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, 2006

                                       OR

[_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO
     __________

                                       OR

[_]  SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
     EXCHANGE ACT OF 1934

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

                         COMMISSION FILE NUMBER 0-20860

                                 LANOPTICS LTD.
              (Exact name of Registrant as specified in its charter
               and translation of Registrant's name into English)

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

                                1 HATAMAR STREET
                                   PO BOX 527
                              YOKNEAM 20692, ISRAEL
                     (Address of principal executive office)

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

        Title of each class            Name of each exchange on which registered
ORDINARY SHARES, NIS 0.02 PAR VALUE               NASDAQ CAPITAL MARKET

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

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

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

            15,669,593 ORDINARY SHARES, PAR VALUE NIS 0.02 PER SHARE
                            (AS OF DECEMBER 31, 2006)

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

                               Yes [_]     No [X]

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

                               Yes [_]     No [X]


<PAGE>


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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large Accelerated filer [_]   Accelerated filer  [X]   Non-accelerated filer [_]

Indicate by check mark which financial statement item the registrant has elected
to follow:

                           Item 17 [_]     Item 18 [X]

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

                               Yes [_]     No [X]

This annual report on Form 20-F is being incorporated by reference into the
Registrant's Form F-3 Registration Statements File Nos. 333-112136, 333-121611,
333-126416 and 333-139707 and Form S-8 Registration Statements File Nos.
33-71822 and 333-134593.


                                       ii
<PAGE>


                                TABLE OF CONTENTS

Part I                                                                       2

   Item 1.    Identity of Directors, Senior Management and Advisers          2
   Item 2.    Offer Statistics and Expected Timetable                        2
   Item 3.    Key Information                                                2
              A. Selected Consolidated Financial Data                        2
              B. Capitalization and Indebtedness                             3
              C. Reasons for the Offer and Use of Proceeds                   3
              D. Risk Factors                                                3
   Item 4.    Information on the Company                                    10
              A. History and Development of the Company                     10
              B. Business Overview                                          11
              C. Organizational Structure                                   19
              D. Property, Plants and Equipment                             19
   Item 4A.   Unresolved Staff Comments                                     19
   Item 5.    Operating and Financial Review and Prospects                  19
              A. Operating Results                                          19
              B. Liquidity and Capital Resources                            27
              C. Research and Development, Patents and Licenses             28
              D. Trend Information                                          29
              E. Off-Balance Sheet Arrangements                             29
              F. Tabular Disclosure of Contractual Obligations              29
   Item 6.    Directors, Senior Management and Employees                    30
              A. Directors and Senior Management                            30
              B. Compensation of Directors and Officers                     31
              C. Board Practices                                            32
              D. Employees                                                  37
              E. Share Ownership                                            38
   Item 7.    Major Shareholders and Related Party Transactions             39
              A. Major Shareholders                                         39
              B. Related Party Transaction                                  40
              C. Interests of Experts and Counsel                           41
   Item 8.    Financial Information                                         41
              A. Consolidated Statements and Other Financial Information    41
              B. Significant Changes                                        41
   Item 9.    The Offer and Listing                                         42
              A. Offer and Listing Details                                  42
              B. Plan of Distribution                                       43
              C. Markets                                                    43
              D. Selling Shareholders                                       43
              E. Dilution                                                   43
              F. Expense of the Issue                                       43
   Item 10.   Additional Information                                        43
              A. Share Capital                                              43
              B. Memorandum and Articles of Association                     43
              C. Material Contracts                                         45
              D. Exchange Controls                                          45
              E. Taxation                                                   46
              F. Dividend and Paying Agents                                 52
              G. Statement by Experts                                       52
              H. Documents on Display                                       52
              I. Subsidiary Information                                     52
   Item 11.   Quantitative and Qualitative Disclosures About Market Risk    52
   Item 12.   Description of Securities Other Than Equity Securities        53


                                      iii
<PAGE>


Part II                                                                     53
   Item 13.   Defaults, Dividend Arrearages and Delinquencies               53
   Item 14.   Material Modifications to the Rights of Security Holders
              and Use of Proceeds                                           53
   Item 15.   Controls and Procedures                                       53
   Item 15T   Controls and Procedures                                       53
   Item 16.   [Reserved]                                                    54
   Item 16A.  Audit Committee Financial Expert                              54
   Item 16B.  Code of Ethics                                                54
   Item 16C.  Principal Accountant Fees and Services                        54
   Item 16D.  Exemptions from the Listing Requirements and Standards
              for Audit Committee                                           55
   Item 16E.  Purchases of Equity Securities by the Issuer and
              Affiliated Purchasers                                         55

Part III                                                                    56
   Item 17.   Financial Statements                                          56
   Item 18.   Financial Statements                                          56
   Item 19.   Exhibits                                                      56

Signatures                                                                  57


                                       iv
<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
to improve the connectivity and performance of corporate Local Area Networks and
Wide Area Networks. Our business now consists of the development and marketing
of high performance network processors through our independent business unit,
EZchip Technologies Ltd., or EZchip, an Israeli company in which we currently
have a 77.8% ownership interest. As used in this Annual Report, the terms "we,"
"us," "our" and "our company" mean LanOptics and its EZchip subsidiary taken
together, unless otherwise expressly stated. Our ordinary shares are traded on
the NASDAQ Capital Market and on the Tel-Aviv Stock Exchange under the symbol
LNOP.

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

     All references in this Annual Report to "dollars" or "$" are to U.S.
dollars and all references in this Annual Report to "NIS" are to New Israeli
Shekels. The representative exchange rate between the NIS and the dollar on
December 31, 2006 as published by the Bank of Israel was NIS 4.225 per $1.00.

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

     This Annual Report on Form 20-F contains various "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and
within the Private Securities Litigation Reform Act of 1995, as amended. Such
forward-looking statements reflect our current view with respect to future
events and financial results. Forward-looking statements usually include the
verbs, "anticipates," "believes," "estimates," "expects," "intends," "plans,"
"projects," "understands" and other verbs suggesting uncertainty. We remind
readers that forward-looking statements are merely predictions and therefore
inherently subject to uncertainties and other factors and involve known and
unknown risks that could cause the actual results, performance, levels of
activity, or our achievements, or industry results, to be materially different
from any future results, performance, levels of activity, or our achievements
expressed or implied by such forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date 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. We
have attempted to identify additional significant uncertainties and other
factors affecting forward-looking statements in the Risk Factors section which
appears in Item 3.D "Key Information -Risk Factors."


                                       1
<PAGE>


                                     PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     Not applicable.

ITEM 3. KEY INFORMATION

A.   SELECTED CONSOLIDATED FINANCIAL DATA

     The following selected consolidated financial data of our company have been
prepared in accordance with U.S. GAAP, and are derived from our audited
consolidated financial statements and accompanying notes. The selected financial
data set forth in the table below have been derived from our audited historical
financial statements for the years 2002 to 2006. T e selected income data for
the years 2004, 2005 and 2006, and the selected balance sheet data at December
31, 2005 and 2006, have been derived from our audited consolidated financial
statements set forth in "Item 18 - Financial Statements." The selected income
data for the years 2002 and 2003, and the selected balance sheet data at
December 31, 2002, 2003 and 2004, have been derived from our previously
published audited consolidated financial statements, which are not included in
this Annual Report. The selected financial data set forth below should be read
in conjunction with and are qualified by reference to "Item 5. Operating and
Financial Review and Prospects," and the Consolidated Financial Statements
included elsewhere in this Annual Report.

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                  ------------------------------------------------------------------
                                                     2002          2003          2004          2005         2006(1)
                                                  ----------    ----------    ----------    ----------    ----------
                                                            (in thousands, except share and per share data)
<S>                                               <C>           <C>           <C>           <C>           <C>
STATEMENT OF OPERATIONS DATA:
Revenues                                          $      465    $    1,756    $    4,746    $    5,848    $    8,469
Operating loss                                       (14,992)       (9,986)       (8,416)      (10,126)      (10,285)
Net loss                                             (14,303)      (10,404)       (9,154)      (10,347)      (12,317)
Per share data:
Net loss per share (basic and diluted)                 (1.85)        (1.23)        (0.98)        (0.93)        (1.05)
Weighted average number of ordinary shares used
     in computing net loss per share               7,744,593     8,484,120     9,365,181    11,156,250    11,745,171

BALANCE SHEET DATA:
Working capital                                   $    9,149    $   17,990    $   25,048    $   20,627    $   19,427
Total assets                                          15,515        23,965        31,365        30,871        66,293
Long-term liabilities                                  1,196         2,919         1,985         2,243         5,801
Preferred shares of a subsidiary                      20,991        32,423        35,790        38,567        23,770
Shareholders' equity (deficiency)                 $   (9,688)   $  (14,320)   $   (9,891)   $  (12,193)   $   32,056
</TABLE>


(1)  Includes pre-tax expense relating to stock-based compensation in the amount
     of $0.6 million.

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.


                                       2
<PAGE>

<TABLE>
<CAPTION>
                                                                                  At Period
Period                                         Average      High         Low         End
------                                         ------      ------       -----       -----
<S>                          <C> <C>            <C>         <C>         <C>         <C>
Twelve months ended December 31, 2002           4.7378      4.994       4.416       4.737
Twelve months ended December 31, 2003           4.5483      4.924       4.283       4.379
Twelve months ended December 31, 2004           4.4823      4.634       4.308       4.308
Twelve months ended December 31, 2005           4.4878      4.741       4.299       4.603
Twelve months ended December 31, 2006           4.4565      4.725       4.176       4.225
</TABLE>

Period                                    High         Low
------                                    -----       -----

October 2006                              4.294       4.238
November 2006                             4.331       4.247
December 2006                             4.234       4.176
January 2007                              4.260       4.187
February 2007                             4.254       4.183
March 2007 (through March 27, 2007)       4.222       4.181

     At March 27, 2007 the representative rate of exchange was NIS 4.181= $1.00,
as published by the Bank of Israel.

B.   CAPITALIZATION AND INDEBTEDNESS

     Not applicable.

C.   REASONS FOR THE OFFER AND USE OF PROCEEDS

     Not applicable.

D.   RISK FACTORS

     INVESTING IN OUR ORDINARY SHARES INVOLVES A HIGH DEGREE OF RISK AND
UNCERTAINTY. YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW BEFORE INVESTING IN OUR ORDINARY SHARES. OUR BUSINESS, PROSPECTS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED DUE TO
ANY OF THE FOLLOWING RISKS. IN THAT CASE, THE VALUE OF OUR ORDINARY SHARES COULD
DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.

RISKS RELATING TO OUR BUSINESS

WE HAVE HAD A LIMITED OPERATING HISTORY IN THE NETWORK PROCESSOR INDUSTRY AND
OUR FUTURE FINANCIAL RESULTS ARE DIFFICULT TO PREDICT.

     Our future success will be subject to the risks we will encounter in the
network processor industry. We have a limited operating history in the industry,
with our first product sales in the second quarter of 2002 and total network
product sales through December 31, 2006 of approximately $21.3 million. We have
also incurred operating losses in each of the five last fiscal years. Our
limited operating history makes it difficult to evaluate the prospects of our
business. Moreover, the network processor industry is constantly evolving and is
subject to technological and competitive forces beyond our control. Our ability
to design and market products to meet customer demand and the revenue and income
potential of our products and business are unproven. As an early stage company
in the developing network processor industry, we face numerous risks and
uncertainties. Some of these risks relate to our ability to:

     o    expand and enhance our product offerings;

     o    increase our revenues;

     o    diversify our sources of revenue;

     o    respond to technological changes; and

     o    respond to competitive market conditions.

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


                                       3
<PAGE>


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 network processor 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 market's acceptance of packet-based converged
telecom networks, in particular carrier Ethernet networks, as well as 10 Gigabit
Ethernet technologies that enable the forwarding of data at a high speed.
Ultimately, the development rate of these technologies may be slower than we
anticipate. If the use of networking equipment does not grow as we anticipate,
if our target customers do not incorporate our products into theirs, or if the
products of our target customers that incorporate our network processors are not
commercially successful, our growth will be impeded.

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

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

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

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

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

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

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

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


                                       4
<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 newly developed
products after incurring significant design and development expenditures. A
customer may decide to cancel or change its product plans, which could cause us
to generate no revenue from that customer and adversely affect our results of
operations. A delay or cancellation of a customer's plans could significantly
adversely affect our financial results. Even after winning a design contract, a
customer may not begin volume production of our equipment for a period of up to
two years, if at all. Due to this lengthy design and development cycle, a
significant period may elapse from the time we begin incurring expenses until
the time we generate revenue from our products. We have no assurances that our
customers will ultimately market and sell their equipment incorporating our
network processors, or that such efforts by our customers will be successful.

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 competitors and from an
increasing number of emerging startup companies with potentially lucrative
employee ownership arrangements. Recruiting, hiring and retaining key personnel
can also result in significant monetary costs.

IF WE ARE UNABLE TO ADEQUATELY PROTECT OUR TECHNOLOGY OR OTHER INTELLECTUAL
PROPERTY THROUGH PATENTS, COPYRIGHTS, TRADE SECRETS, TRADEMARKS AND OTHER
MEASURES, OUR COMPETITORS COULD USE OUR PROPRIETARY INFORMATION AND WE COULD
LOSE OUR COMPETITIVE ADVANTAGE.

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

OUR PRODUCTS EMPLOY TECHNOLOGIES THAT MAY INFRINGE ON THE PROPRIETARY RIGHTS OF
THIRD PARTIES, WHICH MAY EXPOSE US TO LITIGATION AND PREVENT US FROM SELLING OUR
PRODUCTS.

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

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

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


                                       5
<PAGE>


IF THIRD-PARTY MANUFACTURERS AND OTHER SUPPLIERS TERMINATE OUR ARRANGEMENT WITH
THEM, OR AMEND THEM IN A MANNER DETRIMENTAL TO US, WE MAY EXPERIENCE DELAYS IN
PRODUCTION AND OUR BUSINESS MAYBE ADVERSELY AFFECTED.

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

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

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

WE HAVE A HISTORY OF OPERATING LOSSES AND MAY NOT ACHIEVE OR SUSTAIN
PROFITABILITY IN THE FUTURE. IF INTERNALLY GENERATED FUNDS ARE INSUFFICIENT AND
WE ARE UNABLE TO PROCURE FUNDING ON FAVORABLE TERMS, WE WOULD NOT BE ABLE TO
DEVELOP AND EXPAND OUR BUSINESS, WHICH COULD NEGATIVELY AFFECT OUR REVENUES.

     We expect that significant funding will be required in order to continue to
develop our products and to expand our business. Given the state of development
of our products and the present economic environment, we believe that we have
sufficient funding resources to finance our operations through the end of 2008.
The capital markets have experienced severe downturns over the last couple of
years, especially relating to technology companies, and access to capital has at
times been both difficult and expensive.

     We have incurred operating losses in each of the five last fiscal years and
we may not be able to achieve or sustain profitable operations in the future. 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.

RISKS RELATING TO OUR ORDINARY SHARES

YOUR OWNERSHIP INTEREST IN LANOPTICS MAY BE DILUTED AS A RESULT OF ANTICIPATED
FURTHER EXCHANGES OF OUR SHARES FOR EZCHIP SHARES OR AS A RESULT OF ADDITIONAL
FINANCINGS.

     We currently own approximately 77.8% of EZchip. We wish to continue to
exchange our shares from time to time for EZchip shares in order to increase our
ownership interest in EZchip. We will attempt to effect all such exchanges at an
exchange ratio that reflects the relative values of LanOptics and EZchip. If we
are required to issue more LanOptics shares than the number that reflects our
value relative to the value of EZchip, the ownership interests of LanOptics
existing shareholders will be diluted. In addition, we may seek to raise funds
from time to time in public or private issuances of equity, and such financings
may take place in the near future or over the longer term. Any such financing
may dilute the relative holdings of current LanOptics shareholders.


                                       6
<PAGE>


THE LIQUIDATION PREFERENCE OF THE PREFERRED SHAREHOLDERS OF EZCHIP MAY LIMIT
LANOPTICS' RETURN IN THE EVENT OF A SALE OF EZCHIP.

     We hold both ordinary shares and various classes of preferred shares in
EZchip. The other shareholders of EZchip hold only preferred shares, which
provide the holders with preferences upon liquidation. If EZchip were to be
sold, the transaction would likely be deemed a liquidation event that would
entitle the preferred shareholders to their liquidation preference before any
distribution to the holders of ordinary shares. This may result in those
shareholders receiving a higher percentage in liquidation than their actual
ownership percentage. Any voluntary liquidation event would require the approval
of our board of directors.

OUR SHARE PRICE HAS BEEN HIGHLY VOLATILE AND MAY CONTINUE TO BE VOLATILE AND
DECLINE.

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

FUTURE SALES OF OUR ORDINARY SHARES AND THE FUTURE EXERCISE OF OPTIONS AND
WARRANTS, AS WELL AS AN EXCHANGE OF OPTIONS TO PURCHASE EZCHIP'S SHARES FOR
OPTIONS TO PURCHASE OUR SHARES, MAY CAUSE THE MARKET PRICE OF OUR ORDINARY
SHARES TO DECLINE AND MAY RESULT IN SUBSTANTIAL DILUTION.

     We cannot predict what effect, if any, future sales of our ordinary shares,
or the availability of our ordinary shares for future sale, will have on the
market price of our ordinary shares. Sales of substantial amounts of our
ordinary shares in the public market by our 5% shareholders, or the perception
that such sales could occur, or the exchange of our employees' options to
purchase EZchip's shares for options to purchase our shares, as previously
announced, could adversely affect the market price of our ordinary shares and
may make it more difficult for investors to sell ordinary shares at a time and
price which such investors deem appropriate.

WE HAVE NEVER PAID CASH DIVIDENDS AND HAVE NO INTENTION TO PAY DIVIDENDS IN THE
FORESEEABLE FUTURE.

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

OUR ORDINARY SHARES ARE TRADED ON MORE THAN ONE MARKET AND THIS MAY RESULT IN
PRICE VARIATIONS.

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

WE MAY FAIL TO MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION
404 OF THE SARBANES-OXLEY ACT OF 2002.

     The Sarbanes-Oxley Act of 2002 imposes certain duties on us and our
executives and directors. Our efforts to comply with the requirements of Section
404 of the Sarbanes-Oxley Act of 2002 governing internal controls and procedures
for financial reporting, which started in connection with this Annual Report on
Form 20-F for the year ended December 31, 2006, have resulted in increased
general and administrative expense and a diversion of management time and
attention, and we expect these efforts to require the continued commitment of
significant resources. We may identify material weaknesses or significant
deficiencies in our assessments of our internal controls over financial
reporting. Failure to maintain effective internal controls over financial
reporting could result in investigation or sanctions by regulatory authorities,
and could have a material adverse effect on our operating results, investor
confidence in our reported financial information, and the market price of our
ordinary shares.


                                       7
<PAGE>


RISKS RELATING TO OUR LOCATION IN ISRAEL

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

     We are incorporated under the laws of the State of Israel, and our
principal executive offices and principal research and development facilities
are located in Israel. Political, economic and security conditions in Israel
directly influence us. Since the establishment of the State of Israel in 1948,
Israel and its Arab neighbors have engaged in a number of armed conflicts. A
state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. Major hostilities between Israel and its neighbors
may hinder Israel's international trade and lead to economic downturn. This, in
turn, could have a material adverse effect on our operations and business. There
has been an increase in unrest and terrorist activity in Israel, which began in
September 2000 and which has continued with varying levels of severity through
2006. The future effect of this deterioration and violence on the Israeli
economy and our operations is unclear. The election of representatives of the
Hamas movement to a majority of seats in the Palestinian Legislative Council in
January 2006 resulted in an escalation in violence among Israel, the Palestinian
Authority and other groups. In July 2006, extensive hostilities began along
Israel's northern border with Lebanon and to a lesser extent in the Gaza Strip.
Ongoing violence between Israel and the Palestinians as well as tension between
Israel and the neighboring Syria and Lebanon may have a material adverse effect
on our business, financial conditions and results of operations.

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

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

     A significant portion of the cost of our Israeli operations, mainly
personnel and facility-related, is incurred in NIS. Therefore, our NIS related
costs, as expressed in U.S. dollars, are influenced by the exchange rate between
the U.S. dollar and the NIS. In addition, if the rate of inflation in Israel
will exceed the rate of devaluation of the NIS in relation to the U.S. dollar,
or if the timing of such devaluations were to lag considerably behind inflation,
our cost as expressed in U.S. 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.

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

     Our facilities in Israel have been granted Approved Enterprise status under
the Law for the Encouragement of Capital Investments, 1959, commonly referred to
as the Investment Law. The Investment Law provides that capital investments in a
production facility (or other eligible assets) may be designated as an Approved
Enterprise. Until recently, the designation required advance approval from the
Investment Center of the Israel Ministry of Industry, Trade and Labor. For these
programs to be eligible for tax benefits, we must meet certain conditions,
relating principally to adherence to the approved programs and to periodic
reporting obligations. We believe that we are currently in compliance with these
requirements. However, if we fail to meet these requirements, we would be
subject to corporate tax in Israel at the regular statutory rate. We could also
be required to refund tax benefits, with interest and adjustments for inflation
based on the Israeli consumer price index.

     Our board of directors has determined that we will not distribute any
amounts of our undistributed tax exempt income as dividend. We intend to
reinvest our tax-exempt income and not to distribute such income as a dividend.

     On April 1, 2005 an amendment to the Investment Law came into effect, which
revised the criteria for investments qualified to receive tax benefits. An
eligible investment program under the amendment will qualify for benefits as a
Privileged Enterprise (rather than the previous terminology of Approved
Enterprise). Among other things, the amendment provides tax benefits to both
local and foreign investors and simplifies the approval process. The amendment
does not apply to investment programs approved prior to December 31, 2004. The
new tax regime will apply to new investment programs only.


                                       8
<PAGE>


     As a result of the amendment, tax-exempt income generated under the
provisions of the new law will subject us to taxes upon distribution or
liquidation and we may be required to record deferred tax liability with respect
to such tax-exempt income. As of December 31, 2006, we did not generate income
under the provision of the new law.

THE GOVERNMENT GRANTS WE HAVE RECEIVED FOR RESEARCH AND DEVELOPMENT EXPENDITURES
LIMIT OUR ABILITY TO TRANSFER TECHNOLOGIES OUTSIDE OF ISRAEL AND REQUIRE US TO
SATISFY SPECIFIED CONDITIONS. IF WE FAIL TO SATISFY THESE CONDITIONS, WE MAY BE
REQUIRED TO REFUND GRANTS PREVIOUSLY RECEIVED TOGETHER WITH INTEREST AND
PENALTIES, AND MAY BE SUBJECT TO CRIMINAL CHARGES.

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

     Technology developed by OCS funding may not be transferred and any transfer
of technology generally requires the approval of an OCS committee. A transfer,
for the purpose of OCS rules, means an actual sale of the technology, any
exclusive license to develop, market, and manufacture products resulting from
the technology or any other transaction which in essence constitutes a transfer
of the technology and does not include the worldwide sale of products that are
based on technology developed with OCS funding. There is no assurance that we
will receive the required approvals should we wish to transfer this technology
in the future. These restrictions may impair our ability to sell our technology
assets, and the restrictions will continue to apply even after we have repaid
the full amount of royalties payable for the grants. In addition, the
restrictions may impair our ability to consummate a merger or similar
transaction in which the surviving entity is not an Israeli company.

