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 carryforward tax losses:

               The Company and its subsidiaries have accumulated losses and
               deductions for tax purposes as of December 31, 2003 in the amount
               of $ 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.

          d.   Income (loss) from continuing operations, before the minority
               interest, is comprised as follows:

                                     Year ended december 31,
                              ---------------------------------
                                 2003        2002        2001
                              ---------   ---------   ---------
               Domestic       $  (9,467)  $ (14,098)  $  (7,731)
               Foreign           (1,283)     (1,118)        206
                              ---------   ---------   ---------
                              $ (10,750)  $ (15,216)  $  (7,525)
                              =========   =========   =========

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


                                      F-31
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 13:- SEGMENTS AND GEOGRAPHIC INFORMATION

          a.   Segment information:

               The Company manages its business on the basis of one reportable
               segment. See Note 1a for a brief description of the Company's
               business.

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

               The following presents total revenues for the years ended
               December 31, 2003, 2002 and 2001 and long-lived assets, as of
               December 31, 2003, 2002 and 2001:
<TABLE>
<CAPTION>
                                       2003                    2002                    2001
                               ---------------------   ----------------------  ----------------------
                                 Total     Long-live     Total     Long-lived    Total     Long-lived
                                revenues     assets    revenues     assets      revenues     assets
                               ---------   ---------   ---------   ----------  ---------   ----------
               <S>             <C>         <C>         <C>         <C>         <C>         <C>
               Israel          $     271   $   3,679   $     185   $    4,680  $       -   $    2,597
               Far East              993           -         275            -          -            -
               North America         434           4           5           10          -            9
               Others                 58           -           -            -          -            -
                               ---------   ---------   ---------   ----------  ---------   ----------
                               $   1,756   $   3,683   $     465   $    4,690  $       -   $    2,606
                               =========   =========   =========   ==========  =========   ==========
</TABLE>

          c.   Major customer data as a percentage of total revenues (customers
               above 5% of revenues):

                                      Year ended
                                     december 31,
                               -----------------------
                                  2003         2002
                               ---------     ---------

               Customer A              -            11%
               Customer B              -            37%
               Customer C             13%            -
               Customer D              5%            -
               Customer E              9%           10%
               Customer F             22%           14%
               Customer G              -             9%
               Customer H              5%            -
               Customer I              5%            5%
               Customer J              6%            -


                                      F-32
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- SELECTED STATEMENTS OF OPERATIONS DATA

          a.   Financial income (expenses):

<TABLE>
<CAPTION>
                                                                           Year ended december 31,
                                                                       -------------------------------
                                                                         2003        2002       2001
                                                                       --------    -------    --------
               <S>                                                     <C>         <C>        <C>
               Income:
                  Interest income                                      $    207    $   566    $  1,344
                  Gains arising from foreign currency
                    translation adjustments                                   3         76          96
                  Others                                                      -         21           -
                                                                       --------    -------    --------
                                                                            210        663       1,440
                                                                       --------    -------    --------
               Expenses:
                  Interest and bank charges                                  (9)        (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)         -           -
                  Others                                                     (4)         -           -
                                                                       --------    -------    --------
                                                                           (630)        (4)        (13)
                                                                       --------    -------    --------
                                                                       $   (420)   $   659    $  1,427
                                                                       ========    =======    ========
</TABLE>


          b.   Other income:

<TABLE>
<CAPTION>

                                                                            Year ended december 31,
                                                                   ---------------------------------------
                                                                      2003          2002          2001
                                                                   -----------   -----------   -----------
               <S>                                                 <C>           <C>           <C>
               Amortization of deferred gain from issuance of
                 subsidiary's Ordinary shares to a third party     $         -   $         -   $       799
               Capital loss                                                 (3)            -             -
               Other                                                         -             -            15
                                                                   -----------   -----------   -----------

                                                                   $        (3)   $        -   $       814
                                                                   ===========   ===========   ===========

</TABLE>

NOTE 15:- 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>


                                      F-33
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 16:- 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 17:- 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>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON THE
          CONSOLIDATED FINANCIAL STATEMENTS

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

               1.   Deferred income taxes:

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

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

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

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

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

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

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

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


                                      F-35
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON THE
          CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

                    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.

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

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

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

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

               3.   Preferred shares of a subsidiary:

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

                    For the years ended December 31, 2003, 2002 and 2001,
                    amounts of $ 7,853, $ 8,488 and $ 7,002, respectively, were
                    attributed to the holders of Preferred shares of the
                    subsidiary and was recorded as a minority interest in
                    earnings or losses of a subsidiary.

                    Under U.S. GAAP, the issuance of subsidiary's Preferred
                    shares to a third party, should be accounted for as a
                    separate component of minority interest, Preferred shares of
                    subsidiary, that does not participate in the losses of the
                    subsidiary. (See b1 below).


                                      F-36
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON THE
          CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

               4.   Earnings (loss) per share:

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

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

                    For the years ended December 31, 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.

               5.   Functional currency:

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

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

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

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


                                      F-37
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON THE
          CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

               6.   Marketable securities:

                    Marketable securities designated for sale in the short-term
                    are carried at market value, in accordance with Israeli
                    accounting principles- Statement of Opinion No. 44.
                    Unrealized gains from securities classified as a "current
                    investment" in accordance with Israeli GAAP are reflected in
                    earnings even if transactions are not carried out on the
                    basis, which would meet the definition of the trading
                    security under U.S. accounting principles. According to
                    Israeli GAAP, proceeds from marketable securities held for
                    trading should be included in net cash provided by investing
                    activities.

