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# UNITED STATES

# SECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

# FORM 20F

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

# OR

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

# For the fiscal year
ended December 31, 2007

# OR

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

# OR

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

Date
of event requiring this shell company report
.

For the transition period from ________________ to ________________

Commission file number 0-28724



|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|ORCKIT COMMUNICATIONS LTD.                                                                              
|                                                                                                        
|(Exact name of Registrant as specified in its charter
and translation of Registrant's name into English)

|                                               
|-----------------------------------------------
|ISRAEL                                         
|                                               
|(Jurisdiction of incorporation or organization)

|                                              
|----------------------------------------------
|126 Yigal Allon Street, Tel Aviv 67443, Israel
|                                              
|(Address of principal executive offices)      

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

|                                                  |                                                               
|------------------------------------------------- | --------------------------------------------------------------
|Title of each class
Ordinary Shares, no par value | Name of each exchange on which registered
NASDAQ Global Market
|                                                 

Securities registered or to be registered
pursuant to Section 12(g) of the Act.

|                
|----------------
|None            
|                
|(Title of Class)

Securities for which there is a
reporting obligation pursuant to Section 15(d) of the Act.

|                
|----------------
|None            
|                
|(Title of Class)

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.

As
of December 31, 2007, the Registrant had outstanding 16,342,734 Ordinary Shares, no par
value.

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

o Yes      x No



---

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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.

o Yes      x No

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.

x Yes      o 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. (Check one):

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

Indicate
by check mark which financial statement item the Registrant has elected to follow.

Item 17 o 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).

o Yes      x No

2

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# PART I

Unless
the context otherwise  requires,  "Orckit," "us," "we" and "our" refer to Orckit
 Communications  Ltd. and its subsidiaries.

All
share and per share information in this Annual Report has been adjusted to give
retroactive effect to a three-for-one split of our ordinary shares that became effective
as of April 5, 2005.

|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
FINANCIAL DATA
|-- | -----------------------

The
following selected consolidated financial data as of December 31, 2006 and 2007 and for
each of the years ended December 31, 2005, 2006 and 2007 are derived from our audited
consolidated financial statements incorporated by reference into this Annual Report, which
have been prepared in accordance with generally accepted accounting principles in the
United States. The selected consolidated financial data as of December 31, 2003, 2004 and
2005 and for each of the years ended December 31, 2003 and 2004 are derived from our
audited consolidated financial statements not included in the audited financial statements
incorporated by reference into this Annual Report. The selected consolidated financial
data set forth below should be read in conjunction with Item 5. Operating and
Financial Review and Prospects and the consolidated financial statements and the
notes thereto and the other financial information appearing elsewhere in this Annual
Report.

3

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|                              | Year Ended December 31,
|----------------------------- | -----------------------
|
|
|
|
|Statement of Operations Data: |                        
|Revenues                      |                        
|Cost of revenues              |                        
|                              |                        
|Gross profit                  |                        
|Research and development      |                        
|expenses                      |                        
|Less grants                   |                        
|Research and development      |                        
|expenses, net                 |                        
|Selling, general and          |                        
|administrative expenses       |                        
|Operating income (loss)       |                        
|Financial income, net         |                        
|Other income                  |                        
|                              |                        
|Net income (loss)             |                        
|                              |                        
|Net income (loss) per share   |                        
|- basic                       |                        
|Net income (loss) per share   |                        
|- diluted                     |                        
|Weighted average number of    |                        
|ordinary shares               |                        
|outstanding-basic             |                        
|Weighted average number of    |                        
|ordinary shares               |                        
|outstanding-diluted           |                        
|                              |                        

4

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|                                | As of December 31,
|------------------------------- | ------------------
|
|
|
|
|Balance Sheet Data:             |                   
|Cash, cash                      |                   
|equivalents,                    |                   
|bank deposits,                  |                   
|marketable securities           |                   
|and long-term                   |                   
|investments                     |                   
|Working capital (1)             |                   
|Total assets                    |                   
|Convertible subordinated  notes |                   
|Share capital and               |                   
|additional paid-in              |                   
|capital                         |                   
|Shareholders' equity            |                   
|                                |                   

---

|(1) | Total
current assets net of total current liabilities
|--- | -----------------------------------------------------

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

Not
applicable

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

Not
applicable

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

We
are subject to various risks and uncertainties relating to or arising out of the nature of
our business and general business, economic, financing, legal and other factors or
conditions that may affect us. We believe that the occurrence of any one or some
combination of the following factors could have a material adverse effect on our business,
financial condition, cash flows and results of operations.

Risks relating to our business and
industry

We have a history of substantial
losses. We may experience additional losses in the future.

We
incurred significant operating losses in 2003 and 2004 when we incurred significant
research and development expenses addressing the development of the metro CM-100 product,
new telecom equipment products addressing high transmission of data for the metropolitan
area. Our business was transitioning from the sale of asymmetric digital subscriber line,
or ADSL, products in 2003 to the sale of the CM-100 metro product. We stopped selling ADSL
products in 2003. We began to recognize revenues from sales of CM-100 products in 2004. We
were able to generate both operating income and net income for the first time in 2005, as
well as in 2006, although at much lower levels than in 2005. In 2007, we incurred
operating losses of approximately $32 million due to a significant decrease in revenues
from our only significant customer. It is likely that we will recognize both an operating
and a net loss in 2008. We cannot be sure that we will be able to return to profitability.

5

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Our revenues from 2004 through
2007 were dependent on sales of one product line to one telecom carrier in Japan. The
significant decrease in revenues from this customer materially adversely affected our
results of operations in 2006 and 2007 and the loss of this customer, or a continued
decrease in purchases by it, could have a material adverse effect on our results of
operations. We expect to depend on sales of this product line to one or two customers for
the substantial majority of our revenues in 2008.

Almost
all of our revenues from 2004 through 2007 were the result of the sales of our metro
products, the CM-100. Approximately 99.8% of our revenues in 2005, 97.2% of our revenues
in 2006 and 99.3% of our revenues in 2007 were derived from sales of these metro products
to KDDI, a Japanese telecom carrier. We do not know for how long a period of time KDDI
will continue to purchase products from us, nor do we have any control or influence over
the purchasing decisions of KDDI, including the quantities, price and timing of the
deployment of the CM-100 product line in its network. We recently introduced the CM-4000,
a metro product with additional features and capabilities. We do not know if KDDI will
choose to purchase our new CM-4000 product line. We recently added one other customer,
Media Broadcast, which will sell our products in Germany. We expect to depend on sales of
our CM product line to one or both of these customers for the substantial majority of our
revenues in 2008.

KDDI
purchased the CM-100 for initial coverage deployment in its metropolitan area network. It
began significant deployment in late 2004, continuing through 2005. KDDIs
deployments of the CM-100 decreased in 2006 through 2007. We do not expect significant
deployments by KDDI in 2008. It is expected that once this stage is concluded, additional
demand for the CM product from KDDI may be derived from growth in the number of
subscribers for new IP video-related services offered by KDDI, both for wireline and
wireless subscribers. There can be no assurance that KDDI will be successful in offering
new services or securing additional subscribers. Sales to KDDI are dependent on their
success in offering new services and securing additional subscribers. Even if KDDI is
successful, there is no assurance that they will continue to purchase our products or that
they will not choose another vendor. Our revenues from KDDI were significantly reduced in
2006 and 2007 in comparison to 2005. This materially adversely affected our results of
operations. The loss of this customer, or a continued significant decrease in revenues
from it, would have a material adverse effect on our results of operations.

We need to make sales to
additional customers and to develop additional products in order to become profitable.

We
will need to make sales to additional customers and to develop additional products in
order to become profitable for any period of time. Since 2004, all of our revenues have
been derived from our CM-100 product line. We recently added a second product, the
CM-4000, which, although commercially selected, has not been yet commercially deployed. We
cannot be sure that we will be able to make significant sales of this product. This
product is a higher end version of our CM-100. Our CM-100 and CM-4000 product lines were
selected by Media Broadcast Gmbh as a network infrastructure building block for network
solutions deployed by Deutsche Telekoms wholesale business unit, addressing a
leading cable operator in Germany. There is no specific obligation on Media Broadcast to
purchase products from us. Thus, we cannot be sure of the amount of our products that will
be purchased as a result of this selection, or the period of time over which our products
may be purchased by Media Broadcast.

6

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We have a history of extreme
fluctuations in our cash from operations and are using our cash to fund our operating
activities.

In 2006 and 2007, we used $31.1
million and $15.7 million, respectively, of cash in our operating activities. Our use of
cash from operations in 2007 was lower than in 2006 primarily because we received
approximately $14.2 million in cash in connection with the settlement of a commercial
dispute related to our legacy operations. In 2005, we generated $72.6 million in cash from
operating activities. We realized substantially all of our positive cash flow from
operations in 2005 due to the significant increase in sales to KDDI in Japan and the
payment of receivables owed to us in advance of the recognition of the related revenue in
our financial statements. We used cash in our operating activities in 2006 and 2007 as we
recognized revenue in 2006 and 2007 with respect to sales that were paid for in previous
years. In 2008, we expect to continue to use cash in our operating activities. If we are
not able to generate cash from our operations in future periods beyond 2008, we might not
be able to secure alternative funding, which could result in a need to reduce our
expenditures for research and development and for sales and marketing

# We may need additional
financing to grow our business.

We
may need to raise additional capital to continue our longer term expansion plans. The
substantial cash required to fund our operating activities could impede our ability to
fund our operations and to invest in our business. To the extent that we cannot fund our
activities through our existing cash resources and any cash we may generate from
operations, we may need to raise equity or debt funds through additional public or private
financing or through arrangements with strategic partners in order to grow our business.
In March 2007, we issued convertible notes in the aggregate principal amount of
approximately $25.8 million, resulting in net proceeds to us of $25.0 million. These notes
bear interest at the rate of 6% and are linked to the Israeli Consumer Price Index, or
CPI. The notes are due in March 2017, and are subject to the right of the holders to
request early repayment in March 2012. As of March 31, 2008, the indexed amount of our
debt obligation under the notes was approximately $31.2 million (based on the U.S.
Dollar/New Israeli Shekel exchange rate at March 31, 2008). We may be unable to repay
these notes when due. We may not be able to obtain additional financing on acceptable
terms or at all. This could cause us to reduce our expenditures for research and
development and for sales and marketing, which could adversely affect our results of
operations and our ability to grow.

We depend on third party
distributors in Japan and Germany for the sale of our products. If these distributors do
not succeed in selling our products, or if we are not able to maintain our relationship
with them, our results of operations will suffer.

Our
sales of products to KDDI are made through OKI Electric Industry Co., Ltd., and our sales
in Germany are made through Media Broadcast GmbH. We are dependent on these
distributors marketing and sales efforts to convince customers or end-users to
purchase our products and to provide local support services. If a distributor terminates
or adversely changes its relationship with us, we may be unsuccessful in replacing it. The
loss of a distributor could impair our ability to sell our products and materially
adversely affect our results of operations.

7

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The purchasing patterns in the
markets we address will likely result in our revenues being highly volatile.

Sales
of our product lines are dependent on the capital equipment expenditure budgets of telecom
carriers for metro network equipment. The purchasing patterns of telecom carriers for this
type of expansion project are subject to high volatility. We have experienced a
concentrated and inconsistent pattern of purchasing by KDDI in Japan. While product
selections and subsequent deliveries may last several years, the purchasing pattern during
the deployment period is highly uncertain and, accordingly, our revenues are likely to be
subject to high volatility.

Substantially all of our sales are
currently in Japan. We have limited experience in selling and servicing metro products in
Japan and no prior experience in selling and servicing metro products in Germany. This
lack of experience could materially adversely impact our results of operations.

Substantially
all of our sales are currently in Japan, a country in which prior to 2004 we had no sales
experience. We are also beginning to make initial sales of our metro products in Germany.
Telecom equipment sales in both countries are subject to high quality and strict delivery
requirements. We have limited experience in making sales of metro products into these
markets and could face business requirements for quality, delivery, service and support
that we may not meet. Failure to meet these requirements could have a material adverse
effect on our results of operations.

Successful introduction of service
applications by telecommunication carriers that are expected to drive demand for our metro
products could be delayed or slow to emerge.

Service
applications that drive the demand for our metro telecommunication products are related to
the offering of video services, such as video-on-demand, HDTV and Internet TV, as well as
other media services by telecommunication carriers over data networks. These types of
services require very high bandwidth for packet-based transmissions and, as a result,
require an upgrade of metropolitan, or metro, network equipment and access equipment. The
availability of these services has begun to emerge in Asia, the United States and part of
Europe, but is still limited in the breadth of services offered as well as in the number
of subscribers. The launch of these services requires significant capital investment in
equipment by telecom carriers in the access and metro networks for a range of products, as
well as for content packages to be provided by the telecommunication carriers. Delays in
the launch of these services or slow subscriber additions to these services will have an
adverse effect on the demand for our metro products. If the growth of these services
continues to be limited, we will be required to invest additional resources and use more
cash in our research and development, as well as in marketing efforts, in an effort to
attain and maintain a competitive position in these markets before we can benefit from
commercial selection and revenues from our products. Telecommunication carriers could
select solutions offered by our competitors to provide video services. Thus, even if the
demand for video services increases, we cannot be sure that this increased demand will
result in increased sales of our products.

8

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A slow down in capital
expenditures by telecommunications service providers had a material adverse effect on our
results of operations in the past and may do so in the future.

The
global economic deterioration and economic uncertainty in the telecommunications market
resulted in a curtailment of capital investment by telecommunications carriers and service
providers beginning in late 2000 and continuing into 2003. Our results of operations were
materially adversely affected during this period. There is still uncertainty with respect
to the direction of the global economy and the telecommunications market. Consolidation of
telecommunication carriers in the United States has led carriers to purchase from fewer
telecommunication equipment vendors. We are currently experiencing a slow capital
investment environment in Asia, the United States and Europe, which is likely to have a
negative effect on the demand for new technologies and new types of equipment. This could
significantly limit our ability to sell our products. Any future industry downturn could
increase our inventories, decrease our revenues, result in additional pressure on the
price of our products and prolong the time until we are paid, each of which could have a
material adverse effect on our results of operations.

We plan to continue to invest substantial capital and other resources in the development
and commercial launch of new telecom equipment.

We
intend to make substantial investments in the development of telecom solutions capable of
supporting high bandwidth services in telecommunications networks located in metropolitan
areas. Most of our research and development and other operating expenses in 2007 were
related to our recently announced CM-4000 products and we expect the CM-4000 to be our
focus in 2008 as well. Our expenditures with respect to the development of new
telecommunications equipment could reduce our cash balances and impede our ability to
develop new products in addition to the CM-100 and CM-4000 product lines.

Our future growth will depend upon
the acceptance of the technologies developed by us and the development of markets for our
products.

The
markets for our products are dependent on resilient packet ring, or RPR, multi protocol
label switching, or MPLS, pseudo wire emulation, or PWE, and a range of emerging
technologies. These technologies address migration of synchronous transmission protocols
used at relatively low transmission rates to a metropolitan area Ethernet network that is
not limited to synchronous transmission protocols and operates at 10 giga bits per second
and higher rates. We believe that these technologies will support the upgrade of existing
metro networks on a cost efficient basis in order to provide IP transmissions addressing
high numbers of subscribers and multiple services, at significantly higher transmission
speeds than are currently available. The markets for our products are also dependent on
the need to support legacy services and new data services over a single unified metro
network.

The
market for products based on RPR, MPLS and PWE technologies in the metropolitan area may
not fully develop, whether as a result of competition, adoption of alternative
technologies or changes in technologies. Ethernet over fiber in the metro area, an
alternative technology, has gained market share. In addition, changes in technology, such
as reconfigurable Optical add-drop multiplexing, or ROADM, technology, has developed as an
alternative technology which was recently selected as a prime network architecture for the
metro network by major telecom carriers. Our future success depends on the acceptance of
our products and technologies and the purchase of high-transmission services by the
customers of telecommunications companies. We have no control over the development of
these target markets. Even if our technologies are accepted, relationships with providers
of telecommunications services must be developed in order to be successful. Furthermore,
competing technologies in the targeted areas may be utilized in the majority of these
target markets. This would leave us with a small market to address.

9

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We may not be able to keep pace
with emerging industry standards for products we are developing. This could make these
products more costly or unacceptable to potential customers.

Industry-wide
standards for RPR, MPLS PWE, as well as various aspects of the standards applicable to
Ethernet, continue to be enhanced. We design our products to support these standards and
evaluate new requirements as they are proposed by industry working groups. The adoption of
standards different from those currently used by us could result in us having to incur
additional time and expense in order for our products to comply with these standards.
Standards may be adopted by various industry groups or may be proprietary and nonetheless
accepted broadly in the industry. The failure to support evolving standards could limit
acceptance of our products. Since these products will be integrated into networks
consisting of elements manufactured by various companies, they must support a number of
current and future industry standards and practices. It may take us a significant amount
of time to develop and design products incorporating these new standards. We may also have
to pay licensing fees to the developers of the technologies that constitute newly adopted
standards. This would increase our expenses and could adversely affect our results of
operations.

Because telecommunications
companies must obtain in-house and regulatory approvals before they can order our
products, expected sales of our products to new customers or new products to existing
customers are likely to be subject to a long sales cycle, which may harm our business.

Before
telecommunications companies can purchase our products, these products must undergo a
lengthy approval process. Evaluations and modifications of our products to meet
customers requirements are likely to take several years prior to commercial
selection. Accordingly, we are required to submit enhanced versions of products undergoing
the approval process and products in development for approval.

The
following factors, among others, affect the length of the approval process:

| |  | the
time required for telephone companies to determine and publish specifications;
| | - | ----------------------------------------------------------------------------------

| |  | the
complexity of the products involved;
| | - | ----------------------------------------

| |  | the
technological priorities and budgets of telephone companies; and
| | - | --------------------------------------------------------------------

| |  | the
regulatory requirements applicable to telephone companies.
| | - | --------------------------------------------------------------

Delays
in the product approval process could seriously harm our business and results of
operation.

10

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Because of rapid technological and
other changes in the market for telecommunications products, we must continually develop
and market new products and product enhancements while reducing production costs.

The
market for our products is characterized by:

| |  | rapid
technological change;
| | - | ---------------------------

| |  | frequent
product introductions and enhancements;
| | - | ------------------------------------------------

| |  | evolving
industry standards;
| | - | ----------------------------

| |  | changes
in end-user requirements; and
| | - | -------------------------------------

| |  | changes
in services offered by telecommunication companies.
| | - | -----------------------------------------------------------

Technologies
or standards applicable to our products could become obsolete or fail to gain widespread,
commercial acceptance, resulting in losses and inventory write-offs. Rapid technological
change and evolving technological standards are resulting in relatively short life cycles
for our products. Short life cycles for our products could cause decreases in product
prices at the end of the product life cycle, inventory write-offs and a lower rate of
return on our research and development expenditures. We may not be able to respond
effectively to technological changes or new product introductions by others or
successfully develop or market new products.

We may be required to recognize
our deferred income, which would accelerate recognition of revenues and cause fluctuations
in our results of operations.

From
2004 through 2007, we recognized revenues from our major customer in Japan ratably over
the fourteen-month period of post-contract hardware and software support services, or PCS.
This revenue recognition policy was required by generally accepted accounting principles
since the fair value of the PCS could not be determined. We received the cash payments for
these sales over a shorter period than the revenue recognition period. As a result,
changes in our cash and investment balances were not correlated with the amount of our
quarterly revenues. If we become ableto determine, in accordance with generally
accepted accounting principles, the fair value of the PCS that we undertook to provide to
our major customer in Japan, it is likely that the remaining unrecognized revenue, which
was $2.3 million as of December 31, 2007, as well as the related amount of deferred
income, which was $1.0 million as of December 31, 2007, will be required to be recognized.
This would result in a one-time recognition of revenues and income. No cash from
operations will result from this revenue recognition, if required. If we are able to make
this determination with respect to our product and services offerings and if we continue
to experience a volatile pattern of orders and related product delivery schedules similar
to what we experienced in the past, we will likely recognize revenues over a shorter
period of time than in the past and could experience additional fluctuations in our
quarterly revenues, cash flows and results of operations. The determination with respect
to the fair value of the PCS of our product and services offerings could vary between
different customers.

We may accumulate excess or
obsolete inventory that could result in unanticipated price reductions or write downs and
adversely affect our results of operations.

Telecommunications
companies typically require prompt delivery of products. Sales are typically shipped
within a period of up to three months from the date we receive a purchase order. As a
result, we may be required to maintain or have available sufficient inventory levels or
make advance lengthy lead-time component orders to satisfy anticipated demand on a timely
basis. Rapid technological change, evolving industry standards or shifts in demand can
also result in shorter life cycles for our inventory. The recent introduction of the
CM-4000 product may result in reduction in the demand for CM-100 and obsolescence of
related inventory. This increases the risk of decreases in selling prices, inventory
obsolescence and associated write-offs, all of which could adversely affect our results of
operations.

11

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The market for our
telecommunication products is intensely competitive. Because substantially all of our
competitors have much greater resources than we have, it may be difficult for us to effect
commercial sales or to achieve operating profitability.

The
market for our products is intensely competitive, and we expect competition to increase in
the future. Many of our current and potential competitors are large and established
companies and have better name recognition and greater financial, technical,
manufacturing, marketing and personnel resources than us. Consolidation has increased the
size and scope of a number of our competitors. Any of these competitive factors could make
it more difficult for us to attract and retain customers, cause us to lower our prices in
order to compete and reduce our market share and revenues, any of which could have a
material adverse effect on our financial condition and results of operations. The
expansion of research and design facilities in China and India, where engineering costs
are significantly lower compared to the U.S., Western Europe or Israel, is expected to
increase competition and price pressure for our products. In addition, it is also expected
that manufacturers of telecom equipment in China will attempt to leverage their success in
supplying telecom equipment to local carriers in Asia and will increase their marketing
and sales efforts outside China.

The
competitors in our markets are numerous and we expect competition to increase in the
future. The principal competitors for our products include Alcatel-Lucent, Ciena, Cisco
Systems, Inc., ECI Telecom Ltd., Ericsson, Fujitsu, Huwaei, NEC, Nortel Networks,
Nokia-SiemensNetworks, Tellabs and UTStarcom.

Government
regulation of telecommunication companies could adversely affect the demand for our
products.

Telecommunication
regulatory policies affecting the availability of telephone companies services, and
other terms on which telephone companies conduct their business, may impede the market
penetration of our metro products. For example, our CM-100 and CM-4000 product lines
address high bandwidth packets, and are dependent on new service offerings, such as video
services, which require regulatory approvals for introduction by telecom carriers,
including for the scope of content, service packages and tariffs. Telecommunication
companies in the markets in other countries in which we may attempt to sell our products
are also subject to evolving governmental regulation or state monopolies. Changes in laws
or regulations in Japan, the U.S., Germany, the rest of Europe or elsewhere could
materially adversely affect our ability, and the ability of our customers, to deploy our
products.

Because
a limited number of subcontractors manufacture and assemble our products and because we
have a number of single source suppliers of components, our business could suffer if we
cannot retain or replace them.

We
use third-party subcontractors to assemble our products. We have not entered into
multi-year agreements with assurances of supply with any of our suppliers or
subcontractors.

12

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Our
reliance on third-party subcontractors involves several risks, including:

| |  | the
potential absence of adequate capacity if we are able to sell a significant amount of our
products;
| | - | -------------------------------------------------------------------------------------------------------

| |  | the
unavailability of, or interruption in access to, certain process technologies;
| | - | ----------------------------------------------------------------------------------

| |  | reduced
control over product quality, delivery, schedules, manufacturing yields and costs; and.
| | - | -----------------------------------------------------------------------------------------------

| |  | higher per unit prices we could be charged for the manufacturing services we purchase
based on the amount of services purchased.
| | - | --------------------------------------------------------------------------------------------------------------------------------

Shortages
of raw materials or production capacity constraints at our subcontractors could negatively
affect our ability to meet product delivery obligations and result in increased costs for
affected products that we may not be able to recover. Use of subcontractors also involves
the risk of reduced control over product quality, delivery schedules and manufacturing
yields, as well as limited negotiating power to reduce costs.

We
obtain a number of key semiconductor components used in our products from single source
providers. In order to have an adequate supply of components with a long lead-time for
delivery, we may order significant quantities of components from single source suppliers
in advance of receiving a purchase order from our customer. A shortage in the supply of
key semiconductor and other components could affect our ability to manufacture and deliver
our products and result in lower revenues. We may be unable to find alternative sources in
a timely manner, if at all, if any of our single source suppliers were unwilling or unable
to provide us with key components.

In
addition, supply from single source suppliers limits our ability to purchase components at
competitive prices and could require us to maintain higher inventory levels. This
increases our need for working capital and increases the risk of an inventory write-off.
In addition, unless we can significantly increase our sales above 2007 levels, we may be
charged higher per unit prices for the manufacturing services we purchase. In addition, we
may also be charged higher per unit prices for certain components whose costs are unit
sensitive. This would adversely affect our gross profit margins. If we cannot obtain
sufficient manufacturing services or key components as required, or develop alternative
sources if and as required in the future, product shipments may be delayed or reduced.
This could adversely affect our end-user relationships, business and results of
operations.

13

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We
are subject to regulations that will require us to use components based on environmentally
friendly materials. Compliance with these regulations may increase our costs and adversely
affect our results of operations.

We
are subject to telecommunications industry regulations requiring the use of
environmentally-friendly materials in telecommunications equipment. For example, pursuant
to a European Union directive, known as the RoHs5 regulations, telecom
equipment suppliers were required to stop using specified materials that are not
environmentally friendly by July 1, 2006. We are compliant with RoHs5
regulations. In addition, telecom equipment suppliers are required under this directive to
eliminate the lead solders from their products by 2010 (the RoHs6
regulations). We will be dependent on our suppliers for components and sub- system
modules, such as semiconductors and printed circuit boards, to comply with these
requirements. We have not yet complied with this directive. We will attempt to comply with
this directive by 2009. If we are not compliant with this directive on time, it may harm
our ability to sell our products in Europe and in any other countries that may adopt this
directive.

Compliance
with this directive, especially with respect to the requirement that products be lead
free, will require us to undertake significant expense with respect to the re-design of
our products. This could also result in part or our entire inventory becoming obsolete. In
addition, we may be required to pay higher prices for components that comply with this
directive. We may not be able to pass these higher component costs on to our customers. We
cannot at this point estimate the expense that will be required to redesign our products
in order to include environmentally friendly components. We cannot be sure
that we will be able to timely comply with these regulations, that we will be able to
comply on a cost effective basis or that a sufficient supply of compliant components will
be available to us. Compliance with these regulations could increase our product design
costs.

Our
inability or failure to comply with these regulations could have a material adverse effect
on our results of operations. Manufacturers of components that require lead solders may
decide to stop manufacturing those components prior to the 2010 compliance date. These
actions by manufacturers of components could result in a shortage of components that could
adversely affect our business and results of operations.

We
could incur substantial costs if customers assert warranty claims or request product
recalls.

Any
significant product returns or claims under our warranty or PCS could have a material
adverse effect on our business and results of operations. We offer complex products that
have in the past and may in the future contain errors, defects or failures when introduced
or as new versions are released. If we deliver products with defects, errors or bugs or if
we undergo a product recall as a result of errors or failures, market acceptance of our
products could be lost or delayed and we could be the subject of substantial negative
publicity. This could have a material adverse effect on our business and results of
operations. We commenced commercial sales of our metro product in 2004. While to date we
have not incurred warranty expenses that exceeded our estimates, we could incur a higher
level of warranty expense claims at any time compared to our prior experience. We have
agreed to indemnify our customers in some circumstances against liability from defects in
the products sold by us and expect to continue to provide a similar indemnity in
connection with future sales. In some cases, our indemnity also covers indirect damages.
Product liability claims could seriously harm our business, financial condition and
results of operations.