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

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

THE RIGHTS AND RESPONSIBILITIES OF OUR SHAREHOLDERS ARE GOVERNED BY ISRAELI LAW
AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF SHAREHOLDERS
UNDER U.S. LAW.

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


                                       9
<PAGE>


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 in the future
          for our ordinary shares.

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

AS A FOREIGN PRIVATE ISSUER WHOSE SHARES ARE LISTED ON THE NASDAQ CAPITAL
MARKET, WE MAY FOLLOW CERTAIN HOME COUNTRY CORPORATE GOVERNANCE PRACTICES
INSTEAD OF CERTAIN NASDAQ REQUIREMENTS.

     As a foreign private issuer whose shares are listed on The NASDAQ Capital
Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the NASDAQ Marketplace Rules. A
foreign private issuer that elects to follow a home country practice instead of
such requirements, must submit to NASDAQ in advance a written statement from an
independent counsel in such issuer's home country certifying that the issuer's
practices are not prohibited by the home country's laws. In addition, a foreign
private issuer must disclose in its annual reports filed with the Securities and
Exchange Commission each such requirement that it does not follow and describe
the home country practice followed by the issuer instead of any such
requirement. As a foreign private issuer listed on The NASDAQ Capital Market, we
may follow home country practice with regard to, among other things, composition
of the board of directors, director nomination procedure, compensation of
officers, and quorum at shareholders' meetings. In addition, we may follow our
home country law, instead of the NASDAQ Marketplace Rules, which require that we
obtain shareholder approval for certain dilutive events, such as for the
establishment or amendment of certain equity based compensation plans, an
issuance that will result in a change of control of the company, certain
transactions other than a public offering involving issuances of a 20% or more
interest in the company and certain acquisitions of the stock or assets of
another company.

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 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, EZchip Technologies Ltd., or EZchip, in which we currently have a
77.8% ownership interest. Our principal executive offices are located at 1
Hatamar Street, P.O. Box 527, Yokneam 20692 Israel, and our telephone number is
+972-4-959-6666. Puglisi & Associates, located at 859 Library Avenue, Suite 204,
P.O. Box 885, Newark, Delaware 19715, serves as our agent for service of
process.

     Our business initially consisted of developing, marketing and producing LAN
equipment, such as hubs and switches, based on the Token Ring protocol.
Beginning in 1995, the Ethernet protocol became increasingly dominant in the LAN
market. Products based on the Token Ring protocol, which formed the core of our
business, suffered from declining market share. In response to the changing
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 we incorporated as NetXchange in
1996, operated in the fax over Internet Protocol market. We decided to cease the
operations of NetXchange in 1998, after sustaining significant losses. In 1997,
we incorporated NetGuard Ltd., which provided Internet security solutions and
closed its operations during the first quarter of 2001.

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


                                       10
<PAGE>


     Through EZchip we develop high-performance network processors for high
speed networking equipment. EZchip's technology enables complex 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, the NP-1, a 10-Gigabit, seven-layer
network processor, began shipping to customers in April 2002. EZchip's second
generation network processor, the NP-1c, an enhancement to our NP-1 product, has
been commercially available since December 2003. In July 2006, EZchip started
shipping to customers its third generation network processor, the NP-2, which is
an enhanced 10-Gigabit network processor offering integrated traffic management.
We are continuing to develop high-speed network processors with exceptionally
high levels of integration.

B.   BUSINESS OVERVIEW

INDUSTRY BACKGROUND

     In recent years there has been a significant increase in the bandwidth
demands on communications networks. These networks have experienced major
upsurges in the volume, variety and complexity of communications traffic. The
growth in Internet usage is creating strong demand for bandwidth, and an
increasing proportion of today's communications traffic consists of digital
media. Carrier networks are also undergoing significant changes and are
migrating to packet-based networks that deliver voice, video and high-speed
Internet access, or "triple-play" services on one converged network. These
trends require network equipment to comply with evolving market requirements and
be able to provide new services, better Quality of Service, or QoS, and support
new protocols and standards. We believe this makes them a target market for
programmable network processors, or NPUs.

     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.

     Carrier network equipment is the primary target for network processors,
since the switches and routers that make up these networks are more demanding in
features and performance and are less cost sensitive than enterprise networks.
The carrier network usually consists of three domains, although in some cases
there is an overlap between these domains. The access network aggregates traffic
from individual businesses and residences. A metro area network, or MAN, spans a
metropolitan area, and interconnects the access networks. Metro Ethernet
networks worldwide are growing rapidly to deliver triple-play services on
efficient and flexible networks. The switches that build the metro Ethernet
networks must meet evolving market requirements to provide new services, to
provide better quality of service and to support new protocols, tasks for which
programmable network processors are ideally suited. MANs are connected via WANs.

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

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

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

     o    Access switches consist of IP DSLAMs (DSL Access Multiplexers), CMTS
          (Cable Modem Termination Systems) and various Ethernet aggregation
          switches such as EPON (Ethernet Passive Optical Network) and GPON
          (Gigabit Passive Optical Network). The bandwidth requirements of these
          systems grow hand-in-hand with end user traffic growth


                                       11
<PAGE>


     As carriers are gradually migrating to Ethernet-based infrastructure the
various classes of equipment that make up the carrier network are migrating to
Ethernet-centric platforms, commonly referred to as Carrier Ethernet Switches
and Routers, or CESR. Vendors of CESR equipment are the main target customers
for our network processors.

     Other market segments, of lesser focus for EZchip, include data center
appliances that perform functions such as security, load balancing and traffic
analysis

     WAN/MAN edge devices and metro switches are typically configured in a
modular, expandable, multi-slot chassis that consists of several line cards with
many network ports per line card. Access switches are typically built in a
stand-alone, fixed configuration, flat frame known as a pizza box.

MARKET TRENDS

     Carrier network equipment can be designed to incorporate Application
Specific Integrated Circuits, or ASICs, which are non-programmable switching
chips, Field Programmable Gate Arrays, or FPGAs, high-speed network processors
or a combination of them. The challenge is to provide an integrated solution
that is both flexible and cost-effective. Most of the existing solutions are
inadequate and fraught with difficulties.

     ASICs are effective from a performance viewpoint, but their drawback is the
inability to program them. This makes them too inflexible for today's rapidly
changing application environment and they need to be redesigned to deal with
changes in applications. Also, ASICs do not provide the flexibility to implement
evolving requirements to support new features and network protocols.

     FPGAs are expensive devices and fail to provide the price points that
effectively address carrier network price targets.

     High-speed network processors typically strain current silicon technologies
to provide maximum programming flexibility and integration while maintaining
high throughput.

     Within the market for NPUs, there are three main distinct classes:

          o    Access NPUs - typically with up to 1-Gigabit throughput and
               mostly used in access equipment.

          o    Mid-range NPUs - typically with up to 2.5-Gigabit throughput and
               often used in multi-service equipment, such as asynchronous
               transfer mode, or ATM, equipment.

          o    High-speed NPUs - typically with 10-Gigabit or higher throughput
               and mostly used in metro switches and edge routers.

     Because of the 10-Gigabit or higher throughput they provide, high-speed
NPUs are the most suitable of these three classes for use in edge routers and
metro switches. As these products are built in a modular multi-slot chassis and
as each chassis typically consists of 8-16 line cards, with each line card
consisting of 1-4 NPUs, 8-64 NPUs can be typically used for a fully populated
chassis. Of these products, metro switches and specifically Ethernet metro
switches are the fastest growing, as carriers worldwide are migrating from older
TDM SONET/SDH based networks to packet Ethernet based networks.

     The access switches are mostly served today by access NPUs. However as
packet services increase the per-user bandwidth requirements, these switches are
gradually migrating to support aggregate throughput of 10-Gigabit and more and
consequently, represent another market segment suitable for high-speed NPUs.

OUR SOLUTION

     We design and produce network processors for high-speed networking
equipment, integrating several key functions into a single chip. Networking
equipment vendors use EZchip'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. We are a fabless
semiconductor company, which means that we do not have our own semiconductor
manufacturing plant but rather utilize outside fabrication facilities.


                                       12
<PAGE>


     Our network processors are single-chip solutions that enable our customers
to design high-density, multi-port line cards. They include processing and
classification engines, traffic managers (in the case of the NP-2) and media
access controllers, or MACs, and as a result, reduce the number of complementary
chips required. This high level of integration benefits networking vendors by
reducing the system price, complexity and amount of space required on the board.

     Earlier generations of network processor solutions 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, most of these earlier solutions employed generic reduced
instruction set computer, or RISC, processors rather than specially designed
processors. EZchip's advance over these earlier designs lies in its integration
of processing, classification and traffic management functions. This is
accomplished in part with patented elements and other proprietary information
and consists among other things EZchip's Task Optimized Processing technology,
or TOPcore(R), through a combination of chip architecture innovations and
through innovative table lookup (search) algorithms. As a result, systems
designed using EZchip's products offer equipment vendors the ability to reduce
chip count, power consumption and cost.

     Our first product, which was introduced in April 2002, was the NP-1, a
merchant silicon network processor that forms the core of 10-Gigabit networking
equipment. The NP-1 is no longer in use. Most of our customers now use the NP-1c
or NP-2 for their EZchip-based products.

     The NP-1c processor has been commercially available since December 2003.
The NP-1c is an improved and less expensive version of the NP-1 and uses a
0.13-micron chip manufacturing process.

     Our NP-2 network processor has been commercially available since July 2005.
The NP-2 is based on the same network processing core technology as the NP-1c,
with the addition of traffic management functionality onto a single chip. By
combining both the network processing and traffic management functions,
generally performed by two separate chips, into a single chip we offer customers
an even more integrated and cost effective solution. We previously offered a
10-Gigabit traffic manager, the QX-1, that complemented the NP-1/NP-1c network
processors by providing added traffic management functionality and expanded QoS
features. With the introduction of the NP-2 network processor, which integrates
this traffic management functionality, we no longer offer the QX-1 as a
stand-alone product.

     We are continuing to develop highly integrated network processors with our
next generation network processors, NP-3 and NP-4. These network processors are
based on the same TOPcore(R) technology used in the NP-1, NP-1c and NP-2 with
additional features. The NP-3 and NP-4 are currently under development and are
scheduled to sample in 2007 and 2008, respectively. See "Future Products" below.

     The architecture and features of these EZchip products offer the
flexibility, scalability and price performance that are sought by communications
equipment vendors. All our network processors are software-compatible to a great
extent, making it possible for customers to easily port their network-processor
applications among our product families.

PRODUCTS

NETWORK PROCESSOR CHIPS

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

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

     The QX-1, a 10-Gigabit traffic manager, was introduced in January 2003. The
QX-1 was an optional chip that complemented the NP-1/NP-1c by expanding its QoS
features. Subsequently, with the integration of traffic management functionality
into the NP-2 in July 2005, we stopped offering the QX-1.


                                       13
<PAGE>


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

     Whereas the NP-1c is targeted mainly at service cards in communication
applications with typically one or two of these cards per chassis, the NP-2
addresses line card applications, which often have eight or more cards installed
per chassis, and stand-alone pizza box applications. We hope to increase our
market share by expanding into this additional market segment.

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

EVALUATION BOARDS AND NETWORK-PROCESSOR BASED SYSTEMS

     Evaluation systems are usually required by customers to enable them to test
their NPU-based systems. Evaluation systems for the NP-1c and NP-2 are available
with two different interfaces: ten ports of 1-Gigabit Ethernet or one 10-Gigabit
Ethernet port.

     Although our primary business is selling network processor chips, we offer
two systems based on our network processor. These systems serve as evaluation
systems for our current and prospective customers, as well as systems that our
customers may adapt and differentiate and then market as their own products. The
systems we provide use the same hardware and software environments and are
different in their form factor:

     o    EZ-ATCA follows the new Advanced Telecommunications Computing
          Architecture, or AdvancedTCA(R), and is provided as a blade that can
          be plugged into an AdvancedTCA chassis or as a stand-alone,
          self-contained box. AdvancedTCA is the PCI Industrial Computer
          Manufacturers Group, or PICMG, specification for Advanced
          Telecommunications Computing Architecture and forms the basis for
          standard-compliant hardware for next generation telecommunications
          equipment.

     o    EZsystem is a stand-alone, self-contained box.

DEVELOPMENT SOFTWARE TOOLKITS

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

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

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


                                       14
<PAGE>


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

FUTURE PRODUCTS

     EZchip is continuing to develop highly integrated network processors with
its next generation network processors, NP-3 and NP-4. These network processors
are based on our TOPcore(R) technology used in the NP-1, NP-1c and NP-2 with the
addition of higher throughput, new interfaces and more features.

     The NP-3 offers a significant increase in throughput compared to NP-2 due
to its 90nm process technology and enhanced algorithms. It also features various
enhancements that apply to carrier Ethernet packet processing and traffic
management.

     The NP-4 continues with our distinctive high level integration of
functionality into the network processor. NP-4 offers higher throughput than
NP-3, and targets 20-Gigabit to 40-Gigabit line-card and pizza box carrier
Ethernet applications. In addition to its integrated classifiers and traffic
managers, the NP-4 is designed to include Ethernet physical layer transceivers,
or PHYs, and for some applications eliminates the need for a separate fabric
interface chip. Integration of these functions, normally performed by separate
chips, will further save our customers valuable space on their cards while
reducing system costs and complexity.

     The NP-3 and NP-4 are currently under development and are scheduled to be
available in 2007 and 2008, respectively.

     In addition, in October 2006, we announced a partnership with Marvell
Technology Group Ltd., or Marvell, to develop, market and sell next generation
network processor unit solutions. We are currently jointly developing with
Marvell an NPU chip that utilizes both companies' technologies. We currently
expect the partnership to begin generating meaningful revenues in 2008

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.

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

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

     Our NP-2 network processors also possess integrated traffic managers for
advanced QoS, which is required by increasingly complex networks. After
modification, packets are put in queues that are managed and controlled by one
of two traffic managers, which provide traffic management capabilities on both
the ingress and egress paths. By integrating this functionality into our network
processors, EZchip eliminates the need for a separate traffic management chip.


                                       15
<PAGE>


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

RESEARCH AND PRODUCT DEVELOPMENT

     Currently, 72 employees, representing about 75% of EZchip's employees, are
engaged in research and development. EZchip's senior executives devote a
substantial portion of their time in communicating with customers to determine
what product needs should be addressed. Our net research and development
expenses were $7,267,000 in 2004, $8,215,000 in 2005 and $8,402,000 in 2006.
Since April 2006, EZchip's research and development efforts have been financed,
in part, through grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or the OCS. EZchip's 2006 research and
development expenses are net of OCS grants in the amount of $1,003,000.

SALES AND MARKETING

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

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

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

     To facilitate marketing efforts, EZchip has built on its extensive industry
exposure through trade shows and similar events and has established sales and
support offices in California and Massachusetts. Currently, our sales and
marketing staff consists of 13 marketing professionals and administrative
personnel. This sales force consists of persons with technical training and
significant experience in the semiconductor industry. Sales efforts are
augmented by the direct involvement of EZchip's senior executives, who work
closely with customers to determine product needs. In some parts of the world
our strategy is to work with local marketing channels, including sales agents,
resellers and distributors. These channels are assigned territories of primary
responsibility, with exclusive rights in some cases. We will consider the need
for local sales offices when justified by the circumstances. Our in-house sales
and marketing force and the external marketing channels are also responsible for
providing local technical support. Our marketing activities include:

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

     o    public relations activities and customer events;

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

     o    communication on the Internet.

     We also work with leading vendors of complementary technologies to provide
our customers with fully interoperable solutions. We provide interoperability
with devices from Ample Communications, AMCC, Broadcom, Cortina, Dune Networks,
Enigma Semiconductor, Marvell, PMC-Sierra, and Vitesse.


                                       16
<PAGE>


CUSTOMERS AND CUSTOMER SUPPORT

     As of December 31, 2006, we had approximately 100 design wins with
customers worldwide, who purchased development kits and started designs of
networking products based on our network processors. Of our approximately 100
design wins, over 70 are for NP-2 and NP-3 designs, and we expect a significant
portion of these products to enter production during 2007 and 2008. Two major
tier-1 CESR (carrier Ethernet switches and routers) vendors are building several
of their CESR platforms based on EZchip network processors. Our customers have a
total of approximately 25 products in production based on our network
processors. We do not expect that all of our design wins will reach production
stage, as projects may be halted, delayed or cancelled and there is also no
assurance that products that have reached production will be successfully
accepted in the marketplace.

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

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

     Customer support is provided from our Israeli headquarters as well as our
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-area
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
intense. There are currently four vendors providing high-speed network
processors that target the metro and access switches, and edge routers: EZchip,
Sandburst Corporation (which was acquired by Broadcom Corporation in January
2006), Bay Microsystems and Xelerated, Inc. In addition, Broadcom Corporation
and Marvell Technology Group Ltd. have released switch ASICs (non-programmable
chips) that target these market segments as well. Agere Systems Inc., Applied
Micro Circuits Corporation and Intel Corporation also previously targeted the
10-Gigabit network processor market, but are now more focused on lower speed
applications. We also compete with customers who choose to develop their own
network processors or in-house ASIC solutions.

     Some of our competitors or potential competitors are larger, have
significantly greater sales, have greater financial resources and are better
known.

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

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

     Most of our network processor competitors' currently-announced products use
separate chips for processing and traffic management. Traffic managers are
typically separate chips, placed alongside the network processor on the board,
which enable the control of the flow of traffic and implementation of QoS
features.

     Some of our competitors offer a 20-Gigabit full-duplex network processor,
but we believe that our network processors provide greater programming
flexibility. When compared to the non-programmable ASIC solutions, we believe
that our network processors bring flexibility that addresses customers' needs to
support new applications, especially in carrier switches and routers, at a
reasonable price differential when compared to the price of ASIC solutions.


                                       17
<PAGE>


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

INTELLECTUAL PROPERTY RIGHTS

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

     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.

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

MANUFACTURING

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

     The 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. Taiwan Semiconductor Manufacturing
Co. (TSMC) manufactures our 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.

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


                                       18
<PAGE>


C.   ORGANIZATIONAL STRUCTURE

     In mid-1999, we decided to focus on our internal application-specific
integrated circuit (ASIC) team to start a new business initiative. This new
business initiative was incorporated as EZchip Technologies Ltd. in December
1999. Through EZchip we are engaged in the development and marketing of high
performance network processors. Since its inception EZchip has raised
approximately $61 million in three private financing rounds, with $24 million of
that amount invested by LanOptics (or by investors who exchanged their EZchip
shares with LanOptics) and the balance by EZchip minority shareholders. We
currently have a 77.8% ownership interest in EZchip. We intend to seek to
increase our ownership position in EZchip through the exchange of our shares for
EZchip shares.

D.   PROPERTY, PLANTS AND EQUIPMENT

     We do not own any real property. Our principal development, marketing and
administrative facilities occupy approximately 25,000 square feet of a building
in Yokneam, Israel, at an aggregate rental cost of approximately $339,000 in
2006. The lease for our principal offices expires in January 2008 and we have an
option to extend the lease until January 2009.

     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. The aggregate rental cost for EZchip's two offices
was approximately $81,000 in 2006.

     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 $206,000 in 2004, $217,000 in 2005 and $231,000 in 2006. Our
capital expenditures in 2004, 2005 and 2006 were spent primarily for the
procurement of EZchip research and development hardware equipment and software
tools.

ITEM 4A. UNRESOLVED STAFF COMMENTS

     Not applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

A.   OPERATING RESULTS

     THE FOLLOWING DISCUSSION OF OUR RESULTS OF OPERATIONS SHOULD BE READ
TOGETHER WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES, WHICH
APPEAR ELSEWHERE IN THIS ANNUAL REPORT. THE FOLLOWING DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT PLANS, ESTIMATES AND BELIEFS
AND INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY
FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE
OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND ELSEWHERE IN
THIS ANNUAL REPORT.

GENERAL

     We design, develop, manufacture, market and support network processors,
through our subsidiary, EZchip. Since mid-1999, we have focused our efforts on
the network processor market and ceased our investment in research and
development for LAN switching products. We also closed the operations of our
Internet applications business segment, principally comprised of the operations
of NetGuard (in 1998) and NetXchange (early 2001). Our resources are now focused
exclusively on EZchip. Due to this shift in focus, our sales, which until 2002
were comprised solely of our legacy LanOptics and NetGuard products, decreased
significantly after fiscal year 1999. Our sales have increased in the last few
fiscal years as EZchip has begun to generate revenues.

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


                                       19
<PAGE>


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

CRITICAL ACCOUNTING POLICIES

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

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

REVENUE RECOGNITION

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

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

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

     Revenues from sales of software tools and maintenance services which are
sold separately from other products are recognized in accordance with statement
of Position 97-2, "SOFTWARE REVENUES RECOGNITION." We use the "residual method"
when vendor specific objective evidence (VSOE) of fair value only exists for the
maintenance.

     In certain instances, we sell network processor-based systems together with
software tools and maintenance and support services. In these cases, we comply
with the requirements set forth in EITF 00-21, "REVENUE ARRANGEMENTS WITH
MULTIPLE DELIVERABLES," relating to the separation of multiple deliverables into
individual accounting units with determinable fair values.

INVENTORY VALUATION

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


                                       20
<PAGE>


LEGAL CONTINGENCIES

     When the likelihood of the incurrence of losses related to our legal
proceedings is probable and management has the ability to estimate such costs,
we provide for estimates of probable losses through charges to our Consolidated
Statements of Operations. These estimates have been based on our assessment of
the facts and circumstances at each balance sheet date and are subject to change
based upon new information and intervening events.

     We are not currently involved in any significant legal proceedings and are
not required to assess the likelihood of any specific adverse judgments or
outcomes of such proceedings or of any potential ranges of probable losses.

ALLOWANCE FOR DOUBTFUL DEBTS

     Management continually reviews the collectibility of trade accounts
receivable and the adequacy of the allowance for doubtful debts against the
trade accounts receivable. Management specifically analyzes customer accounts,
account receivable aging reports, history of bad debts and the business or
industry sector to which they belong, customer concentrations, customer credit
worthiness, current economic trends and any other pertinent factors. Management
is able to make reasonably objective judgments on the adequacy of other
provisions relating to trade accruals.

GOODWILL AND OTHER INTANGIBLE ASSETS

     We follow Statement of Financial Accounting Standards, or SFAS, No. 142,
"Goodwill and Other Intangible Assets," or SFAS No. 142. Under SFAS No. 142,
goodwill and intangible assets deemed to have indefinite lives are no longer
amortized but are subject to periodic impairment tests in accordance with the
Statement. Goodwill impairment is deemed to exist if the net book value of a
reporting unit exceeds its estimated fair value. The total purchase price of
business acquisitions accounted for using the purchase method is allocated first
to identifiable assets and liabilities based on estimated fair values. The
excess of the purchase price over the fair value of net assets of purchased
businesses is recorded as goodwill.