                    According to U.S. GAAP, management determines the
                    classification of marketable securities at the time of
                    purchase and reevaluates such designations as of each
                    balance sheet date. As of December 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.

                    The gross realized gains on sale of available-for-sale
                    securities totaled $ 130, $ 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.

                    The amortized cost and estimated fair value of debt and
                    marketable securities as at December 31, 2003 and 2002 by
                    contractual maturity are shown below:

<TABLE>
<CAPTION>

                                                   2003                                                 2002
                             --------------------------------------------------   ------------------------------------------------
                                              Gross        Gross       Gross        Gross
                              amortized     unrealized   unrealized    market     amortized    Unrealized    Unrealized    Market
                                 cost         gains       losses       value        cost         gains         losses       value
                             -----------   -----------   ----------  ----------   ----------   -----------   ----------  ---------
       <S>                   <C>            <C>          <C>         <C>          <C>          <C>          <C>          <C>
       AVAILABLE-FOR-SALE:
       U.S. and European
       corporate debts
       securities           $     5,419    $         -   $       (5) $    5,414   $    6,623   $        21   $       -    $  6,644
                            ===========    ===========   ==========  ==========   ===========  ===========   =========   =========
</TABLE>



                                                        2003
                                     ---------------------------------
                                          Amortized        Market
                                             cost          value
                                     --------------    ---------------
          Available-for-sale:
          Matures in one year         $       2,075    $         2,073
          Matures after one year              3,344              3,341
                                     --------------    ---------------

          Total                       $       5,419    $         5,414
                                     ==============    ===============


                                      F-38
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON THE
          CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

               7.   Comprehensive income (loss):

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

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

                    As of December 31, 2003, 2002 and 2001, net unrealized gains
                    (losses) on available-for-sale marketable securities
                    amounted to $ (5), $ 21 and $ 119, respectively.

               8.   Cumulative dividends on Preferred shares:

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

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

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

               9.   Goodwill:

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

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


                                      F-39
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON THE
          CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

               10.  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.

                    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.


                                      F-40
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON THE
          CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

                    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.

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

                    1.   On statement of operations items:
<TABLE>
<CAPTION>

                                                                                           Year ended december 31,
                                                                               --------------------------------------------
                                                                                   2003            2002            2001
                                                                               ------------    ------------    ------------
                         <S>                                                   <C>             <C>             <C>

                         Net income (loss) according to Israeli GAAP           $     (2,897)   $     (6,677)   $        350
                         Gain from issuance of subsidiary's Ordinary
                           shares to third party                                          -               -            (799)
                         Minority interest in losses of subsidiary -
                           Preferred shares                                          (7,853)         (8,488)         (7,002)
                         Amortization of goodwill                                       165              60               -
                         Unrealized losses (gains) on marketable securities               5             (21)           (119)
                                                                               ------------    ------------    ------------

                         Net loss according to U.S. GAAP                       $    (10,580)   $    (15,126)   $     (7,570)
                                                                               ============    ============    ============

                         Net earnings (loss) per share as reported according
                           to Israeli GAAP (basic and diluted)                 $      (0.33)   $      (0.86)   $       0.05
                                                                                ============    ============    ============
                         Net loss per share according to U.S. GAAP             $      (1.25)   $      (1.95)   $      (1.04)
                                                                               ============    ============    ============
                         Net loss per share from continuing operations
                           according to U.S. GAAP (basic)                      $      (1.25)   $      (1.95)   $      (1.15)
                                                                               ============    ============    ============
                         Net earnings per share from discontinued
                           operations according to U.S. GAAP (basic)           $          -    $          -    $       0.11
                                                                               ============    ============    ============
                         Weighted average number of Ordinary shares used
                           in computing net losses per share under U.S.
                           GAAP (basic)                                           8,484,120       7,744,593       7,287,715
                                                                               ============    ============    ============
                             </TABLE>


                                      F-41
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 18:- EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP ON THE
          CONSOLIDATED FINANCIAL STATEMENTS (CONT.)

               2.   On balance sheet items:
<TABLE>
<CAPTION>

                                                             December 31, 2003              December 31, 2002
                                                    ------------------------------  --------------------------------
                                                     As per                 As per   As per                 As per
                                                     israeli                 u.S.    Israeli                 u.S.
                                                      Gaap    adjustment    gaap      gaap    adjustment     gaap
                                                    --------  ----------  --------  --------  ----------   ---------
          <S>                                       <C>       <C>         <C>       <C>       <C>          <C>
          Goodwill (2)                                 1,409         225     1,634     1,574          60       1,634
                                                    --------  ----------  --------  --------  ----------   ---------
          Total assets                                25,689         225    25,914    17,580          60      17,640
                                                    ========  ==========  ========  ========  ==========   =========
          Preferred shares of a subsidiary (1)        (9,146)    (23,276)  (32,422)   (5,567)    (15,422)    (20,989)
          Shareholders' equity (1)                    10,681     (23,051)  (12,370)    7,801     (15,362)     (7,561)
                                                    --------  ----------  --------  --------  ----------   ---------
          Total liabilities and shareholders'
          equity (1)                                 (25,689)       (225)  (25,914)  (17,580)        (60)    (17,640)
                                                    ========  ==========  ========  ========  ==========   =========
</TABLE>

                    (1)  Issuance of Preferred shares to a third party in a
                         subsidiary - see Note 18a3.

                    (2)  Goodwill arising from the acquiring of additional
                         shares in EZchip - see Note 18a9.


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

                                      F-42
<PAGE>


                                   SIGNATURES

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

                                     LANOPTICS LTD.


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

Date:    March 30, 2004


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