14

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As
a result of our issuance of convertible notes in March 2007, we have a significant amount
of debt denominated in NIS and linked to the Israeli CPI and may have insufficient cash
flow to satisfy our debt service obligations. In addition, the amount of our debt could
impede our operations and flexibility.

In
March 2007, we issued convertible notes in the aggregate principal amount of approximately
$25.8 million (based on the U.S. Dollar/New Israeli Shekel (NIS) exchange rate
at that time). The convertible notes are denominated in NIS, bear interest at the rate of
6% and are linked to the Israeli CPI. The convertible notes are due in March 2017, and are
subject to the right of the holders to request early repayment beginning in March 2012. As
of March 31, 2008, the indexed amount of our debt obligation under the convertible notes
was approximately $31.2 million (based on the U.S. Dollar/New Israeli Shekel exchange rate
at March 31, 2008).

The
notes are convertible at the election of the holders into our ordinary shares at the
initial conversion price of NIS 52.50 (approximately $14.78, based on U.S. Dollar/NIS
exchange rate at March 31, 2008) per share if the conversion occurs by March 10, 2010 and
at the initial conversion price of NIS 63.00 (approximately $17.73, based on U.S.
Dollar/NIS exchange rate at March 31, 2008) per share if the conversion occurs thereafter,
in each case subject to adjustment for customary events.

If
we are unable to generate sufficient cash flows or otherwise obtain funds necessary to
make required payments on the notes, we will be in default under the trust agreement
governing the notes which could, in turn, cause defaults under our other existing or
future indebtedness.

Even
if we are able to meet our payment obligations on the notes, the amount of debt we have
incurred could adversely affect us in a number of ways, including by:

| |  | limiting
our ability to obtain additional financing;
| | - | ----------------------------------------------------

| |  | limiting
our flexibility in planning for, or reacting to, changes in our business;
| | - | ----------------------------------------------------------------------------------

| |  | placing
us at a competitive disadvantage as compared to our competitors who have less or no debt;
| | - | -------------------------------------------------------------------------------------------------

| |  | making
us more vulnerable to the downturn in our business and the economy generally;
| | - | ------------------------------------------------------------------------------------

| |  | requiring
us to apply a substantial portion of our cash flows towards payments on our debt, instead
of using those funds for other purposes, such as working capital or capital expenditures;
and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | harming
our financial condition and results of operations.
| | - | ----------------------------------------------------------

# We are subject to
international business risks.

We
have sold our CM-100 products mainly in Japan and are marketing our products primarily in
Asia, the United States and Europe. Expansion of our international business requires
significant management attention and financial resources. Our international sales and
operations are subject to numerous risks inherent in international business activities,
including:

15

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| |  | compliance
with foreign laws and regulations;
| | - | ---------------------------------------------

| |  | staffing
and managing foreign operations;
| | - | -----------------------------------------

| |  | import
or currency control restrictions;
| | - | ----------------------------------------

| |  | burdens
that may be imposed by tariffs and other trade barriers;
| | - | ----------------------------------------------------------------

| |  | local
and international taxation;
| | - | ---------------------------------

| |  | increased
risk of collections;
| | - | ------------------------------

| |  | transportation
delays; and
| | - | --------------------------

| |  | seasonal
reduction of business activities.
| | - | ------------------------------------------

These
factors, as well as different technical standards or product requirements for our systems
in different markets, may limit our ability to penetrate foreign markets.

We
depend on a limited number of key personnel who would be difficult to replace. If we lose
the service of these individuals, our business could be harmed. We have also recently made
management changes.

Our
growth and future success largely depends on the managerial and technical skills of
members of senior management. If any of them is unable or unwilling to continue with us,
our results of operations could be materially and adversely affected. Recently, we made
several management changes. We appointed Mr. Uri Shalom, who previously acted as the Vice
President Finance of our Corrigent subsidiary, as our Chief Financial Officer, Mr. Eli
Aloni as Executive Vice President, Technology and Marketing of Corrigent, Mr. Zvi
Menahemi, who previously acted as Vice President R&D of Corrigent, as Chief Operating
Officer of Corrigent, and Mr. Oren Tepper, who previously acted as Vice President Business
Development of Corrigent, as the Vice President of Corporate Sales of Corrigent. Any
failure of our management to properly manage our business would have a material adverse
effect on our results of operations.

We have experienced periods of
growth and consolidation of our business. If we cannot adequately manage our business, our
results of operations will suffer.

We
have experienced both growth and consolidation in our operations from sales of our metro
products. Future growth or consolidation may place a significant strain on our managerial,
operational and financial resources. We cannot be sure that we have made adequate
allowances for the costs and risks associated with possible expansion and consolidation of
our business, or that our systems, procedures and managerial controls will be adequate to
support our operations. Any delay in implementing, or transitioning to, new or enhanced
systems, procedures or controls may adversely affect our ability to manage our product
inventory and record and report financial and management information on a timely and
accurate basis. We believe our growth may require us to hire additional engineering,
technical support, sales, administrative and operational personnel. Competition for
qualified personnel can be intense in the areas where we operate. The process of locating,
training and successfully integrating qualified personnel into our operations can be
lengthy and expensive. If we are unable to successfully manage our expansion, we may not
succeed in expanding our business, our expenses may increase and our results of operations
may be adversely affected.

16

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Our
proprietary technology is difficult to protect and unauthorized use of our proprietary
technology by third parties may impair our ability to compete effectively.

We
may not be able to prevent the misappropriation of our technology, and our competitors may
independently develop technologies that are substantially equivalent or superior to ours.
We have filed U.S. and international patent applications covering certain of our
technologies.To protect our unpatented proprietary know-how, we rely on technical
leadership, trade secrets and confidentiality and non-disclosure agreements. These
agreements and measures may not adequately protect our technology and it may be possible
for a third party to copy or otherwise obtain and use our technology without our
authorization or to develop similar technology.

There
is a risk that we may violate the proprietary rights of others.

We
are subject to the risk of adverse claims and litigation alleging infringement of the
intellectual property rights of other companies. Many participants in the
telecommunications industry have an increasing number of patents and patent applications
and have frequently commenced litigation based on alleged infringement. We indemnify our
customers with respect to infringement of third party proprietary rights by our products.
Third parties may assert infringement claims in the future and these claims may require us
to enter into license arrangements or result in costly litigation, regardless of the
merits of these claims. Licensing may be unavailable or may not be obtainable on
commercially reasonable terms.

# We face foreign exchange
currency risks.

We
operate in a number of territories and, typically our prices are determined in local
currencies of the countries in which we operate. We hold cash deposits in the main
currencies we operate with, that is, in the U.S dollar, Japanese Yen (Yen) and
NIS. In 2008, we expect that a significant majority of our revenues will be derived from
non US dollar currencies, the Yen and Euro, and that a major part of our expenses will be
denominated in U.S. dollars and in NIS. In particular, we are obligated to pay interest
on, and to repay the principal of, our convertible notes in NIS. We currently do not use
hedge instruments. We are likely to face risks from fluctuations in the value of the Yen,
NIS and the Euro compared to the U.S. dollar, the functional currency in our financial
statements. In 2006, the value of the U.S. dollar increased against the Yen, which caused
us to recognize lower dollar revenues and gross profit in our financial statements. In
2007, the value of the U.S. dollar decreased against the Yen, which caused us to recognize
higher dollar revenues and gross profit in our financial statements. An increase in the
value of the U.S. dollar against the Yen and Euro in 2008 would cause a decrease in our
revenues and gross profit derived in Yen and Euro, respectively. In 2006 and 2007, the
value of the U.S. dollar decreased against the NIS which caused us to recognize higher
dollar expenses (mainly salary expenses). A further decrease in the value of the U.S.
dollar against the NIS would cause a further increase in our expenses.

17

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# We are subject to risks
from our financial investments.

We
invest the majority of our cash on hand in a variety of financial instruments, including
different types of corporate and government bonds from different countries, and other
financial instruments. Some of these bonds and instruments are rated below investment
grade or are not rated. If the obligor of any of the bonds or instruments we hold
defaults or undergoes a reorganization in bankruptcy, we may lose all or a portion of
our investment in such obligor.  This will harm our financial condition.  For
information on the types of our investments as of December 31, 2007, see Item 11 
Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk
Management.

# We are subject to
taxation in several countries.

Because
we operate in several countries, mainly in Israel, Japan, the U.S. and Germany, we are
subject to taxation in multiple jurisdictions. We are required to report to and be subject
to local tax authorities in Israel, the U.S and Japan. In addition, our income that is
derived from sales to customers in one country might also be subject to taxation in
another country. We cannot be sure of the amount of tax we may become obligated to pay in
Israel, the U.S, Japan or Germany. The tax authorities in the countries in which we
operate may not agree with our tax position. Our tax benefits from carry forward losses
and other tax planning benefits such as Israeli approved enterprise programs, may prove to
be insufficient due to Israeli tax limitations, or may prove to be insufficient to offset
tax liabilities from foreign tax authorities. Foreign tax authorities may also use our
gross profit or our revenues in each territory as the basis for determining our income
tax, and our operating expenses might not be considered for related tax calculations. This
could adversely affect our results of operations.

Risks relating to our operations in
Israel.

Potential
political, economic or military instability in Israel may adversely affect our results of
operations.

Our
principal offices and many of our subcontractors and suppliers are located in Israel.
Accordingly, political, economic and military conditions in Israel affect our operations.
Since the establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors. A state of hostility, varying in degree
and intensity, has led to security and economic problems for Israel. Since October 2000,
there has been a marked increase in hostilities between Israel and the Palestinians, and
in January 2006, Hamas, an Islamist movement responsible for many attacks against
Israelis, won the majority of the seats in the Parliament of the Palestinian Authority.
Further, in the summer of 2006, Israel was engaged in a war with Hezbollah, a
Lebanon-based Islamist Shiite militia group, which involved thousands of missile strikes
and disrupted most day-to-day civilian activity in northern Israel. In June 2007, there
was an escalation of violence in the Gaza Strip, resulting in Hamas effectively
controlling 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.

The
future of relations between Israel and the Palestinian Authority is uncertain. Terror
attacks, armed conflicts or political instability in the region could negatively affect
local business conditions and harm our results of operations. We cannot predict the effect
on us of the increase in the degree of violence by Palestinians against Israel or the
effect of military action elsewhere in the Middle East. Furthermore, several countries
restrict doing business with Israel and Israeli companies, and additional companies may
restrict doing business with Israel and Israeli companies as a result of the increase in
hostilities. This may also seriously harm our operating results, financial condition and
the expansion of our business.

18

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Our
results of operations may be negatively affected by the obligation of our personnel to
perform military service.

Most
of our male employees in Israel are obligated to perform military reserve duty from time
to time. In addition, in the event of a military conflict or other attack on Israel,
including the ongoing conflict with the Palestinians, these persons could be required to
serve in the military for extended periods of time. The absence of a number of our
officers and employees for significant periods could disrupt our operations and harm our
business.

Because
almost all our revenues are generated in non-U.S. dollar currencies and a substantial
portion of our expenses are incurred in New Israeli Shekels and other non-U.S. dollar
currencies, our results of operations may be adversely affected by inflation and currency
fluctuations.

A
significant majority of our revenues in 2008 are expected to be generated in currencies
other than the U.S. dollar, including the Yen and Euro, while the majority of our payroll
expenses and a portion of our other expenses are incurred in NIS, and a significant
portion of our cost of revenues is incurred in U.S. dollars. An increase in the value of
the U.S. dollar against the Yen or Euro would adversely affect the amount of revenues we
report in our financial statements, although in 2007 and the first quarter of 2008, the
value of the U.S. dollar declined against the Yen and the Euro.

We
could be further exposed to risk if the rate of inflation in Israel exceeds the rate of
devaluation of the NIS in relation to the Yen, U.S. dollar and other currencies of other
foreign countries in which we operate, or if the timing of such devaluation lags behind
inflation in Israel. In that event, the cost in U.S. dollars of our operations in Israel
would increase and our U.S. dollar-measured results of operations would be adversely
affected. For example, in 2006, the value of the U.S. dollar decreased in relation to the
NIS by 8.2%, while inflation decreased by only 0.1%. As a result, our salary expenses,
which are primarily linked to the NIS, increased in U.S. dollar terms. In 2007, the value
of the U.S. dollar decreased in relation to the NIS by 9.0%, while inflation increased by
3.4%. As a result, our salary expenses, which are primarily linked to the NIS, increased
in U.S. dollar terms. Our issuance in March 2007 of approximately $25.8 million aggregate
principal amount of convertible notes, which are denominated in NIS, has made us more
sensitive to increases in the value of the NIS relative to the U.S. dollar. In 2007, after
the issuance of the notes, the value of the U.S. dollar decreased in relation to the NIS,
and the Israeli inflation increased which caused us to record significant financial
expenses. Subject to such exchange rate differences as of the end of each reporting
period, we may record higher or lower expenses in our financial statements.

We
benefit from government grant programs that have been reduced and may be unavailable to us
in the future. Our participation in these programs restricts our ability to freely
transfer manufacturing rights and technology out of Israel.

Since
our inception, we have relied on Israeli government grants for the financing of a
significant portion of our product development expenditures. Due to a continuing reduction
of the budget of Israels Office of the Chief Scientist of the Ministry of Industry,
Trade and Labor, the amount of grants we receive in the future might be lower than in
prior years, if we receive any at all. In 2005, we recognized $173,000 of grants for our
research and development, which caused an increase in our research and development
expenses. We recognized grants in the amount of $1.9 million in 2006 and $2.5 million in
2007.

19

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Generally,
according to Israeli law, any products developed with grants from the Office of the Chief
Scientist are required to be manufactured in Israel, unless we obtain prior approval of a
governmental committee. As a condition to obtaining this approval, we may be required to
pay the Office of the Chief Scientist up to 300% of the grants we received and to repay
these grants at an accelerated rate, depending on the portion of manufacturing performed
outside Israel. We have obtained an approval from the Office of the Chief Scientist to
manufacture outside Israel. We intend to keep sufficient manufacturing activities in
Israel so that we will be subject to a repayment percentage of up to 150% of the grants we
received. In addition, we are prohibited from transferring to third parties the technology
developed with these grants without the prior approval of a governmental committee. See
Item 5B  Operating and Financial Review and Prospects  Liquidity and
Capital Resources  Government and Other Grants for additional information
about these programs of the Office of the Chief Scientist.

The tax benefits to which we are
currently entitled require us to meet several conditions and may be terminated or reduced
in the future, which would increase our taxes.

We
are entitled to certain government programs and tax benefits, particularly as a result of
the Approved Enterprise status of most of our existing facilities. If we fail
to meet eligibility conditions in the future, the tax benefits could be reduced or
canceled.

For
more information about Approved Enterprises, see Item 5B  Liquidity and
Capital Resources  Effective Corporate Tax Rates in Israel below and Note 5a
to the financial statements incorporated by reference into this Annual Report.

It may be difficult to enforce a
U.S. judgment against us, our officers and directors and our Israeli auditors or to
assert U.S. securities law claims in Israel.

Service
of process upon our directors and officers and our Israeli auditors may be difficult to
effect in the United States because all these parties reside outside the United States.
Any judgment obtained in the United States against such parties may not be collectible in
the United States.

It
may be difficult to assert U.S. securities law claims in original actions instituted in
Israel. Israeli courts may refuse to hear a claim based on a violation of U.S. securities
laws because Israel is not the most appropriate forum to bring such a claim. In addition,
even if an Israeli court agrees to hear a claim, it may determine that Israeli law and not
U.S. law is applicable to the claim. If U.S. law is found to be applicable, the content of
applicable U.S. law must be proved as a fact, which can be a time-consuming and costly
process. Certain matters of procedure will also be governed by Israeli law. There is
little binding case law in Israel addressing these matters.

20

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However,
subject to time limitations, Israeli courts may enforce a U.S. judgment in a civil matter,
if:

| |  | adequate
 service of process has been  effected  and the  defendant  has had a reasonable
 opportunity  to be               heard;
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment and its enforcement  are not contrary to the law, public policy,  security or
sovereignty of the               State of Israel;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
 judgment  was  rendered by a court of competent  jurisdiction,  in  compliance  with due
process and the               rules of private international law prevailing in Israel;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
judgment  was not obtained by  fraudulent  means and does not conflict  with any other
valid  judgment in               the same matter between the same parties;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | no
action  between  the same  parties  in the same  matter is pending  in any  Israeli
 court at the time the               lawsuit is instituted in a U.S. court; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
U.S. courts are not prohibited from enforcing judgments of the Israeli courts.
| | - | ----------------------------------------------------------------------------------

Provisions
of Israeli law may delay, prevent or make an acquisition of us more difficult, which could
depress our share price.

The
Israeli Companies Law generally requires that a merger be approved by the board of
directors and a majority of the shares voting on the proposed merger. Upon the request of
any creditor of a party to the proposed merger, a court may delay or prevent the merger if
it concludes that there is a reasonable concern that, as a result of the merger, the
surviving company will be unable to satisfy its obligations. In addition, a merger may
generally not be completed unless at least (i) 50 days have passed since the filing of the
merger proposal with the Israeli Registrar of Companies and (ii) 30 days have passed since
the merger was approved by the shareholders of each of the parties to the merger.

Also,
in certain circumstances 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 become a 25%
or greater or 45% or greater shareholder of the company (unless there is already a 25% or
greater or a 45% or greater shareholder of the company, respectively). If, as a result of
an acquisition, the acquirer would hold more than 90% of a companys shares, the
acquisition must be made by means of a tender offer for all of the shares.

The
described restrictions could prevent or make more difficult an acquisition of Orckit,
which could depress our share price.

Risks Relating to the Ownership of
our Ordinary Shares

Holders
of our ordinary shares who are U.S. residents face certain income tax risks. In any tax
year, we could be deemed a passive foreign investment company, which could result in
adverse U.S. federal income tax consequences for U.S. holders of our ordinary shares.

Based
on the composition of our gross income and the composition and value of our gross assets
during 2007, it is likely that we would be deemed to have been a passive foreign
investment company, or PFIC, for U.S. federal income tax purposes during 2007. For each of
2005 and 2006, we believe that we would not be deemed to have been a PFIC in either of
those years, although it is likely that we would be deemed to have been a PFIC in each of
2003 and 2004. There can be no assurance that we will not be deemed a PFIC for any future
tax year in which, for example, the value of our assets, as measured by the public market
valuation of our ordinary shares, declines in relation to the value of our passive assets
(such as cash, cash equivalents and marketable securities). If we are a PFIC for any tax
year, U.S. holders of our ordinary shares during such year may be subject to increased
U.S. federal income tax liabilities and reporting requirements for such year and
succeeding years, even if we are no longer a PFIC in such succeeding years.

21

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U.S.
          residents should carefully read Item 10.E Taxation  United States
          Federal Income Tax Considerations for a more complete discussion of the
          U.S. federal income tax risks related to owning and disposing of our ordinary
          shares and the consequences of PFIC status.

# We do not intend to pay
cash dividends.

We
have never declared or paid any cash dividends on our ordinary shares. We currently intend
to retain future earnings, if any, for funding growth. Accordingly, we do not expect to
pay any cash dividends in the foreseeable future.

Two
shareholders who are also our senior officers may be able to control us.

As
of March 31, 2008, Eric Paneth, our Chairman and Chief Executive Officer, and Izhak Tamir,
our President, each beneficially owned an aggregate of 1,679,267 ordinary shares
representing 10.0% of our outstanding ordinary shares, including 480,000 ordinary shares
issuable upon the exercise of options that are currently vested, of which 60,000 options
have no exercise price and 420,000 options have an exercise price of $27.14.

Each
of Mr. Paneth and Mr. Tamir is an executive officer and member of our Board of Directors.
Currently, Messrs. Paneth and Tamir are not party to a shareholders agreement. However, if
Messrs. Paneth and Tamir act together, they may have the power to control the outcome of
matters submitted for the vote of shareholders, including the approval of significant
change in control transactions. The equity interest in Orckit of Mr. Paneth and Mr. Tamir
may make certain transactions more difficult and result in delaying or preventing a change
in control of us unless approved by one or both of them.

Our shareholder bonus rights plan,
the potential exchanges of Corrigent options for Orckit options and the super-majority
voting requirements in our articles of association may delay, prevent or make more
difficult a hostile acquisition of us, which could depress our share price.

In
November 2001, we adopted a shareholder bonus rights plan pursuant to which share purchase
bonus rights were distributed to our shareholders. These rights generally will be
exercisable and transferable apart from our ordinary shares only if a person or group
acquires beneficial ownership of 15% or more of our ordinary shares, or commences a tender
or exchange offer upon consummation of which that person or group would hold such a
beneficial interest. Once these rights become exercisable and transferable, the holders of
rights, other than the person or group triggering their transferability, will be generally
entitled to purchase our ordinary shares at a discount from the market price. The rights
will expire on December 31, 2011. While these rights remain outstanding, they may make an
acquisition of us more difficult and result in delaying or preventing a change in control
of Orckit.

22

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In
addition, pursuant to a plan approved by our shareholders at our Annual General Meeting in
June 2005, we were permitted to offer holders of vested options to purchase Corrigent
common stock at a price of $0.01 per share the opportunity to exchange those options for
vested options to purchase our ordinary shares at a price of $0.01 per share. The
Corrigent options had been issued to employees and directors of Corrigent and Orckit.
Based on the terms of the plan, the number of remaining options for our ordinary shares
that could be issued in future exchange for options to purchase Corrigent shares is
approximately 500,000. If future exchanges are made based on the assumption that the fair
values of Orckit and Corrigent shares are equal, then the exchanges of Corrigent options
for options to purchase Orckits ordinary shares would result in an expense in our
financial statements to the extent that the fair value of Orckit shares exceeds the fair
value of Corrigent shares at the time of exchange.

The
issuance of our shares to holders of Corrigent options could also delay or prevent a
change of control in our company. In addition, our articles of association require the
approval of the holders of at least 75% of our ordinary shares voting on the matter to
remove a director from office and the approval of at least two-thirds of our ordinary
shares voting on the matter to elect a director. These requirements could also delay or
prevent a change of control of our company.

Our
stock price has fluctuated significantly and could continue to fluctuate significantly.

The
market price for our ordinary shares, as well as the prices of shares of other technology
companies, has been volatile. Between January 1, 2005 and March 31, 2008, our share price
has fluctuated from a low of $4.60 to a high of $31.22. The following factors may cause
significant fluctuations in the market price of our ordinary shares:

| |  | fluctuations
in our quarterly revenues and earnings or those of our competitors;
| | - | --------------------------------------------------------------------------------

| |  | shortfalls
in our operating results compared to levels forecast by securities analysts;
| | - | ---------------------------------------------------------------------------------------

| |  | announcements
concerning us, our competitors or telephone companies;
| | - | --------------------------------------------------------------------

| |  | announcements
concerning our customers;
| | - | ---------------------------------------

| |  | announcements
of technological innovations;
| | - | -------------------------------------------

| |  | the
introduction of new products;
| | - | ---------------------------------

| |  | changes
in product price policies involving us or our competitors;
| | - | ------------------------------------------------------------------

| |  | market
conditions in the industry;
| | - | ----------------------------------

| |  | the
conditions of the securities markets, particularly in the technology and Israeli sectors;
and
| | - | -------------------------------------------------------------------------------------------------

| |  | political,
economic and other developments in the State of Israel and world-wide.
| | - | ---------------------------------------------------------------------------------

23

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---

In
addition, stock prices of many technology companies fluctuate significantly for reasons
that may be unrelated or disproportionate to operating results. The factors discussed
above may depress or cause volatility of our share price, regardless of our actual
operating results.

Our quarterly results of
operations, including revenues, profit and loss and cash flow, have fluctuated
significantly in the past, and these fluctuations are expected to continue in 2008 and
beyond. Fluctuations in our results of operations may disappoint investors and result in a
decline in our share price.

We
have experienced and expect to continue to experience significant fluctuations in our
quarterly results of operations. In some periods, our operating results may be below
public expectations or below revenue levels and operating results reached in prior
quarters or in the corresponding quarters of the previous year. If this occurs, the market
price of our ordinary shares could decline. The following factors have affected our
quarterly results of operations in the past and are likely to affect our quarterly results
of operations in the future:

| |  | size
and timing of orders, including order deferrals and delayed shipments;
| | - | ---------------------------------------------------------------------------

| |  | launching
of new product generations;
| | - | -------------------------------------

| |  | length
of approval processes or market testing;
| | - | -----------------------------------------------

| |  | technological
changes in the telecommunications industry;
| | - | ---------------------------------------------------------

| |  | accuracy
of telecommunication  company,  distributor and original equipment  manufacturer
 forecasts of their               customers' demands;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| |  | changes
in our operating expenses;
| | - | ----------------------------------

| |  | the
timing of approval of government research and development grants;
| | - | ---------------------------------------------------------------------

| |  | disruption
in our sources of supply;
| | - | ------------------------------------

| |  | competitive
pricing pressures;
| | - | ------------------------------

| |  | funding
required for our operations;
| | - | ------------------------------------

| |  | general
economic conditions;
| | - | ----------------------------

| |  | terms
 and  conditions  of supply  agreements  with our  customers  and their  impact on our
 recognition  of               revenues from these agreements;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | determination
of the fair value (also known as vendor-specific objective evidence) of some of the
services we provide, as well aschanges in our revenue recognition practice as a
result of changes in the commercial terms between us and our customers;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | determination
of the fair value of the conversion feature in our convertible notes;
| | - | -----------------------------------------------------------------------------------

24

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---

| |  | timely
payments of receivables by customers; and
| | - | ------------------------------------------------

| |  | changes
in payment terms between us and our suppliers which could accelerate the timing of
payments by us and negatively affect our working capital and cash balances.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

Therefore,
the results of any past periods may not be relied on as an indication of our future
performance.

Our actual financial results might
vary from our publicly disclosed financial forecasts.

From
time to time, we publicly disclose financial forecasts. Our forecasts reflect numerous
assumptions concerning our expected performance, as well as other factors which are beyond
our control and which might not turn out to be correct. As a result, variations from our
forecasts could be material. Our financial results are subject to numerous risks and
uncertainties, including those identified throughout this Risk Factors section
and elsewhere in this Annual Report. If our actual financial results are worse than our
financial forecasts, the price of our ordinary shares may decline.

There may be an adverse effect on
the market price of our shares as a result of shares being available for sale in the
future.

If
our shareholders sell substantial amounts of our ordinary shares, including shares issued
upon the exercise of outstanding options or pursuant to the exchange of options to
purchase Corrigent shares for options to purchase Orckit shares, the market price of our
ordinary shares may fall. These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and place that we deem
appropriate.

Our ordinary shares are listed for
trading in more than one market and this may result in price variations.

Our
ordinary shares are listed for trading on the Nasdaq Global Market, or Nasdaq, and on The
Tel-Aviv Stock Exchange, or TASE. Trading in our ordinary shares on these markets is made
in different currencies (U.S. dollars on Nasdaq and NIS on TASE), and at different times
(resulting from different time zones, different trading days and different public holidays
in the United States and Israel). Actual trading volume on the TASE is generally lower
than trading volume on Nasdaq, and as such could be subject to higher volatility. The
trading prices of our ordinary shares on these two markets often differ, resulting from
the factors described above, as well as differences in exchange rates. 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
are subject to ongoing costs and risks associated with complying with extensive corporate
governance and disclosure requirements.

As
a foreign private issuer subject to U.S. federal securities laws, we spend a significant
amount of management time and resources to comply with laws, regulations and standards
relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act
of 2002, SEC regulations and Nasdaq rules. Section 404 of the Sarbanes-Oxley Act requires
managements annual review and evaluation of our internal control over financial
reporting and attestations of the effectiveness of these controls by our management and by
our independent registered public accounting firm. There is no guarantee that these
efforts will result in management assurance or an attestation by our independent
registered public accounting firm that our internal control over financial reporting is
adequate in future periods. In connection with our compliance with Section 404 and the
other applicable provisions of the Sarbanes-Oxley Act, our management and other personnel
devote a substantial amount of time, and we may need to hire additional accounting and
financial staff, to assure that we continue to comply with these requirements. The
additional management attention and costs relating to compliance with the Sarbanes-Oxley
Act and other corporate governance requirements could materially and adversely affect our
financial results.