     We perform an annual impairment test during the fourth quarter of each
fiscal year, or more frequently if impairment indicators are present. We operate
in one operating segment, and this segment comprises our only reporting unit. As
of December 31, 2006, no impairment charges were required.

EQUITY-BASED COMPENSATION EXPENSE

     We account for equity-based compensation in accordance with Financial
Accounting Standards Board, or FASB, Statement No. 123 (revised 2004),
"Share-Based Payment," or SFAS No. 123(R). Under the fair value recognition
provisions of this statement, share-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as an expense
over the requisite service periods. Determining the fair value of share-based
awards at the grant date requires the exercise of judgment, including the amount
of share-based awards that are expected to be forfeited. If actual results
differ from these estimates, equity-based compensation expense and our results
of operations could be impacted. Please see further discussion below under the
caption "Adoption of new accounting standard."

RESULTS OF OPERATIONS

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


                                       21
<PAGE>


INCOME STATEMENT DATA:

<TABLE>
<CAPTION>
                                                                           YEAR ENDED DECEMBER 31,
                                                         ------------------------------------------------------------
                                                           2002         2003         2004         2005       2006 (1)
                                                         --------     --------     --------     --------     --------
                                                                (in thousands, except share and per share data)
<S>                                                      <C>          <C>          <C>          <C>          <C>
Revenues                                                 $    465     $  1,756     $  4,746     $  5,848     $  8,469
Costs of revenues                                             163          624        1,889        2,350        3,664
Amortization of existing technology                            90          239          241          291          360
                                                         --------     --------     --------     --------     --------
Gross profit                                                  212          893        2,616        3,207        4,445
Operating expenses:
Research and development, net                               8,075        7,219        7,267        8,215        8,402
In-process research and development charge                  3,928           --           --        1,475        2,033
Sales, general and administrative, net                      3,201        3,660        3,765        3,643        4,295
                                                         --------     --------     --------     --------     --------
Total operating expenses                                   15,204       10,879       11,032       13,333       14,730
                                                         --------     --------     --------     --------     --------
Operating loss                                            (14,992)      (9,986)      (8,416)     (10,126)     (10,285)
Financial and other income (expenses), net *                  638         (418)        (738)        (312)      (2,204)
                                                         --------     --------     --------     --------     --------
Loss from continuing operations before minority
    interest                                              (14,354)     (10,404)      (9,154)     (10,438)     (12,489)
Minority interest in loss of a subsidiary                      --           --           --          206          172
                                                         --------     --------     --------     --------     --------
Loss from continuing operations                           (14,354)     (10,404)      (9,154)     (10,232)     (12,317)
Income from discontinued operations of a segment of a
    business                                                   51           --           --           --           --
                                                         --------     --------     --------     --------     --------
Net loss                                                  (14,303)     (10,404)      (9,154)     (10,232)     (12,317)
Cumulative effect of change in accounting principle            --           --           --         (115)
Net loss after cumulative effect of change in
    accounting principle                                  (14,303)     (10,404)      (9,154)     (10,347)     (12,317)
                                                         ========     ========     ========     ========     ========
Net loss per share (basic and diluted)                      (1.85)       (1.23)       (0.98)       (0.92)       (1.05)
Net loss per share from continuing operations (basic
    and diluted)                                            (1.85)       (1.23)       (0.98)       (0.92)       (1.05)
Net earnings per share from discontinued operations
    (basic and diluted)                                        --           --           --           --           --
Net loss per share after cumulative effect of change
     in accounting principle                                (1.85)       (1.23)       (0.98)       (0.93)       (1.05)
</TABLE>

---------------
     *reclassified

     (1) Includes pre-tax expense related to stock-based compensation in the
     amount of $0.6 million.

YEAR ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31, 2005

REVENUES

     We generate our revenues mainly from sales of network processors chips and
to a lesser extent from the sales of network processor-based systems, software
tools and maintenance and support services. For the year ended December 31,
2006, revenues increased by $2,621,000, or 45%, to $8,469,000 from $5,848,000 in
the year ended December 31, 2005. This increase is mainly attributable to
increased purchases by a few NP-2 customers that entered into their production
stage for networking products incorporating our network processors chips.

COST OF REVENUES

     Cost of revenues consists primarily of the cost of network processor chips
purchased from our contract manufacturers and to a lesser extent from the cost
of network processor-based systems, labor costs associated with maintenance and
support services and other production management and facilities related costs.
For the year ended December 31, 2006, our cost of revenues increased by
$1,314,000, or 56%, to $3,664,000 (43% of revenues) from $2,350,000 (40% of
revenues) in the year ended December 31, 2005, primarily as a result of the
increase in revenues. The increase in cost of revenues as a percentage of
revenues is the result of the increased volume production orders, characterized
by lower unit prices and a change in the mix of our sales, with a higher
contribution from the sale of chips and other hardware products compared to
software and services in 2005.

GROSS PROFIT

     For the year ended December 31, 2006, gross profit increased by $1,238,000,
or 39%, to $4,445,000 (52% of revenues) from $3,207,000 (55% of revenues) in the
year ended December 31, 2005, primarily as a result of the increase in revenues.

RESEARCH AND DEVELOPMENT EXPENSES, NET

     Research and development expenses consist primarily of the salary and
benefits of engineers and costs related to external engineering design services.
The reported figures consist entirely of EZchip's research and development
costs. Beginning April 1, 2006, we received research and development
participation grants from the Office of the Chief Scientist of the Ministry of
Industry, Trade and Labor of Israel, or the OCS. For the year ended December 31,
2006, research and development costs (excluding OCS grants of $1,003,000)
increased by $1,190,000, or 14%, to $9,405,000 from $8,215,000 in the year ended
December 31, 2005. This increase is attributable primarily to labor costs and
equipment and software tool licenses costs associated with the increase in
EZchip's research and development labor force. In addition, research and
development expenses for the year ended December 31, 2006 included $365,000 of
stock-based compensation expense recorded under SFAS No. 123(R).


                                       22
<PAGE>


IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE

     We recorded in-process research and development charges in the amounts of
$2,033,000 in the year ended December 31, 2006 and $1,475,000 in the year ended
December 31, 2005 in connection with the purchases of EZchip shares in exchange
transactions in December 2006 and June 2005, respectively. See Notes 3(g) and
3(h) to the consolidated financial statements.

SALES, GENERAL AND ADMINISTRATIVE EXPENSES

     Sales, general and administrative expenses consist primarily of salaries,
participation in trade shows and travel expenses as well as legal, accounting
and other administrative costs. For the year ended December 31, 2006, these
expenses increased by $652,000, or 18%, to $4,295,000 from $3,643,000 in the
year ended December 31,d 2005. This increase is attributable primarily to labor
costs resulted mainly from the increase in sales, general and administrative
personnel. In addition, sales, general and administrative expenses for the year
ended December 31, 2006 included $236,000 of stock-based compensation expense
recorded under SFAS No. 123(R).

FINANCIAL AND OTHER INCOME (EXPENSES), NET

     Financial and other income (expenses), net reflects the income or expenses
both from traditional investment income or financing expenses and from exchange
rate fluctuations and currency translation. For the year ended December 31,
2006, net financial expenses increased by $1,892,000, or 606%, to $2,204,000
from net financial expenses of $312,000 for the year ended December 31, 2005.
This increase is primarily attributable to accretion to redemption value of the
EZchip Redeemable Preferred Shares in 2006. The EZchip Series C Redeemable
Preferred Shares were issued in March 2003, March 2004 and July 2005, and we
recorded the amounts of $10.9 million, $2.6 million and $3.0 million, which were
invested by parties other than us in March 2003, March 2004 and July 2005,
respectively, as Redeemable Preferred Shares in EZchip. The EZchip Series C
Redeemable Preferred Shares may be redeemed at the request of the majority
holders of such shares, after March 2007 (four years from the original issuance
date), at a price per share equal to the greater of (a) the original per share
issue price plus an amount equal to any accrued and unpaid dividends thereon
plus 6% interest compounded annually or (b) the fair market value of such
shares. In December 2006, we acquired preferred shares of EZchip in
consideration for the issuance of our ordinary shares resulting in us owning a
majority of the EZchip Series C Redeemable Preferred Shares. See Note 3(h) to
the consolidated financial statements. As a result, a redemption demand cannot
be delivered without our consent and we do not expect that we will be required
to record any interest expense in the future related to such Redeemable
Preferred Shares in our consolidated financial statements.

MINORITY INTEREST IN LOSS OF A SUBSIDIARY

     Minority interest in loss of a subsidiary reflects the share of EZchip's
minority holders of ordinary shares in EZchip's loss. The amounts of $172,000
and $206,000 represent proceeds received during 2006 and 2005, respectively,
from the exercise of options to purchase ordinary shares of EZchip.

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

     In April 2003, EZchip granted a warrant to purchase Series C Redeemable
Preferred C Shares in connection with a loan agreement with a third party. The
loan was repaid in August 2004. EZchip accounts for such warrant in accordance
with FASB Statement No. 150 "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH
CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY," or SFAS No. 150. Under SFAS No.
150, this warrant is classified as a liability and is carried at its fair value.
The guidance of this Statement was applied in the first interim period beginning
after June 30, 2005 and resulted in a cumulative affect of a change in
accounting principles of $115,000. See Note 2(k) of the consolidated financial
statements.


                                       23
<PAGE>


YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004

REVENUES

     For the year ended December 31, 2005, revenues increased by $1,102,000, or
23%, to $5,848,000 from $4,746,000 in the year ended December 31, 2004. This
increase is mainly attributable to increased purchases by several of our
customers that entered into their production stage for networking products
incorporating our network processors chips, as well as to the growth in our
customer base.

COST OF REVENUES

     For the year ended December 31, 2005, our cost of revenues increased by
$461,000, or 24%, to $2,350,000 (40% of revenues) from $1,889,000 (40% of
revenues) in the year ended December 31, 2004, primarily as a result of the
increase in revenues.

GROSS PROFIT

     For the year ended December 31, 2005, gross profit increased by $591,000,
or 23%, to $3,207,000 (55% of revenues) from $2,616,000 (55% of revenues) in the
year ended December 31, 2004, primarily as a result of the increase in revenues.

RESEARCH AND DEVELOPMENT EXPENSES

     For the year ended December 31, 2005, research and development costs
increased by $948,000, or 13%, to $8,215,000 from $7,267,000 in the year ended
December 31, 2004. This increase is attributable primarily to the substantial
external engineering design expenses associated with the final stage of the
design and tape-out of our NP-2 network processor.

IN-PROCESS RESEARCH AND DEVELOPMENT CHARGE

     In-process research and development charge in the amount of $1,475,000 was
recorded in connection with the purchase of EZchip shares in an exchange
transaction that occurred in June 2005. See Note 3(i) to our consolidated
financial statements.

SALES, GENERAL AND ADMINISTRATIVE EXPENSES

     For the year ended December 31, 2005, sales, general and administrative
expenses decreased by $122,000, or 3%, to $3,643,000 from $3,765,000 in the year
ended December 31, 2004. There was no material change in the mix or type of
expenses between 2004 and 2005.

FINANCIAL AND OTHER INCOME (EXPENSES), NET

     For the year ended December 31, 2005, net financial expenses decreased by
$426,000, or 58%, to $312,000 from net financial expenses of $738,000 in the
year ended December 31, 2004. This decrease is primarily attributable to higher
interest income in 2005, resulting from higher interest rates and a higher
average cash balance. In addition, in August 2004, we repaid a loan in the
principal amount of $1,500,000 which resulted in lower interest expense during
2005. Most of our financial expenses (in both periods) were composed of non-cash
interest accruals on EZchip's Series C Preferred Shares. The EZchip Series C
Redeemable Preferred Shares were issued in March 2003, March 2004 and July 2005,
and we recorded the amounts of $10.9 million, $2.6 million and $3.0 million,
which were invested by parties other than us in March 2003, March 2004 and July
2005, respectively, as EZchip Redeemable Preferred Shares. The EZchip Series C
Redeemable Preferred Shares may be redeemed at the request of the majority
holders of such shares, after March 2007 (four years from the original issuance
date), at a price per share equal to the greater of (a) the original per share
issue price plus an amount equal to any accrued and unpaid dividends thereon
plus 6% interest compounded annually or (b) the fair market value of such
shares.


                                       24
<PAGE>


MINORITY INTEREST IN LOSS OF A SUBSIDIARY

     Minority interest in loss of a subsidiary reflects the share of EZchip's
minority holders of ordinary shares in EZchip's loss. The amount of $206,000 in
2005 represents proceeds received during 2005 from the exercise of stock options
in EZchip.

EFFECTIVE CORPORATE TAX RATE

     Israeli companies were generally subject to corporate tax at the rate of
31% of their taxable income in 2006. The corporate tax rate is to be reduced to
29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010. However, because we have
elected to participate in the alternative package of tax benefits for our
current approved enterprise, the income derived from that enterprise will be
exempt from Israeli corporate tax for a specified benefit period (except to the
extent that dividends are distributed during the tax-exemption period other than
upon liquidation) and subject to reduced corporate tax rates for an additional
period. The period of tax benefits for EZchip's approved enterprise is valid for
ten years following the first year in which the company generated net income
associated with the approved enterprise. Certain investment income derived by
EZchip from investments may not be regarded by the Israeli tax authorities as
income from its approved enterprise and consequently may be taxed at the regular
statutory rate in Israel.

     We and EZchip have tax loss carryforwards resulting from the years up to
and including 2006 amounting to approximately $60.6 million which may be carried
forward indefinitely.

     EZchip Inc. is subject to U.S. income taxes and has a loss carryforward
resulting from the years up to and including 2006 amounting to approximately
$4.6 million.

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

ADOPTION OF NEW ACCOUNTING STANDARD

ACCOUNTING FOR EQUITY-BASED COMPENSATION

     Effective January 1, 2006, we adopted SFAS No. 123(R), which supersedes
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations, and amends FASB SFAS No. 95, "Statement
of Cash Flows." Generally, the approach in SFAS 123(R) is similar to the
approach described in SFAS 123. However, SFAS 123(R) requires all equity-based
payments to employees, including grants of employee stock options, to be
recognized in the statement of income based on their fair values. Pro-forma
disclosure is no longer an alternative. In 2006, we recognized equity-based
compensation expense under SFAS 123(R) in the amount of $0.6 million.

     As of December 31, 2006, we had $2.3 million of unrecognized compensation
expense related to non-vested stock options. For options granted before January
1, 2006 and which had graded vesting, we recognized compensation expenses, based
on the straight line method over the requisite service period of each of the
awards. Forfeitures have been estimated with the adoption of SFAS 123(R) for
those awards not yet vested. For options granted after January 1, 2006, we
recognize compensation costs using the straight-line method over the requisite
service period of each of the awards, net of estimated forfeitures, and for
stock options granted before adoption of SFAS 123(R) we use the accelerated
method. SFAS 123(R) requires forfeitures to be estimated at the time of grant
and revised, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. Estimated forfeitures are based on actual historical
pre-vesting forfeitures.

     We adopted SFAS 123(R) using the modified prospective method. Under this
transition method, compensation costs recognized in 2006 include (a)
compensation costs for all stock-based payments granted prior to, but that had
not yet vested as of, January 1, 2006, based on the grant date fair value
estimated in accordance with the pro-forma provisions of SFAS 123, and (b)
compensation costs for the equity-based payments granted subsequent to January
1, 2006, based on the grant date fair value estimated in accordance with SFAS
123(R). Our consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). We selected
the Black-Scholes option pricing model as the most appropriate fair value method
for our stock-options awards.


                                       25
<PAGE>


OUR LOCATION IN ISRAEL

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

IMPACT OF CURRENCY FLUCTUATION 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 U.S. dollars, are influenced by the exchange rate between
the U.S. 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 U.S. dollar,
or if the timing of such devaluations were to lag considerably behind inflation,
our cost as expressed in U.S. 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 and
other income (expenses), net" in our consolidated financial statements includes
the impact of these factors as well as traditional interest income or expense.
See Note 17 to our consolidated financial statements.

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

<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                        ----------------------------------------------------
                                         2002       2003        2004        2005       2006
                                        ------     ------      ------      ------     ------
<S>                                      <C>       <C>         <C>          <C>       <C>
Devaluation of NIS vs. U.S. Dollar       7.3%      (7.6)%      (1.6)%       6.8%      (8.2)%
Israeli Consumer Price Index             6.5%      (1.9)%       1.4%        2.4%      (0.1)%
</TABLE>

     Because exchange rates between the NIS and the dollar fluctuate
continuously, exchange rate fluctuations, particularly larger periodic
devaluations, may have an impact on our profitability and period-to-period
comparisons of our results. We cannot assure you that in the future our results
of operations may not be materially adversely affected by currency fluctuations.

SEASONALITY

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

RECENTLY ISSUED ACCOUNTING STANDARDS

     Based on our review of the recently issued accounting standards, we believe
that the adoption of the following standard may have a significant impact on our
consolidated financial statements:

     In June 2006, FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes", an interpretation of FASB SFAS No. 109,
"Accounting for Income Taxes," or FIN 48. The Interpretation addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under FIN 48, we may
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained on examination by the
tax authorities, based on the technical merits of the position. The tax benefits
recognized in the financial statements from such a position should be measured
based on the largest benefit that has a greater than fifty percent likelihood of
being realized upon ultimate settlement. FIN 48 also provides guidance on
de-recognition, classification, interest and penalties on income taxes,
accounting in interim periods and requires increased disclosures. The provisions
of FIN 48 are effective beginning January 1, 2007. We are currently assessing
the impact FIN 48 will have on our consolidated financial statements.


                                       26
<PAGE>


     B.   LIQUIDITY AND CAPITAL RESOURCES

     Historically we have satisfied our financial requirements primarily through
equity investments, funds provided by operations and research and development
grants. Until 2006, EZchip's research and development was funded through the
proceeds of third party investments, combined with contributions by LanOptics.
Since April 2006, EZchip's research and development efforts have been financed,
in part, through grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or the OCS.

     EZCHIP PRIVATE PLACEMENTS. In 2000 we conducted two rounds of financing for
EZchip, raising $27.2 million through the private placement of EZchip's Series A
and B Preferred Shares, of which we invested $2 million. The amount of
investments by third parties was recorded as preferred shares of a subsidiary in
our financial statements. In addition, we made a $2 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. In September 2004 the $1.5 million was repaid.

     I Under the terms of the Series C Preferred Share financing, EZchip could
raise an aggregate additional amount of up to $8 million at one or more
additional closings to be initiated within 24 months of the initial investment
of $13.5 million On March 9, 2004, EZchip raised the additional $8 million, of
which we invested $5.3 million.

     In July 2005, EZchip raised an additional $10.0 million in a private
placement of Series C Preferred Shares, of which we invested $6.9 million.

     LOAN. In August 2006, EZchip entered into a credit agreement with Plenus
II, Limited Partnership and Plenus II (D.C.M.), Limited Partnership, as lenders,
pursuant to which the lenders agreed to make a $4.0 million line of credit
available to EZchip, which may be increased by an additional $2.0 million upon
EZchip's achievement of certain milestones. Under the terms of the credit
agreement, EZchip may draw amounts under the line of credit from time to time
until August 2007, at which time the drawn and unpaid amount shall be fixed and
the revolving line of credit facility shall become a loan. The loan bears annual
interest of LIBOR+3% for the first two years and LIBOR+4.5% for the third year.
The principal of the loan shall be repaid in 12 equal monthly payments,
commencing August 2008. As part of the credit agreement, EZchip issued to the
lenders 910,000 Series C Redeemable Preferred Shares. EZchip also granted the
lenders a first ranking floating charge on all EZchip's present and future
tangible and intangible assets and rights to secure the loan. As of December 31,
2006, EZchip had an outstanding balance of $4.0 million under the credit
agreement.

     EXCHANGE OF EZCHIP SHARES. During 2005 and 2006, we acquired shares of
EZchip in exchange for our ordinary shares. As a result of such exchange
transactions, we currently hold a 77.8% ownership interest in EZchip. See Notes
3(g) and 3(h) to the consolidated financial statements.

     LANOPTICS PRIVATE PLACEMENTS. 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%. The investors in this private placement
were granted warrants to purchase 187,500 of our ordinary shares at an exercise
price of $11.39 per share with an exercise period of five years

     On November 26, 2004 we concluded a $14.3 million private placement of our
ordinary shares to several institutional investors. The private placement was
undertaken to strength our balance sheet and insure our control over EZchip in
the event of additional private investment in EZchip, as well as for other
general corporate purposes. The investors in this private placement were granted
warrants to purchase 478,800 ordinary shares at an exercise price of $15.5 per
share with an exercise period of five years.

     WORKING CAPITAL; CASH AND CASH EQUIVALENTS. As of December 31, 2006 we had
$19.4 million in working capital and $12.2 million in cash and cash equivalents,
compared to $20.6 million in working capital and $14.1 million in cash and cash
equivalent as of December 31, 2005 and $25.0 million in working capital and
$13.5 million in cash and cash equivalents as of December 31, 2004.


                                       27
<PAGE>


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

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                       ---------------------------------
                                                         2004         2005        2006
                                                       --------     --------    --------
                                                                 (in thousands)
<S>                                                    <C>          <C>         <C>
STATEMENT OF CASH FLOWS DATA:
Net cash used in operating activities                  $  7,942     $  8,978    $  7,136
Net cash provided by (used in) investing activities      (7,276)       6,363        (207)
Net cash provided by financing activities                14,574        3,226       5,414
                                                       --------     --------    --------
Increase (decrease) in cash and cash equivalents           (644)         611      (1,929)
Cash and cash equivalents -- beginning of year           14,148       13,504      14,115
                                                       --------     --------    --------
Cash and cash equivalents -- end of year               $ 13,504     $ 14,115    $ 12,186
                                                       ========     ========    ========
</TABLE>

     Net cash used in operating activities was approximately $7.1 million for
the year ended December 31, 2006 compared with net cash used in operating
activities of approximately $9.0 million for the year ended December 31, 2005
and $7.9 million for the year ended December 31, 2004. There was no material
change in the mix or type of expenses resulted in the net cash used in operating
activities between 2006, 2005 and 2004.

     Net cash used in investing activities was approximately $0.2 million for
the year ended December 31, 2006. This amount was primarily attributable to
purchases of property and equipment. Net cash provided by investing activities
was approximately $6.4 million for the year ended December 31, 2005. Of such
amount, approximately $6.6 million resulted from sale and redemption of
marketable securities and approximately $0.2 million was used for purchases of
property and equipment. Net cash used in investing activities was approximately
$7.3 million for the year ended December 31, 2004. Of such amount, approximately
$7.1 million resulted from net investments in marketable securities and
approximately $0.2 million was used for purchases of property and equipment.

     Net cash provided by financing activities was approximately $5.4 million
for the year ended December 31, 2006. This amount is attributable to $1.4
million proceeds from exercise of stock options and $4 million proceeds from
long-term loan. For the year ended December 31, 2005, net cash provided by
financing activities was approximately $3.2 million. This amount is attributable
to $0.2 million proceeds from exercise of stock options and $3 million
associated with the issuance of EZchip's Series C Preferred Shares to third
parties. For the year ended December 31, 2004, net cash provided by financing
activities was approximately $14.6 million. This amount is attributable to $13.5
million associated with our net proceeds from the issuance of our ordinary
shares to third parties and $2.6 million associated with the issuance of
EZchip's Series C Preferred Shares to third parties, partially offset by the
repayment of a loan in the amount of $1.5 million.