25

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

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

# Our History

Orckit
Communications Ltd. was incorporated in 1990 under the laws of the State of Israel. Our
principal executive offices are located at 126 Yigal Allon Street, Tel Aviv 67443 Israel
and our telephone number is (972-3) 6962121. Our agent in the United States, Puglisi
Associates, is located at 850 Library Avenue, Suite 204 Newark, Delaware 19711.

We
were originally engaged in the development of various products based on digital subscriber
line technology. For several years ending in 2003, our primary business was the sale of
asymmetric digital subscriber line, or ADSL, products. We incurred significant operating
losses in connection with the sale of these products and we no longer sell these products.
Since 2001, we have invested significant funds in other technology products, mainly for
new telecom equipment products addressing high transmission of data for the metropolitan
area. We began to recognize revenues from sales of these products in 2004.

# Major Developments since
January 1, 2007

We
continued in 2007 to direct our resources to the development and marketing efforts related
to our technology and products that address the need for solutions capable of supporting
very high bandwidth services. We are in the process of developing and commercializing the
CM-4000 product lines, which consist of telecommunications equipment supporting high
bandwidth services over fiber networks in telecommunications networks located in
metropolitan, or metro, areas. In 2007, we continued, though to a lesser extent, to sell
our CM-100 product to KDDI in Japan for their national deployment of a metropolitan area
network that carries new IP-based services, including high-definition TV, or HDTV,
cellular network transmissions, Internet access and voice over IP, or VoIP. These
services, if carried over a single network, are also known as quadruple play
services. Substantially all of our operating expenses in 2007 were related to our efforts
to develop and market the CM-100 and CM-4000 product lines. Our CM-4000 product line was
first announced in early 2007 and commercial availability is expected in 2008. The CM-4000
offers significantly higher bandwidth support, greater Ethernet user interface density and
a wider range of services compared with the CM-100.

In
March 2007, we issued convertible notes denominated in NIS in the aggregate principal
amount of approximately $25.8 million (based on the exchange rate at the time of the
issuance), resulting in net proceeds to us of approximately $25.0 million. The notes bear
interest at the rate of 6% and are linked to the Israeli CPI. The notes are due in March
2017, and are subject to the right of the holders to request early repayment in March
2012. As of March 31, 2008 the indexed principal amount of our debt obligation under the
convertible notes was approximately $31.2 million (based on the U.S. Dollar/New Israeli
Shekel exchange rate at March 31, 2008).

The
notes are convertible at the election of the holders into our ordinary shares at the
initial conversion price of NIS 52.50 per share (approximately $14.78, based on the
exchange rate at March 31, 2008) if the conversion occurs by March 10, 2010 and at the
initial conversion price of NIS 63.00 per share (approximately $17.73, based on the
exchange rate at March 31, 2008) if the conversion occurs thereafter, in each case subject
to adjustment for customary events. We have a right to force conversion of the notes if
the market price of our ordinary shares exceeds $30 per share, subject to certain dilution
adjustments, in any 20 trading days within a period of 30 consecutive trading days at the
conversion price then in effect.

In
early 2008, our CM-100 and CM-4000 product lines were selected by Media Broadcast Gmbh as
a network infrastructure building block for network solutions deployed by Deutsche
Telekoms wholesale business unit, and leased to a leading cable operator in Germany.
Deployments are expected to begin in 2008, with a rollout expected over the next few
years.

26

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# Principal Capital
Expenditures

Our
principal capital expenditures to date have been the purchase of equipment and other
software tools in Israel used in our business. These purchases totaled $1.9 million in
2005, $910,000 in 2006 and $613,000 in 2007. We used internal resources to finance these
capital expenditures.

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

# General

We
develop, market and sell telecommunication transport equipment capable of supporting the
growing capacity demands for high bandwidth video services, including HDTV, Internet
Protocol television, or IPTV, and video on demand, or VOD, interactive television
(together known also as video services), as well as other types of data
services and voice services, whether transmitted over wireline or cellular networks, in
metropolitan networks. Our target customers are telecommunications service providers
active in metropolitan areas, with a focus on incumbent local exchange carriers.

Our
CM-100 product line is designed to enable the provision and management of data and voice
transport services in an efficient manner that is expected to reduce the costs of
transport service providers. Supporting fiber-optic infrastructures, the CM-100 supports a
wide range of interfaces for video, data and voice.

The
CM-4000 is our higher end product line in the Ethernet transport area. It is expected to
be commercially available in 2008. It provides multi-service capabilities and reliability
similar to the CM-100, while offering higher bandwidth support, greater Ethernet user
interface density and a wider range of services compared to the CM-100.

Our
CM-100 and CM-4000 metropolitan product lines are optical transport solutions that are
designed to handle not only the growing demand for video and data services by telephone
company customers and small to medium size businesses, but also support most traditional
voice services, in compliance with the technical specifications required by existing
synchronous voice transmission on optical media, or SONET or SDH. The CM-100 and CM-4000
product lines are designed to provide the benefits of both Ethernet and SONET (or SDH)
protocols. The product lines are also designed to avoid integrating costly
protocol-dependant routing and switching functionalities that are generally required in
adapting SONET platforms to support data traffic, as well as the costs of adapting
additional Ethernet platforms to handle packet-based traffic.

We
focus on the need of metropolitan area networks designed in a ring configuration that
primarily addresses a transmission capacity of 10 or more Gigabits per second, or Gbps. A
majority of metropolitan area rings are currently operating at a capacity of 2.5 Gbps or
below because they were primarily designed to address voice traffic and, since 1998, to
support high speed Internet connection services. It is expected that as new HDTV video and
data services emerge, both for residential and small business enterprises, there will be
an increased need to expand capacity of the metro ring.

27

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---

The
CM-100 product line was first delivered for commercial deployment in 2004. In 2004, this
product was selected for commercial deployment by KDDI Corporation in Japan, a major
telecom carrier in Japan. Sales in Japan are made through distributors. Sales to KDDI
accounted for approximately 99.8% of our revenues in 2005, 97.2% of our revenues in 2006
and 99.3% in 2007. KDDI has deployed the CM-100 product line as part of a nation-wide
build up in Japan of an advanced metro network that is expected to carry quadruple
play services.

In
2007, we also continued our marketing efforts through offices in Israel, Korea, the United
States and India. We expect that in the next several years telecommunication carriers in
Asia will invest in the expansion of their metropolitan area networks and will evaluate
solutions that significantly enhance the delivery and support of quadruple play services.

In
2007, we began sales and marketing efforts in select markets in Europe through our
corporate offices in Tel Aviv, Israel. We expect our product lines to offer benefits to
carriers in these markets as they are in the early phases of implementing high-bandwidth
networks for TV and video services.

In
early 2008, our CM-100 and CM-4000 product lines were selected by Media Broadcast Gmbh as
a network infrastructure building block for network solutions deployed by Deutsche
Telekoms wholesale business unit, and leased to a leading cable operator in Germany.
First deployments are expected to begin in 2008.

# Metro Transport Telecom
Markets, Technology and Products

The Metro Transport
Market

The
fiber optic networks of many telecommunications companies in metropolitan areas are
experiencing a shift from carrying primarily voice traffic to carrying a growing mix of
data, video and voice traffic. Data transmissions are based on internet protocol, or IP,
and carry services such as voice over IP, or VoIP, Internet access, and various video
services. Video services include broadcasting streaming video and multicasting streaming
video that is either identical or can be differentiated by subscriber choice, either at
standard definition capacity or at HDTV capacity. In addition, these services include
transmission of all of these services over a cellular network to advanced handheld devices
over third generation, or 3G and 3.5G, cellular networks. Data traffic volumes carried
over these metropolitan area networks are surpassing voice traffic volumes. Data traffic
is forecasted for further growth over the coming years. This increase in data relative to
voice traffic is mainly a result of the rapid growth of the Internet, video services and
local area networks.

Offerings
to consumers of high speed data services at rates of up to 100 mega-bits per second, or
Mbps, have reached millions of subscribers in a number of Asian markets, including Japan
and Korea. These services are offered either over fiber connections or a combination of
fiber and fast access technologies, such as ADSL release 2, very high speed digital
subscriber line, or VDSL, and VDSL release 2, wireless or cable networks. Similar
expansion of fiber to the premises and fiber to the curb has reached millions of
subscribers in the United States as well. Connecting subscribers with fiber is expected to
allow for significantly higher speed services, mainly data and video services and, as a
result, will require an upgrade of metro telecom equipment with technologies that enable
very high speed transmissions of data services over fiber networks.

28

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The
main driver for growth of data traffic is the adoption of new video services by consumers.
Services such as video-on-demand, HDTV, catch-up TV, and Internet-TV are posing new
requirements on service providers networks in terms of bandwidth scaling and quality
of service. Video services require peak bandwidth capacity on orders of magnitude higher
than deployed for Internet access services, but only at certain hours of the day.
Additionally, video services have different characteristics than internet access and voice
services. Video services are sensitive to jitter, loss and delay. In addition, existing
mechanisms to insure quality of service that were developed to address traditional
services are insufficient for HDTV and other new video services. Our CM product line was
designed to address these requirements for the delivery of video services to consumers.

Telecommunication
companies have typically managed their data transfer capacity needs through their existing
metro transport technologies. These technologies were originally designed for transporting
voice services. These traditional solutions, however, are not designed to support high
levels of data services traffic. Traditional networks are also inefficient when
transporting data as they fail to utilize inherent differences in the type of network
support that is required for the transmission of data traffic. Data traffic is generally
less susceptible to corruption resulting from minor time delays and less time-sensitive
than voice traffic. In addition, the flow of data traffic is often characterized by rapid
bursts, with dynamically varying levels of utilization of communication channels, as
opposed to the flow of voice traffic, which has characteristically constant levels of
channel utilization. Most of the metropolitan area networks are based on transmission
equipment that is limited to transmission capacities of 2.5 Gbps and below.
Telecommunications carriers are expected to upgrade their metro networks over the next few
years to be able to support transmission capacities of 10 or more Gbps in order to better
support high bandwidth data services.

A
range of new solutions is being developed to address the need of carriers and service
providers to be able to support higher levels of data traffic within and between
metropolitan areas, commonly referred to as metro transport. One type of solution,
consisting of a router or switch that transports packets of data, focuses on the
characteristics of data traffic without supporting high-rate time division multiplexing,
or TDM, circuit services that meet the stringent timing requirements needed for some
legacy services. In this type of solution, data services and legacy services are
transmitted and maintained in different metro networks. Another type of solution attempts
to take advantage of the characteristics of data traffic while continuing to support
traditional voice traffic over a converged metro network. We offer this second type of
solution that offers transmission capacities of 10 Gbps and higher, and supports
transmission of both packets of data and traditional circuit-based voice and data services
over the same network. Data services supported include the transmission of a range of
video services, whether in standard or HDTV mode, as well as over cellular networks. We
expect that the metro transport solution for the transmission of traditional voice and
increased data traffic will combine the efficient transport of data services based on
Ethernet protocol with high reliability voice services based on SONET/SDH protocol.

Major
metro transport technologies include the following voice and/or data protocols:

SONET
/ SDH. SONET is the American National Standards Institute, or ANSI, standard for
synchronous voice transmission on optical media. The international equivalent of SONET is
synchronous digital hierarchy, or SDH. Together, these two voice protocols ensure
standards to enable digital networks to interconnect internationally and existing
conventional transmission systems to utilize fiber with the help of interfaces that
connect network end-users, called tributary attachments.

29

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Ethernet.
          Ethernet is the most widely-installed local area network, or LAN, technology.
It           is often used incollege dormitoriesand office buildings. The
          most commonly installed Ethernet systems are called 10BASE-T and provide
          transmission speeds up to 10 Mbps. In recent years, through development of new
          protocols and technologies, Ethernet has evolved to become the standard
          interface of choice for new deployments in the Wide Area Network, or WAN, as
          well. In particular, new protocols that improve carriers fault management
          and performance management of Ethernet-based networks have been introduced.

RPR.
Resilient packet ring, or RPR, is a technology that is designed to           integrate
Ethernet data protocols for the efficient transmission of data with           traditional
SONET voice protocols. An industry standard for RPR, IEEE 802.17,           was completed
and approved in 2004, and an amendment known as IEEE 802.17b was           completed and
approved in 2007. We have been instrumental in establishing this           standard,
serving actively as a member of the industry working group charged           with
defining the RPR protocol.

Multiprotocol
Label Switching. Multiprotocol label switching, or MPLS, is a standards-approved
technology for speeding up network traffic flow and making it easier to manage. MPLS
involves setting up a specific path for a given sequence of packets, identified by a label
put in each packet, thus saving the time needed for a router to look up the address to the
next node to forward the packet to. MPLS is called multiprotocol because it works
with the Internet Protocol, or IP, Asynchronous Transport Mode, or ATM, and frame relay
network protocols. In addition to moving traffic faster overall, MPLS makes it easy to
manage a network for quality of service, or QoS. For these reasons, MPLS is gradually
being adopted as networks begin to carry more and different mixtures of traffic.

Pseudo
Wire Emulation.  Pseudo wire emulation, or PWE, is a standards-approved
technology for mapping different services over packet switched networks, such as MPLS. A
pseudowire emulates a point-to-point link, and provides a single service which is
perceived by its user as an unshared link or circuit of the chosen service, and can be
used as a convergence layer for multi-service systems.

CM-100 Product

Our
CM-100 metropolitan product line is an optical transport solution that can handle not only
the growing demand for data services by telephone company customers and small to medium
size businesses, but also support the full range of traditional voice services, in
compliance with SONET/SDH technical specifications. The CM-100 product line is designed to
provide the benefits of both Ethernet and SONET/SDH protocols. It is also designed to
avoid integrating costly protocol-dependant routing and switching functionalities that are
generally required in adopting SONET platforms to cover data traffic, as well as the costs
of adopting Ethernet platforms to handle voice traffic.

The
CM-100 product line utilizes SONET/SDH, RPR, PWE and MPLS technologies to effectively
support a range Ethernet and Time Division Multiplexing, or TDM, services that are
commonly used for voice transmissions and other data services. Data services supported
include video services, whether standard or HDTV streams, in a broadcasting or
multicasting mode, that allows for broader customization of transmission based on a
customers selection. This product line is designed to work with both legacy
SONET/SDH and emerging MPLS core devices. The CM-100 product can support transmission
capacities of up to 10 Gbps and interfaces with:

30

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| | 10
megabit/100 megabit Ethernet;
|- | --------------------------------

| | 1
Gigabit Ethernet;
|- | -------------------

| | 10
Gigabit Ethernet; and
|- | ------------------------

| | a
range of TDM SONET interfaces including:
|- | ------------------------------------------

| | n | 1.544
Mbps Plesiochronous (PDH) interface (known also as T1) and 2.048 megabits per second PDH
interface (known also as E1);
| | - | ----------------------------------------------------------------------------------------------------------------------------

| | n | 44.736
Mbps Plesiochronous (PDH) interface (known also as DS3);
| | - | ---------------------------------------------------------------

| | n | 155
Mbps SONET/SDH interface (known also as OC3/STM-1) Clear Channel and Channelized;
| | - | -------------------------------------------------------------------------------------

| | n | 622
Mbps SONET interface (known also as OC12/STM-4); and
| | - | --------------------------------------------------------

| | n | 2.5
gigabit per second SONET interface (known also as OC48/STM-16).
| | - | -------------------------------------------------------------------

The
CM-100 product line is designed to deliver both Ethernet and TDM (SONET/SDH) based
services over a packet-based network. These services are carried over MPLS pseudowires
over an RPR ring in a packetized form that is designed for both bandwidth efficiency and
lower cost architecture. The CM-100 allows legacy data services, such as frame relay,
asynchronous transfer mode, or ATM, and packet over SONET, to be carried in their native
form allowing a reduction in the bandwidth used to provide these services. MPLS is used to
provide both end-to-end automatic provisioning capabilities and isolation between
different users services, thus providing a preferred method of traffic engineering.
MPLS also aids end-to-end interoperability between the transport systems of different
vendors.

In
2008, we expect to continue the development of additional software features for the CM-100
product line, to support customer requirements and address emerging quadruple
play service applications, that is, a bundled service offering by telecom carriers
to residential subscribers which is comprised of voice services, Internet connection and a
range of video and other media services that address high transmission rates (typically of
10 Mbps and beyond), all over IP protocols. Quadruple play also supports cellular services
of the third generation, or 3G and 3.5G, carried over IP networks that include
video transmission over the cellular network.

31

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CM-4000 Product

Our
CM-4000 product line was first announced in early 2007, with commercial availability
expected in 2008. The CM-4000 is our high capacity product line in the packet transport
area. It provides multiservice capabilities and reliability similar to the CM-100. The
CM-4000 offers higher bandwidth support, greater Ethernet user interface capacity and a
wider range of services compared to the CM-100. It is based on a 320 Gbps non-blocking
switching architecture, scalable to 640 Gbps, and provides high scalability of services
and service rates.

The
CM-4000 product line builds on our industry-leading packet transport technology, and
supports a mix of data and TDM interfaces ranging from tens of Megabits to tens of
Gigabits, through the introduction of advanced bonding technologies. It supports a range
of classes of service and service aware traffic management, as well as high rate
interfaces for Ethernet and for SONET services.

We
believe that our CM-4000 switches address the needs for next-generation carrier
ethernet transport, or CET, with a cost-effective combination of Ethernet,
TDM and intelligent video processing. Our solution is designed to ensure service
quality and availability, while enabling a  reduction of capital and operating
expenses. Using CM-4000 switches enables a customer to achieve network
convergence with a plug-and-play network management system, or NMS, that easily
interacts with operating support system, or OSS, service applications. The CM-4000 is
a high-capacity MPLS-based carrier Ethernet transport switch providing high service
availability and scalability, and simplified end-to-end point-and-click
management through its service/application-oriented CM-view NMS.

Our
CM-4000 product line includes the CM-4314 and CM-4206 systems, which provide non-blocking
switching capacity of 320 Gbps, scalable to 640 Gbps, and 160 Gbps, scalable to 320 Gbps.
It provides in-service scalability of network-side links to up to 100 Gbps through
advanced link bonding technologies. It can be deployed in any topology, including ring,
mesh and tree, over one or multiple 10 Gbps wavelengths. The following interfaces are
expected to be supported on the CM-4000:

| | 10
megabits/100 megabits Ethernet;
|- | ----------------------------------

| | 1
Gigabit Ethernet;
|- | -------------------

| | 10
Gigabit Ethernet;
|- | --------------------

| | OC-192
10 Gigabit Resilient Packet Ring; and
|- | --------------------------------------------

| | Rate
and Protocol configurable SONET/SDH at OC-3/STM-1,       OC-12/STM-4, OC-48/STM-16
|- | ---------------------------------------------------------------------------------------

By
cost-effectively enabling a mix of Ethernet and TDM traffic over the same network
infrastructure, the CM-4000 secures service providers investment, enabling
deployment of advanced residential multi-play and business Ethernet services, together
with traditional TDM services, and the means to gradually migrate them to Ethernet through
interworking technologies.

32

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---

Our
CM-4000 was designed to efficiently deliver a mix of TDM and advanced packet services over
a single, converged transport infrastructure. It offers a designed application and
service-aware traffic management scheme, that provides end-to-end performance during
congestion, and enables dynamic bandwidth reclamation and optimal bandwidth utilization
for the delivery of the following packet and TDM services:

| | E-Line,
E-Tree and E-LAN services with differentiated quality of service, or QoS,
application-aware classification and Service Level Agreement, or SLA, guarantee;
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Ethernet
virtual private line, or EVPL, and virtual private LAN services, or VPLS;
|- | ----------------------------------------------------------------------------------

| | SONET/SDH
to Ethernet interworking;
|- | -----------------------------------

| | A
full range of TDM private line services; and
|- | ----------------------------------------------

| | Non-blocking
SONET/SDH low-order and high-order cross connect.
|- | --------------------------------------------------------------

These
services enable the delivery of end-user applications such as multi-play (VoIP, broadcast
video, VoD, shifted TV, network private video recorder, or nPVR, high speed internet
access, or HSI), business Ethernet, 3.5G/4G wireless backhaul and on-demand content
distribution. They also facilitate the migration towards all-IP by providing a viable path
to convergence through the introduction of SONET/SDH to Ethernet interworking.

# Sales, Marketing and
Service

Sales
and Marketing. We market our products to telecommunication companies both directly and
indirectly through original equipment manufacturers, strategic alliances and agency and
distribution arrangements. Our direct sales and marketing efforts are carried out through
our offices in India, Israel, Japan, Korea and the United States. In addition, we believe
that our participation in technology committees involved in the establishment of industry
standards is a strong marketing tool. As of December 31, 2007, overall marketing and sales
efforts were conducted by approximately 40 employees.

The
following is a summary of revenues by geographic area for the last three years:

| |                 | Year ended December 31
| | --------------- | ----------------------
|
|
|
|
| | Japan           |                       
| | Other countries |                       
| |                 |                       
| |                 |                       
| |                 |                       
| |                 |                       

All
of our revenues from 2005 through 2007 were generated from our CM-100 metro product line,
with sales to KDDI accounting for 99.8% of our revenues in 2005, 97.2% of our revenues in
2006 and 99.3% of our revenues in 2007. We expect to depend on purchases by a very limited
number of telecommunication carriers for our product revenues.

33

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Approval
Process. Telecommunication companies are significantly larger than us and consequently
are able to exert a high degree of influence over us. Prior to selling our products to
telecommunication companies, we are required to undergo lengthy approval processes.
Evaluation can last for over one year for enhanced products or products based on newer
technologies.

The
length of the approval process is affected by a number of factors, including the
complexity of the product involved, technological and budgetary priorities of the
telecommunication companies and regulatory issues affecting telecommunication companies. A
telecommunication company will usually conduct technical trials after completing a
laboratory evaluation that tests a new products function and performance against
industry standards. After completion of technical trials, field trials simulate operations
to evaluate performance and to assess ease of installation and operation. Throughout the
approval process, we commit senior technical and marketing personnel to participate in
technology, field and market trials and to actively support the evaluation efforts.

Commercial
deployment of a new product usually involves substantially greater numbers of systems and
locations than the field trial stage. In the first phase of commercial deployment, a
telecommunications company installs the equipment in selected locations for certain
applications. This phase is followed by general deployment which involves greater numbers
of systems and locations. Telecommunications companies typically select a number of
suppliers for general deployment to ensure that their needs can be met. Subsequent orders,
if any, are placed under a single or multi-year supply agreement.

Following
selection for commercial deployment, the introduction of successive generations of
products or upgraded software versions is vital to our business, because it enhances
functionality and reduces costs. Our growth substantially depends on commercial acceptance
of advanced products and technology by telecommunication companies and acceptance of new
data services by subscribers, as well as our ability to develop new technologies and sell
new products.

Services
and Support. We offer repair services as part of our warranty services and technical
support services for our products. We usually do not offer installation services. We
expect that our local distributor or reseller will provide the first level of service and
support. More extensive repair and technical support is offered at our headquarters in
Israel pursuant to software support and hardware warranty obligations. We also offer
telephone support and provide product training to our carrier customers on a case-by-case
basis. We deliver our products to our resellers and usually they are responsible for
installations. Alternatively, in Germany, the reseller can ask us to make the
installations for an agreed price. Second level support services that address
identification and documentation of field failures are provided by our office in Japan
and, for sales in Germany, by our office in Israel.

To
date, substantially all of our CM-100 product sales are subject to a warranty and support
protection period of up to two years. This period is likely to be increased in connection
with future sales. Our warranty generally covers defects in materials or workmanship and
failure to meet published specifications, but excludes damages caused by improper use and
other express or implied warranties. In the future, based on market conditions, we may
agree to indemnify our customers in some circumstances against liability from defects in
our products or for indirect damages. In the event that there are material deficiencies or
defects in the design or manufacture of our products, the affected products could be
subject to recall. Our exposure to indirect damages arising from failures covered by our
warranty could be significant.

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Customers
and End-users. The CM-100 product line was first delivered for commercial deployment
in 2004. To date, our product has been commercially deployed by KDDI Corporation in Japan.
Recently, our CM-100 and CM-4000 product lines were selected by Media Broadcast Gmbh as a
network infrastructure building block for network solutions deployed by Deutsche
Telekoms wholesale business unit, and leased to a leading cable operator in Germany.
The frame agreement with Media Broadcast was signed in the first quarter of 2008.

Our
sales to KDDI in Japan are made pursuant to agreements and related terms of sale with OKI,
a distributor of telecom and enterprise products in Japan. We typically provide a
fourteen-month product warranty and post-contract hardware and software support services
with respect to products sold. OKI provides on-site product support services and training.
Our distribution agreement sets general distribution terms regarding any sales that are
made to targeted customers. OKI submits purchase orders for products on an as needed basis
and is not committed to purchase any specific amount of our products.

Our sales to Media Broadcast in
Germany will be made pursuant to a frame agreement that governs sales to them. We
typically will provide a two year product warranty and post-contract hardware and software
support services with respect to products sold. Media Broadcast will provide on-site
product support services and training to the end user. Our frame agreement sets general
terms regarding sales that are made to targeted customers. Media Broadcast will submit
purchase orders for products on an as needed basis and is not committed to purchase any
specific amount of products.

# Manufacturing

We
use one or two major subcontractors for component sourcing, inventory warehousing, board
assembly, testing and shipment. These contracting and manufacturing arrangements have
enabled us in the past to produce reliable, high quality products at competitive prices
and to achieve on-time delivery of our products. We expect to continue to utilize third
parties to manufacture, assemble and test our new products.

Telecommunications
company orders are short term and typically involve short delivery time frames. The
manufacture of products is mainly against purchase orders, although we are likely to order
products based on sales forecasts and also to keep certain levels of products in
inventory. We and our manufacturers perform final quality control and extensive testing
prior to shipping. Product quality and reliability are of prime concern in all phases of
the manufacturing process. Our facilities are subject to the ISO9001 certification
process. This certification is required in order to sell to many of the telecommunication
companies.

In
procuring components, we and our subcontractors rely on a number of suppliers of
semiconductor solutions that are the sole source for certain of the components. In order
to have an adequate supply of components with a long lead-time for delivery, we
periodically order significant quantities of components from single source semiconductor
component suppliers.

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# Industry Standards and
Government Regulations

Our
products must comply with industry standards relating to telecommunications equipment.
Before completing sales in a country, our products must comply with local
telecommunications standards, recommendations of quasi-regulatory authorities and
recommendations of standards-setting committees. In addition, public carriers require that
equipment connected to their networks comply with their own standards.
Telecommunication-related policies and regulations are continuously reviewed by
governmental and industry standard-setting organizations and are subject to amendment or
change. Although we believe that our products currently meet applicable industry and
government standards, we cannot be sure that our products will comply with future
standards.

We
are subject to telecom industry regulations and requirements set by telecommunication
carriers that address a wide range of areas including quality, final testing, packaging
and use of environmentally friendly components. We comply with the European
Unions Restriction of Hazardous Substances Directive that required telecom
equipment suppliers to stop the usage of some materials that are not environmentally
friendly by July 1, 2006, known as the RoHs5 regulations. Further regulations,
the RoHs6 regulations require suppliers to stop the usage of lead in solders in
telecommunication equipment. Under the directive, an extension for compliance with the
RoHs6 regulations through 2010 was granted. We expect that other countries, including
countries we operate in, will adopt similar directives or other additional regulations. We
will attempt to comply with the RoHs6 regulations by 2009.

# Competition

We
compete on the basis of technological capability, price, customer service, product
features, adherence to standards, quality, reliability, availability and technical
support. With respect to our metro products, competition is based primarily on
technological capability and the ability to develop a product that can be manufactured and
sold with a cost structure that will allow for mass deployment to customers of
telecommunication companies. Many of our competitors and potential competitors have
greater financial, technological, manufacturing, marketing and personnel resources than we
have. We also expect that companies with facilities in Asia, where engineering and
production costs tend to be lower, will increasingly provide competition to us and our
products.

The
two main competing solutions for our carrier Ethernet transport product lines are layer-3
routers and pure-play carrier Ethernet switches. Older generation SONET/SDH based
platforms cannot address the scalability requirements posed by the fast growth of video
and other data services. Layer-3 routers were the first to address the new requirements
for high bandwidth scalability. Pure-play carrier-Ethernet switches offered a similar
value proposition at a lower price. Both alternatives lack carrier-class and
transport-class characteristics required in service providers transport networks,
and do not support high capacity legacy TDM services, but may be used by service providers
deploying separate overlay networks for packet and TDM services.

Our
competitors in our targeted markets of metro and access telecom equipment are numerous and
we expect competition to increase in the future. Our principal competitors for our
products include Alcatel-Lucent, Ciena, Cisco Systems, Inc., ECI Telecom Ltd., Ericsson,
Fujitsu, Huwaei, NEC, Nortel Networks, Nokia-Siemens Networks, Tellabs and UTStarcom.

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# Intellectual Property
Rights

We
regard certain areas of technology as proprietary. We have obtained several patents and
have filed U.S. and international patent applications covering certain key areas of our
technologies. In general, we have relied on a combination of technical leadership, trade
secret, copyright and trademark law and nondisclosure agreements to protect our unpatented
proprietary know-how. Our proprietary technology incorporates algorithms, software, system
design and hardware design that we believe is not easily copied. We believe that, because
of the rapid pace of technological change in the telecommunications industry, patent and
copyright protection are less significant to our competitive position than factors such as
the knowledge, ability and experience of our personnel, new product development, market
recognition and ongoing product maintenance and support.

# Legal Proceedings

On
May 24, 2006, Bezeq  The Israeli Telecommunications Corporation Ltd. filed a lawsuit
against us in the District Court of Tel Aviv. The complaint alleges that we breached
supply undertakings regarding DSL products and services we supplied Bezeq and claims
approximately $11 million in damages. We do not supply any more DSL products or services.
We filed an answer denying the allegations in the complaint and counterclaimed for
approximately $2.2 million in damages. We believe that Bezeqs lawsuit is without
merit and intend to vigorously defend against it.

We
are not a party to any other material pending legal proceedings, nor is any of our
property the subject of any other material pending legal proceeding.

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

# List of Significant
Subsidiaries

Corrigent Systems Inc., a subsidiary,
is a Delaware corporation. As of March 31, 2008, Orckit owned almost all of the shares of
Corrigent Systems on a fully-diluted basis.

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

Our
principal offices in Tel Aviv occupy approximately 60,000 square feet of space rented
through a series of leases. Our major lease in Tel Aviv expires in December 2010. We have
an option to terminate these lease agreements with six months prior written notice.
We also maintain offices in Tokyo, Japan, Mumbai, India and Seoul, South Korea. We believe
that our offices and facilities are adequate for our current needs and that suitable
additional or substitute space will be available when needed.

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

None.

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

Statements
in this Annual Report concerning our business outlook or future economic performance,
anticipated revenues, expenses or other financial items, introductions and advancements in
development of products, and plans and objectives related thereto, and statements
concerning assumptions made or expectations as to any future events, conditions,
performance or other matters, are forward-looking statements as that term is
defined under the United States Federal Securities Laws. Forward-looking statements are
subject to risks, uncertainties and other factors which could cause actual results to
differ materially from those stated in such statements. Factors that could cause or
contribute to such differences include, but are not limited to, those set forth under
Risk Factors in this Annual Report as well as those discussed elsewhere in
this Annual Report and in our other filings with the Securities and Exchange Commission.

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A.
          OPERATING RESULTS

Our
operating and financial review and prospects should be read in conjunction with our
financial statements, accompanying notes thereto and other financial information appearing
elsewhere in or incorporated by reference into this Annual Report.

# Overview

Orckit
was founded in 1990. We are an Israeli corporation engaged in the design, development,
manufacture and marketing of telecom equipment that enables transmission of broadband
services. Substantially all of our revenues since 2004 have been derived from the sale of
our metro products, the CM-100 product line, to KDDI. Our historical revenues through
December 31, 2003 were generated primarily from the sale of systems and customer premises
modems based on digital subscriber line, or DSL, technology. We have terminated the sale
of these DSL products. We expect to generate substantially all of our revenues in 2008
from the sale of our CM-100 and CM-4000 metro product lines.

The
end-user base for our products is comprised primarily of large telecommunications
companies, and has historically been concentrated in each year among a very small number
of companies. Sales to KDDI accounted for approximately 99.8% of our revenues in 2005,
97.2% of our revenues in 2006 and 99.3% of our revenues in 2007. In early 2008, our CM-100
and CM-4000 product lines were selected by Media Broadcast Gmbh as a network
infrastructure building block for network solutions deployed by Deutsche Telekoms
wholesale business unit, and leased to a leading cable operator in Germany. Deployments
are expected to begin in 2008, with a rollout expected over the next few years. We expect
that in 2008 substantially all of our revenues will be generated by sales to KDDI and
Media Broadcast and that for the foreseeable future we will continue to experience high
customer concentration.

Our
products undergo lengthy approval and procurement processes prior to their sale due to the
quality specifications of our end-users and the regulated environment in which they
operate. Accordingly, we make significant expenditures in product and market development
prior to actually commencing sales of new products. In addition, frequently we are
required to make significant expenditures to tailor our products to specific end-user
needs during the initial commercialization phase. Our product sales to end-users are
subject to fluctuation from quarter to quarter and year to year.

We
intend to continue to evaluate new technologies and related product opportunities and
engage in extensive research and development activities related to new technologies.
Accordingly, we expect to continue to make significant expenditures for research and
development.

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Substantially
all of our operating expenses in 2007 related to research and development expenses,
selling, general and administrative expenses and capital expenditures for the operations
and support related to our CM-100 and CM-4000 product lines and related technologies.

We
generated operating losses in each of the five years prior to 2005. Our revenues were
insignificant in 2003 and the first half of 2004, as we transitioned our business from the
sale to DSL products to the sale of metro products. We began to generate revenues from
sales of our metro products in the second half of 2004. In 2005 and 2006, we recognized
revenues solely from sales of our metro products and were able to generate operating and
net income in these years, although the amount of operating and net income was
significantly lower in 2006 than in 2005. Our sales declined in the second half of 2006.
The decline in revenues accelerated in 2007 due to a significant decrease in sales to our
only significant customer. As a result, we generated operating and net losses in 2007. It
is likely that we will recognize an operating loss and a net loss in 2008.

The
telecommunications equipment market is undergoing continuous change. Companies with
research and development activities in Asia, particularly in China, are leveraging the
lower engineering cost structure and also building on the success they have had in
supplying products to telecom carriers in their local markets. In addition, Asian
equipment manufacturers have begun to make sales in commercial volumes of high-end
telecommunication equipment to carriers in Europe, Asia and the Middle East. These sales
have increased price competition in these areas. These equipment vendors have access to
lower cost research and development resources, and are able to sell their products to
government-owned local carriers. These manufacturers are likely to become strong
competitors in the markets we target. As a result, we are focusing our resources on
bringing to market highly-advanced products with innovative technology components. We also
concentrate on cost efficiencies in our design process to be able to respond to expected
price competition going forward.

Our
metro products address high-bandwidth packet services. We expect that quadruple
play services will grow and drive the demand for our metro products. However, the
growth of these services will be subject to the ability of telecom carriers to offer
services at a price that is attractive to subscribers while generating profits to the
carriers sufficient to justify a significant investment in new equipment. Our future
success will be directly affected by the ability of our customers to add subscribers for
these new data services.

# Critical Accounting
Policies and Estimates

We
prepare our consolidated financial statements in conformity with accounting principles
generally accepted in the United States. These accounting principles require management to
make certain estimates, judgments and assumptions based upon the information available at
the time they are made, historical experience and various other factors believed to be
reasonable under the circumstances. These estimates, judgments and assumptions can affect
the reported amounts of assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the periods presented. Management
evaluates its estimates and judgments on an on-going basis.

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Critical
accounting policies are those that are most important to the portrayal of our financial
condition and our results of operations, and require managements most difficult,
subjective and complex judgments, as a result of the need to make estimates about the
effect of matters that are inherently uncertain. Our most critical accounting estimates,
discussed below, pertain to revenue recognition, provision for servicing products under
warranty, inventories, fair value of financial instruments and stock-based compensation In
determining these estimates, management must use amounts that are based upon its informed
judgments and best estimates. We evaluate our estimates on an ongoing basis. We base our
estimates on historical experience and on various other assumptions that we believe are
reasonable under the circumstances. The results of these estimates form the basis for
making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under
different assumptions and conditions.

We
are also subject to risks and uncertainties that may cause actual results to differ from
estimates and assumptions, such as changes in the economic environment, competition,
foreign exchange, taxation and governmental programs. Certain of these risks,
uncertainties and assumptions are discussed in Item 3.D  Risk Factors.
To facilitate the understanding of our business activities, described below are certain
accounting policies that are relatively more important to the portrayal of our financial
condition and results of operations and that require managements more subjective
judgments. Please refer to Note 1 to our consolidated financial statements incorporated by
reference into this Annual Report for a summary of all of our significant accounting
policies.

Revenue recognition

Revenues
from sales of products are recognized when title passes to the customer, provided that an
appropriate form of arrangement exists, the fee is fixed or determinable and
collectibility is reasonably assured.

EITF
Issue No. 03-5, Applicability of AICPA Statement of Position 97-2 to Non-Software
Deliverables in an Arrangement Containing More-Than-Incidental Software states that
the revenue recognition guidance in Statement of Position 97-2 (SOP 97-2) also
applies to non-software deliverables, such as computer hardware, if the software is
essential to the functionality of the non-software deliverables. We applied SOP 97-2, as
amended, in our financial statements. According to SOP 97-2, revenues from sales of
software products are recognized when title passes to the customer, provided that an
appropriate form of arrangement exists, the fee is fixed or determinable, collectibility
is reasonably assured and vendor-specific objective evidence, or VSOE, of fair value for
undelivered elements exists. VSOE is typically based on the price charged when an element
is sold separately or, if an element is not sold separately, on the price established by
authorized management, if it is probable that the price, once established, will not change
before market introduction.

In
2004 through 2007, we granted post-contract hardware and software support services, or
PCS, in our sales to KDDI. The VSOE of the fair value of the PCS relating to these sales
could not be determined. The VSOE is evaluated on a case by case basis for each product. Accordingly, revenues for substantially all sales in 2004 through 2007 were
recognized ratably over the fourteen-month term of the PCS. Deferred income of $3.2
million as of December 31, 2006 represented $5.9 million of deferred revenues, less the
$2.7 million deferred cost of goods associated with these revenues. Deferred income of
$1.0 million as of December 31, 2007, represented $2.3 million of deferred revenues less
the $1.3 million deferred cost of goods associated with these revenues. The deferred
revenues and costs will be included in our statements of operations over the term of the
PCS. Applicable costs that were deferred consist of (a) cost of components used in
manufacture and assembly, (b) subcontractors fees for component procurement, manufacture,
assembly, testing, shipment and final testing, (c) expenses related directly to
operational activities: salaries of manufacturing planning, support, procurement
personnel, premises lease and related expenses of those departments, travel expenses of
those employees, related expenses of subcontractors and depreciation of equipment used in
the testing process, (d) expenses addressing Post Contract Services of level 3
and maintenance services including provisions for salary and travel expenses, (e)
warranty provisions for hardware repair, and (f) OCS royalties on products sold.

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We
do not expense these costs upon product delivery since these expenses are costs of the
products and, therefore, until the revenues from the sale of the corresponding products
are recognized, these costs should not be expensed. We offset these cost of goods sold
against the corresponding deferred revenues rather than presenting these deferred costs as
an asset. We use this presentation because the products have been delivered to the
customer, title has passed to the customer and we deferred the gross margin to be
recognized in future periods.

We
expect to recognize deferred revenues ratably over the applicable PCS period. If we are
able to determine the VSOE relating to the PCS services, we will be required to recognize
the balance of deferred income, including the related deferred revenues and deferred
expenses, with respect to the same deliveries for which VSOE was determined, at one time
on a current basis.

Under
GAAP, we may be required to change our revenue recognition practice, including the method
by which we recognize revenues over the applicable PCS period, if there are changes in the
commercial terms of sales to our customers relating to the scope of product and service
deliveries and payment terms, as well as because of changed commercial terms with our
resellers and distributors. Depending on the amount of our deferred income, this type of
change could have a material effect upon our results of operations.

Provision for servicing
products under warranty

Sales
of our metro products to KDDI are subject to warranty for a period of fourteen months. We
provide an estimate for warranty expense at the time revenues from the related sales are
recognized. The annual provision for warranty is calculated as a percentage of the sales,
based on historical experience, or where historical experience is not available, based on
management estimates for expenses which may be required, to cover the amounts necessary to
settle product-related matters existing as of the balance sheet date and which may arise
during the warranty period.

The
amount of our estimated warranty liability may change if the costs incurred due to product
failures increase in the future and exceed our estimates. In the event of any future
problems with our products, we may need to increase the amount of our reserves.

Inventories

Inventories
are stated at the lower of cost or market value. Cost is determined using the moving
average cost method for raw materials and on the basis of direct manufacturing costs
for finished products. We periodically evaluate the quantities on hand relative to current
and historical selling prices and historical and projected sales volume and technological
obsolescence. Based on these evaluations, inventory write-offs and write-down provisions
are provided to cover risks arising from slow moving items, technological obsolescence,
excess inventories, discontinued products and for market prices lower than cost. We wrote
off and wrote down inventory in a total amount of $0 in 2005, $940,000 in 2006 and
$960,000 in 2007.

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Fair value of financial
instruments

We
determined that the conversion feature of our convertible notes is an embedded derivative.
According to FAS 133  Accounting for Derivative Instruments and Hedging
Activities (FAS 133), if an embedded derivative is indexed to the
reporting entitys own stock and would be classified in stockholders equity if
it was a freestanding derivative, that embedded derivative is not considered a derivative
for purposes of FAS 133. Since the conversion price of the convertible notes is
denominated in NIS, while our functional currency is the U.S. dollar, this embedded
derivative would not be classified in stockholders equity as if it were a
freestanding derivative. Thus, the conversion feature is a derivative for FAS 133
purposes. Since the economic characteristics and risks of the conversion feature are not
clearly and closely related to the economic characteristics and risks of the host
contract, the convertible notes, the conversion option must be separated and measured as a
derivative.

We
measured the fair value of the conversion feature on the issuance date at approximately $5
million. The valuation methodology used the following key parameters: standard deviation,
time to expiration, the risk free rate of return and the value of the underlying asset. A
change in one of the parameters is likely to alter the valuation of the conversion
feature. Since we received net proceeds of approximately $25 million, the remaining $20
million was allocated to the notes, thereby creating a discount and increasing the
effective interest rate. The discount is amortized over the period from the issuance date
to the expected maturity date. The conversion feature is evaluated at each reporting
period, and the difference in fair value is recorded as financial income or expense.

At
December 31, 2007, mainly due to the decline in our share price, partly offset by the
change in the NIS-U.S. dollar exchange rate, the fair value of the conversion feature
decreased by approximately $3.5 million.

Stock-based compensation
expense

Effective
July 1, 2005, we account for stock-based compensation costs in accordance with Statement
of Financial Accounting Statements Standards No. 123R  Share-Based
Payment (SFAS 123R). We utilize the Black-Scholes option pricing model
to estimate the fair value of stock-based compensation at the date of grant, which
requires subjective assumptions, including dividend yields, expected volatility of our
share price, expected life of the option and risk-free interest rates. Further, as
required under SFAS 123R, we estimate forfeitures for options granted which are not
expected to vest. Changes in these inputs and assumptions can materially affect the
measure of estimated fair value of our stock-based compensation.

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Prior
to July 1, 2005, we accounted for stock-based compensation costs in accordance with
Accounting Principle Board Opinion number 25 (Accounting for Stock Issued to Employees),
known as APB25, and related interpretations. Under this treatment, compensation cost for
employee stock option plans was measured using the intrinsic value based method of
accounting. We expensed $616,000 in 2005, $855,000 in 2006 and $2.7 million in 2007 for
stock-based compensation, of which $263,000 was recorded in 2005 for the period January 1
through June 30, 2005 and was calculated based on APB 25 and the balance of $353,000 was
recorded for the period July 1 through December 31, 2005 and was calculated based on SFAS
123R. If we had used SFAS 123R from January 1, 2005 through December 31, 2005, our
stock-based compensation expense for 2005 would have been $5.5 million. As of December 31,
2007, there was approximately $5.1 million of total unrecognized stock-based compensation
expense related to non-vested stock-based compensation arrangements granted by us
(including options whose vesting is subject to our meeting specified performance goals,
which we assume will be achieved). That expense is expected to be recognized by us over a
weighted-average period of 2.5 years.

# Results of Operations

The
following table sets forth certain items from our consolidated statement of operations as
a percentage of total revenues for the periods indicated:

|                                             | For the years ended December 31,
|-------------------------------------------- | --------------------------------
|
|
|
|
|Revenues                                     |                                 
|Cost of revenues                             |                                 
|                                             |                                 
|Gross profit                                 |                                 
|Research and development expenses, net       |                                 
|Selling, general and administrative expenses |                                 
|                                             |                                 
|Operating income (loss)                      |                                 
|Financial income, net                        |                                 
|Other income                                 |                                 
|                                             |                                 
|Net income (loss)                            |                                 
|                                             |                                 
|                                             |                                 

Revenues.
          Our revenues of $101.2 million in 2005, $63.6 million in 2006 and $9.9 million
          in 2007 were generated from sales of our CM-100 product line. Almost all of
          these revenues were generated from sales to KDDI. Our revenues decreased in
2006           and 2007 as a result of lower orders from KDDI as they completed their
initial           deployment of the CM-100.

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Gross
Profit.Cost of revenues consists primarily of raw materials, subcontracting costs,
costs for integration, assembly and testing of finished products, expenses related
directly to operational activities, cost related to PCS and maintenance services and the
payment of royalties to the Office of the Chief Scientist. Gross profit was $5.1 million,
or 51.3% of revenues in 2007 compared to $33.4 million, or 52.5% of revenues, in 2006 and
$49.4 million, or 48.8% of revenues, in 2005. The increase in our gross profit percentage
in 2006 in comparison to 2005 was primarily attributable to revenues from software license
fees.

Operating Expenses:

|                                    | Year ended December 31,
($ in millions) | % Change
|----------------------------------- | --------------------------------------- | --------
|
|
|
|
|Research and development, net       |                                         |         
|Selling, general and administrative |                                         |         
|Total operating expenses            |                                         |         
|                                    |                                         |         

Research
and Development Expenses, net. Research and development expenditures consist primarily
of materials, depreciation and salaries and related costs for engineering and technical
personnel and subcontracting costs associated with developing new products and features.
Our costs for research and development are expensed as incurred. Grants from the
government of Israel for research and development are offset against our gross research
and development expenditures. Research grants were $173,000 in 2005, $1.9 million in 2006
and $2.5 million in 2007. Research grants in 2006 were higher than in 2005 because a
portion of the grants recognized in 2006 covered our research and development working plan
for 2005. Research grants in 2007 were higher than in 2006 because a higher portion of the
grant was assured and recognized in 2007. Our net research and development expenses were
slightly lower in 2006 compared to 2005, mainly due to larger grants received from the
Israeli Office of the Chief Scientist, partly offset by an increase in the cost of
salaries of research and development employees. Our net research and development expenses
were higher in 2007 compared to 2006 due to an increase in the cost of salaries of
research and development employees and increase in investment in materials and equipment
required for research and development activities. We anticipate that we will incur the
same or higher level of research and development expenditures in 2008 compared to 2007 in
connection with our design efforts relating to the CM-4000 product line.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses
consist primarily of costs relating to promotion, trade shows, compensation costs for
marketing and sales personnel, and other general corporate expenses. Selling, general and
administrative expenses were higher in 2007 than in 2006 mainly due to an increase in
compensation expenses related to employee stock option grants. We expect that marketing
and sales expenses will increase in 2008 as we continue with our marketing activities and
sales efforts in an attempt to expand the distribution of our metro products.

Financial
Income, net. Our financial income consists primarily of interest on short term and
long-term investments and on bank deposits. In 2007, our financial income also included
income resulting from the valuation of the convertible terms of our convertible note. In
2005, financial expense consisted primarily of interest payments with respect to bank
loans and exchange rate differentials. In 2006, financial expense consisted primarily of
losses from the sale of marketable securities. In 2007 financial expense consisted
primarily of interest payments with respect to our convertible notes and amortization of
the issuance costs of our convertible notes.

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Financial
income, net was $2.6 million in 2005, $3.3 million in 2006 and $5.7 million in 2007. The
fluctuations in our financial income were primarily driven by the amount of financial
income derived from our investment in marketable securities and, in 2007, by financial
income resulting from the valuation of the convertible terms of our convertible notes. In
2005, exchange rate currency losses also impacted our financial income, net mainly due to
fluctuations of the Yen versus the U.S. dollar which resulted in expenses of approximately
$972,000, offset in part by income of approximately $410,000 from fluctuations of other
currencies (mainly NIS) versus the U.S dollar. In 2006 we had net exchange rate currency
income of approximately $397,000. In 2007, we had a financial income of approximately $3.5
million resulting from the valuation of convertible terms of our convertible notes.

Other
Income. Other income in 2005 consisted of capital gain in the amount of $2.4 million
that we recognized in connection with a sale for $4.2 million of our holdings in Siliquent
Technologies Inc., a venture backed private technology entity. Other income in 2007
resulted from the payment of an arbitration claim won by the Company against a supplier of
semiconductor chips. The claim was for damages Orckit incurred in the period from 2001
through 2003 with respect to semiconductor chips that were used in Orckits legacy
DSL products.

# Impact of Inflation,
Devaluation and Fluctuation of Currencies on Results of Operations, Liabilities and Assets

As
of December 31, 2007, the majority of our assets in non-dollar currencies were in NIS and
in Yen. A devaluation of the Yen or NIS in relation to the U.S. dollar would have the
effect of decreasing the dollar value of assets in Yen or NIS of Orckit, to the extent the
underlying value is Yen or NIS based. A devaluation of the Yen or NIS would also have the
effect of reducing the U.S. dollar amount of any of our liabilities that are payable in
NIS (unless such payables are linked to the U.S. dollar). Furthermore, a devaluation of
the NIS would also have an effect on the U.S. dollar conversion price of our convertible
notes. A devaluation of the NIS in relation to the U.S. dollar would have the effect of
decreasing the dollar value of the conversion price of the notes.

Almost
all of our sales from 2005 through 2007 were denominated in Yen. A substantial part of our
expenses, principally payroll and payments to Israeli vendors, is in NIS, while a
significant portion of the cost of goods sold is in U.S. dollars. Our results of
operations are adversely affected by increases in the rate of inflation in Israel when
such increases are not offset by a corresponding devaluation of the new Israeli shekel
against the U.S. dollar. The results are also affected by the currency exchange rate
between the U.S. dollar and Yen. Due to the increasing value of the U.S. dollar against
the Yen in 2005 and to lesser extent in 2006, sales that were denominated in Yen were
recognized based on higher Yen/U.S. Dollar exchange rates, resulting in lower revenues and
gross margins and lower income than if the exchange rate had not changed from the previous
year. In 2007, the value of the U.S. dollar declined against the Yen resulting in higher
revenues and gross margins. In 2007, the value of the U.S. dollar also declined against
the NIS, which caused our NIS denominated expenses to increase.

45

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We
are not presently engaged in hedging transactions. We may, however, enter into foreign
currency derivatives, mainly forward exchange contracts; in order to protect our cash
flows in respect of existing assets.

The
following table presents information about the rate of inflation in Israel, the rate of
devaluation of the NIS, the rate of inflation in Israel adjusted for the devaluation and,
for 2003 through 2007, the devaluation rate of the Yen against the U.S. dollar:

|Years Ended
December 31, | Israeli Inflation
Rate | NIS Devaluation
Rate | Israel Inflation Adjusted
for Devaluation | Yen Devaluation
Rate
|------------------------ | ---------------------- | -------------------- | ----------------------------------------- | --------------------
|
|
|
|
|2003                     |                        |                      |                                           | (1.9                
|2004                     |                        |                      |                                           | 1.2                 
|2005                     |                        |                      |                                           | 2.4                 
|2006                     |                        |                      |                                           | (0.1                
|2007                     |                        |                      |                                           | 3.4                 
|                         |                        |                      |                                           |                     

B.
          LIQUIDITY AND CAPITAL RESOURCES

We
have historically financed our operations primarily through sales of equity, issuance of
convertible notes and the receipt of grants to fund research and development, as well as
from bank loan proceeds. In 2005, we also used cash from operations to finance our
operations.

We
had working capital (total current assets net of total current liabilities) of $34.9
million as of December 31, 2006 and $57.7 million as of December 31, 2007. The increase in
our working capital in 2007 occurred mainly as a result of an increase in our cash, cash
equivalents and short-term marketable securities balances resulting from the net proceeds
of the sale of our convertible notes.

We
had cash, cash equivalents, long-term marketable securities and bank deposits of $101.2
million as of December 31, 2007 compared to $85.6 million as of December 31, 2006 and
$117.8 million as of December 31, 2005. Since all of our revenues in 2005 and
substantially all of our revenues in 2006 and 2007 were recognized ratably over a 14-month
period from product delivery, the increase of cash, cash equivalents and marketable
securities did not result in a corresponding increase in revenues recognized in 2005. In
2007, we generated approximately $14.2 million in cash from a payment to the Company in
connection with the settlement of a commercial dispute related to the Companys
legacy operations. We also generated cash from the issuance of our convertible notes.
Accordingly, our balance of cash, cash equivalents, long-term marketable securities and
bank deposits increased in 2007. We expect that the balance of our cash, cash equivalents
and marketable securities will decline in 2008.

The
majority of our cash, cash equivalents and marketable securities was invested in
securities denominated in U.S. dollars and NIS. In 2005, we repaid all of our bank
borrowings in the amount of $31.0 million that were outstanding as of December 31, 2004.

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In
March 2007, we issued convertible notes in the aggregate principal amount of approximately
$25.8 million. See below under Convertible Notes for more details.

Cash Provided by/Used in
Operating Activities

In
2007, we used $15.7 million of cash from operating activities primarily as a result of our
net loss of $12.1 million, unrealized interest, premium amortization and currency
differences on marketable securities equal to $7.4 million and an aggregate decrease of
$4.7 million in trade payables, accrued expenses and other payables and deferred income.
These amounts were offset in part by non-cash charges of $2.7 million for stock based
compensation, a decrease of $2.1 million in inventories, a decrease of $2.0 million in
trade and other receivables and depreciation and amortization of $1.7 million.

In
2006, we used $31.1 million of cash from operating activities primarily as a result of a
decrease of $25.5 million in our deferred income and a decrease of $13.4 million in trade
payables, accrued expenses and other payables, offset in part by our net income in the
amount of $5.2 million and depreciation and amortization of $2.2 million.

In
2005, we generated $72.6 million of cash from operating activities primarily as a result
of our net income, a decrease of $54.1 million of trade receivables and other receivables
and $9.6 million from trading marketable securities, offset in part by a decrease of $9.0
million in trade payables and accrued expenses and an decrease of $6.9 million in deferred
income. A substantial part of the sales related to the receivables collected by us in 2005
were not recognized as revenue in 2005.

Cash Provided by/Used in
Investing Activities

Our
principal investing activity relating to our operations has been the purchase of equipment
and other fixed assets used in our business. These purchases totaled $1.9 million in 2005,
$910,000 in 2006 and $613,000 in 2007. Our capital expenditures in 2005, 2006 and 2007
were primarily for the procurement of telecommunications equipment and related software
tools.