     We believe that our unused cash, cash equivalents and marketable securities
balances will provide sufficient cash resources to finance our operations at
least through the end of 2008. 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. There can be no
assurance that such financing will be available in the future, or, if available,
will be on terms satisfactory to us.

C.   RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

     Currently, 72 employees, representing about 75% of EZchip's employees, are
engaged in research and development. EZchip's senior executives devote a
substantial portion of their time in communicating with customers to determine
what product needs should be addressed.

     Since April 2006, our research and development efforts have been financed,
in part, through grants from the Office of the Chief Scientist of the Israeli
Ministry of Industry, Trade and Labor, or OCS. The following table sets forth
our research and development expenses for the periods indicated:

                                               YEAR ENDED DECEMBER 31,
                                          --------    --------    --------
                                            2004        2005        2006
                                          --------    --------    --------
                                                   (in thousands)

Research and development expenses         $  7,267    $  8,215    $  9,405
Office of the Chief Scientist grants            --          --       1,003
Research and development expenses, net    $  7,267    $  8,215    $  8,402


                                       28
<PAGE>


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

     We hold four U.S. patents:

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

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

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

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

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

D.   TREND INFORMATION

     Our 2006 revenues increased 45% to $8.5 million, up from $5.8 million in
2005. This increase in revenues is mainly attributable to several of our
customers entering production in 2006. Our NP-2 contributed approximately 50% of
our total 2006 revenues, even though we only started shipping NP-2 in production
quantities in the third quarter of 2006. Of our approximately 100 design wins,
over 70 are for NP-2 and NP-3 designs, and we expect a significant portion of
these products to enter production during 2007 and 2008. Two major tier-1 CESR
(carrier Ethernet switches and routers) vendors are building several of their
CESR platforms based on EZchip network processors. One of these customers has
started production of several NP-2-based products and is expected to roll out
several more NP-2-based products during 2007 and 2008. The second vendor has
selected the NP-3 for various products that are in development stage. This
customer is expected to start volume shipment of several of its strategic
NP-3-based platforms during 2008. At the end of 2006, another tier-1 vendor
began production of several NP-2 designs and we expect several more tier-1
vendors to enter production in the next few quarters. Our chips go into
communication equipment that average about two years from design win to product,
and volume orders can be expected only after the customer's equipment enters
production. Consequently, we have not yet realized the potential of our design
wins and we expect that our quarterly revenues will continue to fluctuate. We do
not expect that all of our customers will reach production stage, as projects
may be halted, delayed or cancelled and there is also no assurance that products
that have reached production will be successfully accepted in the marketplace.
Our future revenue ramp-up will continue to depend on the success of our
customers' new products that incorporate our network processors, on market
acceptance of these products, and on the pace of recovery in the
telecommunications and related markets. See also discussion in Item 5A
"Operating Results and Financial Review and Prospects - Operating Results."

E.   OFF-BALANCE SHEET ARRANGEMENTS

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

F.   TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

     The following table summarizes our material contractual obligations as of
December 31, 2006:

<TABLE>
<CAPTION>
                                                      PAYMENTS DUE BY PERIOD
                                             ------------------------------------------
                                            LESS THAN                          MORE THAN
CONTRACTUAL OBLIGATIONS          TOTAL       1 YEAR    1-3 YEARS   4-5 YEARS    5 YEARS
------------------------         ------      ------      ------      ------      ------
                                                     (in thousands)
<S>                              <C>         <C>         <C>
Operating lease obligations      $  985      $  670      $  315          --          --
Long-term loan(1)                $4,747      $  336      $4,411          --          --
Severance pay (2)                $2,464          --          --          --          --
                                 ------      ------      ------      ------      ------
Total                            $8,196      $1,006      $4,726
</TABLE>

-----------------
(1) This amount includes interest for a loan in the amount of $4 million at the
rate of LIBOR+ 3% through August 2008 and LIBOR+4.5% through July 2009.

(2) Severance pay relates to accrued severance obligations to our Israeli
employees as required under Israeli labor law. These obligations are payable
only upon termination, retirement or death of the respective employee and there
is no obligation if the employee voluntarily resigns. Of this amount, only $0.5
million is unfunded.


                                       29
<PAGE>


ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.   DIRECTORS AND SENIOR MANAGEMENT

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

NAME                                         AGE             POSITION(S)
----------------------                       ----      -----------------------

Eli Fruchter                                  51       Chairman of the Board
Dror Israel                                   38       Chief Financial Officer
Prof. Ran Giladi (1)                          52       Director
Karen Sarid (1)(3)                            56       Director
Shai Saul (1)(2)(3)                           44       Director
David Schlachet (1)(2)(3)                     61       Director

-----------------
(1)  "Independent Director" under rules of the Securities and Exchange
     Commission and NASDAQ Marketplace Rules (see explanation below)

(2)  "Outside Director" within the meaning of the Israeli Companies Law (see
     explanation below)

(3)  Member of our Audit Committee.

     ELI FRUCHTER serves as the President and Chief Executive Officer of EZchip,
a position that he has held since EZchip's inception, and has served as a
director of our company since its inception and Chairman of our Board of
Directors since December 2006. He served as General Manager of our company from
its inception until May 1999, and as President, Chief Executive Officer and
General Manager from May 1999 through September 1999. From March 1995 until
September 1999, he served as the Chairman of the Board of Directors of our
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 assisting to found Adacom in 1985, Mr.
Fruchter was Manager - Research and Development Group of Fibronics Ltd., a
manufacturer of data communications and fiber optics systems. Mr. Fruchter holds
a B.Sc. degree in Electrical Engineering from the Technion - Israel Institute of
Technology.

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

     PROF. RAN GILADI has served as a director of our company since December
2001. Prof. Giladi is a faculty member 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. Prof. Giladi is also the active
Chairman of DiskSites, Inc. a data-communication company which was acquired by
Expand Networks Ltd. in 2006. He co-founded InfoCyclone Inc. 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.
Prof. Giladi taught at the Business School and at the Electrical Engineering
Department of Tel-Aviv University from 1987 until 1993. Prof. Giladi co-founded
Ramir Ltd., which was later acquired by Harris-Adacom, and served as Vice
President Research & Development in both companies from 1984 until 1986. Prof.
Giladi 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. Prof. Giladi
holds a B.Sc. degree in Physics and M.Sc. degree in Biomedical Engineering, both
from the Technion - Israel Institute of Technology, and a Ph.D. in Computers and
Information Systems from Tel-Aviv University.

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


                                       30
<PAGE>


     SHAI SAUL has served as a director of our company since December 2006. Mr.
Saul is Managing General Partner of Tamir Fishman Ventures, an Israeli
technology-focused venture capital fund, which he co-founded in 1999. During
2001, he acted as interim chief executive of CopperGate Communications. From
1994 to 1999, Mr. Saul served as Executive Vice President of Aladdin Knowledge
Systems Ltd. (NASDAQ: ALDN), a leading provider of digital rights management and
security solutions. From 1993 to 1994, he served as Chief Executive Officer of
Ganot Ltd. Mr. Saul also serves as Chairman of the Board of CopperGate
Communications and as a director of Allot Communications. His past board
positions include Native Networks and Teleknowledge. Mr. Saul holds an LL.B.
degree from Tel Aviv University.

     DAVID SCHLACHET has served as director of our company since September 2005.
Mr. Schlachet has served as chief executive officer of Syneron Medical Ltd.
since November 2005, after having served as chief financial officer of Syneron
Medical Ltd. from July 2004. From 2000 to June 2004, Mr. Schlachet served as
Managing Partner of Biocom, a venture capital fund specializing in the life
sciences area. From 1995 to 2000, Mr. Schlachet served as a senior Vice
President and Chief Financial Officer of Strauss Elite Holdings, a packaged food
group. He also served as an active Chairman of Elite Industries Ltd. From 1988
to 1995 Mr. Schlachet served first as CEO of Yeda, the Weizmann Institute
technology transfer company, and later as Vice President of Finance and
Administration of the Weizmann Institute of Science. Mr. Schlachet serves as a
director and chair of audit committee for NASDAQ listed companies Pharmos Inc.
and Compugen Ltd., and is a director of Adgar Investment and Development, which
is listed on the Tel Aviv Stock Exchange. Mr. Schlachet holds a B.Sc. degree in
chemical engineering and an M.B.A. from Tel-Aviv University.

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

B.   COMPENSATION OF DIRECTORS AND OFFICERS

     The aggregate amount of compensation paid during 2006 to all of our
directors and executive officers as a group (eight persons, including two
directors whose term expired during 2006) for services in all capacities was
approximately $344,000. This amount does not include expenses we incurred for
other payments, including dues for professional and business associations,
business travel and other expenses and benefits commonly reimbursed or paid by
companies in Israel. The aggregate amount set aside or accrued during 2006 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 $9,000. All our executive officers work full time for us.

     During 2006, we granted all of our directors and executive officers as a
group (eight persons) options to purchase an aggregate of 800,000 of EZchip's
ordinary shares under the EZchip 2003 Section 102 Share Option Plan. The options
expire in 2013. See Item 6E "Directors, Senior Management and Employees - Share
Ownership - Equity Incentive Plans - EZchip Option Plans." In 2006, we did not
grant any of our directors or executive officers options to purchase our shares.

     During the year ended December 31, 2006, we paid each of our outside
directors approximately $1,450 per quarter and approximately $300 per meeting
attended. Our other directors did not receive any compensation during 2006.

     In December 2006, our shareholders approved a one-time award to each of our
non-employee directors of options to purchase 27,000 of our ordinary shares or
9,000 restricted share units, or RSUs, or any combination thereof based on the
same ratio of RSUs per option under our 2003 Amended and Restated Equity
Incentive Plan. The shareholders delegated to our audit committee the final
determination as to whether to grant options or RSUs (or a combination thereof).
In January 2007, the audit committee determined to grant (i) to each
non-employee director in office prior to the 2006 annual shareholders meeting,
3,000 RSUs and 18,000 options, (ii) to non-employee directors elected in the
2006 annual shareholders meeting, 27,000 options, and (iii) to the non-employee
director who did not stand for reelection at the 2006 annual shareholders
meeting, 3,000 RSUs. See Item 6E "Directors, Senior Management and Employees -
Share Ownership - Equity Incentive Plans - LanOptics Equity Incentive Plans."

     We follow Israeli law and practice, instead of the NASDAQ Marketplace
requirements, regarding the compensation of our executive officers. See below in
this Item 6.C. "Directors, Senior Management and Employees - Board Practices -
NASDAQ Marketplace Rules and Home Country Practices."


                                       31
<PAGE>


C.   BOARD PRACTICES

ELECTION OF DIRECTORS

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

     Our directors, other than our outside directors, as described below, are
appointed by our shareholders at our annual general meeting and hold office
until the next annual general meeting. Our annual general meetings are held at
least once every calendar year, but not more than 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.

     We do not follow the requirements of the NASDAQ Marketplace Rules with
regard to the nomination process of directors, and instead, we follow Israeli
law and practice, in accordance with which our directors are recommended by our
board of directors for election by our shareholders. See below in this Item 6C.
"Directors, Senior Management and Employees - Board Practices - NASDAQ
Marketplace Rules and Home Country Practices."

ALTERNATE DIRECTORS

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

OUTSIDE AND INDEPENDENT DIRECTORS

     OUTSIDE DIRECTORS. In accordance with the Israeli Companies Law, as an
Israeli public company, we are required to have at least two outside directors.
The outside directors must meet certain statutory requirements of independence.
In general, the term of office of an outside director is three years, which can
be extended for one additional three year-term (there are no prescribed terms of
service for the other directors of the company). An outside director can be
removed from office only under very limited circumstances.

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

     As of January 2006, at least one of the outside directors elected must have
"accounting and financial expertise" and any other outside director must have
"accounting and financial expertise" or "professional qualification," as such
terms are defined by regulations promulgated under the Israeli Companies Law.
This requirement does not apply to outside directors appointed prior to January
2006. Our outside director, Mr. David Schlachet, has "accounting and financial
expertise" and our other outside director, Mr. Shai Saul, has "professional
qualification," as such terms are defined by regulations promulgated under the
Israeli Companies Law.

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

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

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


                                       32
<PAGE>


     Merssrs, Shai Saul and David Schlachet serve as our outside directors under
the Israeli Companies Law. Mr. Saul's term will expire at our 2009 annual
meeting of shareholders and Mr. Schlachet's term will expire in 2008, following
which their service as an outside director may each be extended for one
additional three-year term.

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

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 including all of the outside directors. The chairman of
the board of directors, any director employed by or otherwise providing services
to the company, and a controlling shareholder or any relative of a controlling
shareholder may not be a member of the audit committee.

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

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

     Our Audit Committee currently consists of Shai Saul, Karen Sarid and David
Schlachet. We believe that these appointments comply with the requirements of
the Israel Companies Law, the Securities and Exchange Commission and NASDAQ.

     Our Audit Committee reviewed our audited financial statements for the year
ended December 31, 2006 and members of the Audit 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, 2006.

INTERNAL AUDITOR

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

DIRECTORS' SERVICE CONTRACTS

     We do not have any service contracts with our directors. There are no
arrangements or understandings between us and any of our subsidiaries, on the
one hand, and any of our directors, on the other hand, providing for benefits
upon termination of their employment or service as directors of our company or
any of our subsidiaries.


                                       33
<PAGE>


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

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

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

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

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

     The Israeli Companies Law applies the same disclosure requirements to a
controlling shareholder of a public company, which includes a shareholder that
holds 25% or more of the voting rights if no other shareholder owns more than
50% of the voting rights in the company. Two or more shareholders with a
personal interest in the approval of the same transaction are deemed to be one
shareholder. Extraordinary transactions, including a private placement, with a
controlling shareholder or in which a controlling shareholder has a personal
interest, and the terms of compensation 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 shareholders approval must
include the majority of shares voted at the meeting. In addition, 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.


                                       34
<PAGE>


     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 also provides that a breach of the duty of fairness will be
governed by the laws governing breach of contract; however, the Israeli
Companies Law does not describe the substance of this duty.

INDEMNIFICATION OF DIRECTORS AND OFFICERS; LIMITATIONS ON LIABILITY

     INDEMNIFICATION OF OFFICE HOLDERS

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

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

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

     o    reasonable legal costs, including attorneys' fees, expended by the
          office holder or for which the office holder is charged by a court:

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

               o    in a criminal action from which the office holder is
                    acquitted, or

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

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

     INSURANCE OF OFFICE HOLDERS

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


                                       35
<PAGE>


     EXCULPATION OF OFFICE HOLDERS

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

     LIMITATIONS ON EXCULPATION, INSURANCE AND INDEMNIFICATION

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

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

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

NASDAQ MARKETPLACE RULES AND HOME COUNTRY PRACTICES

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

     On July 27, 2005, we provided NASDAQ with a notice of non-compliance with
Rule 4350. In practice, we do not comply with the NASDAQ requirements regarding
the director nominations process, compensation of executive officers and the
distribution of annual reports. Instead, we follow Israeli law and practice in
accordance with which our directors are recommended by our board of directors
for election by our shareholders, our board sets executive compensation, subject
to the required approvals under Israeli law, and we post our annual reports or
Form 20-F on our website. See above in this Item 6C. "Directors, Senior
Management and Employees - Board Practices - Election of Directors" and
"Directors, Senior Management and Employees - Board Practices - Approval of
Certain Transactions; Obligations of Directors, Officers and Shareholders".


                                       36
<PAGE>


D.   EMPLOYEES

     As of March 31, 2007, we had 100 employees, 97 of which were employees of
EZchip and three of which were LanOptics employees. The following table presents
the number of employees of ours and EZchip categorized by function as of
December 31:

                                        AS OF DECEMBER 31,
                                ------------------------------
                                 2004        2005        2006
                                ------      ------      ------

Operations                           6           5           8
Research and development            57          59          72
Sales and marketing                 11          11          13
General and administrative           6           7           7
                                            ------      ------
Total (1)                           80          82         100
                                ======      ======      ======

--------------
(1)  Includes three employees of LanOptics, all of whom are general and
     administrative.

     The following table presents the number of employees of ours and EZchip
categorized geographic area as of December 31:

                          AS OF DECEMBER 31,
                   ------------------------------
                    2004        2005        2006
                   ------      ------      ------

Israel (1)             74          76          92
United States           6           6           7
China                  --          --           1
                   ------      ------      ------
Total                  80          82         100
                   ======      ======      ======

----------------
(1)  Includes three employees of LanOptics, all of whom are general and
     administrative.

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

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

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

     Pursuant to Israeli law, we are legally required to pay severance benefits
upon certain circumstances, including the retirement or death of an employee or
the termination of employment of an employee without due cause. All of our
employees are covered by life and/or pension insurance policies providing
customary benefits to employees, including retirement and severance benefits. 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 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 to the
maximum amounts that are not considered taxable income to the employee. Israeli
employers and employees are required to pay predetermined sums to the National
Insurance Institute, which is similar to the United States Social Security
Administration. The payments to the National Insurance Institute are determined
progressively in accordance with wages.


                                       37
<PAGE>


E.   SHARE OWNERSHIP

BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS

     None of our directors and executive officers holds more than 1% of our
outstanding shares, other than Eli Fruchter, the Chairman of our board of
directors and President and Chief Executive Officer of EZchip. For Mr.
Fruchter's holdings, see Item 7A "Major Shareholders and Related Party
Transactions - Major Shareholders." As of December 31, 2006, our executive
officers and directors as a group held options to purchase an aggregate of
15,000 of our ordinary shares. The exercise price of these options is $6.93 and
their expiration date is November 2013. For information regarding ownership of
our ordinary shares by our directors and executive officers as a group, see Item
7.A. "Major Shareholders and Related Party Transactions - Major Shareholders."

EQUITY INCENTIVE PLANS

LANOPTICS EQUITY INCENTIVE PLANS

     1992 STOCK OPTION PLAN. 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. Upon the expiration of the
1992 Plan, approximately 140,000 ordinary shares remained that had not
previously been issued under the 1992 Plan or that were not subject to
outstanding options previously granted under the 1992 Plan. As of December 31,
2006, options to purchase 132,652 ordinary shares were outstanding under the
1992 Plan. All of these options were exercisable at exercise prices ranging from
$2.50 to $4.23 per share.

     2003 AMENDED AND RESTATED EQUITY INCENTIVE PLAN. On October 2003, LanOptics
adopted the 2003 Israeli Share Option Plan. The plan was amended in December
2006 and renamed the LanOptics Ltd. 2003 Amended and Restated Equity Incentive
Plan, or the 2003 Israel Plan. Up to 270,000 ordinary shares may be granted
under the 2003 Israel Plan, which amount is reduced by three shares for each
restricted share unit that we grant under the plan and by one share for each
option that we grant under the plan. The 2003 Israel Plan is administered by the
Board of Directors, or a committee of the Board that is delegated authority to
act as the administrator. The administrator has broad discretion, subject to
certain limitations, to determine the persons entitled to receive awards, the
terms and conditions on which awards are granted and the number of shares
subject to each award granted. Under the 2003 Israel Plan, we may grant
restricted share units, or RSUs, and options to purchase our ordinary shares to
Israeli employees, directors, consultants, advisers and service providers of our
company and its subsidiaries. In accordance with the terms and conditions
imposed by Section 102 of the Israel Income Tax Ordinance, grantees who receive
awards under the 2003 Israel Plan are afforded certain tax benefits (excluding
our controlling shareholders or those who are not our employees or directors).
We have elected the benefits available under the "capital gains" alternative.
There are various conditions that must be met in order to qualify for these
benefits, including registration of the awards in the name of a trustee for each
of the employees who is granted awards. Each award, and any ordinary shares
acquired upon the exercise of the award, must be held by the trustee for a
period commencing on the date of grant and ending no earlier than 24 months
after the end of the tax year in which the award was granted and deposited in
trust with the trustee. The 2003 Israel Plan provides for the awards granted to
have a maximum exercise period of ten years from the date of grant. Awards
granted under the 2003 Israel Plan are generally exercisable over four years.
Awards that are not exercised will become available for further grant by the
Board under the 2003 Israel Plan.

     As of December 31, 2006, options to purchase 15,000 ordinary shares were
outstanding under the 2003 Israel Plan. All of these options were exercisable at
an exercise price of $6.93 per share.

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
11,500,000 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.


                                       38
<PAGE>


     As of December 31, 2006, there were outstanding options to purchase
ordinary shares of EZchip representing approximately 15% of the share capital of
EZchip on an as converted and fully diluted basis. Approximately 44% 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 26, 2007 for
(i) each person who, as far as we know, beneficially owns more than 5% of our
outstanding ordinary shares, (ii) each of our executive officers and directors
that beneficially owns more than 1% of our outstanding ordinary shares, and
(iii) our executive officers and directors as a group. The information in the
table below is based on 15,748,569 ordinary shares outstanding as of March 26,
2007. Each of our outstanding ordinary shares has identical rights in all
respects.

                                        NUMBER OF
NAME                                    SHARES(1)       PERCENT
----------------------------------      ---------       ------

Star Ventures Management (2)            1,296,138        8.23%
Nokia Venture Partners (3)              1,051,574        6.68%
Eli Fruchter (4)                          532,712        3.38%
All directors and executive
officers as a group (6 persons)(5)        547,712        3.48%

------------
(1)  The number of ordinary shares beneficially owned includes the shares
     issuable pursuant to options and restricted share units that are
     exercisable within 60 days of March 26, 2007. Shares issuable pursuant to
     such options or restricted share units are deemed outstanding for computing
     the percentage of the person holding such options or restricted share units
     but are not outstanding for computing the percentage of any other person.

(2)  Based on Schedule 13G filed with the Securities and Exchange Commission on
     December 28, 2006 and other information available to the company. The
     aggregate number of shares includes ordinary shares beneficially held by
     Star-Seed Managementgesellschaft mbH, or Star Seed, and by SVM Star
     Ventures Managementgesellschaft mbH Nr. 3., or Star 3. The Schedule 13G
     states that Dr. Barel is the sole director and primary shareholder of SVM 3
     and Seed and as such, he may be deemed to be the beneficial holder of, and
     to share the power to vote and dispose of, the shares owned directly and
     indirectly by SVM 3 and Star Seed. According to the Schedule 13G, Dr.
     Barel, Star Seed and SVM 3 each disclaim beneficial ownership of all of the
     foregoing shares except to the extent of any pecuniary interest therein,
     except for certain ordinary shares held by SVM 3 as Trustee for Dr. Barel.
     The address of Star Ventures Management is Possartstrasse 9, D-81679
     Munich, Germany.