Our
investing activities also included primarily the receipt of $39.1 million in 2007, $58.3
million in 2006 and $15.1 million in 2005 from marketable securities, offset by $33.3
million in 2007, $48.3 million in 2006 and $63.8 million in 2005 of investments in
marketable securities.

Cash Provided by/Used in
Financing Activities

In
2007, $25.6 million of cash was provided by financing activities as a result of the
issuance of our convertible notes in the net amount of $24.8 million and $749,000
resulting from the exercise of stock options. In 2006, $1.7 million of cash was provided
by financing activities as a result of the exercise of stock options. In 2005, we used
$25.0 million in financing activities as we repaid $31.0 million of bank borrowings,
offset in part by the receipt of $6.0 million from the exercise of stock options.

Convertible Notes

In
March 2007, we issued convertible notes denominated in NIS in the aggregate principal
amount of approximately $25.8 million (based on the exchange rate at the time of the
issuance), resulting in net proceeds to us of approximately $25.0 million. The notes bear
interest at the rate of 6% and are linked to the Israeli CPI. The notes are due in March
2017, and are subject to the right of the holders to request early repayment in March
2012. As of March 31, 2008 the indexed principal amount of our debt obligation under the
convertible notes was approximately $31.2 million (based on the U.S. Dollar/New Israeli
Shekel exchange rate at March 31, 2008).

47

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The
notes are convertible at the election of the holders into our ordinary shares at the
initial conversion price of NIS 52.50 per share (approximately $14.78, based on the
exchange rate at March 31, 2008) if the conversion occurs by March 10, 2010 and at the
initial conversion price of NIS 63.00 per share (approximately $17.73, based on the
exchange rate at March 31, 2008) if the conversion occurs thereafter, in each case subject
to adjustment for customary events. We have a right to force conversion of the notes if
the market price of our ordinary shares exceeds $30 per share, subject to certain dilution
adjustments, in any 20 trading days within a period of 30 consecutive trading days at the
conversion price then in effect.

The
convertible notes were registered for trading on the Tel Aviv Stock Exchange.

Bank Borrowings

On
March 30, 2004, we borrowed $16.0 million from a bank in order to finance the early
redemption of our convertible subordinated notes. This borrowing bore interest at a rate
between 2.08% and 2.17% per year until maturity in May and July 2005. We have paid this
loan on its maturity dates from the proceeds of our long-term marketable securities.

In
December 2004, we borrowed $15.0 million from a bank at an interest rate of 3.8% per year
in order to enhance our working capital in anticipation of an increase of sales. This loan
was fully repaid in January 2005.

Working Capital

We
believe that we have sufficient working capital to meet our anticipated operating and
capital expenditure requirements for 2008 and 2009. If we do not have available sufficient
cash to finance our operations, we may be required to obtain equity or debt financing. We
cannot be certain that we will be able to obtain additional financing on acceptable terms
or at all.

# Government and Other
Grants

The
Government of Israel encourages research and development projects through the Office of
Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, or the OCS, pursuant
to the Law for the Encouragement of Industrial Research and Development, 1984, as amended,
commonly referred to as the R&D Law.

Under
the R&D Law, a research and development plan that meets specified criteria is eligible
for a grant of up to 50% of certain approved research and development expenditures. The
plan must be approved by the Office of the Chief Scientist.

In
prior years, we relied on grants from the Office of the Chief Scientist to finance a
portion of our product development expenditures. During the three years ended December 31,
2007, we recognized research and development grants in an aggregate amount of
approximately $4.5 million. As of December 31, 2007, our total contingent liabilities to
the Office of the Chief Scientist were approximately $8.7 million.

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Under
the terms of the grants we received from the Office of Chief Scientist, we are obligated
to pay royalties of 3% during the first three years following commencement of royalty
payments, and up to 5% thereafter. Pursuant to a proposed amendment to the R&D Law
described below, we expect our royalty rate to be 3%  5% per annum. Royalties are
payable up to 100% of the amount of such grants, or up to 300% as detailed below, linked
to the U.S. Dollar, plus annual interest at LIBOR. The payment of royalties is on all
revenues derived from the sale of the products developed pursuant to the funded plans,
including revenues from licensed ancillary services.

The
Israeli government is currently in the process of formulating a proposed amendment to
the royalty regulations promulgated under the R&D Law. The
amendment proposes changes to the royalty rates, which would vary from company to
company based on the amount of its revenues and approval date of its program, up to a
rate of 6%, and, as of 2006, an increase to the rate of interest
accruing on grants by 1% per year. The amendment proposes to have
retroactive effect, although there is no assurance as to whether and when
it will be adopted.

The R&D Law generally requires
that a product developed under a program be manufactured in Israel. However, upon
notification to the Office of the Chief Scientist, up to 10% of a companys approved
Israeli manufacturing volume, measured on an aggregate basis, may be transferred out of
Israel. In addition, upon the approval of the Chief Scientist, a greater portion of the
manufacturing volume may be performed outside of Israel, provided that the grant recipient
pays royalties at an increased rate, which may be substantial, and the aggregate repayment
amount is increased up to 300% of the grant, depending on the portion of the total
manufacturing volume that is performed outside of Israel. The R&D Law further permits
the OCS, among other things, to approve the transfer of manufacturing rights outside
Israel in exchange for an import of different manufacturing into Israel as a substitute,
in lieu of the increased royalties. We have obtained an approval from the Office of the
Chief Scientist for manufacturing outside Israel. We intend to keep sufficient
manufacturing activities in Israel so that, under certain assumptions, we will be subject
to a repayment percentage of up to 150% of the grants we received and an increased royalty
percentage payment. The R&D Law also allows for the approval of grants in cases in
which the applicant declares that part of the manufacturing will be performed outside of
Israel or by non-Israeli residents and the research committee is convinced that doing so
is essential for the execution of the program. This declaration will be a significant
factor in the determination of the Office of Chief Scientist whether to approve a program
and the amount and other terms of benefits to be granted. For example, an increased
royalty rate and repayment amount might be required in such cases.

The
R&D Law also provides that know-how developed under an approved research and
development program may not be transferred to third parties in Israel without the approval
of the research committee. Such approval is not required for the sale or export of any
products resulting from such research or development. The R&D Law further provides
that the know-how developed under an approved research and development program may not be
transferred to any third parties outside Israel, except in certain special circumstances
and subject to the OCS prior approval. The OCS may approve the transfer of
OCS-funded know-how outside Israel, generally in the following cases: (a) 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), or (b) the grant recipient receives
know-how from a third party in exchange for its OCS-funded know-how, or (c) such transfer
of OCS-funded know-how arises in connection with certain types of cooperation in research
and development activities.

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The
R&D Law imposes reporting requirements with respect to certain changes in the
ownership of a grant recipient. The law requires the grant recipient and its controlling
shareholders and foreign interested parties to notify the Office of the Chief Scientist of
any change in control of the recipient or a change in the holdings of the means of control
of the recipient that results in a non-Israeli becoming an interested party directly in
the recipient, and requires the new interested party to undertake to the Office of the
Chief Scientist to comply with the R&D Law. In addition, the rules of the Office of
the Chief Scientist may require additional information or representations in respect of
certain such events. For this purpose, control is defined as the ability to
direct the activities of a company other than any ability arising solely from serving as
an officer or director of the company. A person is presumed to have control if such person
holds 50% or more of the means of control of a company. Means of control
refers to voting rights or the right to appoint directors or the chief executive officer.
An interested party of a company includes a holder of 5% or more of its
outstanding share capital or voting rights, its chief executive officer and directors,
someone who has the right to appoint its chief executive officer or at least one director,
and a company with respect to which any of the foregoing interested parties owns 25% or
more of the outstanding share capital or voting rights or has the right to appoint 25% or
more of the directors. Accordingly, any non-Israeli who acquires 5% or more of our
ordinary shares will be required to notify the Office of the Chief Scientist that it has
become an interested party and to sign an undertaking to comply with the R&D Law.

# Effective Corporate Tax
Rates in Israel

Generally,
Israeli companies are subject to corporate tax on their taxable income at the rate of 29%
for the 2007 tax year. Following an amendment to the Israeli Income Tax Ordinance [New
Version], 1961 (the Tax Ordinance), which came into effect on January 1, 2006,
the corporate tax rate is scheduled to decrease as follows: 27% for the 2008 tax year, 26%
for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli companies are
generally subject to capital gains tax at a rate of 25% for capital gains (other than
gains deriving from the sale of listed securities) derived from assets purchased after
January 1, 2003. However, the effective tax rate payable by a company that derives income
from an Approved Enterprise program may be considerably less. For more information, please
see Item 10E. TaxationIsraeli Tax ConsiderationsTax Benefits Under the
Law for the Encouragement of Capital Investments, 1959.

Under
Israeli tax law, at December 31, 2007, we had accumulated losses for tax purposes
amounting to approximately $195 million. These losses are available indefinitely to offset
future taxable business income. As of December 31, 2007, our carry forward of capital
losses for tax purposes were approximately $52 million. Orckit and each of our
subsidiaries are assessed on a stand-alone basis. Therefore, accumulated tax losses in
each of the entities can offset future taxable business income only in the entity in which
the losses were generated.

# Dividend Policy

We
have never declared or paid cash dividends on our capital stock. In the foreseeable
future, we intend to use any future earnings for the operation and expansion of our
business. Accordingly, we do not anticipate paying any cash dividends. Payment of future
dividends, if any, will be at the discretion of our board of directors and the audit
committee of the Board and will depend on various factors, such as our statutory retained
earnings, financial condition, operating results and current and anticipated cash needs.

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If
we declare cash dividends, we will pay those dividends in NIS. Current Israeli law permits
holders of our ordinary shares who are non-residents of Israel and who acquired their
shares with a non-Israeli currency to repatriate all distributions on these shares in that
non-Israeli currency.

# Inventory

Inventory
in 2005, 2006 and 2007 consisted primarily of finished products and raw materials. Our
inventory was $1.3 million as of December 31, 2007, $3.5 million as of December 31, 2006
and $3.3 million as of December 31, 2005. In 2007, our inventory level was lower than in
2005 mainly due to sale of inventory and write-off of additional inventory in 2006. In
2006, our inventory level was similar to that of 2005. In each of 2006 and 2007, we wrote
off approximately $1.0 million of obsolete inventory due to the release of certain new
sub-system line cards for our CM-100 product line.

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES ETC.

We
focus our research and development efforts on developing new products that address the
need for solutions capable of supporting very high bandwidth services in
telecommunications networks in metropolitan areas. We obtain extensive product development
input from potential users and through participation in industry organizations and
standards-setting bodies.

Our
research and development staff consisted of 133 employees as of December 31, 2005, 144
employees as of December 31, 2006 and 165 employees as of December 31, 2007, most of whom
are located in Israel and hold engineering or other advanced technical degrees. The number
of research and development employees increased in 2006 and 2007 because we increased our
research and development efforts, mainly related to our CM-4000 product line. Our gross
research and development expenses were approximately $16.3 million in 2005, $17.4 million
in 2006 and $22.6 million in 2007. These expenses were offset by grants from the Office of
the Chief Scientist of the Ministry of Industry, Trade and Labor of the Government of
Israel of approximately $173,000 in 2005, $1.9 million in 2006 and $2.5 million in 2007.

In
2006, the majority of our research and development work was focused on the CM-100 and
CM-4000 product lines, addressing software and hardware capabilities. In 2007, the
majority of our research and development work was focused on the CM-4000 product line. We
expect that these efforts will continue and comprise substantially all of our 2008
research and development plan. We expect that we will continue to commit substantial
resources to research and development in the future. We believe that a continued
commitment to research and development is required to maintain our technical excellence
and launch new innovative products in the metro transport and access markets. If our
applications for Office of Chief Scientist grants are not approved or partially approved,
or if we elect not to receive these grants, our net research and development expenses will
increase.

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D.          TREND INFORMATION

The
introduction by telecom carriers of new data and video services to residential users and
enterprises require significantly higher bandwidth support over metro networks. In areas
where new high bandwidth services are offered, it is expected that demand for more robust
metro products will increase. In response to this trend, we have focused on innovative
telecom products for the metro area, where we expect to see a need for equipment upgrade
over the coming years with the growth of new high bandwidth service offerings. These
services are expected to include quadruple play services, that is, a bundled
offering of voice, Internet access and high end high-definition (HD) video services, all
based on IP protocols, offered by traditional telecom carriers, as well as TV over
cellular services, that address video transmissions to advanced 3G and 3.5G handheld
devices.

E.           OFF-BALANCE SHEET ARRANGEMENTS

We
do not have any "off-balance sheet arrangements" as such term is defined in Item 5E of
the Form 20-F rules.

F.           TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The
following table of our material contractual obligations as of December 31, 2007 summarizes
the aggregate effect that these obligations are expected to have on our cash flows in the
periods indicated.

|                                   | Payment due by period
($ in thousands)
|---------------------------------- | --------------------------------------
|
|
|
|
|Long-Term Debt Obligations         |                                       
|Operating Lease Obligations        |                                       
|Purchase Obligations               |                                       
|Other Liabilities Reflected on our |                                       
|Balance Sheet under U.S. GAAP      |                                       
|Total                              |                                       

---

|1 | The amount is presented in the 3-5 years column since March 2012 is the earliest
               possible repayment date for these convertible notes.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------

|2 | Our major premises leases allow for early termination upon advance notice.
               Accordingly, this amount reflects lease payments for the applicable notice
               period and is presented in the less than 1 year column.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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|3 | These amounts reflect the trade payables, accrued expenses, deferred income and
               other payables presented in our balance sheet.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------

|4 | This amount reflects our accrued severance pay liability and our provision for
               Uncertainty in Income Taxes under FASB Interpretation No. 48. The time of its
               payment, in whole or in part, cannot be predicted and, as a result, this amount
               is presented in the more than 5 years column. Of this amount, $3.5 million has
               been previously funded for the coverage of our accrued severance pay liability
               by our contributions to employee plans.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, as of December 31, 2007, our contingent liability to the Office of the
Chief Scientist in respect of grants received was approximately $8.7 million. This
liability is required to be repaid only by royalties based on revenues derived from
products (and related services) whose development was funded with these grants.

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

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

The
following table sets forth certain information with respect to Orckits directors and
executive officers.

|Name         | Age | Position                                                                                                   
|------------ | --- | -----------------------------------------------------------------------------------------------------------
|
|
|
|
|Eric Paneth  | 58  | Chairman of the Board and Chief Executive Officer                                                          
|Izhak Tamir  | 55  | President and Director of Orckit and Chairman of the Board and Chief Executive Officer of Corrigent Systems
|Uri Shalom   | 37  | Chief Financial Officer                                                                                    
|Eli Aloni    | 40  | Executive Vice President, Technology and Marketing                                                         
|Zvi Menahemi | 40  | Chief Operating Officer of Corrigent Systems                                                               
|Akio Ogiso   | 53  | Vice President, Asia Pacific of Corrigent Systems                                                          
|Warren Roddy | 49  | Vice President, Sales Americas                                                                             
|Oren Tepper  | 36  | Vice President, Corporate Sales                                                                            
|Miri Gelbman | 56  | Outside Director                                                                                           
|Moshe Nir    | 58  | Outside Director                                                                                           
|Jed M. Arkin | 44  | Director                                                                                                   
|Moti Motil   | 55  | Director                                                                                                   

The
business experience of each of our directors and executive officers is as follows:

Mr.
Paneth has been Chairman of the Board of Directors and Chief Executive
          Officer of Orckit since its founding in 1990. From 1975 until 1983, Mr. Paneth
          was a senior engineer in the Israeli Government, and from 1985 to 1990, was
head           of a technical department in the Israeli Government. From 1983 until 1985,
he           was employed by Linkabit Inc., in San Diego, California. Since January 2000,
Mr.           Paneth has been a director of Tikcro Technologies Ltd. Mr. Paneth holds an
          advanced engineering degree from the Israel Institute of Technology, commonly
          known as the Technion.

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Mr.
         Tamir has been President and a Director of Orckit since its founding in 1990
          and Chairman of the Board of Corrigent Systems since 2001 and Chief Executive
          Officer of Corrigent Systems since May 2007. Mr. Tamir has served as a Director
          of Gilat Satellite Networks Ltd. since 2005. From 1987 until 1989, Mr. Tamir
was           employed by Comstream Inc., in San Diego, California. From 1985 until 1987,
he           was vice president of A.T. Communication Channels Ltd., a subsidiary of
Bezeq            the Israel Telecommunications Corporation Ltd. From 1978 to 1985,
he was           a senior engineer in the Israeli Government. Mr. Tamir has been chairman
of the           board of directors of Tikcro since January 2000 and was its chief
executive           officer from August 2003 to December 2007. Mr. Tamir holds an
engineering degree           from the Technion and an M.B.A. from Tel Aviv University.

Mr.
         Shalom has been our Chief Financial Officer since December 2007. He joined
          Orckit in 1998 and has managed the finance department of Corrigent since its
          inception in 2000. He also held various positions in our finance department,
          starting in 1998. Prior to joining Orckit, Mr. Shalom served as an accountant
at           PricewaterhouseCoopers in Israel. Mr. Shalom is a Certified Public
Accountant in           Israel and holds a B.A. degree in accounting and economics from
Tel Aviv           University.

Mr.
         Aloni has been our Executive Vice President of Technology and Marketing
          since May 2007. From 2004 to 2007, he served as Vice President of System
          Engineering for Siliquent Technologies, which was acquired by Broadcom in 2005.
          Prior thereto, Mr. Aloni founded and managed Frontalis Technologies. From 2000
          to 2001, Mr. Aloni served as Chief Technology Officer of Corrigent Systems.
From           1999 to 2000, he served as our Vice President of Planning. Mr. Aloni holds
an           MSc degree in Electrical Engineering from Tel Aviv University.

Mr.
         Menahemi has been the Chief Operating Officer of Corrigent Systems since May
          2007. From April 2005 to August 2007, he served as the Vice President of R&D
          of Corrigent Systems. From September 2000 until April 2005, Mr. Menahemi was
the           Real Time Software Director of Corrigent. From January 2000 to September
2000,           Mr. Menahemi was a project manager for Orckit. From 1997 to 2000, Mr.
Menahemi           served as hardware director for ADC Teledata Ltd. From 1995 until
1997, Mr.           Menahemi served as senior system architecture engineer in Lannet.
From 1989 to           1995, he served as a senior engineer in the Israel Defense Forces.
Mr. Menahemi           holds a B.Sc. degree in Electrical Engineering from Tel Aviv
University.

Mr.
         Ogiso has been Vice President of Japan and Korea for Corrigent Systems
          since November 2005. From 2003 until 2005, Mr. Ogiso served as a country
manager           in Japan for Corrigent. From 1990 until 2002, Mr. Ogiso was employed by
          AT&T, which later became Lucent Technologies, where he served as managing
          director of customer operations/project management in Tokyo, Japan.  From
          1988 to 1990, he was a system division director for Raychem Corporation.
           From 1980 until 1988, he was employed by SECOM Co., Ltd.  Mr. Ogiso
          holds a B.Sc. in Applied Mathematics from the Science University of Tokyo.

Mr.
         Roddy has been our Vice President of Sales since July 2005. He is
          responsible for sales and service for Corrigent in North America. From 2003 to
          2005, Mr. Roddy was Senior Vice President for Worldwide Sales at Venturi
          Wireless and from 1999 to 2003, he was Senior Vice President for Sales and
          Marketing at Pluris. From 1998 to 2000, he served as Senior Vice President
          Worldwide Sales at Pairgain and from 1995 to 1998 as Director, NSP Western
          Operations at Cisco Systems Inc. Mr. Roddy holds a B.S. degree in Marketing
from           Menlo College.

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Mr.
         Tepper has been our Vice President of Corporate Sales since October
          2007, and since 2006, he has also served as our Vice President of Business
          Development. From 2002 to 2006, he served as Regional Sales Director
          of Siemens Communications Fixed Networks (currently NSN) responsible for
          sales in the Asia Pacific region, Latin America and portions of Europe. From
          2001 to 2002, Mr. Tepper served as Technical Sales Director for Speedwise, a
          start up company which was acquired by Orsus Solutions.

Ms.
         Gelbman has been a Director of Orckit since November 2002. Ms. Gelbman has
          served since 1999 as founder and General Manager of Milgal Ltd., an Israeli
          privately-owned appliance distribution and service company. From 1984 to 1998,
          she was employed by IBM Israel in various positions. Her last role with IBM was
          as Manager of Quality and Customer Relationship Management.

Mr.
         Nir has been a Director of Orckit since November 2002. Mr. Nir has served
          since 1990 as Founder and CEO of privately-held Business Directions Ltd., a
          distributor of analytic management software. From 1985 to 1990, he served as
          manager of the economics and control department and member of the Executive
          Board of Elite Industries Ltd., a publicly traded food manufacturer in Israel.
          From 1974 to 1985, he held senior financial and control positions with Tempo
          Breweries and Soft Drinks Ltd., Tadiran Electronics Industries Ltd. and Clal
          Israel Ltd. He holds a B.A. degree in economics from Tel Aviv University, and
an           M.B.A. and Post Graduate Diploma in Computer and Information Sciences from
the           Recanati School of Management, Tel Aviv University.

Mr.
         Arkin has been a Director of Orckit since August 2001. From January 2000
          through April, 2007, Mr. Arkin served as Chairman of MadahCom, Inc, a
          manufacturer of digital wireless public alerting systems. MadahCom was acquired
          by Cooper Industries (NYSE: CBE) in April, 2007. From March 2005 until April
          2007, Mr. Arkin served as a director of Shamir Optical Industries Ltd. Since
          January 2005 he has been a director, and is currently Chairman, of Mosaic
          Crystals Ltd., a developer of Gallium Nitride semiconductor materials. From
1999           to 2001, he served as General Manager of merchant banking for Oscar Gruss
&          Son, a New York-based investment bank.  From 1995 to 1998, Mr. Arkin
served           as Vice President of The Challenge Fund, an Israeli venture capital
firm. He           holds a B.A. from St. Johns College in Annapolis, Maryland, an
M.B.A. from           Harvard Business School and a J.D. from Harvard Law School.

Mr.
         Motil has been a Director of Orckit since November 2002. Mr. Motil has
          served since 1996 as Vice President Finance and an associate of Palmot Ltd., an
          investment company based in Israel, and has also served since 2006 as Chief
          Financial Officer of Gan-Bair Senior Citizen Residence Ltd., a subsidiary of
          Palmot Ltd. From 1991 until 1996, he served as Chief Financial Officer of the
          Israeli subsidiary of Jan-Bell Marketing Inc., a retail company. Mr. Motil
holds           a B.A. degree in economics and accounting from Tel-Aviv University and he
is a           Certified Public Accountant in Israel.

There
are no family relationships between any of our directors or executive officers. There are
no arrangements or understandings between any of our directors or executive officers and
any other person pursuant to which our directors or executive officers were selected.

55

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|B. | COMPENSATION
|-- | ------------

The aggregate direct remuneration
paid by us to all persons as a group (15 persons,) who served in the capacity of director
or executive officer in 2007, including the remuneration of Eric Paneth and Izhak Tamir
detailed below, was approximately $2.9 million, which includes approximately $400,000
for the provision and payment of pension, retirement or similar benefits, expenses
reimbursed (including professional and other business association dues and expenses) and
other fringe benefits. In 2007, we granted to this group (excluding Messrs. Paneth and
Tamir) options to purchase an aggregate of 724,200 ordinary shares under the Orckit
Israeli Share Incentive Plan. The substantial majority of these options are contingent
upon meeting various performance goals in addition to their vesting period. The options
had an exercise price of $10.82 to 11.46 per share, which represented the market price of
our ordinary shares on the date of grant. Following a modification of the performance
goals of these options (excluding options held by Messrs. Paneth and Tamir), the
exercise price of 486,113 of these options was reduced to $7.81 per share, which
represented the market price of our ordinary shares on the date of the modification. These
options will expire by 2016.

Employment Agreements
with Eric Paneth and Izhak Tamir

In
1993, we entered into an employment agreement with each of Mr. Paneth and Mr. Tamir. These
agreements were extended several times over the years without modification of the
employment terms. The original agreement with each of them provided, among other things,
for an annual bonus based on specified percentages of our pre-tax income for the
applicable year. No bonus was paid under this provision in 2003 or 2004. After review of
our expected results for 2005, we concluded that the bonus based on pre-tax income for
2005 was going to be significant. Based on our publicly announced projection in April 2005
of $15.0 million of net income for 2005, the bonus for each of Mr. Paneth and Mr. Tamir
based on pre-tax income of 2005 would have amounted to approximately $730,000. With the
consent of Messrs. Paneth and Tamir, we reduced the rate of the annual bonus based on
pre-tax income and eliminated any such bonus for 2005 with respect to the first $15.0
million of pre-tax income, as detailed below. Since our actual pre-tax income for 2005 was
$22.2 million, the related bonus for each of Mr. Paneth and Mr. Tamir would have been
approximately $1.1 million under the original agreement. Pursuant to the amended
agreement, the related bonus for each of them was approximately $217,000.

Pursuant
to the amended employment agreement of each of Mr. Paneth and Mr. Tamir, each is entitled
to an annual bonus based on our results of operations for 2006 and each subsequent fiscal
year equal to the sum of: (i) 1.0% of the first $5.0 million of pre-tax income; (ii) 2.0%
of pre-tax income between $5.0 million and $15.0 million; (iii) 3.0% of pre-tax income in
excess of $15.0 million; and (iv) 0.25% of revenues. However, for 2005, the bonus with
respect to pre-tax income was payable only to the extent that the amount of our pre-tax
income exceeded $15.0 million and then only to the extent of 3% of the excess. The rate of
the bonus based on revenues, equal to 0.25% of our revenues in each year, was not modified
from the original agreement. As a result of these provisions, the bonus for each of Mr.
Paneth and Mr. Tamir in 2007 was approximately $25,000 .

The
original employment agreement of each of Mr. Paneth and Mr. Tamir provided for a base
salary payable in NIS, linked to the Israeli CPI, and customary employee benefits, such as
managers insurance and employment fund, which are grossed up to cover income tax
liabilities, and a company car (or, at the employees election, a cash payment added
to the base salary in lieu of a car). Under the original employment agreement, the base
salary and employee benefits increased by 15% per year. Accordingly, the base salary and
employee benefits for each of Mr. Paneth and Mr. Tamir for 2005 would have been
approximately $630,000 (based on the exchange rate on March 31, 2005 of NIS 4.361 to one
U.S. dollar).

56

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The
amended employment agreements reduced the base salary and employee benefits for 2005 of
each of them, effective January 1, 2005, to the amount of NIS equal to $570,000 (based on
the exchange rate on March 31, 2005 of NIS 4.361 to one U.S. dollar) and reduced the
annual percentage used to adjust base salary from 15% to 5%, but subject to adjustments
pursuant to the Israeli CPI beginning in 2006. The dollar equivalent of the salary will
fluctuate in accordance with fluctuations of the exchange rate of the NIS to the U.S.
dollar. There also may be adjustments as a result of changes in tax, national insurance
and other applicable laws from time to time. Accordingly, the base salary and employee
benefits of each of Mr. Paneth and Mr. Tamir for 2007 were approximately $686,000 (based
on the average exchange rate in 2007 of NIS 4.11 to one U.S. dollar).

The
employment agreement of each of Mr. Paneth and Mr. Tamir is not for a specific term and
requires six months advance notice by either us or the employee to terminate the
employment agreement. Upon termination of the employment for any reason by either us or by
the employee, we would make a severance payment equal to the employees last monthly
salary multiplied by the number of years that he worked for us. According to Israeli labor
law, this is the amount of severance generally payable to any employee who is terminated
by his employer. In the event that the employment of Mr. Paneth or Mr. Tamir is terminated
under circumstances in which we would not be required to pay the full amount of severance
pursuant to Israeli labor law, his non-competition period will be extended from one to two
years in consideration of receiving the additional amount. Since we reserve for these
severance payments in our financial statements on an ongoing basis, as required by
generally accepted accounting principles, we do not expect to recognize an additional
accounting expense for these severance payments upon the termination of employment.
Neither employment agreement provides for any other payments or golden
parachutes upon termination of employment. The amendments to the employment
agreements with Mr. Paneth and Mr. Tamir were approved by our shareholders at our 2005
Annual General Meeting.

57

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

# Corporate Governance
Practices

We
are incorporated in Israel and therefore are subject to various corporate governance
practices under the Israeli Companies Law, 1999, or the Companies Law, relating to such
matters as outside directors, the audit committee, the internal auditor and approvals of
interested party transactions. These matters are in addition to the ongoing listing
conditions of the Nasdaq Global Market and other relevant provisions of U.S. securities
laws. Under the Nasdaq rules, a foreign private issuer may generally follow its home
country rules of corporate governance in lieu of the comparable Nasdaq requirements,
except for certain matters such as composition and responsibilities of the audit committee
and the independence of its members. We plan to follow the Companies Law, the relevant
provisions of which are summarized in this Annual Report, rather than comply with the
Nasdaq requirements relating to the quorum for shareholder meetings, shareholder approval
with respect to issuance of securities and sending annual reports to shareholders.

# Nasdaq Requirements

Under
the Nasdaq rules, a majority of our directors are required to be independent
directors as defined in Nasdaqs rules. We are also required to have an audit
committee, all of whose members are independent directors as defined in
Nasdaqs rules. Four out of the six members of our board of directors, namely,
Messrs. Arkin, Nir and Motil and Ms. Gelbman, are independent directors under the Nasdaq
requirements. Messrs. Nir and Motil and Ms. Gelbman are the members of our audit
committee.

We
have adopted an audit committee charter as required by the Nasdaq rules. Our audit
committee assists the board of directors in fulfilling its responsibility for oversight of
the quality and integrity of our accounting, auditing and financial reporting practices
and financial statements and the independence qualifications and performance of our
independent auditors. The audit committee also has the authority and responsibility to
oversee our independent auditors, to recommend for shareholder approval the appointment
and, where appropriate, replacement of our independent auditors and to pre-approve audit
fees and all permitted non-audit services and fees. Our audit committee is also authorized
to act as our qualified legal compliance committee. As such, our audit
committee will be responsible for investigating reports, made by attorneys appearing and
practicing before the SEC in representing us, of perceived material violations of U.S.
federal or state securities laws, breaches of fiduciary duty or similar material
violations of U.S. law by us or any of our agents. Under Nasdaq rules, the approval of the
audit committee is also required to effect related-party transactions that would be
required to be disclosed in our annual report.

Nasdaq
rules require that director nominees be selected or recommended for the boards
selection either by a committee composed solely of independent directors or by a majority
of independent directors. The compensation of a companys chief executive officer and
other executive officers is required to be approved either by a majority of the
independent directors on the board or a committee comprised solely of independent
directors.

Our
audit committee, which is composed solely of independent directors, is authorized to also
act as our nominating committee and compensation committee. The nominating committee is
responsible for, among other things, assisting our board of directors in identifying
prospective director nominees and recommending nominees for each annual meeting of
shareholders to the board of directors. The compensation committee is responsible for,
among other things reviewing and approving annual base salaries, annual incentive bonuses,
including the specific goals and amount, equity compensation, employment agreements, and
any other benefits, compensation or arrangements of our executive officers.

58

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# Israeli Companies Law

Board of Directors

According
to the Companies Law and our articles of association, the oversight of the management of
our business is vested in our board of directors. The board of directors may exercise all
powers and may take all actions that are not specifically granted to our shareholders. As
part of its powers, our board of directors may cause us to borrow or secure payment of any
sum or sums of money for our purposes, at times and upon terms and conditions as it thinks
fit, including the grant of security interests in all or any part of our property. Our
board of directors may consist of between three and seven directors and currently consists
of six directors.

Under
the Companies Law, our board of directors must determine the minimum number of directors
having financial and accounting expertise, as defined in the regulations, that our board
of directors should have. In determining the number of directors required to have such
expertise, the board of directors must consider, among other things, the type and size of
the company and the scope and complexity of its operations. Our board of directors has
determined that we require at least one director with the requisite financial and
accounting expertise and that Mr. Motil has such expertise.

Our
directors are elected at annual meetings of shareholders by a vote of the holders of at
least 66-2/3% of the ordinary shares voting thereon. Directors generally hold office until
the next annual meeting of shareholders. Our annual meeting of shareholders is required to
be held at least once during every calendar year and not more than fifteen months after
the last preceding meeting. The board of directors generally may temporarily fill
vacancies in the board. Directors may be removed earlier from office by a resolution
passed at a general meeting of shareholders by a vote of the holders of at least 75% of
the ordinary shares voting thereon.

A
resolution proposed at any meeting of the board of directors is deemed adopted if approved
by a majority of the directors present and voting on the matter.

Outside Directors

Qualifications
of Outside Directors

Under
the Israeli Companies Law, companies incorporated under the laws of Israel whose shares
are listed for trading on a stock exchange or have been offered to the public in or
outside of Israel are required to appoint at least two outside directors. Outside
directors are required to possess professional qualifications as set out in regulations
promulgated under the Companies Law. Pursuant to our articles of association, we may
appoint up to three outside directors. The Companies Law provides that a person may not be
appointed as an outside director if the person or the persons relative, partner,
employer or any entity under the persons control has, as of the date of the
persons appointment to serve as an outside director, or had, during the two years
preceding that date, any affiliation with:

59

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| |  | the
company;
| | - | ------------

| |  | any
entity controlling the company; or
| | - | --------------------------------------

| |  | any
entity controlled by the company or by its controlling entity.
| | - | ------------------------------------------------------------------

The
term affiliation includes:

| |  | an
employment relationship;
| | - | ---------------------------

| |  | a
business or professional relationship maintained on a regular basis;
| | - | ----------------------------------------------------------------------

| |  | control;
and
| | - | ------------

| |  | service
as an office holder, excluding service as an office holder during the three-month period
in which the company first offers its shares to the public.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------

The
Companies Law defines the term office holder of a company to include a
director, the chief executive officer and any officer of the company who reports directly
to the chief executive officer.

No
person can serve as an outside director if the persons position or other business
creates, or may create, a conflict of interest with the persons responsibilities as
an outside director or may otherwise interfere with the persons ability to serve as
an outside director.

Until
two years from termination of office, a company may not engage an outside director to
serve as an office holder and cannot employ or receive services from that person, either
directly or indirectly, including through a corporation controlled by that person.

Election
of Outside Directors

Outside
directors are elected at meetings of shareholders by a vote of the holders of at least
66-2/3% of the ordinary shares voting thereon, provided that either:

| |  | at
least one third of the shares of  non-controlling  shareholders  voted at the meeting
vote in favor of the               outside director's election; or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of shares of non-controlling shareholders that voted against the election of
the outside director does not exceed one percent of the aggregate voting rights in the
company.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The initial term of an outside
director is three years and may be extended for one additional term of three years.
Thereafter, he or she may be reelected by our shareholders for additional periods of up
to three years each only if the audit committee and the board of directors confirm that,
in light of the external directors expertise and special contribution to the work
of the board of directors and its committees, the reelection for such additional period
is beneficial to the company. Outside directors may be removed from office only by a vote
of the holders of at least 66-2/3% of the ordinary shares voting thereon, or by a court,
and only if the outside directors cease to meet the statutory qualifications for their
appointment or if they violate their duty of loyalty to the company. Each committee of a
companys board of directors that exercises a power of the board of directors is
required to include at least one outside director, except for the audit committee, which
is required to include all the outside directors.

60

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Our
outside  directors  are Ms.  Gelbman and Mr. Nir,  who were  re-elected  to a second
 three-year  term in 2005.

Committees

Subject
to the provisions of the Companies Law, our board of directors may delegate its powers to
committees consisting of board members. Our board has formed an audit committee and an
option committee.

Audit
Committee

Under
the Israeli Companies Law, our board of directors is required to appoint an audit
committee, comprised of at least three directors, including all of the outside directors,
but excluding:

| |  | the
chairman of our board of directors;
| | - | ---------------------------------------

| |  | a
controlling shareholder or a relative of a controlling shareholder; and
| | - | -------------------------------------------------------------------------

| |  | any
director employed by us or who provides services to us on a regular basis.
| | - | ------------------------------------------------------------------------------

The
role of the audit committee is to identify irregularities in the management of our
business, including in consultation with the internal auditor and our independent
accountants, to suggest remedial measures and to approve specified related party
transactions. Under the Companies Law, the audit committee may not approve an action or a
transaction with related parties or with its office holders unless at the time of approval
at least two outside directors are serving as members of the audit committee and at least
one of whom was present at the meeting in which any approval was granted. Our audit
committee consists of Mr. Nir, Ms. Gelbman and Mr. Motil. Our audit committee also
performs other functions as described above under Nasdaq Requirements.

Option
Committee

Our
Option Committee administers our share option plan, including the grant of options in
exchange for Corrigent options, subject to certain exceptions. Our Option Committee is
empowered, among other things, to approve option grants, optionees, dates of grant and the
exercise price of options, subject to guidelines adopted by our board of directors.
Messrs. Paneth, Tamir and Nir are currently the members of our option committee. Grants of
options to executive officers and directors require approvals in addition to the Option
Committee pursuant to the Companies Law and Nasdaq rules.

Internal Auditor

Under
the Companies Law, our board of directors is required to appoint an internal auditor
proposed by the audit committee. The role of the internal auditor is to examine, among
other things, whether our actions comply with the law and orderly business procedure. The
internal auditor may not be an interested party, an office holder, or a relative of any of
the foregoing, nor may the internal auditor be our independent accountant or its
representative.

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The
Companies Law defines the term interested party to include a person who:

| |  | holds
5% or more of our outstanding share capital or voting rights;
| | - | -------------------------------------------------------------------

| |  | has
the right to appoint one or more directors or the general manager; or
| | - | -------------------------------------------------------------------------

| |  | who
serves as a director or as the general manager.
| | - | ---------------------------------------------------

Approval of Specified
Related Party Transactions Under Israeli Law

Fiduciary Duties of
Office Holders

The
Israeli Companies Law imposes a duty of care and a duty of loyalty on all office holders
of a company. The duty of care requires an office holder to act with the level of care
with which a reasonable office holder in the same position would have acted under the same
circumstances. The duty of care includes a duty to use reasonable means to obtain:

| |  | information
on the  advisability  of a given action brought for his approval or performed by him by
virtue of               his position; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to these actions.
| | - | ------------------------------------------------------------

The
duty of loyalty of an office holder includes a duty to:

| |  | refrain
 from any  conflict  of  interest  between  the  performance  of his duties for the
 company  and the               performance of his other duties or his personal affairs;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
from  exploiting  any business  opportunity  of the company to receive a personal gain
for himself or               others; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | disclose
to the company any information or documents relating to a companys affairs which
the office holder has received due to his position as an office holder.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

Disclosure of Personal
Interest of an Office Holder

The
Israeli Companies Law requires that an office holder of a company disclose to the company
any personal interest that he may have and all related material information known to him,
in connection with any existing or proposed transaction by the company. The disclosure is
required to be made promptly and in any event no later than the board of directors meeting
in which the transaction is first discussed. If the transaction is an extraordinary
transaction, the office holder must also disclose any personal interest held by:

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| |  | the
office holder's  spouse,  siblings,  parents,  grandparents,  descendants,  spouse's
 descendants and the               spouses of any of these people; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | any
corporation in which the office holder is a 5% or greater shareholder, director or
general manager or in which he has the right to appoint at least one director or the
general manager.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under
Israeli law, an extraordinary transaction is a transaction that is:

| |  | not
in the ordinary course of business;
| | - | ---------------------------------------

| |  | not
on market terms; or
| | - | -----------------------

| |  | likely
to have a material impact of the company's profitability, assets or liabilities.
| | - | ---------------------------------------------------------------------------------------

Under
the Companies Law, once an office holder complies with the above disclosure requirement,
the transaction can be approved, provided that it is not adverse to the companys
interest. A director who has a personal interest in a matter which is considered at a
meeting of the board of directors or the audit committee will generally not be present at
this meeting or vote on this matter unless a majority of the directors or members of the
audit committee have a personal interest in the matter. If a majority of the directors
have a personal interest in the matter, the matter also requires approval of the
shareholders of the company. Under the Companies Law, unless the articles of association
provide otherwise, a transaction with an office holder, or a transaction with a third
party in which the office holder has a personal interest, requires approval by the board
of directors. If it is an extraordinary transaction or an undertaking to indemnify or
insure an office holder who is not a director, audit committee approval is required, as
well. Arrangements regarding the compensation, indemnification or insurance of a director
require the approval of the audit committee, board of directors and shareholders, in that
order.

Disclosure of Personal
Interests of a Controlling Shareholder

Under
the Israeli Companies Law, the disclosure requirements which apply to an office holder
also apply to a controlling shareholder of a public company. A controlling shareholder is
a shareholder who has the ability to direct the activities of a company, including a
shareholder that owns 25% or more of the voting rights if no other shareholder owns more
than 50% of the voting rights, but excluding a shareholder whose power derives solely from
his or her position on the board of directors or any other position with the company.
Extraordinary transactions with a controlling shareholder or with a third party in which a
controlling shareholder has a personal interest, and the terms of engagement of a
controlling shareholder as an office holder or employee, require the approval of the audit
committee, the board of directors and the shareholders of the company, in that order. The
shareholder approval must be by a majority of the shares voted on the matter, provided
that either:

63

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| |  | at
least one-third of the shares of shareholders who have no personal interest in the
transaction and who               vote on the matter vote in favor thereof; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
shareholders who have no personal interest in the transaction who vote against the
transaction do not represent more than one percent of the voting rights in the company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For
information concerning the direct and indirect personal interests of our office holders
and principal shareholders in specified transactions with us, see Item 7B of this Annual
Report.

Approval of Private
Placements

Under
the Companies Law, a private placement of securities requires approval by the board of
directors and the shareholders of the company if it will cause a person to become a
controlling shareholder or if:

| |  | the
securities issued amount to 20% or more of the company's outstanding voting rights before
the issuance;
| | - | -----------------------------------------------------------------------------------------------------------

| |  | some
or all of the  consideration  is other  than  cash or listed  securities  or the
 transaction  is not on                   market terms; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
transaction will increase the relative holdings of a shareholder that holds 5% or more of
the companys outstanding share capital or voting rights or that will cause any
person to become, as a result of the issuance, a holder of more than 5% of the companys
outstanding share capital or voting rights.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

The
numbers and breakdowns of our employees as of the end of the past three years are set
forth in the following table:

|                                             | As of December 31,
|-------------------------------------------- | ------------------
|
|
|
|
|Numbers of employees by geographic location  |                   
|Israel                                       |                   
|United States                                |                   
|Elsewhere                                    |                   
|                                             |                   
|Total workforce                              |                   
|                                             |                   
|Numbers of employees by category of activity |                   
|MIS, finance and administration              |                   
|Research and development                     |                   
|Manufacturing, testing and quality assurance |                   
|Sales and marketing                          |                   
|                                             |                   
|Total workforce                              |                   
|                                             |                   

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Our
number of employees increased by nine between December 31, 2005 and December 31, 2006 due
to an increase in the number of employees engaged in product development and sales and
marketing, offset in part by a decline in the number of employees engaged in
manufacturing, testing and quality assurance.

Our
number of employees increased by 21 between December 31, 2006 and December 31, 2007 mainly
due to an increase in the number of employees engaged in product development.

We
believe that we have been able to attract talented engineering and other technical
personnel. None of our employees is represented by a labor union and we have not
experienced a work stoppage. We believe that our relationship with our employees is good
and that our future success will depend on a continuing ability to hire, assimilate and
retain qualified employees.

Certain
provisions of the collective bargaining agreements between the Histadrut (General
Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations,
including the Industrialists Associations, are applicable to our employees by order of the
Israeli Ministry of Labor and Welfare. These provisions principally concern cost of living
increases, recreation pay, social contributions and other conditions of employment.

Israeli
labor laws and regulations are applicable to all of our employees in Israel. The laws
principally concern matters such as paid annual vacation, paid sick days, the length of
the workday, payment for overtime, insurance for work-related accidents, severance pay and
other conditions of employment. Israeli law generally requires severance pay, which may be
funded, in whole or in part, by Managers Insurance described below, in certain
circumstances, including the retirement or death of an employee or termination of
employment without cause, as defined under Israeli law. The payments to Managers
Insurance in respect of severance obligations amount to approximately 8.3% of wages.
Furthermore, Israeli employees are required to pay predetermined sums to the National
Insurance Institute. The payments to the National Insurance Institute are approximately
18% of wages of which the employee contributes approximately 12% and the employer
contributes approximately 6%.

We
contribute amounts on behalf of most of our employees to funds known as Managers
Insurance and/or pension funds. Each employee who agrees to participate in such funds
contributes an amount equal to 5% of such employees base salary and the employer
contributes approximately 15% of such salary (including payments for disability
insurance), which 15% includes the 8.3% for severance pay.

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

As
of March 31, 2008, Messrs. Eric Paneth and Izhak Tamir, each beneficially owned 1,679,267
ordinary shares, or 10.0% of our ordinary shares. This includes options to purchase (i)
60,000 of our ordinary shares at nominal value, which expire in August 2010, and (ii)
420,000 of our ordinary shares at $27.14 per share, which expire in June 2012.

Except
for Messrs. Paneth and Tamir, none of our executive officers or directors beneficially
owns 1% or more of our outstanding ordinary shares.

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At March 31, 2008, outstanding
options to purchase a total of 5,207,687 ordinary shares (including options whose vesting
is subject to our meeting specified performance goals) were outstanding under our share
incentive plan, of which options to purchase a total of 2,155,625 ordinary shares were
held by our directors and officers (12 persons) as a group. Our share incentive plan is
administered by an option committee of our board of directors, which is empowered, subject
to applicable law, to determine the optionees, dates of grant and the exercise price of
options. Unless otherwise decided by our board of directors or the option committee,
options granted under the share incentive plan are non-assignable except by the laws of
descent. The outstanding options are exercisable at purchase prices which range from $0 to
$27.14 per share, vest mainly over periods of up to four to five years, and have
expiration dates which range from 2008 to 2016.

Exchange of Corrigent
Options

At
our annual meeting of shareholders held in June 2005, our shareholders approved the
potential exchanges, from time to time, of all of the vested stock options of Corrigent,
which constituted at that time approximately 10% of the outstanding share capital of
Corrigent (on a fully diluted basis), for vested options for up to 10% of our outstanding
ordinary shares (on a fully diluted basis after giving effect to such issuances). The goal
of this program was to simplify our capital structure by increasing our fully diluted
ownership percentage of Corrigent to up to 100%. Generally, our option committee, along
with the board of directors of Corrigent, determined the persons who are offered an
exchange and the amount and terms of such exchange. Corrigent options are exercisable for
the par value of Corrigent shares, $0.01 per share, and the Orckit options granted in the
exchanges would be exercisable at the same price. The issuance of our ordinary shares upon
the exercise of our options received in any exchange is expected to be covered by a
Registration Statement on Form S-8 filed with the SEC under the Securities Act of 1933, as
amended.

In September 2007, we effected
exchanges of all Corrigent options held by each of Eric Paneth and Izhak Tamir for
240,204 Orckit options. Each of Eric Paneth and Izhak Tamir subsequently exercised the
Orckit options issued in this exchange for Orckit shares and, as of March 31, 2008, has
not sold these shares. In connection with such option exercise, we withheld income tax
from each of Eric Paneth and Izhak Tamir at the rate of 48% of the market value of the
underlying Orckit shares on the exercise date.

We
expect to effect exchanges of the remaining Corrigent options, which are held by employees
of Corrigent who are not directors of Orckit or Corrigent, in the next 12 months. If such
exchanges were effected today, we estimate that an aggregate of approximately 500,000
Orckit options would be issuable.

We
have not recorded an expense in our financial statements for the exchanges effected to
date because, based on independent valuations, the fair value of the Orckit options that
we granted in exchange for Corrigent options did not exceed the fair value of the
Corrigent options being exchanged. However, it is our intention to effect future exchanges
based on the assumption that the fair values of Orckit and Corrigent are equal. This would
result in an expense in our financial statements to the extent that the fair value of
Orckit shares exceeds the fair value of Corrigent shares at the time of exchange.

66

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

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

To
our knowledge, (A) we are not directly or indirectly owned or controlled (i) by another
corporation or (ii) by any foreign government and (B) there are no arrangements, the
operation of which may at a subsequent date result in a change in control of Orckit.

The
following table sets forth, as of March 31, 2008, the number of our ordinary shares, which
constitute our only voting securities, beneficially owned by (i) all shareholders known to
us to own more than 5% of our outstanding ordinary shares, and (ii) all of our directors
and executive officers as a group. The voting rights of all shareholders are the same. As
of March 31, 2008, 16,382,376 of our ordinary shares were outstanding.

|Identity of Person or Group                                   | Amount Owned | Percent of Class
|------------------------------------------------------------- | ------------ | ----------------
|
|
|
|
|Eric Paneth (1)                                               |              |                 
|Izhak Tamir (2)                                               |              |                 
|David J. Greene and Company, LLC (3)                          |              |                 
|All directors and executive officers as a group  (12 persons) |              |                 

---

|(1)(2) | Includes,
in the case of each of Messrs. Tamir and Paneth, 480,000 ordinary                shares
issuable upon the exercise of options that are currently vested or vest
               within 60 days following March 31, 2008. This figure also includes, in the
case                of each of Messrs. Tamir and Paneth, 420,000 ordinary shares subject
to a                six-year variable forward sale contract entered into with Credit
Suisse Capital                LLC on March 1, 2006. Under each such contract, 420,000
ordinary shares were                pledged to Credit Suisse as collateral.
|------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based
on a Schedule 13G of David J. Greene and Company, LLC filed on February 8,
               2007 with the Securities and Exchange Commission.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes 1,417,707 ordinary shares
which may be purchased pursuant to options exercisable within sixty days following March
31, 2008. As discussed in Item 6.E above, stock options of Corrigent held by officers may
be exchanged for options of Orckit.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of February 28, 2005, each of Mr. Paneth and Mr. Tamir beneficially owned 1,689,063
ordinary shares, or 12.3% of our outstanding ordinary shares. As of March 1, 2006, each
beneficially owned 1,294,063 ordinary shares, or 8.2% of our outstanding ordinary shares.
As of March 31, 2007, each beneficially owned 1,224,063, or 7.5% of our outstanding
ordinary shares.

As
of February 29, 2008, there were 29 holders of record of our ordinary shares in the United
States who collectively held approximately 91.4% of our outstanding ordinary shares. The
number of record holders in the United States is not representative of the number of
beneficial holders nor is it representative of where such beneficial holders are resident
since many of these ordinary shares were held of record by brokers or other nominees.

67

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

Tikcro Management
Agreement

Following
the sale of Tikcros business to STMicroelectronics in April 2003, we agreed to
provide Tikcro administrative services. For the services rendered in 2005, Tikcro paid us
$72,000. In each of 2006 and 2007, the fees paid by Tikcro were $48,000.

We
believe that any transactions involving affiliated parties were on terms no less favorable
to us than could be obtained with non-affiliated parties.

Siliquent
Technologies

Siliquent
Technologies, a provider of technology for the storage network applications industry, was
founded in 2000 as a technology project. In October 2001, Siliquent Technologies, raised
$10.0 million in equity financing from third parties. Certain of our directors, officers
and employees had previously been granted securities in Siliquent with a nominal exercise
price. In 2003, we participated in follow-on investment rounds in Siliquent and increased
our investment by $1.0 million. In 2004, we participated in another follow on investment
rounds in Siliquent for $1.4 million. In 2005, Broadcom acquired Siliquent, and the
consideration paid for our holdings in Siliquent was $4.4 million. In addition, the
consideration paid to certain of our directors and officers who were granted securities in
Siliquent upon incorporation was approximately $198,000 in the aggregate.

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

Not
applicable

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

# Consolidated Statements
and Other Financial Information

See
Item 18.

# Legal Proceedings

For
a discussion of our legal proceedings, please see Item 4B  Information on the
Company  Busines Overview  Legal Proceedings.

# Dividend Policy

For
a discussion of our dividend policy, please see Item 5B  Operating and
Financial Review and Prospects  Liquidity and Capital Resources  Dividend
Policy.

# Significant Changes

No
significant change has occurred since December 31, 2007, except as otherwise disclosed in
this Annual Report.

68

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

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

Our
ordinary shares are quoted on the Nasdaq Global Market and the Tel-Aviv Stock Exchange
under the symbol ORCT.

The
following table sets forth, for the periods indicated, the high and low sales prices of
our ordinary shares as reported on Nasdaq. The price per share of our ordinary shares and
share count has been retroactively adjusted to reflect the three-for-one stock split of
our ordinary shares as of April 5, 2005.

|Calendar Year | Price Per Share
|------------- | ---------------
|
|
|
|
|2007          |                
|2006          |                
|2005          |                
|2004          |                
|2003          |                

|                                        |  | 
|--------------------------------------- |  | 
|
|
|
|
|2008                                    |  | 
|Second Quarter (through April 14, 2008) |  | 
|First Quarter                           |  | 
|                                        |  | 
|2007                                    |  | 
|First Quarter                           |  | 
|Second Quarter                          |  | 
|Third Quarter                           |  | 
|Fourth Quarter                          |  | 
|                                        |  | 
|2006                                    |  | 
|First Quarter                           |  | 
|Second Quarter                          |  | 
|Third Quarter                           |  | 
|Fourth Quarter                          |  | 

69

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|Calendar Month | Price Per Share
|-------------- | ---------------
|
|
|
|
|2008           |                
|March          |                
|February       |                
|January        |                
|               |                
|2007           |                
|December       |                
|November       |                
|October        |                

70

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The
following table sets forth, for the periods indicated, the high and low sales prices of
our ordinary shares as reported on the Tel-Aviv Stock Exchange.

|     |  | 
|---- |  | 
|
|
|
|
|2007 |  | 
|2006 |  | 
|2005 |  | 
|2004 |  | 
|2003 |  | 

|Calendar Period                         | Price Per Share
|--------------------------------------- | ---------------
|
|
|
|
|2008                                    |                
|Second Quarter (through April 14, 2008) |                
|First Quarter                           |                
|                                        |                
|2007                                    |                
|First Quarter                           |                
|Second Quarter                          |                
|Third Quarter                           |                
|Fourth Quarter                          |                
|                                        |                
|2006                                    |                
|First Quarter                           |                
|Second Quarter                          |                
|Third Quarter                           |                
|Fourth Quarter                          |                

|Calendar Month | Price Per Share
|-------------- | ---------------
|
|
|
|
|2008           |                
|March          |                
|January        |                
|February       |                
|               |                
|2007           |                
|December       |                
|November       |                
|October        |                

71

---

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The
share prices as presented above in US dollars were originally denominated in NIS and were
converted to US dollars using the representative exchange rate between the US dollar and
the NIS published by the Bank of Israel for each applicable day in the presented period.

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

Not
applicable

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

Our
ordinary shares are quoted on the Nasdaq Global Market under the symbol ORCT. Our ordinary
shares are also quoted on the Tel-Aviv Stock Exchange. Options relating to our ordinary
shares began trading on the Chicago Board Options Exchange, the American Stock Exchange
and the Philadelphia Stock Exchange in May 2005.

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

Not
applicable

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

Not
applicable

|F. | EXPENSES
OF THE ISSUE
|-- | ---------------------

Not
applicable

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

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

Not
applicable

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

# Objects and Purposes

We
were first registered under Israeli law on January 22, 1990 as a private company, and, on
July 22, 1996, became a public company. Our registration number with the Israeli registrar
of companies is 52-004287-0. Our object is to engage, directly or indirectly, in any
lawful undertaking or business whatsoever, including, without limitation, as stipulated in
our memorandum and articles of association, which are filed as exhibits to this Annual
Report.