(3)  Based on Schedule 13G filed with the Securities and Exchange Commission on
     February 9, 2007 and other information available to the company. The
     aggregate number of shares includes 1,039,919 ordinary shares directly
     owned by Nokia Venture Partners II, L.P., or NVP II, and 11,655 ordinary
     shares directly owned by NVP II Affiliates Fund, L.P., or NVPA. The
     Schedule 13G states that N.V.P. II SP, L.P. , or NVP SP, the general
     partner of NVP II and NVPA, and N.V.P. II, L.L.C., or NVP LLC, the general
     partner of NVP SP, may be deemed to have sole power to vote and dispose of
     such shares, and John Malloy, John Gardner, W. Peter Buhl and Tantti, Ltd.,
     the managing members of NVP LLC, may be deemed to have shared power to vote
     and dispose of such shares. The address of the reporting persons is 545
     Middlefield Road, Suite 210, Menlo Park, California 94025.

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

(5)  As of March 26, 2007 all directors and executive officers as a group (six
     persons) held options exercisable within 60 days of the date of the table
     into 15,000 ordinary shares at an exercise prices of $6.93. These options
     expire in 2013.


                                       39
<PAGE>


SIGNIFICANT CHANGES IN THE OWNERSHIP OF MAJOR SHAREHOLDERS

     On February 9, 2007, Nokia Venture Partners II, L.P., or NVP II, filed a
Schedule 13G with the Securities and Exchange Commission reflecting ownership of
1,577,362, or 10.06%, of our ordinary shares. The Schedule 13G reflects that of
such shares, 1,559,879 are directly owned by NVP II and 17,483 are directly
owned by NVP II Affiliates Fund, L.P., or NVPA. The Schedule 13G states that
N.V.P. II SP, L.P., or NVP SP, the general partner of NVP II and NVPA, and
N.V.P. II, L.L.C., or NVP LLC, the general partner of NVP SP, may be deemed to
have sole power to vote and dispose of such shares, and John Malloy, John
Gardner, W. Peter Buhl and Tantti, Ltd., the managing members of NVP LLC, may be
deemed to have shared power to vote and dispose of such shares. On February 12,
2007, NVP II sold 519,960 of such shares and NVPA sold 5,828 of such shares.

     On December 28, 2006, Dr. Meir Barel filed a Schedule 13G with the
Securities and Exchange Commission reflecting ownership of 1,944,204, or 12.4%,
of our ordinary shares. The Schedule 13G reflects that of such shares, 735,797
ordinary shares are held by Star-Seed Managementgesellschaft mbH, or Star Seed,
and 1,208,407 ordinary shares are beneficially held by SVM Star Ventures
Managementgesellschaft mbH Nr. 3., or Star 3. The Schedule 13G states Dr. Barel
is the sole director and primary shareholder of SVM 3 and Seed GmbH and as such,
he may be deemed to be the beneficial holder of, and to share the power to vote
and dispose of, the shares owned directly and indirectly by SVM 3 and Seed GmbH.
Dr. Barel, Seed GmbH and SVM 3 each disclaim beneficial ownership of all of the
foregoing shares except to the extent of any pecuniary interest therein, except
for 15,633 ordinary shares held by SVM 3 as Trustee for Dr. Barel. On February
12, 2007, these entities sold an aggregate 648,066 of the shares held by them.

MAJOR SHAREHOLDERS VOTING RIGHTS

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

RECORD HOLDERS

     Based on a review of the information provided to us by our transfer agent,
as of March 26, 2007, there were 39 holders of record of our ordinary shares,
including 13 holders of record residing in the United States holding 13,800,173
ordinary shares, or 87.63% of the aggregate 15,748,569 ordinary shares
outstanding as of such date. These numbers are not representative of the number
of beneficial holders of our shares nor is it representative of where such
beneficial holders reside since many of these ordinary shares were held of
record by brokers or other nominees (including one U.S. nominee company, CEDE &
Co., which held approximately 80.88% of our outstanding ordinary shares as of
such date).

B.   RELATED PARTY TRANSACTIONS

     In May 2003, LanOptics executed an agreement with all of EZchip's major
shareholders. Pursuant to the agreement, EZchip's four major shareholders were
granted the right to exchange all their shares in EZchip for ordinary shares of
LanOptics, subject to the fulfillment of certain conditions (as fully describe
in Note 3 to our consolidated financial statements). The exchange ratio is
calculated according to a formula determined by the parties, and applies to all
series of EZchip's shares without regard to any preferences of such shares. The
exchange right expires upon the earlier of an initial public offering of
EZchip's securities and the sale of all or substantially all of EZchip's assets
or securities. On December 22, 2006, we issued 3,521,566 of our ordinary shares
to funds affiliated with two of the major shareholders, Star Ventures and
BlueRun Ventures (formerly known as Nokia Venture Partners), in exchange for the
shares of EZchip previously held by them pursuant to the agreement.

     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. The terms of the
Series C Preferred Share 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
Preferred Share investment in EZchip in the amount of $8 million, of which we
invested $5.3 million. In July 2005, EZchip raised an additional $10.0 million
in a private placement of Series C Preferred Shares, of which amount we invested
$6.9 million.


                                       40
<PAGE>


C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.


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.

EXPORT SALES

     See Note 16(b) to the financial statements.

LEGAL PROCEEDINGS

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

DIVIDEND POLICY

     We anticipate that we will retain any future earnings to support operations
and to finance the growth and development of our business. In addition,
tax-exempt income attributable to our status as an approved enterprise under
Israeli tax law 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 our tax-exempt income. Any future dividend policy will be
determined by our Board of Directors and will be based upon conditions then
existing, including our results of operations, financial condition, current and
anticipated cash needs, contractual restrictions and other conditions. In
addition, our articles of association provide that the declaration of a dividend
requires approval by an ordinary resolution of our shareholders, which may
decrease but not increase the amount proposed by the Board of Directors.

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

B.   SIGNIFICANT CHANGES

     Except as otherwise disclosed in this Annual Report, there has been no
material change in our financial position since December 31, 2006.


                                       41
<PAGE>


ITEM 9. THE OFFER AND LISTING

A.   OFFER AND LISTING DETAILS

     Our ordinary shares are quoted on the NASDAQ Capital Market (prior to April
14, 2003, our 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 NASDAQ.

     Set forth below for each of the periods 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, the date we commenced trading on the Tel Aviv Stock Exchange.
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.

ANNUAL SHARE PRICE INFORMATION

     The following table sets forth, for each of the years indicated, the high
and low market prices of our ordinary shares on the NASDAQ Capital Market and
the Tel Aviv Stock Exchange:

                 NASDAQ     TEL AVIV STOCK EXCHANGE
            ----------------    ----------------
YEAR         HIGH       LOW      HIGH       LOW
----        ------    ------    ------    ------

2002        $16.45    $ 3.97    $14.86    $ 6.16
2003        $11.20    $ 3.88    $11.10    $ 4.78
2004        $15.17    $ 4.77    $14.79    $ 5.22
2005        $14.90    $ 4.56    $14.41    $ 4.93
2006        $15.15    $ 5.07    $15.26    $ 5.25

QUARTERLY SHARE PRICE INFORMATION

     The following table sets forth, for each of the full financial quarters in
the years indicated, the range of high ask and low bid prices of our ordinary
shares on the NASDAQ Capital Market and the Tel-Aviv Stock Exchange:

                               NASDAQ         TEL AVIV STOCK EXCHANGE
                        --------------------    --------------------
                          HIGH        LOW         HIGH         LOW
                        --------    --------    --------    --------

2005
First quarter           $  14.90    $   6.62    $  14.41    $   7.60
Second quarter              9.49        6.60        9.37        6.86
Third quarter               8.69        6.04        8.41        6.94
Fourth quarter              7.34        4.56        7.05        4.93

2006
First quarter               9.44        5.07        9.16        5.25
Second quarter             10.25        8.37       10.88        8.55
Third quarter               9.93        7.05       10.07        7.63
Fourth quarter             15.15        9.71       15.26        9.85


                                       42
<PAGE>


MONTHLY SHARE PRICE INFORMATION

     The following table sets forth, for the most recent six months, the high
and low market prices of our ordinary shares on the NASDAQ Capital Market and
the Tel Aviv Stock Exchange:

                                         NASDAQ         TEL AVIV STOCK EXCHANGE
                                  --------------------    --------------------
                                    HIGH        LOW         HIGH        LOW
                                  --------    --------    --------    --------

2006
October                           $  14.23    $   9.66    $  14.26    $   9.85
November                             15.15       12.66       15.26       12.11
December                             14.66       13.52       14.84       13.77

2007
January                              14.21       12.08       14.26       12.09
February                             13.97       11.55       14.44       11.77
March (through March 27, 2007)       14.93       11.39       15.11       11.43

B.   PLAN OF DISTRIBUTION

     Not applicable

C.   MARKETS

     See Item 9A. "The Offer and Listing - Offer and Listing Details."

D.   SELLING SHAREHOLDERS

     Not applicable.

E.   DILUTION

     Not applicable.

F.   EXPENSE OF THE ISSUE

     Not applicable.

ITEM 10. ADDITIONAL INFORMATION

A.   SHARE CAPITAL

     Not applicable.

B.   MEMORANDUM AND ARTICLES OF ASSOCIATION

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 6B. Directors, Senior Management and
Employees - Board Practices- Approval of Certain Transactions; Obligations of
Directors, Officers and Shareholders." 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.


                                       43
<PAGE>


RIGHTS ATTACHED TO ORDINARY SHARES

     Our authorized share capital consists of 30,000,000 ordinary shares, par
value NIS 0.02 per share. Holders of ordinary shares have one vote per share,
and are entitled to participate equally in the payment of dividends and share
distributions and, in the event of our liquidation, in the distribution of
assets after satisfaction of liabilities to creditors. No preferred shares are
currently authorized. All outstanding ordinary shares are validly issued and
fully paid. The rights of our ordinary shares may be cancelled, added to,
restricted, amended or otherwise altered with a vote of the holders of at least
75% of the outstanding ordinary shares voting at a duly convened shareholders'
meeting.

TRANSFER OF SHARES AND NOTICES

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

DIVIDEND AND LIQUIDATION RIGHTS

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

ANNUAL AND EXTRAORDINARY GENERAL MEETINGS

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

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

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.


                                       44
<PAGE>


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

     Our 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 6C. "Directors, Senior Management and Employees - Board Practices- Approval
of Certain Transactions; Obligations of Directors, Officers and Shareholders"
above for certain duties of shareholders towards the company.

LIMITATIONS ON THE RIGHTS TO OWN SECURITIES

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

ANTI-TAKEOVER PROVISIONS UNDER ISRAELI LAW

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

     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.

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

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

C.   MATERIAL CONTRACTS

     None.

D.   EXCHANGE CONTROLS

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


                                       45
<PAGE>


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

E.   TAXATION

ISRAELI TAX CONSIDERATIONS

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

     YOU ARE URGED TO CONSULT YOUR OWN TAX ADVISOR AS TO THE ISRAELI AND OTHER
TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR ORDINARY
SHARES, INCLUDING, IN PARTICULAR, THE EFFECT OF ANY NON-ISRAELI, STATE OR LOCAL
TAXES.

GENERAL CORPORATE TAX STRUCTURE IN ISRAEL

     Israeli companies were generally subject to corporate tax at the rate of
31% of their taxable income in 2006. Pursuant to tax reform legislation that
came into effect in 2003, the corporate tax rate is to undergo further staged
reductions to 25% by the year 2010. In order to implement these reductions, the
corporate tax rate is scheduled to decline to 29% in 2007, 27% in 2008, and 26%
in 2009.

     As discussed below, however, the rate is effectively reduced for income
derived from an Approved Enterprise and Privileged Enterprise.

LAW FOR THE ENCOURAGEMENT OF CAPITAL INVESTMENTS, 1959

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

     On April 1, 2005 an amendment to the Investment Law came into effect, in
which it revised the criteria for investments qualified to receive tax benefits.
An eligible investment program under the amendment will qualify for benefits as
a Privileged Enterprise (rather than the previous terminology of Approved
Enterprise). Among other things, the amendment provides tax benefits to both
local and foreign investors and simplifies the approval process. The amendment
does not apply to investment programs approved prior to December 31, 2004. The
new tax regime will apply to new investment programs only.

     Under the Approved/Privileged Enterprise programs, a company is eligible
for governmental grants, but may elect to receive an alternative package
comprised of tax benefits (Alternative Track). Under the alternative package, a
company's undistributed income derived from an Approved/Privileged Enterprise is
exempt from corporate tax for an initial period (two to ten years, depending on
the geographic location of the Approved/Privileged Enterprise within Israel).
The exemption begins in the first year that the company realizes taxable income
from the Approved/Privileged Enterprise.


                                       46
<PAGE>


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

     Currently, EZchip has one Approved Enterprise program under the alternative
track of the Investment Law. EZchip has derived, and expects to continue to
derive, a substantial portion of its operating income from its Approved
Enterprise facilities. EZchip is therefore eligible for a tax exemption for a
period of ten years on undistributed Approved Enterprise income. We and EZchip
intend to continue to elect our investments in productive assets as Privileged
Enterprise programs, but we cannot assure you that we will do so or that we will
be successful. We intend to reinvest the entire amount of our tax-exempt income
and not to distribute this income as a dividend.

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

     As a result of the amendment to the Investment Law in April 2005,
tax-exempt income generated under the provisions of the amended law will subject
us to taxes upon distribution or liquidation and we may be required to record
deferred tax liability with respect to such tax-exempt income. As of December
31, 2006, we had not generated any income under the provisions of the new law.

LAW FOR ENCOURAGEMENT OF RESEARCH AND DEVELOPMENT IN THE INDUSTRY, 1984

     Since April 2006, our research and development efforts have been financed,
in part, through grants from the Office of the Chief Scientist, or the OCS,
under our approved plans in accordance with the Israeli Law for Encouragement of
Research and Development in the Industry, 1984, or the R&D Law. Through December
31, 2006, we had applied and received approval for grants totaling $1.8 million
from the OCS. Under Israeli law and the approved plans, royalties on the
revenues derived from sales of all of our products are payable to the Israeli
government, generally at the rate of 3.0% during the first three years and 3.5%
beginning with the fourth year, up to the amount of the received grants as
adjusted for fluctuation in the U.S. dollar/NIS exchange rate. The grants also
bear interest equal to the 12-month London Interbank Offered Rate applicable to
dollar deposits that is published on the first business day of each calendar
year. Royalties are paid on our consolidated revenues.

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

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

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

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

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


                                       47
<PAGE>


     As of December 31, 2006, we had an outstanding contingent obligation to pay
royalties in the amount of approximately $1.0 million.

LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

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

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

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

     o    accelerated depreciation rates on equipment and buildings,

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

     o    expenses related to a public offering are deductible in equal amounts
          over three years.

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

SPECIAL PROVISIONS RELATING TO TAXATION UNDER INFLATIONARY CONDITIONS

     We measure our taxable income in accordance with the Income Tax Law
(Inflationary Adjustments), 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. Our results for tax purposes
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.

TAXATION OF NON-ISRAELI SHAREHOLDERS ON RECEIPT OF DIVIDENDS

     Under Israeli tax law, a distribution of dividends from income attributable
to an Approved/Privileged Enterprise will be subject to tax in Israel at the
rate of 15%, which is withheld and paid by the company paying the dividend, if
the dividend is distributed during the benefits period or within the following
12 years (but the 12-year limitation does not apply to a Foreign Investors
Company). Any distribution of dividends from income that is not attributable to
an Approved/Privileged Enterprise will be subject to tax in Israel at the rate
of 25%, except that dividends distributed on or after January 1, 2006 to an
individual who is deemed "a non-substantial shareholder" are subject to tax at
the rate of 20%.

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

CAPITAL GAINS TAXES APPLICABLE TO NON-ISRAELI SHAREHOLDERS

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

FOREIGN EXCHANGE REGULATIONS

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


                                       48
<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 either prospectively or retroactively.
This discussion generally considers only U.S. Shareholders that will hold the
ordinary shares as capital assets for U.S. federal income tax purposes and does
not consider (a) all aspects of U.S. federal income taxation that may be
relevant to particular U.S. Shareholders by reason of their particular
circumstances (including potential application of the alternative minimum tax),
(b) U.S. Shareholders subject to special treatment under the U.S. federal income
tax laws, such as financial institutions, insurance companies, broker-dealers
and tax-exempt organizations, (c) U.S. Shareholders owning, directly or by
attribution, 10% or more of 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

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

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


                                       49
<PAGE>


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

SALE, EXCHANGE OR OTHER DISPOSITION OF THE ORDINARY SHARES

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

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

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

PASSIVE FOREIGN INVESTMENT COMPANY STATUS

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

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


                                       50
<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 able to make a qualified
electing fund election unless we comply with certain applicable information
reporting requirements.

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

     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.


                                       51
<PAGE>


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

BACKUP WITHHOLDING AND INFORMATION REPORTING

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

F.   DIVIDEND AND PAYING AGENTS

     Not applicable.

G.   STATEMENT BY EXPERTS

     Not applicable.

H.   DOCUMENTS ON DISPLAY

     We are subject to certain of the information reporting requirements of the
Securities and Exchange Act of 1934, as amended. As a "foreign private issuer,"
we are exempt from the rules and regulations under the Securities Exchange Act
prescribing the furnishing and content of proxy statements, and our officers,
directors and principal shareholders are exempt from the reporting and
"short-swing" profit recovery provisions contained in Section 16 of the
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 file with the Securities and Exchange Commission an
annual report on Form 20-F containing financial statements audited by an
independent accounting firm. We also furnish quarterly reports on Form 6-K
containing unaudited financial information after the end of each of the first
three quarters. We post our Annual Report on Form 20-F on our Website
(www.lanoptics.com) promptly following the filing of our Annual Report with the
Securities and Exchange Commission.

     This report and other information filed or to be filed by us can be
inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at:

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

     Copies of these materials can also be obtained from the Public Reference
Section of the Securities and Exchange Commission, 100 F Street, NE, Washington,
D.C. 20549, at prescribed rates.

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

I.   SUBSIDIARY INFORMATION

     Not applicable.

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.


                                       52
<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 2.5% - 3.5%, with maturities in the range of 3 to 12 months; and (ii)
short term managed liquidity funds bearing annual interest rates in the range of
3.0% - 4.0%.

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

                                     PART II

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     None

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

     Not applicable.

ITEM 15. CONTROLS AND PROCEDURES

     Not applicable.

ITEM 15T. CONTROLS AND PROCEDURES

DISCLOSURE CONTROLS AND PROCEDURES

     We maintain disclosure controls and procedures that are designed to ensure
that information required to be disclosed in its Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to the chairman of our board of
directors who serves as our principal executive officer and our chief financial
officer to allow timely decisions regarding required disclosure. Our management,
including our acting principal executive officer and chief financial officer,
conducted an evaluation of our disclosure controls and procedures, as defined
under Exchange Act Rule 13a-15(e), as of the end of the period covered by this
Annual Report on Form 20-F. Based upon that evaluation, our acting principal
executive officer and chief financial officer have concluded that, as of such
date, our disclosure controls and procedures were effective.

MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Our management, including our acting principal executive officer and chief
financial officer, is responsible for establishing and maintaining adequate
internal control over financial reporting, as defined under Exchange Act Rules
13a-15(f) and 15d-15(f). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the
United States. Internal control over financial reporting includes those policies
and procedures that: (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets, (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that the our
receipts and expenditures are being made only in accordance with appropriate
authorizations; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of our assets
that could have a material effect on the financial statements.


                                       53
<PAGE>


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

     Our acting principal executive officer and chief financial officer assessed
the effectiveness of our internal control over financial reporting as of the as
of the end of the period covered by this annual report. Their assessment
included an evaluation of the design of our internal control over financial
reporting and testing of the operational effectiveness of our internal control
over financial reporting. Based on their assessment, our acting principal
executive officer and chief financial officer believe that, as of such date, we
maintained effective internal control over financial reporting.

     This annual report does not include an attestation report of our
independent registered public accounting firm regarding internal control over
financial report. Management's report was not subject to attestation by our
independent registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit us to provide only management's
report in this annual report.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

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

ITEM 16. [RESERVED]

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

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

ITEM 16B. CODE OF ETHICS

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

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS

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

                               YEAR ENDED DECEMBER 31,
                               ----------------------
SERVICES RENDERED                 2005         2006
-----------------              --------      --------

Audit (1)                      $ 68,000      $ 85,000
Audit-related (2)                42,000        53,000
Tax (3)                          18,000         8,000
Total                          $128,000      $146,000


                                       54
<PAGE>


-----------------
     (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 in 2005 and 2006 relate to accounting consultation
     and audits in connection with our applications to the Office of the Chief
     Scientist, review of a registration statement filed with the Securities and
     Exchange Commission, employee benefit plans audits, and consultation
     concerning financial accounting and reporting standards.

     (3) Tax fees in 2005 and 2006 relate to services performed by the tax
     division for tax compliance, planning, and advice.

PRE-APPROVAL POLICIES AND PROCEDURES

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

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

     Not applicable.

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

ISSUER PURCHASE OF EQUITY SECURITIES

     There were no shares purchased by us or on our behalf or by any affiliated
purchaser during 2006.


                                       55
<PAGE>


                                    PART III

ITEM 17. FINANCIAL STATEMENTS

     Not applicable.

ITEM 18. FINANCIAL STATEMENTS

     See pages F-1 to F-39 incorporated herein.

ITEM 19. EXHIBITS

  EXHIBIT NO.       DESCRIPTION OF EXHIBIT
  ----------        ----------------------

     1.1            Memorandum of Association of the Registrant (1)

     1.2            Articles of Association of the Registrant (2)

     4.1            Ordinary Share Purchase Agreement dated June 22, 2005 among
                    the Registrant and the Investors therein (3)

     4.2            LanOptics Ltd. 2003 Amended and Restated Equity Incentive
                    Plan

     8.1            List of Subsidiaries

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

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

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

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

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

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

     (2)  Filed as Exhibit 3.2 to Amendment No. 1 of the Registrant's
          Registration Statement on Form F-1, registration number 33-52676, and
          incorporated herein by reference.

     (3)  Filed as Exhibit 4.3 to Amendment No. 3 of the Registrant's
          Registration Statement on Form F-3, registration number 333-126416 and
          incorporated herein by reference.

                                       56
<PAGE>


                       LANOPTICS LTD. AND ITS SUBSIDIARIES

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2006

                                 IN U.S. DOLLARS

                                      INDEX

                                                                        PAGE
                                                                      -------

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM                 F-2

CONSOLIDATED BALANCE SHEETS                                          F-3 - F-4

CONSOLIDATED STATEMENTS OF OPERATIONS                                   F-5

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

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                           F-9 - F-39


                                     F - 1
<PAGE>


[ERNST & YOUNG LOGO]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             TO THE SHAREHOLDERS OF

                                 LANOPTICS LTD.

     We have audited the accompanying consolidated balance sheets of LanOptics
Ltd. ("the Company") and its subsidiaries as of December 31, 2006 and 2005, and
the related consolidated statements of operations, changes in shareholders'
equity (deficiency) and cash flows for each of the three years in the period
ended December 31, 2006. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

     We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. We were not engaged to
perform an audit of the Company's internal control over financial reporting. An
audit includes consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management and
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, 2006 and 2005, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2006, in conformity with U.S.
generally accepted accounting principles.

     As discussed in Note 2 to the consolidated financial statements, in 2006
the Company adopted Financial Accounting Standard Board Statement No. 123(R)
"Share-Based Payment".