72

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# Borrowing Powers

Our
articles of association provide that our board of directors may from time to time, in its
discretion, cause us to borrow any sums of money for our purposes, and may secure or
provide for the repayment of such sums in such manner, at such times and upon such terms
and conditions in all respects as it thinks fit.

# Transfer of Shares and
Notices

Fully
paid ordinary shares may be freely transferred pursuant to our articles of association
unless the transfer is restricted or prohibited by another instrument. Unless otherwise
prescribed by law, we will provide at least 21 calendar days prior notice of any
general shareholders meeting.

# Dividend and
Liquidation Rights

Dividends
on our ordinary shares may be paid only out of profits and other surplus, as defined in
the Companies Law, as of our most recent financial statements or as accrued over a period
of two years, whichever is higher. Our board of directors, with the approval of our audit
committee, is authorized to declare dividends, provided that there is no reasonable
concern that the dividend will prevent us from satisfying our existing and foreseeable
obligations as they become due. 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 their respective holdings. These dividend and liquidation rights may be
affected by the grant of preferential dividends or distribution rights to the holders of a
class of shares with preferential rights that may be authorized in the future.

# Voting,
Shareholders Meetings and Resolutions

Holders
of ordinary shares have one vote for each ordinary share held on all matters submitted to
a vote of shareholders. Under the Companies Law and our articles of association, most
resolutions of our shareholders require approval by a simple majority of the ordinary
shares voting thereon. Amendments to our articles of association and the election of
directors require approval of 66-2/3% of our ordinary shares voting thereon, and
liquidation and the removal of directors (other than outside directors) require approval
of 75% of our ordinary shares voting thereon.

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.

We
have two types of general shareholders meetings: the annual general meetings and
extraordinary general meetings. Directors are elected only at annual general meetings.
These meetings may be held either in Israel or in any other place the board of directors
determines. An annual general meeting must be held in each calendar year, but not more
than 15 months after the last annual general meeting. Our board of directors may convene
an extraordinary meeting, from time to time, at its discretion and is required to do so
upon the request of shareholders holding at least 5% of our ordinary shares.

The
quorum required for a meeting of shareholders consists of at least two shareholders
present in person or by proxy who hold or represent between them at least 25% of the
outstanding voting shares, unless otherwise required by applicable rules. Nasdaq generally
requires a quorum of 33-1/3%, but we have received an exemption and instead follow the
generally accepted business practice for companies in Israel. 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 designate with the consent of a
majority of the voting power represented at the meeting and voting on the matter
adjourned. At such reconvened meeting the required quorum consists of any two members
present in person or by proxy, unless otherwise required by applicable rules.

73

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# Duties of Shareholders

Under
the Companies Law, each and every shareholder has a duty to act in good faith in
exercising his rights and fulfilling his obligations towards us and other shareholders and
to refrain from abusing his power in us, such as in voting in the general meeting of
shareholders on the following matters:

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

| |  | an
increase of our authorized share capital;
| | - | --------------------------------------------

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

| |  | approval
of certain actions and transactions which require shareholder approval.
| | - | --------------------------------------------------------------------------------

In
addition, each and every shareholder has the general duty to refrain from depriving other
shareholders of their rights.

Furthermore,
any controlling shareholder, any shareholder who knows that it possesses the power to
determine the outcome of a shareholder vote and any shareholder that, pursuant to the
provisions of the articles of association, has the power to appoint or to prevent the
appointment of an office holder in us or any other power toward us is under a duty to act
in fairness towards us. The Companies Law does not describe the substance of this duty of
fairness. These various shareholder duties may restrict the ability of a shareholder to
act in what the shareholder perceives to be its own best interests.

# Anti-Takeover
Provisions; Mergers and Acquisitions

The
Israeli Companies Law includes provisions that allow a merger transaction and requires
that each company that is a party to a merger have the transaction approved by its board
of directors and a vote of the majority of its shares, at a shareholders meeting
called on at least 21 days prior notice. For purposes of the shareholder vote,
unless a court rules otherwise, the statutory merger will not be deemed approved if a
majority of the shares present that are held by parties other than the other party to the
merger, or by any person who holds 25% or more of the shares or the right to appoint 25%
or more of the directors of the other party, vote against the merger. Upon the request of
a creditor of either party to the proposed merger, the court may delay or prevent the
merger if it concludes that there exists a reasonable concern that as a result of the
merger, the surviving company will be unable to satisfy the obligations of any of the
parties to the merger. In addition, a merger may not be completed unless at least (i) 50
days have passed from the time that the requisite proposal for the merger has been filed
by each party with the Israeli Registrar of Companies and (ii) 30 days have passed since
the merger was approved by the shareholders of each party.

74

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The
Companies Law also provides that an acquisition of shares of a public company must be made
by means of a tender offer if as a result of the acquisition the purchaser would become a
25% or greater shareholder of the company and there is no existing 25% or greater
shareholder in the company. An acquisition of shares of a public company must also be made
by means of a tender offer if as a result of the acquisition the purchaser would become a
45% or greater shareholder of the company and there is no existing 45% or greater
shareholder in the company. These requirements do not apply if the acquisition (i) occurs
in the context of a private placement by the company that received shareholder approval,
(ii) was from a 25% shareholder of the company and resulted in the acquirer becoming a 25%
shareholder of the company or (iii) was from a 45% shareholder of the company and resulted
in the acquirer becoming a 45% shareholder of the company. The tender offer must be
extended to all shareholders, but the offeror is not required to purchase more than 5% of
the companys outstanding shares, regardless of how many shares are tendered by
shareholders. The tender offer may be consummated only if (i) at least 5% of the
companys outstanding shares will be acquired by the offeror and (ii) the number of
shares tendered in the offer exceeds the number of shares whose holders objected to the
offer.

If,
as a result of an acquisition of shares, the acquirer will hold more than 90% of a
companys outstanding shares, the acquisition must be made by means of a tender offer
for all of the outstanding shares. If less than 5% of the outstanding shares are not
tendered in the tender offer, all the shares that the acquirer offered to purchase will be
transferred to it. The law provides for appraisal rights if any shareholder files a
request in court within three months following the consummation of a full tender offer. If
more than 5% of the outstanding shares are not tendered in the tender offer, then the
acquirer may not acquire shares in the tender offer that will cause his shareholding to
exceed 90% of the outstanding shares.

Israeli
tax law also 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, under
certain circumstances, subject a shareholder who exchanges his ordinary shares for shares
of another corporation to taxation prior to the sale of the shares received in such
stock-for-stock swap.

Our
articles of association provide that our board of directors may, at any time in its sole
discretion, adopt protective measures to prevent or delay a coercive takeover of us,
including, without limitation, the adoption of a shareholder rights plan. In November
2001, our board of directors adopted a shareholder bonus rights plan pursuant to which
share purchase bonus rights were distributed on December 6, 2001 at the rate of one right
for each of our ordinary shares held by shareholders of record as of the close of business
on that date.

The
rights plan is intended to help ensure that all of our shareholders are able to realize
the long-term value of their investment in us in the event of a potential takeover which
does not reflect our full value and is otherwise not in the best interests of us and our
shareholders. The rights plan is also intended to deter unfair or coercive takeover
tactics.

Each
right initially will entitle shareholders to buy one-half of one of our ordinary shares
for $21.67. The rights generally will be exercisable and transferable apart from our
ordinary shares only if a person or group becomes an acquiring person by
acquiring beneficial ownership of 15% or more of our ordinary shares, subject to certain
exceptions set forth in the rights plan, or commences a tender or exchange offer upon
consummation of which such person or group would become an acquiring person.
Subject to certain conditions described in the rights plan, once the rights become
exercisable, the holders of rights, other than the acquiring person, will be entitled to
purchase ordinary shares at a discount from the market price.

75

---

---

The
rights will expire on December 31, 2011 and are generally redeemable by our board of
directors, at $0.01 per right, at any time until the tenth business day following public
disclosure that a person or group has become an acquiring person.

Our
articles of association also provide that as long as any of our securities are publicly
traded on a United States market or exchange, all proxy solicitations by persons other
than our board of directors must be undertaken pursuant to the United States proxy rules,
regardless of whether those proxy rules are legally applicable to us. These provisions of
our articles of association could discourage potential acquisition proposals and could
delay or prevent a change in control of us.

# Modification of Class
Rights

Our
articles of association provide that the rights attached to any class (unless otherwise
provided by the terms of that class), such as voting, rights to dividends and the like,
may be varied by a shareholders resolution, subject to the sanction of a resolution
passed by a majority of the holders of the shares of that class at a separate class
meeting.

# Indemnification,
Exculpation and Insurance of Office Holders

Exculpation of Office
Holders

Under
the Companies Law, an Israeli company may not exempt an office holder from liability for
breach of his duty of loyalty, but may exempt in advance an office holder from liability
to the company, in whole or in part, for a breach of his duty of care (except in
connection with distributions), provided the articles of association of the company allow
it to do so. Our articles of association allow us to exempt our office holders to the
fullest extent permitted by law, and we have done so.

Insurance of Office
Holders

Our
articles of association provide that, subject to the provisions of the Companies Law, we
may enter into an insurance contract which would provide coverage for any monetary
liability incurred by any of our office holders, with respect to an act performed in the
capacity of an office holder for:

| |  | a
breach of his duty of care to us or to another person;
| | - | --------------------------------------------------------

| |  | a
breach of his duty of loyalty to us, provided that the office holder acted in good faith
and had reasonable cause to assume that his act would not prejudice our interests; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
financial liability imposed upon him in favor of another person.
| | - | ------------------------------------------------------------------

We
obtained liability insurance covering our officers and directors.

76

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Indemnification of Office
Holders

Our
articles of association provide that we may indemnify an office holder against:

| |  | a
financial liability imposed on or incurred by an office holder in favor of another person
by any judgment, including a settlement or an arbitrators award approved by a court
concerning an act performed in his capacity as an office holder. Such indemnification may
be approved (i) after the liability has been incurred or (ii) in advance, provided that
the undertaking is limited to types of events which our board of directors deems to be
foreseeable in light of our actual operations at the time of the undertaking and limited
to an amount or criterion determined by our board of directors to be reasonable under the
circumstances, and further provided that such events and amounts or criterion are set
forth in the undertaking to indemnify;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder as a
result of an investigation or proceeding instituted against him by a competent authority,
provided that such investigation or proceeding concluded without the filing of an
indictment against him and either (A) concluded without the imposition of any financial
liability in lieu of criminal proceedings or (B) concluded with the imposition of a
financial liability in lieu of criminal proceedings but relates to a criminal offense
that does not require proof of criminal intent; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him by a court, in proceedings instituted against him by or on our behalf or
by another person, or in a criminal charge from which he was acquitted, or a criminal
charge in which he was convicted for a criminal offense that does not require proof of
intent, in each case relating to an act performed in his capacity as an office holder.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

We
have undertaken to indemnify our directors and officers pursuant to applicable law.

Limitations on
Exculpation, Insurance and Indemnification

The
Companies Law provides that a company may not exculpate or indemnify an office holder, or
enter into an insurance contract which would provide coverage for any monetary liability
incurred as a result of any of the following:

77

---

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| |  | a
breach by the office holder of his duty of loyalty unless, with respect to insurance
coverage or indemnification, the office holder acted in good faith and had a reasonable
basis to believe that the act would not prejudice the company;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
breach by the office holder of his duty of care if the breach was committed intentionally
or recklessly;
| | - | ----------------------------------------------------------------------------------------------------------

| |  | any
act or omission committed with the intent to derive an illegal personal benefit; or
| | - | ---------------------------------------------------------------------------------------

| |  | any
fine imposed on the office holder.
| | - | --------------------------------------

In
addition, under the Companies Law, exculpation of, indemnification of, or procurement of
insurance coverage for, our office holders must be approved by our audit committee and our
board of directors and, if the beneficiary is a director, by our shareholders. We have
obtained such approvals for the procurement of liability insurance covering our officers
and directors and for the grant of indemnification letters to our officers and directors
and have granted amended and restated indemnification and exculpation letters to our
directors and officers that require us to indemnify them to the fullest extent permitted
by applicable law.

Our
articles of association also provide that, subject to the provisions of applicable law, we
may procure insurance for or indemnify any person who is not an office holder, including
without limitation, any of our employees, agents, consultants or contractors.

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

For
a description of our convertible notes, see Liquidity and Capital
ResourcesConvertible Notes under Item 5B of this Annual Report on Form 20-F.

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

There
are currently no Israeli currency control restrictions on payments of dividends or other
distributions with respect to our ordinary shares or the proceeds from the sale of the
shares, except for the obligation of Israeli residents to file reports with the Bank of
Israel regarding certain transactions. However, legislation remains in effect pursuant to
which currency controls can be imposed by administrative action at any time.

The
ownership or voting of our ordinary shares by non-residents of Israel, except with respect
to citizens of countries which are in a state of war with Israel, is not restricted in any
way by our memorandum of association or articles of association or by the laws of the
State of Israel.

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

The
following is a general summary only and should not be considered as income tax advice or
relied upon for tax planning purposes.

78

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United States Federal Income Tax
Considerations

The
following summary describes the material U.S. federal income tax consequences to
U.S. Holders (as defined below) arising from the purchase, ownership or
disposition of our ordinary shares. This summary is based on the Internal Revenue Code of
1986, as amended, or the Code, the final, temporary and proposed U.S. Treasury
Regulations promulgated thereunder and administrative and judicial interpretations
thereof, all as of the date hereof and all of which are subject to change (possibly with
retroactive effect) or different interpretations. For purposes of this summary, a
U.S. Holder will be deemed to refer only to any of the following holders of
our ordinary shares:

| |  | an
 individual  who is either a U.S.  citizen  or a resident  of the U.S.  for U.S.  federal
 income tax               purposes;
| | - | --------------------------------------------------------------------------------------------------------------------------------

| |  | a
corporation or other entity taxable as a corporation for U.S.  federal income tax
purposes  created or               organized in or under the laws of the U.S. or any
political subdivision thereof;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | an
estate  the income of which is subject to U.S.  federal  income tax  regardless  of the
source of its               income; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------

| |  | a
trust, if (a) a U.S. court is able to exercise  primary  supervision  over the
 administration  of the               trust and one or more U.S.  persons  have the
 authority  to control all  substantial  decisions  of the               trust, or (b)
the trust has a valid election in effect under applicable U.S. Treasury  Regulations to
be               treated as a U.S. person.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

This
summary does not consider all aspects of U.S. federal income taxation that may be relevant
to particular U.S. Holders by reason of their particular circumstances, including
potential application of the U.S. federal alternative minimum tax, or any aspect of state,
local or non-U.S. federal tax laws or U.S. federal tax laws other than U.S. federal income
tax laws. In addition, this summary is directed only to U.S. Holders that hold our
ordinary shares as capital assets within the meaning of Section 1221 of the
Code and does not address the considerations that may be applicable to particular classes
of U.S. Holders, including financial institutions, regulated investment companies, real
estate investment trusts, pension funds, insurance companies, broker-dealers, tax-exempt
organizations, grantor trusts, partnerships or other pass-through entities, U.S. Holders
whose functional currency is not the U.S. dollar, U.S. Holders who have elected
mark-to-market accounting, U.S. Holders who acquired our ordinary shares through the
exercise of options or otherwise as compensation, U.S. Holders who hold our ordinary
shares as part of a straddle, hedge or conversion
transaction, U.S. Holders selling our ordinary shares short, U.S. Holders deemed to
have sold our ordinary shares in a constructive sale, and U.S. Holders,
directly, indirectly or through attribution, of 10% or more (by vote or value) of our
outstanding ordinary shares. If a partnership (including for this purpose any entity,
domestic or foreign, treated as a partnership for U.S. federal income tax purposes) is a
beneficial owner of our ordinary shares, the U.S. federal income tax treatment of a
partner in such partnership generally will depend upon the status of the partner and the
activities of the partnership. A partnership that is a beneficial owner of our ordinary
shares, and partners in such partnership, are urged to consult their own tax advisors
regarding the U.S. federal income tax consequences of the purchase, ownership and
disposition of our ordinary shares.

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Each
U.S. Holder should consult with its own tax advisor as to the particular tax consequences
to it of the purchase, ownership and sale of our ordinary shares, including the effects of
applicable tax treaties, state, local, foreign or other tax laws and possible changes in
the tax laws.

# Sale, Exchange or
Other Taxable Disposition of Ordinary Shares

Subject
to the discussion below under Passive Foreign Investment Company Status, a
U.S. Holders sale, exchange or other taxable disposition of ordinary shares
generally will result in the recognition by such U.S. Holder of capital gain or loss in an
amount equal to the difference between the U.S. dollar value of the amount realized and
the U.S. Holders tax basis in the ordinary shares disposed of (determined in U.S.
dollars). This gain or loss will be long-term capital gain or loss if such ordinary shares
have been held or are deemed to have been held for more than one year at the time of the
disposition. Individual U.S. Holders currently are subject to a maximum tax rate of 15% on
long-term capital gains for tax years beginning on or before December 31, 2010. Short-term
capital gains generally are taxed at the same rates applicable to ordinary income. If the
U.S. Holders holding period on the date of the taxable disposition is one year or
less, such gain or loss will be a short-term capital gain or loss. See Israeli Tax
Considerations Capital Gains Tax for a discussion of taxation by Israel of
capital gains realized on sales of our ordinary shares. Any capital loss realized upon the
taxable disposition of ordinary shares generally is deductible only against capital gains
and not against ordinary income, except that non-corporate U.S. Holders generally may
deduct annually from ordinary income up to $3,000 of capital losses in excess of capital
gains. In general, any capital gain or loss recognized by a U.S. Holder upon the taxable
disposition of ordinary shares will be treated as U.S.-source income or loss for U.S.
foreign tax credit purposes. However, under the tax treaty between the United States and
Israel, gain derived from the taxable disposition of ordinary shares by a U.S. Holder who
is a resident of the U. S. 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.

A
U.S. Holders tax basis in his, her or its ordinary shares generally will be the U.S.
dollar purchase price paid by such U.S. Holder to acquire such ordinary shares. The U.S.
dollar cost of an ordinary share purchased with foreign currency generally will be the
U.S. dollar value of the purchase price on the date of purchase or, in the case of our
ordinary shares that are purchased by a cash basis U.S. Holder (or an accrual basis U.S.
Holder that so elects), on the settlement date for the purchase. Such an election by an
accrual basis U.S. Holder must be applied consistently from year to year and cannot be
revoked without the consent of the U.S. Internal Revenue Service. The holding period of
each ordinary share owned by a U.S. Holder will commence on the day following the date of
the U.S. Holders purchase of such ordinary share and will include the day on which
the ordinary share is sold by such U.S. Holder.

In
the case of a U.S. Holder who uses the cash basis method of accounting and who receives
NIS in connection with the taxable disposition of ordinary shares, the amount realized
will be based on the spot rate of exchange on the settlement date of such
taxable disposition. If such U.S. Holder subsequently converts NIS into U.S. dollars at a
conversion rate other than the spot rate in effect on the settlement date, he, she or it
may have a foreign currency exchange gain or loss treated as ordinary income or loss for
U.S. federal income tax purposes. A U.S. Holder who uses the accrual method of accounting
may elect the same treatment required of cash method taxpayers with respect to a taxable
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 U.S. Internal
Revenue Service. If an accrual method U.S. Holder does not elect to be treated as a cash
method taxpayer (pursuant to U.S. Treasury Regulations applicable to foreign currency
transactions), such U.S. Holder may be deemed to have realized an immediate foreign
currency gain or loss for U.S. federal income tax purposes in the event of any difference
between the U.S. dollar value of the NIS on the date of taxable disposition and the
settlement date. Any such currency gain or loss generally would be treated as U.S.-source
ordinary income or loss and would be subject to tax in addition to any gain or loss
recognized by such U.S. Holder on the taxable disposition of ordinary shares.

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# Treatment of
Distributions

For
U.S federal income tax purposes, the amount of any distribution with respect to our
ordinary shares will equal the amount of cash distributed, the fair market value of any
property distributed and the amount of any Israeli taxes withheld on such distribution as
described below under Israeli Tax Considerations  Tax on Dividends.
Other than distributions in liquidation or in redemption of our ordinary shares that are
treated as exchanges, a distribution with respect to our ordinary shares paid by us to a
U.S. Holder generally will be treated as a dividend to the extent that the distribution
does not exceed our current and accumulated earnings and profits, as determined for U.S.
federal income tax purposes. The amount of any distribution that exceeds these earnings
and profits will be treated first as a non-taxable return of capital, reducing the U.S.
Holders tax basis in his, her or its ordinary shares (but not below zero), and then
generally as capital gain from a deemed sale or exchange of such ordinary shares.
Corporate U.S. Holders generally will not be allowed a deduction under Section 243 of the
Code for dividends received on our ordinary shares and thus will be subject to tax at the
rate applicable to their taxable income. Currently, a noncorporate U.S. Holders
qualified dividend income generally is subject to tax at a rate of 15%. For
this purpose, qualified dividend income generally includes dividends paid by a
foreign corporation if, among other things, the noncorporate U.S. Holder meets certain
minimum holding period requirements and either (a) the stock of such corporation is
readily tradable on an established securities market in the U.S., including the Nasdaq
National Market, or (b) such corporation is eligible for the benefits of a comprehensive
income tax treaty with the U.S. which includes an information exchange program and is
determined to be satisfactory by the U.S. Secretary of the Treasury. The U.S. Secretary of
the Treasury has indicated that the income tax treaty between the U.S. and Israel is
satisfactory for this purpose. Dividends paid by us will not qualify for the 15% U.S.
federal income tax rate, however, if we are treated, for the tax year in which the
dividends are paid or the preceding tax year, as a passive foreign investment
company for U.S. federal income tax purposes. See the discussion below under the
heading Passive Foreign Investment Company Status. U.S. Holders are urged to
consult their own tax advisors regarding the U.S. federal income tax consequences of their
receipt of any distributions with respect to our ordinary shares.

A
dividend paid by us in NIS will be included in the income of U.S. Holders at the U.S.
dollar amount of the dividend, based on the spot rate of exchange in effect on
the date of receipt or deemed receipt of the distribution, regardless of whether the
payment is in fact converted into U.S. dollars. U.S. Holders will have a tax basis in the
NIS for U.S. federal income tax purposes equal to that U.S. dollar value. Any gain or loss
upon the subsequent conversion of the NIS into U.S. dollars or other disposition of the
NIS will constitute foreign currency gain or loss taxable as ordinary income or loss and
will be treated as U.S.-source income or loss for U.S. foreign tax credit purposes.

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Dividends
received with respect to our ordinary shares will constitute portfolio income
for purposes of the limitation on the use of passive activity losses and, therefore,
generally may not be offset by passive activity losses. Dividends received with respect to
our ordinary shares also generally will be treated as investment income for
purposes of the investment interest deduction limitation contained in Section 163(d) of
the Code, and as foreign-source passive income for U.S. foreign tax credit purposes or, in
the case of a U.S. Holder that is a financial services entity, financial services income.
Subject to certain limitations, U.S. Holders may elect to claim as a foreign tax credit
against their U.S. federal income tax liability any Israeli income tax withheld from
distributions on our ordinary shares which constitute dividends under U.S. income tax law.
U.S. Holders that do not elect to claim a foreign tax credit may instead claim a deduction
for Israeli income tax withheld, but only if the U.S. Holder elects to do so with respect
to all foreign income taxes in such year. In addition, special rules may apply to the
computation of foreign tax credits relating to qualified dividend income, as
defined above. The calculation of foreign tax credits and, in the case of a U.S. Holder
that elects to deduct foreign income taxes, the availability of deductions are complex and
involve the application of rules that depend on a U.S. Holders particular
circumstances. U.S. Holders are urged to consult their own tax advisors regarding the
availability to them of foreign tax credits or deductions in respect of any Israeli tax
withheld or paid with respect to any dividends which may be paid with respect to our
ordinary shares.

# Passive Foreign
Investment Company Status

Generally,
a foreign corporation is treated as a passive foreign investment company
(PFIC) for U.S. federal income tax purposes for any tax year if, in such tax
year, either (i) 75% or more of its gross income (including its pro rata share of the
gross income of any company in which it owns 25% or more of the shares by value) is
passive in nature (the Income Test), or (ii) the average percentage of its
assets during such tax year (including its pro rata share of the assets of any company in
which it owns 25% or more of the shares by value) which produce, or are held for the
production of, passive income (determined by averaging the percentage of the fair market
value of its total assets which are passive assets as of the end of each quarter of such
year) is 50% or more (the Asset Test). Passive income for this purpose
generally includes dividends, interest, rents, royalties and gains from securities and
commodities transactions.

There
is no definitive method prescribed in the Code, U.S. Treasury Regulations or
administrative or judicial interpretations thereof for determining the value of a foreign
corporations assets for purposes of the Asset Test. The legislative history of the
U.S. Taxpayer Relief Act of 1997 (the 1997 Act), however, indicates that for
purposes of the Asset Test, the total value of a publicly-traded foreign
corporations assets generally will be treated as equal to the sum of the aggregate
value of its outstanding stock plus its liabilities. It is unclear under current
interpretations of the 1997 Act whether other valuation methods could be employed to
determine the value of our assets.

Based
on the approach to valuation of a public companys assets set forth in the
legislative history of the 1997 Act and the composition and value of our gross assets
during 2007, it is likely that we would be deemed to have been a PFIC during 2007. For
2005 and 2006, we believe, based on the composition of our gross income and the
composition and value of our gross assets during such years, that we would not be deemed
to have been a PFIC in either of such years, although it is likely that we would have been
deemed a PFIC in 2002, 2003 and 2004. There can be no assurance that we will not be deemed
a PFIC in any future tax year.

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Accordingly,
U.S. Holders are urged to consult their own tax advisors for guidance as to our status as
a PFIC in any tax year. For those U.S. Holders who determine that we are a PFIC in any tax
year and notify us in writing of their request for the information required in order to
effectuate the QEF Election described below, we will promptly make such information
available to them.

If
we are treated as a PFIC for U.S. federal income tax purposes for any year during a U.S.
Holders holding period of ordinary shares and the U.S. Holder does not make a QEF
Election or a mark-to-market  election (both as described below):

| |  | Excess
distributions by us to a U.S. Holder would be taxed in a special way. Excess
distributions with respect to any U.S. Holder are amounts received by such U.S.
Holder with respect to our ordinary shares in any tax year that exceed 125% of the
average distributions received by such U.S. Holder from us during the shorter of (i) the
three previous years, or (ii) such U.S. Holders holding period of our ordinary
shares before the then-current tax year. Excess distributions must be allocated ratably
to each day that a U.S. Holder has held our ordinary shares. A U.S. Holder must include
amounts allocated to the current tax year in his, her or its gross income as ordinary
income for that year, pay tax on amounts allocated to each prior tax year in which we
were a PFIC at the highest rate on ordinary income in effect for such prior year and pay
an interest charge on the resulting tax at the rate applicable to deficiencies of U.S.
federal income tax.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
entire amount of any gain realized by a U.S. Holder upon the sale or other disposition of
our ordinary shares also would be treated as an excess distribution subject
to tax as described above.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | The
tax basis in ordinary shares acquired from a decedent who was a U.S. Holder would not
receive a step-up to fair market value as of the date of the decedents death, but
instead would be equal to the decedents basis, if lower.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Although
we generally will be treated as a PFIC as to any U.S. Holder if we are a PFIC for any year
during the U.S. Holders holding period, if we cease to be a PFIC, the U.S. Holder
may avoid the consequences of PFIC classification for subsequent years if he, she or it
elects to recognize gain based on the unrealized appreciation in his, her or its ordinary
shares through the close of the tax year in which we cease to be a PFIC.

A
U.S. Holder who beneficially owns shares of a PFIC must file U.S. Internal Revenue Service
Form 8621 (Return by a Shareholder of a Passive Foreign Investment Company or Qualified
Electing Fund) with the U.S. Internal Revenue Service for each tax year in which he, she
or it holds shares in a PFIC. This form describes any distributions received with respect
to these shares and any gain realized upon the disposition of these shares.