                                                /s/ Kost Forer Gabbay & Kasierer
                                                -------------------------------
Haifa, Israel                                     KOST FORER GABBAY & KASIERER
March 29, 2007                                  A Member of Ernst & Young Global


                                     F - 2
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                                  DECEMBER 31,
                                                                                             -----------------------
                                                                                  NOTE        2006            2005
                                                                                  ----       -------         -------
<S>                                                                               <C>        <C>             <C>
ASSETS

CURRENT ASSETS:
    Cash and cash equivalents                                                                $12,186         $14,115
    Marketable securities                                                          4           5,472           5,437
    Trade receivables, net of allowance for doubtful accounts of $49
    at December 31, 2006 and 2005                                                              1,706             931
    Other accounts receivable and prepaid expenses                                 5             683             300
    Inventories                                                                    6           3,489           2,098
                                                                                             -------         -------

TOTAL current assets                                                                          23,536          22,881
                                                                                             -------         -------

LONG-TERM INVESTMENTS:
    Prepaid development and production costs, net                                  7             290             381
    Severance pay fund                                                                         1,951           1,564
                                                                                             -------         -------

TOTAL long-term investment                                                                     2,241           1,945

PROPERTY AND EQUIPMENT, NET                                                        8             352             351
                                                                                             -------         -------

INTANGIBLE ASSETS, NET                                                             9           3,633             861
                                                                                             -------         -------

GOODWILL                                                                          10          36,531           4,833
                                                                                             -------         -------

TOTAL assets                                                                                 $66,293         $30,871
                                                                                             =======         =======
</TABLE>

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


                                     F - 3
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                             DECEMBER 31,
                                                                                     ----------------------------
                                                                         NOTE          2006                2005
                                                                         ----        ---------          ---------
<S>                                                                       <C>        <C>                <C>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIENCY)

CURRENT LIABILITIES:
    Trade payables                                                                   $   1,017          $     338
    Other accounts payable and accrued expenses                           11             3,092              1,916
                                                                                     ---------          ---------

TOTAL current liabilities                                                                4,109              2,254
                                                                                     ---------          ---------

LONG-TERM LIABILITIES:
    Long-term loan                                                        12             3,337                 --
    Accrued severance pay                                                                2,464              1,990
    Warrants to Redeemable Preferred Shares in EZchip                     2k                --                253
                                                                                     ---------          ---------

TOTAL long-term liabilities                                                              5,801              2,243
                                                                                     ---------          ---------

EMPLOYEE STOCK OPTIONS IN EZchip                                                           557                 --
                                                                                     ---------          ---------

REDEEMABLE PREFERRED SHARES IN EZchip                                                       --             18,499
                                                                                     ---------          ---------

PREFERRED SHARES IN EZchip                                                2j            23,770             20,068
                                                                                     ---------          ---------

COMMITMENTS AND CONTINGENT LIABILITIES                                    13

SHAREHOLDERS' EQUITY (DEFICIENCY):
    Share capital
    Ordinary Shares of NIS 0.02 par value -                               14
    Authorized: 30,000,000 shares at December 31, 2006 and 2005;
    Issued and outstanding: 15,669,593 and 11,633,771 shares at
    December 31, 2006 and 2005, respectively                                                93                 75
    Additional paid-in capital                                                         117,716             61,185
    Accumulated other comprehensive loss                                                   (19)               (36)
    Accumulated deficit                                                                (85,734)           (73,417)
                                                                                     ---------          ---------

TOTAL shareholders' equity (deficiency)                                                 32,056            (12,193)
                                                                                     ---------          ---------

TOTAL liabilities and shareholders' equity (deficiency)                              $  66,293          $  30,871
                                                                                     =========          =========
</TABLE>

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


                                     F - 4
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                          --------------------------------------------------------
                                                              NOTE          2006 (1)               2005                   2004
                                                              ----        ------------          ------------          ------------
<S>                                                            <C>        <C>                   <C>                   <C>
Revenues                                                       16         $      8,469          $      5,848          $      4,746
Costs of revenues                                                                3,664                 2,350                 1,889
Amortization of existing technology                                                360                   291                   241
                                                                          ------------          ------------          ------------

Gross profit                                                                     4,445                 3,207                 2,616
                                                                          ------------          ------------          ------------

Operating expenses:
    Research and development, net                                                8,402                 8,215                 7,267
    In-process research and development charge                                   2,033                 1,475                    --
    Sales and marketing                                                          2,735                 2,245                 2,309
    General and administrative                                                   1,560                 1,398                 1,456
                                                                          ------------          ------------          ------------

Total operating expenses                                                        14,730                13,333                11,032
                                                                          ------------          ------------          ------------

Operating loss                                                                 (10,285)              (10,126)               (8,416)
Financial and other expenses , net                             17               (2,204)                 (312)                 (738)
                                                                          ------------          ------------          ------------

Loss before minority interest                                                  (12,489)              (10,438)               (9,154)

Minority interest in losses of EZchip                                              172                   206                    --
                                                                          ------------          ------------          ------------

Net loss before cumulative effect of change in
accounting principle                                                           (12,317)              (10,232)               (9,154)

Cumulative effect of change in accounting principle            2k                   --                  (115)                   --
                                                                          ============          ============          ============

Net loss                                                                  $    (12,317)         $    (10,347)         $     (9,154)
                                                                          ============          ============          ============

Net loss per share before cumulative effect of change
in accounting principle                                                   $      (1.05)         $      (0.92)         $      (0.98)
                                                                          ============          ============          ============
Net loss per share                                                        $      (1.05)         $      (0.93)         $      (0.98)
                                                                          ============          ============          ============

Weighted average number of Ordinary Shares used in
computing net loss per share                                                11,745,171            11,156,250             9,365,181
                                                                          ============          ============          ============
</TABLE>

(1)  The year ended December 31, 2006 includes equity based compensation pre-tax
     expense of $609, which was classified as follows: $8 to cost of revenues,
     $365 to research and development expenses, $122 to sales and marketing
     expenses and $114 to general and administrative expenses.

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


                                     F - 5
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                                                    ACCUMULATED
                                                                                                  ADDITIONAL           OTHER
                                                                 ORDINARY          SHARE           PAID-IN         COMPREHENSIVE
                                                                  SHARES          CAPITAL          CAPITAL          INCOME (LOSS)
                                                                ----------         ------         ----------         ----------
<S>                                                              <C>               <C>            <C>                <C>
Balance as of January 1, 2004                                    9,250,535         $   64         $   39,516         $       16

Issuance of shares, net                                          1,368,000              6             13,465                 --
Exercise of stock options                                            7,750           *)--                 40                 --
Compensation related to options granted to employees                    --             --                172                 --
Comprehensive loss:
     Unrealized losses on available-for-sale securities                 --             --                 --               (100)
     Net loss                                                           --             --                 --                 --
                                                                ----------         ------         ----------         ----------

Total comprehensive loss

Balance as of December 31, 2004                                 10,626,285             70             53,193                (84)

Issuance of shares, net                                          1,006,486              5              7,951                 --
Exercise of stock options                                            1,000           *)--                  3                 --
Compensation related to options granted to employees                    --             --                 38                 --
Comprehensive loss:
     Unrealized losses on available-for-sale securities                 --             --                 --                 48
     Net loss                                                           --             --                 --                 --
                                                                ----------         ------         ----------         ----------

Total comprehensive loss


Balance as of December 31, 2005                                 11,633,771             75             61,185                (36)
Issuance of shares, net                                          3,878,235             18             55,612                 --
Exercise of stock options                                          157,587           *)--                867                 --
Compensation related to options granted to employees                    --             --                 52                 --
Comprehensive loss:
     Unrealized income on available-for-sale securities                 --             --                 --                 17
     Net loss                                                           --             --                 --                 --
                                                                ----------         ------         ----------         ----------

Total comprehensive loss

Balance as of December 31, 2006                                 15,669,593         $   93         $  117,716         $      (19)
                                                                ==========         ======         ==========         ==========
</TABLE>

<TABLE>
<CAPTION>
                                                                                                         TOTAL
                                                                                      TOTAL          SHAREHOLDERS'
                                                                ACCUMULATED        COMPREHENSIVE         EQUITY
                                                                  DEFICIT             LOSS           (DEFICIENCY)
                                                                ----------          ---------         ----------

<S>                                                             <C>                 <C>               <C>
Balance as of January 1, 2004                                   $  (53,916)                           $  (14,320)

Issuance of shares, net                                                 --                                13,471
Exercise of stock options                                               --                                    40
Compensation related to options granted to employees                    --                                   172
Comprehensive loss:
     Unrealized losses on available-for-sale securities                 --          $    (100)              (100)
     Net loss                                                       (9,154)            (9,154)            (9,154)
                                                                ----------          ---------         ----------

Total comprehensive loss                                                               (9,254)
                                                                                    =========
Balance as of December 31, 2004                                    (63,070)                               (9,891)

Issuance of shares, net                                                 --                                 7,956
Exercise of stock options                                               --                                     3
Compensation related to options granted to employees                    --                                    38
Comprehensive loss:
     Unrealized losses on available-for-sale securities                 --                 48                 48
     Net loss                                                      (10,347)           (10,347)           (10,347)
                                                                ----------          ---------         ----------

Total comprehensive loss                                                              (10,299)
                                                                                    =========

Balance as of December 31, 2005                                    (73,417)                              (12,193)
Issuance of shares, net                                                 --                                55,630
Exercise of stock options                                               --                                   867
Compensation related to options granted to employees                    --                                    52
Comprehensive loss:
     Unrealized income on available-for-sale securities                 --                 17                 17
     Net loss                                                      (12,317)           (12,317)           (12,317)
                                                                ----------          ---------         ----------

Total comprehensive loss                                                            $ (12,300)
                                                                                    =========
Balance as of December 31, 2006                                 $  (85,734)                           $   32,056
                                                                ==========                            ==========
</TABLE>

*)   Less than $ 1.

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


                                     F - 6
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                           YEAR ENDED DECEMBER 31,
                                                                               --------------------------------------------
                                                                                 2006              2005              2004
                                                                               --------          --------          --------
<S>                                                                            <C>               <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss                                                                       $(12,317)         $(10,347)         $ (9,154)
Adjustments to reconcile net loss to net cash used in operating
activities:
    Depreciation and amortization                                                   682               625               661
    In-process research and development charge                                    2,033             1,475                --
    Interest and amortization of premium/discount of marketable
    securities                                                                      (85)              152               275
    Realized loss related to sale of marketable securities                           --                 9                 5
    Accrued interest and revaluation to fair value of Redeemable
    Preferred Shares in EZchip                                                    2,649               890               804
    Capital gain from sale of property and equipment                                 --                (3)               (1)
    Accrued severance pay, net                                                       87               (70)              209
    Amortization of discount on long-term loan                                       80                --                88
    Stock-based compensation related to options granted to employees
    in the Company and EZchip                                                       609                38               172
    Minority interest in losses of EZchip                                          (172)             (206)               --
    Cumulative effect of change in accounting principle                              --               115                --
    Change in fair value of warrants to Redeemable Preferred Shares                  (9)               (9)               --
    Increase in trade receivables                                                  (775)             (151)             (343)
    Decrease (increase) in other accounts receivable and prepaid
    expenses                                                                       (383)              403              (350)
    Increase in inventory                                                        (1,391)             (819)             (875)
    Increase (decrease) in trade payables                                           680              (518)              654
    Increase (decrease) in other accounts payable and accrued expenses            1,176              (562)              (87)
                                                                               --------          --------          --------

Net cash used in operating activities                                            (7,136)           (8,978)           (7,942)
                                                                               --------          --------          --------

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in marketable securities                                              (5,471)               --           (10,820)
Proceeds from sale and redemption of marketable securities debt                   5,495             6,566             3,739
Purchase of property and equipment                                                 (231)             (217)             (206)
Proceeds from sale of property and equipment                                                           14                11
                                                                               --------          --------          --------

Net cash provided by (used in) investing activities                            $   (207)         $  6,363          $ (7,276)
                                                                               --------          --------          --------
</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,
                                                                             --------------------------------------------
                                                                               2006              2005              2004
                                                                             --------          --------          --------
<S>                                                                          <C>               <C>               <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares, net                                                      $     --          $    (11)         $ 13,471
Issuance of Redeemable Preferred Shares in EZchip, net                             --             3,028             2,563
Proceeds from exercise of options                                                 867                 3                40
Proceeds from exercise of options in EZchip                                       172               206                --
Proceeds from exercise of warrants to Redeemable Preferred Shares in
EZchip                                                                            375                --                --
Proceeds from long-term loan                                                    4,000                --                --
Repayment of long-term loan                                                        --                --            (1,500)
                                                                             --------          --------          --------

Net cash provided by financing activities                                       5,414             3,226            14,574
                                                                             --------          --------          --------

Increase (decrease) in cash and cash equivalents                               (1,929)              611              (644)
Cash and cash equivalents at the beginning of the year                         14,115            13,504            14,148
                                                                             --------          --------          --------

Cash and cash equivalents at the end of the year                             $ 12,186          $ 14,115          $ 13,504
                                                                             ========          ========          ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOWS ACTIVITIES:
Cash paid during the year for:
Interest on long term loan                                                   $    110          $     --          $     56
                                                                             ========          ========          ========

NON-CASH ACTIVITIES:
EZchip shares acquisition (see Notes 3g & 3h):
    Book value of EZchip's Preferred A, B, C and
    Ordinary Shares acquired by the Company                                    18,808             1,142                --
Intangible assets acquired:
    Existing technology                                                         2,752               517                --
    Backlog                                                                       240                --                --
    Customer base                                                                 141                --                --
    Goodwill                                                                   31,698             4,833                --
    In-process research and development                                         2,033             1,475                --
                                                                             --------          --------          --------

    Value of shares acquired                                                 $ 55,672          $  7,967          $     --
                                                                             ========          ========          ========

Reclassification of Redeemable Preferred Shares to Preferred
Shares in EZchip upon shares acquisition transaction (see Note
3h)                                                                          $  9,983          $     --          $     --
                                                                             ========          ========          ========
</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. The Company is
          now operating in the segment of network processors, through its
          business unit, EZchip Technologies Ltd., ("EZchip"), a fabless
          semiconductor company that provides high-speed network processors.

          EZchip's network processors provide the flexibility and integration
          that enable triple-play data, voice and video services in systems that
          make up the new Carrier Ethernet networks. Flexibility and integration
          make EZchip's solutions ideal for building systems for a wide range of
          applications in telecom networks, enterprise backbones and data
          centers.

          EZchip was established in December 1999 as a wholly-owned subsidiary
          of the Company. Over the years EZchip raised funds from third party
          investors while diluting the Company's holding. As of December 31,
          2006, the Company holds 77.8% of EZchip shares and voting rights.
          During 2001, EZchip established a wholly-owned subsidiary, EZchip
          Inc., in the United States, which is engaged in the marketing of
          EZchip's products.

     b.   The Company's Ordinary Shares are traded on the NASDAQ Capital 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.

     c.   All of the Company's network processor chips are manufactured by third
          party subcontractors. While these subcontractors have been able to
          adequately meet the demands of the Company's increasing business, the
          Company is and will likely continue to be dependent upon such
          subcontractors to achieve acceptable manufacturing yields, quality
          levels and costs, and to allocate to the Company sufficient capacity
          to meet the Company's needs in a timely manner. Revenues could be
          materially and adversely affected should these subcontractors fail to
          meet the Company's demand for products due to a shortage of production
          capacity, process difficulties, low yield rates or financial
          instability. For the year ended December 31, 2006 these major
          subcontractors accounted for approximately 80% of the Company's cost
          of revenues.

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

          The consolidated financial statements were prepared in accordance with
          United States generally accepted accounting principles ("U.S. GAAP")
          applied on a consist basis except as described in p below are as
          follows:

     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.


                                     F - 9
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     b.   Financial statements in U.S. dollars:

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

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

     c.   Basis of consolidation:

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

     d.   Cash equivalents:

          The Company considers all highly liquid investments that are
          convertible to cash with maturities of three months or less at their
          acquisition date as cash equivalents.

     e.   Marketable securities:

          The Company accounts for its investments in marketable securities in
          accordance with SFAS No. 115, "Accounting for Certain Investments in
          Debt and Equity Securities". 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 2006 and
          2005, all marketable securities were designated as available-for-sale
          securities. 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.

          Following SEC Staff Accounting Bulletin No. 59, management evaluates
          in each period whether declines in the market value of its securities
          are other than temporary. Where such declines are determined to be
          other than temporary, the related unrealized loss is recorded as a
          write-down included in financial expenses.


                                     F - 10
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     f.   Inventories:

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

          Cost is determined as follows:

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

     g.   Property and equipment:

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

          The annual depreciation rates are as follows:

                                                            PERCENTAGE (%)
                                                      --------------------------
Office furniture and equipment                                     6
Computers, software and electronic equipment                      33
                                                      Over the less than term of
Leasehold improvements                                 the lease or useful life

     h.   Impairment of long-lived assets:

          The Company's long-lived assets and certain identifiable intangibles
          are reviewed for impairment in accordance with SFAS No. 144
          "Accounting for the Impairment or Disposal of Long Lived Assets",
          whenever events or changes in circumstances indicate that the carrying
          amount of an asset may not be recoverable. Recoverability of assets to
          be held and used is measured by a comparison of the carrying amount of
          an asset to the future undiscounted cash flows expected to be
          generated by the assets. If such assets are considered to be impaired,
          the impairment to be recognized is measured by the amount by which the
          carrying amount of the assets exceeds the fair value of the assets.
          Assets to be disposed of are reported at the lower of the carrying
          amount or fair value less costs to sell. During the years 2006, 2005
          and 2004, no impairment losses have been identified.

     i.   Goodwill and intangible assets:

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

          The Company adopted Statement of Financial Accounting Standards No.
          142, "Goodwill and Other Intangible Assets ("SFAS No. 142"). Under
          SFAS No. 142, goodwill is not amortized but instead is tested for
          impairment at least annually (or more frequently if impairment
          indicators arise).


                                     F - 11
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     i.   Goodwill and intangible assets (cont.):

          SFAS No. 142 prescribes a two-phase process for impairment testing of
          goodwill. The first phase screens for impairment while the second
          phase (if necessary) measures impairment.

          In the first phase of impairment testing, goodwill attributable the
          reporting unit is tested for impairment by comparing the fair value of
          the reporting unit with its carrying value. As of December 31, 2006,
          no instances of impairment were found.

          Intangible Assets are amortized over their useful lives using a method
          of amortization that reflects the pattern in which the economic
          benefits of the intangible assets are consumed or otherwise used up,
          in accordance with SFAS No. 142. The Company amortizes its intangible
          assets on a straight line basis.

     j.   Redeemable Preferred Shares in EZchip and Preferred Shares in EZchip:

          Until December 31, 2005, investments by third parties in Redeemable
          Preferred Shares and in Preferred Shares in EZchip were presented as
          two separate components in the balance sheet. Following the
          acquisition of certain EZchip shares by the Company on December 22,
          2006 (see also Notes 3e and 3h), the Redeemable Preferred Shares were
          classified as Preferred Shares in the EZchip account

          Redeemable Preferred Shares in EZchip may be redeemed at the request
          of the majority holders of such shares after March 2007 (four years
          after the original issuance date), at a price per share equal to the
          greater of (a) the original 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.

          Through December 22, 2006, the date on which the Company acquired
          certain EZchip shares (see Note 3h), the Redeemable Preferred Shares
          balances included an accrual reflecting the higher of (a) or (b)
          above. The total accretion for the years ended December 31, 2006, 2005
          and 2004, were $2,650, $891 and $804, respectively. Following the
          aforementioned acquisition of EZchip shares , the Company stopped the
          accretion to redemption value since the Company acquired the majority
          of the Redeemable Preferred Shares and as such, the redemption right
          is within the control of the Company (see Note 3e).

     k.   Warrants to Redeemable Preferred Shares in EZchip:

          In April 2003, EZchip granted a warrant to purchase Preferred C Shares
          in connection with a Loan Agreement with a third party. The loan was
          repaid in August 2004.

          EZchip accounts for such warrants in accordance with FASB Staff
          Position FASB Statement No. 150 "Accounting for certain financial
          Instruments with Characteristics of both liabilities and Equity" (FSP
          FAS-150-5). Under FSP FAS-150-5 these warrants are classified as
          liabilities and are carried at their fair value. The guidance of this
          FSP was applied in the first interim period beginning after June 30,
          2005 and resulted in a cumulative affect of a change in accounting
          principles of $115.


                                     F - 12
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     k.   Warrants to Redeemable Preferred Shares in EZchip (cont.):

          Changes in fair value of these warrants are charged to the statements
          of operations in each reporting period. The fair value of the warrants
          was determined using the "Black - Scholes" option pricing model, with
          the following assumptions as of December 22, 2006 and December 31,
          2005: risk free interest rate of 4.1% and 3.72%, dividend yield of 0%,
          expected life of between 5.0 to 5.75 years and expected volatility of
          80%. The computation of expected volatility is based on realized
          historical stock price volatility of peer companies. As of December
          31, 2006 and 2005 the Company recorded income related to the change in
          fair value of these warrants in the amount of $9 each year.

          These warrants were exercised and the underlying Preferred C Shares
          were purchased by the Company on December 22, 2006 (see Note 3h).

     l.   Research and development costs:

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

     m.   Severance pay:

          The liability of the Company and its Israeli subsidiary 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 for the years ended December 31, 2006, 2005 and
          2004 were $42, $(36) and $193, respectively.

     n.   Income taxes:

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


                                     F - 13
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     o.   Net losses per share:

          Basic net loss per share is computed based on the weighted average
          number of Ordinary Shares outstanding during each year. Diluted net
          losses 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, 2006, 2005 and 2004, all outstanding
          stock options and warrants have been excluded from the calculation of
          the diluted net loss per share because all such stock options were
          anti-dilutive. The total weighted average number of Ordinary Shares
          related to options and warrants excluded from the calculation of
          diluted net loss per share were 813,952, 971,539 and 572,539 for the
          years ended December 31, 2006, 2005 and 2004, respectively.

     p.   Accounting for stock based compensation:

          Prior to January 1, 2006, the Company accounted for these plans under
          the recognition and measurement provisions of APB Opinion No. 25,
          Accounting for Stock Issued to Employees ("APB-25"), and related
          Interpretations, as permitted by FASB Statement No.123, Accounting for
          Stock-Based Compensation. No stock-based employee compensation costs
          were recognized in the Statement of Operations of the Company for the
          years ended December 31, 2006, 2005 and 2004, as all options granted
          under those plans had an exercise price equal to the market value of
          the underlying common stock on the date of grant.

          Effective January 1, 2006, the Company adopted the fair value
          recognition provisions of FASB Statement No. 123(R), Share-Based
          Payment ("SFAS 123(R)"), using the modified prospective transition
          method. Under that transition method, compensation cost recognized in
          year 2006 includes: (a) compensation cost for all share-based payments
          granted prior to, but not yet vested as of January 1, 2006, based on
          the grant date fair value estimated in accordance with the original
          provisions of SFAS 123, and (b) compensation cost for all share-based
          payments granted subsequent to January 1, 2006, based on the
          grant-date fair value estimated in accordance with the provisions of
          SFAS 123(R). Results for prior periods have not been restated. In
          March 2005, the Securities and Exchange Commission issued Staff
          Accounting Bulletin No. 107 ("SAB 107") relating to SFAS 123(R). The
          Company has applied the provisions of SAB 107 in its adoption of SFAS
          123(R).

          As a result of adopting SFAS 123(R) on January 1, 2006, the Company's
          net loss for the year ended December 31, 2006 was $609 higher than if
          it had continued to account for share-based compensation under APB 25.
          Basic and diluted net loss per share for the year ended December 31,
          2006 is $0.05 lower than if the Company had continued to account for
          share-based compensation under APB 25.

          The Company recognizes compensation expenses for the fair value of its
          awards, based on the straight line method over the requisite service
          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.)

     p.   Accounting for stock based compensation (cont.):

          GRANTS FOR TWELVE MONTHS ENDED DECEMBER 31, 2006 IN EZCHIP:

          The weighted-average estimated fair value of employee stock options
          granted in EZchip during 2006 as calculated by a third party appraiser
          is $0.49 per option using the Black and Scholes model with the
          following weighted-average assumptions (annualized percentages):

                                                       YEAR ENDED
                                                   DECEMBER 31, 2006
                                               ---------------------------
          Volatility                                   77.5%-80%
          Risk-free interest rate                     4.36%-5.04%
          Dividend yield                                   0%
          Pre vesting forfeiture rate                     1.7%

          EZchip used peer companies stock price data for calculating volatility
          in accordance with SFAS 123(R), allowing exclusive reliance on
          historical volatility. The Company has no reason to believe that its
          applicable future volatility for the expected term is likely to differ
          from the historical measures as determined according to the peer
          companies' stock price data. The computation of historical volatility
          uses a simple average calculation method, a sequential period of
          historical data at least equal to the expected term of the employee
          stock option, and a reasonably sufficient number of price observations
          are used. As a result of the above-mentioned calculations, the
          weighted-average volatility used in the model in 2006 is 79.5%.

          EZchip's Ordinary Share fair value was calculated by a third party
          appraiser and the weighted average price for 2006 was $0.75.

          Prior to the year ended December 31, 2006, EZchip had used peer
          companies stock price data for calculating volatility in accordance
          with SFAS 123 for purposes of presenting its pro forma information.

          The risk-free interest rate assumption is based on observed interest
          rates appropriate for the term of EZchip's employee stock options. The
          weighted average interest rate used for the year ended December 31,
          2006 was 4.85`%.

          The expected term of employee stock options represents the
          weighted-average period the stock options are expected to remain
          outstanding. The expected life for options granted in EZchip during
          year 2006 is in the range from 4.46 to 4.66 years.

          EZchip is required to assume a dividend yield as an input in the Black
          and Scholes model. The dividend yield assumption is based on the
          Company's historical and expectation of future dividend payouts and
          may be subject to substantial change in the future. The dividend yield
          used for the year ended December 31, 2006 was 0%.

          The expected annual pre-vesting forfeiture rate (the percentage of
          options cancelled every year prior to vesting) affects the number of
          exercisable options. Based on EZchip's employment termination history,
          the annual pre-vesting forfeiture rate is 1.7%.


                                     F - 15
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     p.   Accounting for stock based compensation (cont.):

          GRANTS BY THE COMPANY:

          The fair value for options granted by the Company were estimated at
          the date of grant using the Black and Scholes valuation model with the
          following assumptions for 2003: risk-free interest rates of 2.98%;
          dividend yields of 0%; expected life for an option of four years and
          excepted volatility of 83.6%. No options were granted by the Company
          during 2006, 2005 and 2004.

          Pro forma information under SFAS 123 (R)

          The following table illustrates the assumptions that had been used in
          calculating the fair value for options granted to EZchip's employees
          in 2004 and 2005. These options are amortized over their vesting
          period and their fair value was estimated at the date of grant using
          the Black-Scholes pricing model:

                                                    YEAR ENDED DECEMBER 31,
                                                 ----------------------------
                                                   2005                2004
                                                 -------              -------
           Dividend yield                             0%                   0%
           Expected volatility                       80%                  50%
           Risk-free interest                      4.28%                3.08%
           Expected life of up to                6 years              4 years

          The following table illustrates the effect on net loss and net loss
          per share if the Company had applied the fair value recognition
          provisions of SFAS No.123 to options granted under the Company's and
          EZchip's stock options plans in all periods presented:

<TABLE>
<CAPTION>
                                                                     2005              2004
                                                                   --------          --------
<S>                                                                <C>               <C>
Net loss as reported                                               $(10,347)         $ (9,154)
Add: stock-based employee compensation expense determined
under fair value based method                                          (568)           (1,219)
Deduct: stock-based employee compensation expense included
in reported net loss                                                     38               172
                                                                   --------          --------

Pro forma net loss                                                 $(10,877)         $(10,201)
                                                                   ========          ========

Net loss per share, as reported                                    $  (0.93)         $  (0.98)
                                                                   ========          ========

Pro forma net loss per share                                       $  (0.98)         $  (1.09)
                                                                   ========          ========
</TABLE>


                                     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:

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

          Revenues from network processors chips and network processors based
          systems are recognized upon delivery in accordance with Staff
          Accounting Bulletin No. 104 "Revenue Recognition" ("SAB 104"), when
          persuasive evidence of an agreement exists, delivery of the product
          has occurred, the fee is fixed or determinable and collectibility is
          probable. The Company does not have any significant obligations after
          delivery.

          Revenues from sales of software tools and maintenance and support
          services, which are sold separately from other products, are
          recognized in accordance with Statement of Position 97-2, "Software
          Revenues Recognition" ("SOP 97-2"). The Company uses the "residual
          method" when Vendor Specific Objective Evidence ("VSOE") of fair value
          only exists for the maintenance.

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

          The Company does not grant a right of return to its customers. In
          addition if a transaction sale does not meet all the criteria the
          revenue is deferred until all criteria are met.

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

     r.   Advertising expenses:

          Advertising expenses are charged to the statement of operations, as
          incurred. Advertising expenses for the years ended December 31, 2006,
          2005 and 2004 amounted to $132, $120 and $142, respectively.

     s.   Concentrations of credit risk:

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

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


                                     F - 17
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     s.   Concentrations of credit risk (cont.):

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

     t.   Fair value of financial instruments:

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

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

          The fair value of marketable securities is based on quoted market
          prices. If the market value is lower than the amortized cost for an
          other-than-temporary period, then the amortization is included in the
          financial expenses. As for the fair value of the marketable securities
          see Note 4.

          The carrying amounts of the Company's long-term loan approximate its
          fair value. Fair value was estimated according to similar loans.

     u.   Royalty-bearing grants:

          Royalty-bearing grants from the Office of the Chief Scientist of the
          Ministry of Industry, Trade and Labor of Israel (the "OCS") for
          funding approved research and development projects are recognized at
          the time EZchip is entitled to such grants, on the basis of the costs
          incurred and included as a reduction of research and development
          costs. Research and development grants recognized in 2006 amounted to
          $1,003. The Company did not recognize any research and development
          grants in 2004 and 2005.

          To date, the Company has not accrued or paid any royalties pursuant to
          the OCS program. When and if accrued or paid, royalties will be
          recorded as part of cost of revenues.


                                     F - 18
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     v.   Impact of recently issued accounting standards:

          1.   FASB Interpretation No. 48:

               In July 2006, the FASB issued FASB Interpretation No. 48
               "Accounting for Uncertainty in Income Taxes an Interpretation of
               FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
               accounting for income taxes by prescribing the minimum
               recognition threshold a tax position is required to meet before
               being recognized in the financial statements. FIN 48 utilizes a
               two-step approach for evaluating tax positions. Recognition (step
               one) occurs when an enterprise concludes that a tax position,
               based solely on its technical merits, is more-likely-than-not to
               be sustained upon examination. Measurement (step two) is only
               addressed if step one has been satisfied (i.e., the position is
               more-likely-than-not to be sustained). Under step two, the tax
               benefit is measured as the largest amount of benefit, determined
               on a cumulative probability basis that is more-likely-than-not to
               be realized upon ultimate settlement.

               FIN 48 applies to all tax positions related to income taxes
               subject to the Financial Accounting Standard Board Statement No.
               109, "Accounting for income taxes" ("FAS 109"). This includes tax
               positions considered to be "routine" as well as those with a high
               degree of uncertainty.

               FIN 48 has expanded disclosure requirements, which include a
               tabular roll forward of the beginning and ending aggregate
               unrecognized tax benefits as well as specific detail related to
               tax uncertainties for which it is reasonably possible the amount
               of unrecognized tax benefit will significantly increase or
               decrease within twelve months. These disclosures are required at
               each annual reporting period unless a significant change occurs
               in an interim period.

               FIN 48 is effective for fiscal years beginning after December 15,
               2006. The cumulative effect of applying FIN 48 will be reported
               as an adjustment to the opening balance of retained earnings. The
               Company is currently evaluating the impact of adopting FIN 48.

          2.   SFAS No. 157:

               In September 2006, the FASB issued SFAS No. 157, Fair Value
               Measurements ("SFAS No. 157"). This statement provides a single
               definition of fair value, a framework for measuring fair value,
               and expanded disclosures concerning fair value. Previously,
               different definitions of fair value were contained in various
               accounting pronouncements creating inconsistencies in measurement
               and disclosures. SFAS No. 157 applies for those previously issued
               pronouncements that prescribe fair value as the relevant measure
               of value, except for SFAS No. 123(R) and related interpretations.
               The statement does not apply to accounting standard that require
               or permit measurement similar to fair value but are not intended
               to represent fair value. This pronouncement is effective for
               fiscal years beginning after November 15, 2007. The Company is
               currently evaluating the impact of adopting SFAS 157.


                                     F - 19
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     v.   Impact of recently issued accounting standards (cont.):

          3.   SFAS No. 159:

               In February, 2007, the FASB issued SFAS No. 159, "The Fair Value
               of Option for Financial Assets and Financial Liabilities" ("SFAS
               No. 159"). SFAS No. 159 permits entities to choose to measure
               many financial assets and financial liabilities at fair value.
               Unrealized gains and losses on items for which the fair value
               option has been elected are reported in earnings. SFAS No. 159 is
               effective for fiscal years beginning after November 15, 2007. The
               Company is currently assessing the impact of SFAS No. 159 on its
               consolidated financial position and results of operations.

NOTE 3:- INVESTMENT IN EZCHIP

     a.   In March 2003, EZchip issued to the Company and to third parties
          16,542,267 Series C Redeemable 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 EZchip.

     b.   In March 2004, EZchip issued an additional 9,802,825 Series C
          Redeemable Preferred Shares to the Company and to third parties, for a
          total consideration of $8,000. The net amount of $2,563, which was
          invested by third parties, was recorded as Redeemable Preferred Shares
          in EZchip.

     c.   In July 2005, EZchip issued an additional 12,253,531 Series C
          Redeemable Preferred Shares to the Company and to third parties, for a
          total consideration of $10,000. The net amount of $3,028, which was
          invested by third parties, was recorded as Redeemable Preferred Shares
          in EZchip.

     d.   In August 2006, EZchip issued an additional 910,000 Series C
          Redeemable Preferred Shares to third parties in connection with a loan
          (see Note 12). The fair value of the shares was recorded as Redeemable
          Preferred Shares in EZchip.

     e.   Pursuant to the terms of the Series C Redeemable Preferred Shares,
          after March 2007, holders of majority of the shares of Series C
          Redeemable Preferred Shares of EZchip may request redemption of the
          shares. If redemption is requested, the shares are to be redeemed at a
          price per share equal to the greater of (a) the original Series C
          Redeemable Preferred 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.
          Following the Company's acquisitions of 9,524,388 Series C Redeemable
          Preferred Shares on June 23, 2005 and on December 22, 2006 (see Notes
          3g and 3h), the Company holds a majority of the outstanding Series C
          Redeemable Preferred Shares. As a result, a redemption request cannot
          be delivered to EZchip without the consent of the Company.


                                     F - 20
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 3:- INVESTMENT IN EZCHIP (CONT.)

     f.   In May 2003, the Company executed an agreement with the four largest
          minority shareholders of EZchip (the "Major Shareholders"), pursuant
          to which the Company offered to the Major Shareholders the right to
          exchange all their shares in EZchip for Ordinary Shares of the
          Company. The exchange right is contingent upon at least two of the
          Major Shareholders electing to exchange their EZchip's shares for
          Company Ordinary Shares in accordance with the agreed terms.

               1.   If at least two of the four Major Shareholders elect to
                    exchange their EZchip shares for Company Ordinary Shares,
                    then all of the holders of EZchip's Preferred Shares will be
                    offered to participate in exchange at the same terms.

               2.   If at least three out of the four Major Shareholders in
                    EZchip elect to exchange their EZchip shares for Company
                    Ordinary Shares then the fourth Major Shareholder will be
                    compelled to participate in the exchange transaction.

               3.   Under the agreement, the exchange ratio will be calculated
                    according to a formula determined between the Company and
                    the Major Shareholders in good faith taking into
                    consideration the business situation applicable at the time
                    of exchange with no differences between the series of EZchip
                    shares.

          The exchange right is in effect until the earlier of the (1) Initial
          Public Offering ("IPO") of EZchip's securities and (2) the sale of
          substantially all of EZchip assets or securities.

          As of December 31, 2006, two of the four Major Shareholders exercised
          their right to exchange their EZchip shares for Company Ordinary
          Shares (see Note 3h).

     g.   On June 23, 2005, the Company acquired 2,378,924 Ordinary Shares,
          831,667 Preferred A Shares, 110,619 Preferred B Shares and 245,070
          Redeemable Preferred C Shares of EZchip, in consideration of the
          issuance of 1,006,486 Ordinary Shares of the Company. The total fair
          value of the Company Ordinary Shares issued for the acquisition was
          $7,967 based on the average share prices of the Company Ordinary
          Shares two days before and two days after the announcement.

     h.   Following the election of two Major Shareholders to exchange their
          Preferred Shares of EZchip for Company Ordinary Shares, on December
          22, 2006, the Company acquired 4,166,666 Preferred A Shares, 1,106,194
          Preferred B Shares and 7,909,811 Redeemable Preferred C Shares of
          EZchip, in consideration of the issuance of 3,521,566 Ordinary Shares
          of the Company. On December 22, 2006, the Company also acquired from
          the Lenders (as described in Note 12 below) 1,369,507 Redeemable
          Preferred C Shares of EZchip in consideration of the issuance of
          356,669 Ordinary Shares of the Company. The total fair value of the
          Company Ordinary Shares issued for the acquisition was $55,672 based
          on the average share prices of the Company Ordinary Shares two days
          before and two days after the announcement.


                                     F - 21
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 3:- INVESTMENT IN EZCHIP (CONT.)

     i.   Each of the EZchip share acquisitions was accounted for according to
          the purchase method of accounting, in accordance with SFAS No. 141,
          and accordingly, the respective purchase price was allocated to the
          assets acquired and liabilities assumed based upon their estimated
          fair values at the respective dates of acquisition.

          The purchase price allocations are as follows:

<TABLE>
<CAPTION>
                                                            DECEMBER 22,      JUNE 23,
PURCHASE PRICE ALLOCATION                                      2006            2005
-------------------------                                     -------         -------
<S>                                                           <C>             <C>
EZchip's Preferred A,B,C and Ordinary Shares acquired         $18,808         $ 1,142
Intangible assets acquired:
     In-process research and development (1)                    2,033           1,475
     Existing technology (2)                                    2,752             517
     Backlog (3)                                                  240              --
     Customer Base (2)                                            141              --
     Goodwill (4)                                              31,698           4,833
                                                              -------         -------

Total consideration                                           $55,672         $ 7,967
                                                              =======         =======
</TABLE>

               (1)  The Company recorded a charge of $2,033 with respect to the
                    December 22, 2006 shares acquisition and a charge of $1,475
                    with respect to the June 23, 2005 shares acquisition related
                    to in-process research and development for projects which
                    have not yet reached technological feasibility and which
                    have no alternative future use.

               (2)  The existing technology and the customer base are amortized
                    using the straight-line method over their useful life, which
                    is between four to five years.

               (3)  The backlog is amortized according to a shipment schedule,
                    which calls for shipments during the first quarter of 2007.

               (4)  Goodwill in the amount of $31,698 related to the December
                    22, 2006 shares acquisition and $4,833 related to the June
                    23, 2005 shares acquisition represents the excess of the
                    purchase price over the fair value of the assets acquired.
                    Goodwill will not be amortized and will be tested for
                    impairment at least annually.


                                     F - 22
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 4:- MARKETABLE SECURITIES

     As of December 31, 2006 and 2005 all of the Company's securities were
     classified as available-for-sale.

<TABLE>
<CAPTION>
                                    DECEMBER 31, 2006                     DECEMBER 31, 2005
                          ---------------------------------       ---------------------------------
                                       GROSS                                   GROSS
                        AMORTIZED    UNREALIZED      MARKET      AMORTIZED   UNREALIZED      MARKET
                          COST         LOSSES        VALUE         COST        LOSSES        VALUE
                          ------       ------        ------       ------       ------        ------
<S>                       <C>          <C>           <C>          <C>          <C>           <C>
Available-for-sale:
   Corporate debts        $5,491       $  (19)       $5,472       $1,951       $  (24)       $1,927
   US government
debts                         --           --            --        3,522          (12)        3,510
                          ------       ------        ------       ------       ------        ------

Total                     $5,491       $  (19)       $5,472       $5,473       $  (36)       $5,437
                          ======       ======        ======       ======       ======        ======
</TABLE>

                                       2006
                                -------------------
                               AMORTIZED     MARKET
                                 COST        VALUE
                                ------       ------
Available-for-sale:
   Matures in one year          $  996       $  993
   Matures after one year       $4,495       $4,479
                                ------       ------
Total                           $5,491       $5,472
                                ======       ======

     For the years ended December 31, 2006, 2005 and 2004, the unrealized gain
     (losses) amounted to $17, $48 and $(100), respectively.

     For the year ended December 31, 2006, unrealized losses in the Company's
     investments in corporate debt instruments are mainly attributed to interest
     rate fluctuations. As the Company has the ability to hold these investments
     until maturity, it is expected that these securities would not be settled
     at a price less than the amortized cost of the Company's investment.
     Therefore, the debt instruments were not considered to be other than
     temporarily impaired at December 31, 2006.

NOTE 5:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

                                DECEMBER 31,
                             ---------------
                             2006       2005
                             ----       ----

Government authorities       $331       $ 64
Prepaid expenses              309        204
Others                         43         32
                             ----       ----
Total                        $683       $300
                             ====       ====

NOTE 6:- INVENTORIES

                            DECEMBER 31,
                        -------------------
                         2006         2005
                        ------       ------

Raw materials           $  416       $  202
Work in progress           284           69
Finished products        2,789        1,827
                        ------       ------
Total                   $3,489       $2,098
                        ======       ======


                                     F - 23
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 7:- PREPAID DEVELOPMENT AND PRODUCTION COSTS, NET

     During 2000, the Company recorded prepaid development and production costs
     in the amount of $2,134 pursuant to an agreement signed between EZchip and
     IBM. According to the agreement, EZchip issued to IBM fully vested
     non-forfeitable Ordinary Shares and was also obligated to future payments
     according to achievements of milestones and production quantities, in
     consideration of development and production services to be provided by IBM,
     which consists of the following:

          a)   Production: Access to unique semiconductor communications cores
               and technologies, and

          b)   Development: IBM agreed to develop specialized high-performance
               embedded DRAM cores, which meet the requirements of EZchip's
               10-Gigabit wire-speed processing.

     The fair value of these services was measured in accordance with EITF 96-18
     "Accounting for Equity Investments That Are Issued to Other Than Employees
     for Acquiring or in Conjunction with Selling, Goods or Services" ("EITF
     96-18") and recorded as an asset in accordance with EITF 00-18 " Accounting
     Recognition for Certain Transactions involving Equity Instruments Granted
     to Other Than Employees" ("EITF 00-18").

     The Ordinary Shares that were issued were valued in accordance with
     EZchip's fair value estimation at the date of this agreement. Accordingly,
     prepaid costs totaling $2,134 were allocated between prepaid development
     services of $1,500, and prepaid production services of $634. Development
     costs are amortized upon achievement of milestones determined in the
     agreement. As of December 31, 2003 the development costs were fully
     amortized.

     Production costs are included in cost of 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 years ended December 31, 2006, 2005 and 2004, amortization expenses
     related to the production cost amounted to $91, $95 and $47, respectively.


                                     F - 24
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 8:- PROPERTY AND EQUIPMENT, NET

                                                          DECEMBER 31,
                                                      ------       ------
                                                       2006         2005
                                                      ------       ------

Cost:
   Office furniture and equipment                     $   11       $   10
   Computers, software and electronic equipment        3,623        3,394
   Leasehold improvements                                 57           56
                                                      ------       ------
Total cost                                             3,691        3,460
                                                      ------       ------

Accumulated depreciation:
   Office furniture and equipment                          2            2
   Computers, software and electronic equipment        3,301        3,079
   Leasehold improvements                                 36           28
                                                      ------       ------
Total accumulated depreciation                         3,339        3,109
                                                      ------       ------

Depreciated cost                                      $  352       $  351
                                                      ======       ======

     Depreciation expenses for the years ended December 31, 2006, 2005 and 2004,
     amounted to $230, $239 and $376, respectively.

NOTE 9:- INTANGIBLE ASSETS, NET

                                         DECEMBER 31,
                                     ------       ------
                                      2006         2005
                                     ------       ------

Cost:
   Existing technology               $4,472       $1,720
   Customer Base                        141           --
   Backlog                              240           --
                                     ------       ------
Total cost                           $4,853        1,720
                                     ------       ------

Accumulated amortization:
   Existing technology                1,219          859
   Customer Base                          1
   Backlog                               --           --
                                     ------       ------
Total accumulated amortization        1,220          859
                                     ------       ------

Amortized cost                       $3,633       $  861
                                     ======       ======

     Amortization expenses for the years ended December 31, 2006, 2005 and 2004,
     amounted to $361, $291 and $241, respectively.

     Following is the estimated amortization expenses in respect of identifiable
     intangible assets:

     YEAR ENDED DECEMBER 31,
     -----------------------
     2007                        $   1,223
     2008                        $     827
     2009                        $     827
     2010                        $     756


                                     F - 25
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 10:- GOODWILL

     The following table presents details of the Company's total goodwill:

As of December 31, 2005                                $ 4,833
Goodwill resulted from EZchip shares acquisition
(see Note 3h)                                           31,698
                                                       -------

As of December 31, 2006                                $36,531
                                                       =======

NOTE 11:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                         DECEMBER 31,
                                     ------       ------
                                      2006         2005
                                     ------       ------

Employees and payroll accruals       $1,507       $1,225
Accrued expenses                      1,228          585
Deferred revenues                       357          106
                                     ------       ------
                                     $3,092       $1,916
                                     ======       ======

NOTE 12:- LONG-TERM LOAN

     In August 2006, EZchip entered into a Credit Agreement (the "Credit
     Agreement") with third parties (the "Lenders") pursuant to which the
     Lenders agreed to make a $4,000 line of credit available to EZchip, which
     may be increased by an additional $2,000 upon EZchip's achievement of
     certain milestones.

     Under the terms of the Credit Agreement, EZchip may draw amounts under the
     line of credit from time to time until August 2007 at which time the drawn
     and unpaid amount shall be fixed and the revolving line of credit facility
     shall become a loan (the "Loan").

     As of December 31, 2006, EZchip has a balance of $2,000 of unused line of
     credit.

     The Loan bears annual interest of LIBOR+3% for the first two years and
     LIBOR+4.5% for the third year. The principal of the Loan shall be repaid in
     12 equal monthly payments, commencing August 2008.

     As part of the Credit Agreement, EZchip issued to the Lenders 910,000
     Series C Redeemable Preferred Shares. The Series C Redeemable Preferred
     Shares were recorded at fair value and were presented as a discount on the
     Loan in the amount of $743. The discount on the Loan is amortized as
     financial expenses over a period of 3 years.

     EZchip granted the Lenders a first ranking floating charge on all EZchip's
     present and future tangible and intangible assets and rights to secure the
     Loan.

     The 910,000 Series C Redeemable Preferred Shares in EZchip were acquired by
     the Company in December 2006, in exchange for Company Ordinary Shares (see
     Note 3h).


                                     F - 26
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 13:- COMMITMENTS AND CONTINGENT LIABILITIES

     a.   Lease commitments:

          1.   The Company and its subsidiary lease their facilities under
               operating lease agreements, which will expire in 2008. The
               minimum lease payments under non-cancelable operating leases are
               as follows:

                      YEAR ENDED DECEMBER 31,
               ---------------------------------------
               2007                                        $ 339
               2008                                        $  28

               In the event the Company will decide to terminate the operating
               lease agreement, it must provide 90 days prior notice.

               EZchip leases two offices in the U.S. under lease agreement,
               which it renews every six months for a monthly payment of $7.

               Total rent expenses for the Company and for its subsidiaries, for
               the years ended December 31, 2006, 2005 and 2004, amounted to
               $420, $419 and $414, respectively.

          2.   The Company and EZchip lease motor vehicles under operating lease
               agreements, which will expire in 2009. The minimum lease payments
               under non-cancelable operating leases are as follows:

               YEAR ENDED DECEMBER 31,
               ---------------------------------------
               2007                                        $ 331
               2008                                          201
               2009                                           86
                                                           -----
                                                           $ 618
                                                           =====

               The Company can terminate the motor vehicle lease agreement
               before 2009, by compensation of one to three months charges for
               leasing contracts that are less than three years.

               Leased motor vehicles expenses for the years ended December 31,
               2006, 2005 and 2004, amounted to $767, $605 and $572,
               respectively.

     b.   Royalties commitments:

          EZchip is participating in programs sponsored by the Office of the
          Chief Scientist of the Ministry of Industry, Trade and Labor of Israel
          ("OCS") for the support of research and development activities.

          In April 2006, EZchip received an approval from the OCS for its
          participation in research and development costs of EZchip, in an
          amount of approximately $1,950 based on a budget approved by the OCS.
          Pursuant to such program, the OCS will participate in 50% of the
          approved project for a period of one year ending March 31, 2007.


                                     F - 27
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 13:- COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)

     b.   Royalties commitments (cont.):

          In connection with the grant, EZchip is obligated to pay royalties to
          the OCS calculated at the rate of 3%-3.5% of sales of the products
          developed with the OCS's participation up to 100% of the grants
          received linked to the U.S. dollar bearing annual interest at a rate
          of LIBOR.

          As of December 31, 2006, the cumulative amount of royalty bearing
          participations received by EZchip was $1,259 which represents the
          outstanding contingent obligation to pay royalties as of that date.

NOTE 14:- SHAREHOLDERS' EQUITY (DEFICIENCY)

     a.   Company's shares:

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

          2.   On November 24, 2004, the Company signed an Investment Agreement
               ("Investment Agreement") with investors pursuant to which the
               Company issued 1,368,000 Ordinary Shares for a net total
               consideration of $13,471. In addition, the investors were granted
               warrants to purchase 478,800 Ordinary Shares at an exercise price
               of $15.5 per share with an exercise period of five years.
               According to the Investment Agreement the Company was required to
               effect a registration statement permitting the resale of the
               shares underlying the Investment Agreement and to keep such
               registration effective until 2009. Any delay in registration
               and/or effectiveness will result in liquidated damages (and not
               penalty, as stated in the Agreement), to be paid in cash to the
               investors. The Company classified the warrants as equity
               according to EITF 00-19 "Accounting for Derivative Financial
               Instruments Indexed to and potentially settled in a Company's own
               stock" ("EITF 00-19"). In December 2004, the Company filed a Form
               F-3 registration statement registering the underlying shares,
               including the underlying shares related to the warrants, which
               was declared effective within the time period required in the
               Investment Agreement.

          3.   The Company issued 3,828,235 and 1,006,486 Ordinary Shares during
               2006 and 2005, respectively, in connection with the acquisition
               of EZchip shares (see also Notes 3g and 3h).


                                     F - 28
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:-         SHAREHOLDERS' EQUITY (DEFICIENCY) (CONT.)

     b.   EZchip's shares:

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

          1.   The Preferred Shares confer on their holders all of the rights
               conferred by the Ordinary Shares.

          2.   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.

          3.   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.

          4.   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 price, prior and in
               preference to any declaration or payment of any dividend to the
               holders of Ordinary Shares.

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

          5.   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 - 29
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- SHAREHOLDERS' EQUITY (DEFICIENCY) (CONT.)

     b.   EZchip's shares (cont.):

          6.   Liquidation preference:

               The liquidation preference of the Preferred Shares includes the
               following:

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

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

          7.   Redemption:

               At the request of the majority 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.


                                     F - 30
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- SHAREHOLDERS' EQUITY (DEFICIENCY) (CONT.)

     b.   EZchip's shares (cont.):

          8.   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:

               -    Change the rights and terms of the Series C Preferred
                    Shares;

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

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

               -    Pay any dividend to or redeem any existing Preferred Shares
                    or Ordinary Shares;

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

     c.   Stock option plans:

          LANOPTICS STOCK 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. As
          of December 31, 2006 there were 147,652 options outstanding pursuant
          to the 1992 plan.

          On October 2003, the Company adopted the 2003 Israeli Share Option
          Plan. The plan was amended in December 2006 and renamed the LanOptics
          Ltd. 2003 Amended and Restated Equity Incentive Plan (as amended, the
          "2003 Israel Plan"). The total number of Ordinary Shares that are
          available for grant under the 2003 Israel Plan is 270,000, which is
          reduced by three shares for each restricted share unit that the
          Company will grant under the plan and by one share for each option
          that the Company will grant under the plan. Awards under the 2003
          Israel Plan are issued to Israeli employees, directors, consultants,
          advisers and service providers of the Company and its subsidiaries.
          The 2003 Israel Plan provides for the awards granted to have a maximum
          exercise period of ten years from the date of grant. Awards that will
          be granted under the 2003 Israel Plan will be generally exercisable
          over four years. Awards that are not exercised will become available
          for further grant.

          As of December 31, 2006, the Company did not grant any restricted
          share units under the 2003 Israel Plan.


                                     F - 31
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- SHAREHOLDERS' EQUITY (DEFICIENCY) (CONT.)

     c.   Stock option plans (cont.):

          Transactions related to the grant of options to employees under the
          above plans during the years ended December 31, 2006, 2005 and 2004,
          were as follows:

<TABLE>
<CAPTION>
                                                          YEAR ENDED DECEMBER 31,
                               -----------------------------------------------------------------------------
                                        2006                        2005                        2004
                               ---------------------       ---------------------       ---------------------
                                              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                         305,239        $5.00        306,239        $4.99        313,989        $5.00

Granted                              --        $  --             --        $  --             --        $  --
Exercised                      (157,587)       $5.51         (1,000)       $2.50         (7,750)       $5.21
Forfeited                            --           --             --           --             --        $  --
                               --------                    --------                    --------
Outstanding at end of
year                            147,652        $4.46        305,239        $5.00        306,239        $4.99
                               ========        =====       ========        =====       ========        =====
Exercisable options at
end of year                     147,652        $4.46        295,239        $4.77        266,239        $5.74
                               ========        =====       ========        =====       ========        =====
</TABLE>


          The intrinsic value of exercisable options (the difference between the
          Company's closing stock price on the last trading day in fiscal 2006
          and the exercise price, multiplied by the number of in-the-money
          options) represents the amount that would have been received by the
          option holders had all option holders exercised their options on
          December 31, 2006. This amount changes based on the fair market value
          of the Company's stock. Total intrinsic value of exercisable options
          for the year ended December 31, 2006 was $1,403. As of December 31,
          2006, all the compensation costs were already recognized related to
          share-based compensation arrangements granted under the Company's
          stock option plans.

          Aggregate intrinsic value, at the date of exercise, of options that
          were exercised during the year ended December 31, 2006 was $1,154.

          The options outstanding as of December 31, 2006, have been separated
          by exercise prices, as follows:

<TABLE>
<CAPTION>
                                  OPTIONS                  WEIGHTED                  OPTIONS
                             OUTSTANDING AS OF        AVERAGE REMAINING         EXERCISABLE AS OF
                                DECEMBER 31,             CONTRACTUAL               DECEMBER 31,
EXERCISE PRICE                      2006                  LIFE YEARS                   2006
-------------------------- ----------------------- ------------------------- -------------------------
<S>                                   <C>                    <C>                          <C>
$2.5                                    4,250                0.32                           4,250
$4.234                                128,402                1.00                         128,402
$6.93                                  15,000                6.84                          15,000
                                      -------                ----                         -------
                                      147,652                1.57                         147,652
                                      =======                ====                         =======
</TABLE>


                                     F - 32
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- SHAREHOLDERS' EQUITY (DEFICIENCY) (CONT.)

     c.   Stock option plans (cont.):

          During 2006, 2005 and 2004, the Company decided to extend the exercise
          period for certain grants. The extension was accounted for in
          accordance with SFAS 123R in 2006 and SFAS 123 in 2004 and 2005, by
          applying modification accounting. Modifications are treated as an
          exchange of the original award, resulting in additional compensation
          expenses based on the differences between the fair value of the new
          award and the original award immediately before modification. The
          incremental cost relates to vested awards it was expensed immediately.
          Applying modification accounting, resulted additional compensation
          expenses for the years ended December 31, 2006, 2005 and 2004 that
          amounted to $52, $38 and $172, respectively.

          EZCHIP STOCK 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 16,500,000 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 following table is a summary of activity (except options granted
          to consultants) for EZchip's stock option plans:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                               --------------------------------------------------------------------------------------
                                          2006                           2005                            2004
                               ------------------------       ------------------------       ------------------------
                                                 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        10,208,067        $0.67        10,655,411        $0.67         8,180,474        $0.71
of year

Granted                          5,359,000         0.75           231,500        $0.79         2,522,625        $0.80
Exercised                         (194,375)        0.89          (278,750)       $0.72                --
Forfeited                         (304,812)        0.80          (400,094)       $0.81           (47,688)       $0.81
                               -----------                    -----------                    -----------

Outstanding at end of
year                            15,067,880        $0.69        10,208,067        $0.67        10,655,411        $0.73
                               ===========        =====       ===========        =====       ===========        =====

Exercisable options at
end of year                      9,517,985        $0.76         8,128,806        $0.71         6,516,475        $0.67

Vested and expected to
vest                            14,811,726        $0.69        10,208,067        $0.67        10,655,411        $0.73
                               ===========        =====       ===========        =====       ===========        =====
</TABLE>

          As of December 31, 2006, there was $2,276 of total unrecognized
          compensation cost related to non-vested share-based compensation
          arrangements granted under the plans. That cost is expected to be
          recognized over the period from 2007 through 2010.


                                     F - 33
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 14:- SHAREHOLDERS' EQUITY (DEFICIENCY) (CONT.)

     c.   Stock option plans (cont.):

          The year ended December 31, 2006 includes equity based compensation
          pre-tax expense of $557, which was classified as follows: $8 to cost
          of revenues, $365 to research and development expenses, $122 to sales
          and marketing expenses and $62 to general and administrative expenses.

          The options outstanding as of December 31, 2006, have been separated
          into exercise prices as follows:

                      OPTIONS       WEIGHTED      OPTIONS       WEIGHTED
                     OUTSTANDING    AVERAGE      EXERCISABLE    AVERAGE
                       AS OF        REMAINING       AS OF      REMAINING
                     DECEMBER 31,  CONTRACTUAL   DECEMBER 31,  CONTRACTUAL
EXERCISE PRICE          2006       LIFE YEARS       2006       LIFE YEARS
-----------------    ----------       ----       ----------       ----

$            0.4      2,930,938       0.34        2,930,938       0.34
$            0.72       156,344       0.51          156,344       0.51
$            0.74     4,591,000       6.55               --         --
$            0.78       841,499       9.86          377,042       9.00
$            0.80     2,050,625       7.66        1,677,248       7.64
$            0.82     2,478,950       5.68        2,357,889       5.53
$            1.00     2,018,524       2.47        2,018,524       2.47
                     ----------       ----       ----------       ----

                     15,067,880       4.93        9,517,985       3.71
                     ==========       ====       ==========       ====

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

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                   --------------------------------
                                                     2006        2005        2004
                                                   --------    --------    --------
<S>                                                <C>         <C>         <C>
Weighted average exercise price                    $   0.75    $   0.79    $   0.80
Weighted average fair value on date of grant       $   0.49    $   0.44    $   0.34
</TABLE>

          EZchip's outstanding options to consultants as of December 31, 2006,
          are as follows:

              NUMBER OF    EXERCISE
               OPTIONS      PRICE      OPTIONS      EXERCISABLE
ISSUANCE DATE  GRANTED    PER SHARE  EXERCISABLE     THROUGH
--------       ------       -----       ------       --------
May 2000       15,000       $0.72       15,000       May 2007


                                     F - 34
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 15:- TAXES ON INCOME

     a.   Reduction in Israeli tax rates:

          Until December 31, 2003, the regular tax rate applicable to income of
          companies (which are not entitled to benefits due to "Approved
          Enterprise", as described below) was 36%. In June 2004 and in July
          2005, the "Knesset" (Israeli parliament) passed amendments to the
          Income Tax Ordinance (No. 140 and Temporary Provision), 2004 and (No.
          147), 2005 respectively, which determine, among other things, that the
          corporate tax rate be gradually reduced to the following tax rates:
          2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26%
          and 2010 and thereafter - 25%.

     b.   Measurement of taxable income under the Income Tax (Inflationary
          Adjustments) Law, 1985:

          Results for tax purposes are measured in terms of earnings in NIS
          after certain adjustments for increases in Israel's Consumer Price
          Index ("CPI"). As explained in Note 2b, the financial statements are
          measured in U.S. dollars. The difference between the annual change in
          Israel's CPI and in the NIS/dollar exchange rate causes a further
          difference between taxable income and the income before taxes shown in
          the financial statements. In accordance with paragraph 9(f) of SFAS
          No. 109, the Company has not provided deferred income taxes on the
          difference between the functional currency and the tax bases of assets
          and liabilities.

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

          In 2000, EZchip Ltd. was granted the "Approved Enterprise" status
          under the Law.

          According to the provisions of the Law, EZchip has chosen to enjoy the
          "Alternative Benefits" track and, accordingly, its income from the
          "Approved Enterprise" is tax-exempt for a period of ten years,
          commencing in the first year EZchip has taxable income. Due to the
          reported losses, the benefit period has not commenced. 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 December 31, 2006, management believes that EZchip is meeting
          all of the aforementioned conditions.

          In the event of a distribution of cash dividends from income that is
          tax-exempt as mentioned above, EZchip would have to pay income tax
          equal to 10% to 25% of the amount distributed.

          The tax-exempt income attributable to the "Approved Enterprise" can be
          distributed to shareholders without subjecting EZchip to taxes only
          upon the complete liquidation of EZchip. EZchip currently has no plans
          to distribute dividends and intends to retain future earnings to
          finance the development of its business.


                                     F - 35
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 15:- TAXES ON INCOME (CONT.)

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

          Should EZchip derive income from sources other than the "Approved
          Enterprise" during the relevant period of benefits, such income will
          be taxable at the regular corporate tax rate.

          On April 1, 2005, an amendment to the Investment Law came into effect
          ("the Amendment") and has significantly changed the provisions of the
          Investment Law. The Amendment limits the scope of enterprises which
          may be approved by the Investment Center by setting criteria for the
          approval of a facility as a Privileged Enterprise, such as provisions
          generally requiring that at least 25% of the Privileged Enterprise's
          income will be derived from export. Additionally, the Amendment
          enacted major changes in the manner in which tax benefits are awarded
          under the Investment Law so that companies no longer require
          Investment Center approval in order to qualify for tax benefits.
          However, the Investment Law provides that terms and benefits included
          in any certificate of approval granted prior to December 31, 2004 will
          remain subject to the provisions of the law as they were on the date
          of such approval. Therefore the EZchip's existing Approved Enterprise
          will generally not be subject to the provisions of the Amendment. As a
          result of the amendment, tax-exempt income generated under the
          provisions of the new law, will subject EZchip to taxes upon
          distribution or liquidation and EZchip may be required to record
          deferred tax liability with respect to such tax-exempt income. As of
          December 31, 2006, EZchip did not generate income under the provision
          of the new law.

     d.   Net operating losses carryforward:

          As of December 31, 2006, the tax loss carryforwards of the Company and
          EZchip Ltd amounted to approximately $60,644. These net operating
          losses may be carried forward indefinitely and may be offset against
          future taxable income. The Company expects that during the period in
          which these tax losses are utilized its income would be substantially
          tax-exempt.

          The carryforward tax losses through December 31, 2006 of EZchip's
          subsidiary in the U.S amounted to approximately $3,777. These losses
          may be offset against any future U.S. taxable income of the U.S.
          subsidiary for periods of up to 20 years. In light of the U.S.
          subsidiary's recent history of operating losses, the Company has
          recorded a valuation allowance for all its deferred tax assets.

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


                                     F - 36
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 15:-         TAXES ON INCOME (CONT.)

         e.   Loss before taxes is comprised as follows:

                               YEAR ENDED DECEMBER 31,
                        -----------------------------------
                         2006          2005          2004
                        -------       -------       -------

Domestic (Israel)       $11,535       $ 9,452       $ 8,150
Foreign                     782           895         1,004
                        -------       -------       -------

                        $12,317       $10,347       $ 9,154
                        =======       =======       =======

     f.   Deferred taxes:

          Deferred income taxes reflect the net tax effects of temporary
          differences between the carrying amounts of assets and liabilities for
          financial reporting purposes and the amounts used for income tax
          purposes. The Company and its subsidiaries' deferred tax assets are
          comprised of operating loss carryforwards and other temporary
          differences. Significant components of the Company and its
          subsidiaries deferred tax assets are as follows:

                                                           DECEMBER 31,
                                                     ----------------------
                                                       2006           2005
                                                     -------        -------

Reserves and allowances                              $    57        $    47
Loss carryforward                                      6,052          6,010
                                                     -------        -------

Deferred tax assets before valuation allowance         6,109          6,057
Less - valuation allowance                            (6,109)        (6,057)
                                                     -------        -------

Net deferred tax assets                              $    --        $    --
                                                     =======        =======

          The Company's U.S. subsidiary has provided valuation allowances in
          respect of deferred tax assets resulting from operating loss
          carryforward and other temporary differences. Management currently
          believes that since the Company and its subsidiaries have a history of
          losses it is more likely than not that the deferred tax regarding the
          loss carryforward and other temporary differences will not be realized
          in the foreseeable future.

     g.   Reconciliation of the theoretical tax expense (benefit) to the actual
          tax expense (benefit):

          The main reconciling items between the statutory tax rate of the
          Company and the effective tax rate are the non-recognition of tax
          benefits from accumulated net operating losses carryforward among the
          Company and its subsidiaries due to the uncertainty of the realization
          of such tax benefits and the effect of approved enterprise.


                                     F - 37
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 16:-         SEGMENTS AND GEOGRAPHIC INFORMATION

     a.   Segment information:

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

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

          The following presents total revenues for the years ended December 31,
          2006, 2005 and 2004 and long-lived assets as of December 31, 2006,
          2005 and 2004:

<TABLE>
<CAPTION>
                              2006                        2005                        2004
                      ---------------------       ---------------------       ---------------------
                       TOTAL      LONG-LIVED      TOTAL       LONG-LIVED      TOTAL       LONG-LIVED
                      REVENUES      ASSETS       REVENUES       ASSETS       REVENUES       ASSETS
                      -------       -------       -------       -------       -------       -------
<S>                   <C>           <C>           <C>           <C>           <C>           <C>
Israel                $ 1,865       $40,801       $ 2,414       $ 6,425       $ 1,503       $ 1,491
Far East                2,007            --         1,843            --         1,065            --
North America           3,035             5         1,390             1         2,157             3
Europe & Others         1,562            --           201            --            21            --
                      -------       -------       -------       -------       -------       -------

                      $ 8,469       $40,806       $ 5,848       $ 6,426       $ 4,746       $ 1,494
                      =======       =======       =======       =======       =======       =======
</TABLE>

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

                                     YEAR ENDED DECEMBER 31,
                       -----------------------------------------------------
                            2006               2005               2004
                       ---------------    ---------------    ---------------
Customer A                   1%                28%                41%
Customer B                  11%                 8%                11%
Customer C                  13%                10%                --
Customer D                  19%                 1%                --
Customer E                  15%                 3%                --


                                     F - 38
<PAGE>


                                             LANOPTICS LTD. AND ITS SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS

NOTE 17:- FINANCIAL AND OTHER EXPENSES, NET

<TABLE>
<CAPTION>
                                                         YEAR ENDED DECEMBER 31,
                                                  -------------------------------------
                                                    2006           2005           2004
                                                  -------        -------        -------
<S>                                               <C>            <C>            <C>
Income:
   Interest income                                $   735        $   578        $   270
   Foreign currency translation adjustments            --             26             --
   Change in fair value of warrants to
   Redeemable Preferred Shares                          9              9             --
   Other income                                        --              3              1
                                                  -------        -------        -------

Total income                                          744            616            271
                                                  -------        -------        -------
Expenses:
   Interest and bank charges                          (26)           (37)           (36)
   Foreign currency translation adjustments           (82)            --            (25)
   Amortization of discount on long-term
   loan                                               (80)            --            (88)
   Interest on a long-term loan                      (110)            --            (56)
   Accretion to redemption value of
   Redeemable Preferred Shares in EZchip,
   net                                             (2,650)          (891)          (804)
                                                  -------        -------        -------

Total expenses                                     (2,948)          (928)        (1,009)
                                                  -------        -------        -------

Net financial and other expenses                  $(2,204)       $  (312)       $  (738)
                                                  =======        =======        =======
</TABLE>


                                     F - 39
<PAGE>


                                   SIGNATURES

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

                                              LANOPTICS LTD.

                                              By: /S/ ELI FRUCHTER
                                              --------------------
                                              Eli Fruchter
                                              Chairman of the Board of Directors

Dated:   March 29, 2007

                                       57