For
any tax year in which we are treated as a PFIC, a U.S. Holder may elect to treat his, her
or its ordinary shares as an interest in a qualified electing fund (a QEF
Election), in which case the U.S. Holder would be required to include in income
currently his, her or its proportionate share of our earnings and profits in years in
which we are a PFIC regardless of whether distributions of our earnings and profits are
actually made to the U.S. Holder. Any gain subsequently recognized by the U.S. Holder upon
the sale of his, her or its ordinary shares, however, generally would be taxed as capital
gain and the denial of the basis step-up at death described above would not apply.

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A
U.S. Holder may make a QEF Election with respect to a PFIC for any tax year of the U.S.
Holder. A QEF Election is effective for the tax year in which the election is made and all
subsequent tax years of the U.S. Holder. Procedures exist for both retroactive elections
and the filing of protective statements. A U.S. Holder making the QEF Election must make
the election on or before the due date, as extended, for the filing of the U.S.
Holders U.S. federal income tax return for the first tax year to which the election
will apply. Upon his, her or its request, we will provide to each U.S. Holder, who wishes
to make a QEF Election for any year in which we are treated as a PFIC, the information
required to make a QEF Election and to make subsequent annual filings.

As
an alternative to a QEF Election, a U.S. Holder generally may elect to mark his, her or
its ordinary shares to market annually, recognizing ordinary income or loss (subject to
certain limitations) equal to the difference, as of the close of the tax year, between the
fair market value of his, her or its ordinary shares and the adjusted tax basis of such
shares. If a mark-to-market election with respect to ordinary shares is in effect on the
date of a U.S. Holders death, the normally available step-up in tax basis to fair
market value will not be available. Rather, the tax basis of the ordinary shares in the
hands of a U.S. Holder who acquired them from a decedent will be the lesser of the
decedents tax basis or the fair market value of the ordinary shares. Once made, a
mark-to-market election generally continues unless revoked with the consent of the U.S.
Internal Revenue Service.

The
implementation of many aspects of the Codes PFIC rules requires the issuance of
Treasury Regulations which in many instances have yet to be promulgated and which may have
retroactive effect when promulgated. We cannot be sure that any of these regulations will
be promulgated or, if so, what form they will take or what effect they will have on the
foregoing discussion. Accordingly, and due to the complexity of the PFIC rules, U.S.
Holders should consult their own tax advisors regarding our status as a PFIC and the
eligibility, manner and advisability of making a QEF Election or a mark-to-market election
if we are treated as a PFIC.

# Information Reporting
and Backup Withholding

Payments
in respect of our ordinary shares that are made in the U.S. or by certain U.S.-related
financial intermediaries may be subject to information reporting and backup withholding
tax at rates equal to 28% through 2010 and 31% after 2010 (unless legislation is enacted
that provides otherwise). Information reporting will not apply, however, with respect to
payments to certain U.S. Holders, including corporations and tax-exempt organizations. In
addition, backup withholding will not apply to a U.S. Holder that (i) is a corporation or
comes within certain exempt categories, and demonstrates that fact when so required, or
(ii) furnishes a correct taxpayer identification number and furnishes other required
certifications. U.S. Holders required to establish their exemption from backup withholding
generally must provide a certification on IRS Form W-9 (or substitute form). Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules
may be credited against a U.S. Holders U.S. federal income tax liability, and a U.S.
Holder may obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the U.S. Internal Revenue Service.
U.S. Holders should consult their own tax advisors regarding their qualification for an
exemption from backup withholding and the procedures of obtaining such an exemption, if
applicable.

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Israeli Tax Considerations

The
following discussion, which represents a summary of the current tax structure applicable
to companies in Israel, with special reference to its effect on us, and certain Israeli
tax laws affecting our shareholders, including U.S. shareholders, is for general
information only and is not intended to substitute for careful or specific tax planning.
To the extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, there can be no assurance that the views expressed herein
will accord with any such interpretation in the future by the tax authorities or by the
courts. This summary does not discuss all the aspects of Israeli tax law that may be
relevant to a particular shareholder in light of his or her personal investment
circumstances or to some types of investors that are subject to special treatment under
Israeli law. This discussion is not intended, and should not be construed, as legal or
professional tax advice, and does not cover all possible tax considerations. Accordingly,
each investor should consult his or her own tax advisor as to the particular tax
consequences of an investment in the ordinary shares including the effects of applicable
Israeli or foreign or other tax laws and possible changes in the tax laws.

# Corporate Tax Structure

Generally,
Israeli companies are subject to corporate tax on their taxable income at the rate of 29%
for the 2007 tax year. Following an amendment to the Israeli Income Tax Ordinance, or the
Tax Ordinance, which came into effect on January 1, 2006, the corporate tax rate is
scheduled to further decrease as follows: 27% for the 2008 tax year, 26% for the 2009 tax
year and 25% for the 2010 tax year and thereafter. Israeli companies are generally subject
to capital gains tax at a rate of 25% for capital gains (other than gains deriving from
the sale of listed securities) derived from assets purchased after January 1, 2003.
However, the effective tax rate payable by a company that derives income from an Approved
Enterprise program may be considerably less, as further discussed below.

# Tax Benefits Under the
Law for the Encouragement of Capital Investments, 1959

Under
the Law for Encouragement of Capital Investments, 1959, known as the Investments Law, by
virtue of the Approved Enterprise status granted to some of our investment
programs, we are entitled to various tax benefits. Until its amendment in April 2005 (as
further discussed below), the Investments Law provided that a proposed capital investment
in eligible facilities may, upon application to the Investment Center of the Ministry of
Industry, Trade and Labor of the State of Israel, or the Investment Center, be designated
as an Approved Enterprise. The period of tax benefits is seven years,
commencing in the first year in which we earn taxable income from the approved enterprise,
subject to certain limitations. Under certain circumstances, the period of tax benefits
may be extended to ten years. Under this law, since we have elected what is known as the
alternative package, our taxable income derived from an investment program
designated as an Approved Enterprise is fully exempt from corporate tax for a period of
two years, after which the income from these enterprises is taxable at the rate of 10%
 25% (depending on the level of foreign holdings in our ordinary shares) for the
remainder of the period of tax benefits. The exemption is applicable as long as the gains
are not distributed. Upon distribution, a 10%  25% tax rate will apply, as described
below. Tax benefits as an Approved Enterprise, can be reduced or cancelled if the company
manufactures its products outside of Israel.

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Income
generated from these Approved Enterprise programs includes income generated from the grant
of a usage right with respect to know-how developed by the Approved Enterprise, income
generated from royalties and income derived from a service which is auxiliary to such
usage right or royalties, provided that such income is generated within the Approved
Enterprises ordinary course of business, under the terms and conditions set by the
Approved Enterprise programs. After the applicable benefit period expires, any such income
from Approved Enterprise programs will be subject to tax at the full corporate tax rate.

On
April 1, 2005, an amendment to the Investments Law came into force. Pursuant to the
amendment, a companys facility will be granted the status of Approved
Enterprise only if it is proven to be an industrial facility (as defined in the
Investments Law) that contributes to the economic independence of the Israeli economy and
is a competitive facility that contributes to the Israeli gross domestic product. The
amendment provides that the Israeli Tax Authority and not the Investment Center will be
responsible for an Approved Enterprise under the alternative package of benefits, referred
to as a Benefited Enterprise. A company wishing to receive the tax benefits
afforded to a Benefited Enterprise is required to select the tax year from which the
period of benefits under the Investment Law are to commence by simply notifying the
Israeli Tax Authority within 12 months of the end of that year. In order to be recognized
as owning a Benefited Enterprise, a company is required to meet a number of conditions set
forth in the amendment, including making a minimal investment in manufacturing assets for
the Benefited Enterprise and having completed a cooling-off period of no less than three
years from the companys previous year of commencement of benefits under the
Investments Law. The amendment will apply to approved enterprise programs in which the
year of election under the Investments Law is 2004 or later, unless such programs received
approval from the Investment Center on or prior to December 31, 2004 in which case the
amendment provides that terms and benefits included in any certificate of approval already
granted will remain subject to the provisions of the law as they were on the date of such
approval. There can be no assurance that we will receive future benefits under such
amendment to the Investments Law.

Part
of our income has been generated through our Approved Enterprises. If a company that has
elected the alternative package distributes to its shareholders a cash
dividend from tax-exempt income attributable to it, it would incur a tax liability on the
amount distributed at the rate (10% to 25%) which would have been applicable had the
company not elected the alternate package, and it will have to withhold tax at the rate of
15% with respect to the dividend distributed. Our taxes outside of Israel, mainly in Japan
and the United States, are dependent on our operations in each jurisdiction as well as
relevant laws and treaties.

# Capital Gains Tax

Israeli
law generally imposes a capital gains tax on the sale of any capital assets by residents
of Israel, as defined for Israeli tax purposes, and on the sale of assets located in
Israel, including shares in Israeli companies, by non-residents of Israel, unless a
specific exemption is available or unless a tax treaty between Israel and the
shareholders country of residence provides otherwise. The law distinguishes between
the inflationary surplus and the real gain. The inflationary surplus is a portion of the
total capital gain which is equivalent to the increase of the relevant assets
purchase price attributable to the increase in the Israeli CPI, or in certain
circumstances, a foreign currency exchange rate, between the date of purchase and the date
of sale. The real gain is the excess of the total capital gain over the inflationary
surplus.

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The
tax rate generally applicable to capital gains derived from the sale of shares, whether
listed on a stock market or not, is 20% for Israeli individuals, unless such shareholder
claims a deduction for financing expenses in connection with such shares, in which case
the gain will generally be taxed at a rate of 25%. Additionally, if such shareholder is
considered a significant shareholder at any time during the 12-month period
preceding such sale (i.e., such shareholder holds directly or indirectly, including with
others, at least 10% of any means of control in the company) the tax rate will be 25%.
Israeli companies are subject to the corporate tax rate on capital gains derived from the
sale of listed shares, unless such companies were not subject to the Income Tax Law
(Inflationary Adjustments), 5745-1985, referred to as the Adjustments Law, (or certain
regulations) as of August 10, 2005, in which case the applicable tax rate is 25%. However,
the foregoing tax rates will not apply to dealers in securities and shareholders who
acquired their shares prior to an initial public offering (which may be subject to
different tax treatment).

The
tax basis of shares acquired prior to January 1, 2003 will be determined in accordance
with the average closing share price in the three trading days preceding January 1, 2003.
However, a request may be made to the tax authorities to consider the actual adjusted cost
of the shares as the tax basis if it is higher than such average price.

Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from the sale of
shares of Israeli companies publicly traded on Nasdaq or a recognized stock market outside
of Israel, provided that such capital gains are not derived from a permanent establishment
in Israel, that such shareholders are not subject to the Adjustments Law and that such
shareholders did not acquire their shares prior to the issuers initial public
offering. However, non-Israeli corporations will not be entitled to such exemption if
Israeli residents (i) have a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) are the beneficiaries of or are entitled to 25% or more of the
revenues or profits of such non-Israeli corporation, whether directly or indirectly.

In
some instances where our shareholders may be liable for Israeli tax on the sale of their
ordinary shares, the payment of the consideration may be subject to the withholding of
Israeli tax at the source.

Pursuant
to a treaty between the governments of the United States and Israel, known as the
U.S.-Israel Tax Treaty, the sale, exchange or disposition of shares by a person who holds
the ordinary shares as a capital asset, who qualifies as a resident of the United States
within the meaning of the treaty and who is entitled to claim the benefits afforded to a
U.S. resident by the treaty will generally not be subject to Israeli capital gains tax.
This exemption does not apply if the person holds, directly or indirectly, shares
representing 10% or more of our voting power during any part of the 12-month period
preceding the applicable sale, exchange or disposition, subject to specified conditions.
However, under the treaty, such person would be permitted to claim a credit for the
capital gains tax paid in Israel against the U.S. federal income tax imposed with respect
to the applicable sale, exchange or disposition, subject to the limitations in U.S. laws
applicable to foreign tax credits. The treaty does not relate to U.S state or local taxes.

87

---

---

# Tax on Dividends

Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
These sources of income include passive income such as dividends. On distributions of
dividends other than bonus shares, or stock dividends, we would be required to withhold
income tax at the source at the rate of 20%, or 25% for a shareholder that is considered a
significant shareholder at any time during the 12-month period preceding such
distribution, unless a different rate is provided in a treaty between Israel and the
shareholders country of residence and a special certificate is provided. If the
income out of which the dividend is being paid is attributable to an Approved Enterprise
(or Benefited Enterprise), the rate is generally 15%. Under the U.S.-Israel Tax Treaty, if
the income out of which the dividend is being paid is not attributable to an Approved
Enterprise (or Benefited Enterprise) and if not more than 25% of our gross income consists
of interest or dividends, then income tax with respect to shareholders that are U.S.
corporations holding at least 10% of our issued voting power during the part of the tax
year which precedes the date of payment of the dividend and during the whole of its prior
tax year, is required to be withheld at the rate of 12.5%.

|F. | DIVIDENDS
AND PAYING AGENTS
|-- | ---------------------------

Not
applicable

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

Not
applicable.

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

We
are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, applicable to foreign private issuers and fulfill the obligations with respect to
such requirements by filing reports with the Securities and Exchange Commission, or
SEC.  You may read and copy any document we file, including any exhibits, with the
SEC without charge at the SECs public reference room at 100 F Street, N.E.,
Washington, D.C. 20549.  Copies of such material may be obtained by mail from the
Public Reference Branch of the SEC at such address, at prescribed rates.  Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room. 
Certain of our SEC filings are also available to the public at the SECs website at
http://www.sec.gov.

As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing
the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act.  In addition, we are not
required under the Exchange Act to file periodic reports and financial statements with the
SEC as frequently or as promptly as United States companies whose securities are
registered under the Exchange Act.  We have obtained an exemption from Nasdaqs
requirement to send an annual report to shareholders prior to our annual general meetings.
We file annual reports on Form 20-F electronically with the SEC and post a copy on our
website, www.orckit.com.

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

Not
applicable

88

---

---

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

# General

We
are exposed to market risk, including movements in interest rates and foreign currency
exchange rates. Our primary market risk exposure occurs because we generate a substantial
part of our revenues in Yen, but incur a majority of our salaries and related expenses and
part of our other expenses in NIS. In 2008, we may also begin to generate revenues in
Euro. Our convertible notes are also denominated in NIS. As of March 31, 2008, we have
investments linked to the NIS and the CPI in an amount substantially equivalent to the
debt value of our notes. We may not have such an amount in the future.

From
time to time, in managements discretion, we may engage in hedging or other
transactions intended to manage risks relating to foreign currency exchange rates. As of
March 31, 2008, we were not involved in any hedging transactions. We may in the future
undertake hedging or other similar transactions or invest in market risk sensitive
instruments when our management determines that it is necessary to offset these risks.

Our
interest rate and foreign exchange exposures are monitored by tracking actual and
projected commitments.

# Exchange Rate Risk
Management

Our
functional currency and that of our subsidiaries is the U.S. dollar.

From
time to time, we assess our exposure to exchange rate risks and endeavor to limit this
exposure through natural hedging, or by attempting to maintain a similar level of assets
and liabilities in any given currency.

The
table below presents our balance sheet exposure as of December 31, 2007 at fair value
related to market risk sensitive instruments, mainly short term receivables, cash, cash
equivalents and payables in currencies other than U.S. dollars. Substantially all of such
balance is in the currencies set forth in the table below. The information is presented in
U.S. dollars (in millions), which is our reporting currency.

Please
see also the explanatory notes below the table.

| |  |  | 
| |  |  | 
|
|
|
|
| |  |  | 

Explanatory
notes:

1)       
          Total balance sheet exposure relating to market risk sensitive instruments is
          the sum of the absolute figures (excess of assets over liabilities in the amount
          of $1.1 million). A devaluation of 5% of the U.S. dollar compared to the NIS
          would cause a decrease in expenses of approximately $25,000. A devaluation of 5%
          of the U.S. dollar compared to the Yen would cause an increase in expenses of
          approximately $80,000.

89

---

---

2)       
          The data presented in the table reflects the exposure after taking into account
          the effect of the natural hedging.

# Interest Rate Risk
Management

As
of December 31, 2007, we had $26.8 million of cash and cash equivalents, $39.9 million of
short-term marketable securities, $1.5 million of short-term bank deposits, and $33.0
million of long-term marketable securities. Our trading securities mature as follows:
$34.2 million in 2008, and $38.8 million over a period of one to 13 years until 2020. Due
to the relatively short-term maturities of a substantial part of our cash, deposits and
securities portfolio, and the intent to hold most of our securities until maturity, an
immediate 10% change in the current interest rates (for example, from 5.0% to 5.5%) is not
expected to have a material effect on its near-term financial condition or results of
operations.

|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
|-------- |  | ----------------------------------------------------------------------------

None

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

Disclosure Controls and
Procedures

We
performed an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of December 31, 2007. The evaluation was performed with the
participation of our senior management and under the supervision and with the
participation of our chief executive officer and chief financial officer. Based on this
evaluation, our chief executive officer and chief financial officer have concluded that
our disclosure controls and procedures are effective to alert them on a timely basis to
material information required to be included in our periodic reports with the Securities
and Exchange Commission.

Managements Annual
Report on Internal Control Over Financial Reporting

Our
management, including our chief executive officer and chief financial officer, is
responsible for establishing and maintaining adequate internal control over our financial
reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act.
Our internal control system was designed to provide reasonable assurance to our management
and our board of directors regarding the reliability of financial reporting and the
preparation and fair presentation of published financial statements for external purposes
in accordance with generally accepted accounting principles. All internal control systems,
no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurances with respect to
financial statement preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may decline.

90

---

---

Our
management (with the participation of our chief executive officer and chief financial
officer) conducted an evaluation, pursuant to Rule 13a-15(c) under the Exchange Act, of
the effectiveness, as of the end of the period covered by this Annual Report, of our
internal control over financial reporting based on the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on the results of this evaluation, management assessed the
effectiveness of our internal control over financial reporting as at December 31,
2007 and concluded that our internal control over financial reporting was effective as of
December 31, 2007.

Attestation Report of the
Registered Public Accounting Firm

See
report of Kessleman & Kesselman, a member of PricewaterhouseCoopers International
Limited, an independent registered public accounting firm, included under Item 18 on page
F-2.

Changes in Financial
Control Over Financial Reporting

There
were no changes in our internal control over financial reporting that occurred during 2007
that have materially affected, or that are reasonably likely to materially affect, our
internal control over financial reporting.

|Item 16A. |  | Audit
Committee Financial Expert
|--------- |  | --------------------------------

Our
board of directors has determined that Mr. Motil qualifies as an audit committee
financial expert as defined in Item 16A of the Form 20-F rules and is
independent as defined in the applicable regulations.

|Item 16B. |  | Code
of Ethics
|--------- |  | --------------

Our
board of directors has adopted our Code of Ethics, a code that applies to all of our
officers, directors and employees. We will provide our Code of Ethics free of charge to
any person who requests a copy of it. Such requests may be sent to our offices in 126
Yigal Alon Street, Tel Aviv, Israel, attention: Controller.

|Item 16C. |  | Principal
Accountant Fees and Services
|--------- |  | --------------------------------------

At
our annual general meeting held in April 2007, our shareholders re-appointed Kesselman
& Kesselman, a member of PricewaterhouseCoopers International Limited, to serve as our
independent auditors. These accountants billed the following fees to us for professional
services in each of the last two fiscal years:

91

---

---

| |                    | Year Ended December 31,
| | ------------------ | -----------------------
|
|
|
|
| | Audit Fees         |                        
| | Audit-Related Fees |                        
| | Tax Fees           |                        
| | All Other Fees     |                        
| |                    |                        
| | Total              |                        

Audit
Fees are the aggregate fees billed for the audit of our annual financial statements,
as well as of our managements assessment of the effectiveness of our internal
control over financial reporting. This category also includes services that generally the
independent accountant provides, such as statutory audits including audits required by the
Office of the Chief Scientist and other Israeli government institutes, consents and
assistance with and review of documents filed with the SEC.

Audit-Related
Fees are the aggregate fees billed for assurance and related services that are
reasonably related to the performance of the audit and are not reported under Audit Fees.
These fees include mainly accounting consultations regarding the accounting treatment of
matters that occur in the regular course of business, implications of new accounting
pronouncements and other accounting issues that occur from time to time.

Tax
Fees are the aggregate fees billed for professional services rendered for tax
compliance, tax advice, other than in connection with the audit. Tax compliance involves
preparation of original and amended tax returns, tax planning and tax advice.

All
Other Fees include fees not included in any of the other categories. These fees were
mainly for consultations and services provided in connection with internal control over
financial reporting.

Our
Audit Committee has adopted a pre-approval policy for the engagement of our independent
accountant to perform certain audit and non-audit services. Pursuant to this policy, which
is designed to assure that such engagements do not impair the independence of our
auditors, the audit committee pre-approves annually a catalog of specific audit and
non-audit services in the categories of Audit Service, Audit-Related Service, Tax Services
and other services that may be performed by our independent accountants, and the maximum
pre-approved fees that may be paid as compensation for each pre-approved service in those
categories. Any proposed services exceeding the maximum pre-approved fees require specific
approval by the Audit Committee.

None
of the fees paid by us to our independent auditors during 2006 were for services approved
pursuant to 2-01(c)(7)(i)(C) of Regulation S-K.

The
Audit Committee may delegate its pre-approval authority to one or more of its members,
subject to ratification by the entire Audit Committee.

Requests
or applications to provide services that require specific approval by the Audit Committee
are submitted to the Audit Committee by an executive officer, together with detailed
back-up documentation and a statement as to whether, in the requesting executive
officers view, the provision of such services by the outside auditor would impair
its independence.

92

---

---

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

Not
applicable.

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

None.

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

See
Item 18.

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

Our
consolidated financial statements and related auditors report for the year ended
December 31, 2007 are attached to this Annual Report.

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

The
following exhibits are filed as part of this Annual Report:

93

---

---

|Exhibit
No. | Exhibit
|----------- | -------

|1.19 | Memorandum of Association, as amended.
|----- | --------------------------------------

|1.28 | Sixth Amended and Restated Articles of Association.
|---- | ---------------------------------------------------

|1.34 | Bonus Rights Agreement, dated as of November 20, 2001, between Orckit
               Communications Ltd. and American Stock Transfer & Trust Company, as Rights
               Agent.
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|1.41 | Amendment No. 1, dated as of February 5, 2003, to Bonus Rights Plan, dated as of
               November 20, 2001, between Orckit Communications Ltd. and American Stock
               Transfer & Trust Company, as Rights Agent.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.18 | Orckit Israeli Share Incentive Plan, as amended.
|---- | ------------------------------------------------

|4.53 | Lease Agreement, dated September 28, 1999, between Orckit Communications Ltd.
               and Gush 7093 Helka 162 Ltd., private company # 51-058315-6.
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|4.65 | Corrigent Stock Option Plan (2001).
|---- | -----------------------------------

|4.107 | Orckit Communications Ltd. 2003 Subsidiary Employee Share Incentive Plan.
|----- | -------------------------------------------------------------------------

|4.159 | Amended and Restated Employment Agreement, dated as of June 23, 2005, between
               Orckit Communications Ltd. and Eric Paneth.
|----- | ----------------------------------------------------------------------------------------------------------------------------------------

|4.169 | Amended and Restated Employment Agreement, dated as of June 23, 2005, between
               Orckit Communications Ltd. and Izhak Tamir.
|----- | ----------------------------------------------------------------------------------------------------------------------------------------

|4.1710 | English summary of the terms and conditions of Convertible Notes issued in March
               2007.
|------ | -----------------------------------------------------------------------------------------------------

|8.1* |  | Subsidiaries
of Orckit Communications Ltd.
|---- |  | ------------------------------------------

|12.1* |  | Certification
of Principal Executive Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant
                toss.302 of the Sarbanes-Oxley Act
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|12.2* |  | Certification
of Principal Financial Officer pursuant to 17 CFR 240.13a-14(a), as adopted pursuant
                toss.302 of the Sarbanes-Oxley Act
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

|13.1* |  | Certification
of Principal Executive Officer pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.
                906 of the Sarbanes-Oxley Act
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|13.2* |  | Certification
of Principal Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to 906
of the Sarbanes-Oxley Act
|----- |  | -----------------------------------------------------------------------------------------------------------------------------

|15.1* |  | Consent
of Kesselman & Kesselman, independent auditors of Orckit Communications Ltd.
|----- |  | ------------------------------------------------------------------------------------

94

---

---

---

| | Translated
 in full or  summary  version;  the  original  language  version  is on file with  Orckit
         Communications Ltd. and is available upon request.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|1 | Incorporated
by reference to Orckit Communications Ltd.s Registration                Statement
(File No. 000-28724) on Form 8-A/A.
|- | -----------------------------------------------------------------------------------------------------------------------------------

|2 | Incorporated
by reference to Orckit Communications Ltd.s Registration                Statement
(File No. 333-12178) on Form S-8.
|- | ---------------------------------------------------------------------------------------------------------------------------------

|3 | Incorporated
by reference to Orckit Communications Ltd.s Annual Report on                Form
20-F for the fiscal year ended December 31, 2000.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

|4 | Incorporated
by reference to Orckit Communications Ltd.s Registration                Statement
(File No. 000-28724) on Form 8-A.
|- | ---------------------------------------------------------------------------------------------------------------------------------

|5 | Incorporated
by reference to Orckit Communications Ltd.s Annual Report on                Form
20-F for the fiscal year ended December 31, 2001.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

|6 | Incorporated
by reference to Orckit Communications Ltd.s Annual Report on                Form
20-F for the fiscal year ended December 31, 2003.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

|7 | Incorporated
by reference to Orckit Communications Ltd.s Annual Report on                Form
20-F for the fiscal year ended December 31, 2002.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

|8 | Incorporated
by reference to Orckit Communication Ltd.s Registration                Statement on
Form S-8 (File No. 333-131991).
|- | ---------------------------------------------------------------------------------------------------------------------------------

|9 | Incorporated
by reference to Orckit Communications Ltd.s Annual Report on                Form
20-F for the fiscal year ended December 31, 2005.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------

|10 | Incorporated
by reference to Orckit Communications Ltd.s Annual Report on                Form
20-F for the fiscal year ended December 31, 2006.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------

|* | Filed
herewith.
|- | ---------------

95

---

---

# 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.

| |  | ORCKIT COMMUNICATIONS LTD.By:      /s/ Izhak Tamir
Izhak TamirPresidentDate: April 16, 2008
| |  | ---------------------------------------------------------------------------------------------------------

96

---

---

ORCKIT COMMUNICATIONS LTD.

(An Israeli Corporation)

2007 CONSOLIDATED FINANCIAL STATEMENTS



---

---

ORCKIT COMMUNICATIONS LTD.

(An Israeli Corporation)

2007 CONSOLIDATED FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                        | Page      
|------------------------------------------------------- | ----------
|
|
|
|
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2       
|                                                       
|CONSOLIDATED FINANCIAL STATEMENTS:                     
|Balance sheets                                          | F-3       
|Statements of operations                                | F-4       
|Statements of changes in shareholders' equity           | F-5       
|Statements of cash flows                                | F-6       
|Notes to financial statements                           | F-7 - F-35

The
amounts are stated in U.S. dollars ($) in thousands.



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of

ORCKIT COMMUNICATIONS LTD.

We
have audited the accompanying consolidated balance sheets of Orckit Communications Ltd. (the
Company) and its subsidiaries as of December 31, 2007 and 2006, and the
related consolidated statements of operations, changes in shareholders equity and
cash flows for each of the years in the three-year period ended December 31, 2007. We also
have audited the Companys internal control over financial reporting as of December
31, 2007, based on criteria established in Internal Control  Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys Board of Directors and management are responsible for these financial
statements, for maintaining effective internal control over financial reporting, and for
its assessment of the effectiveness of internal control over financial reporting, included
in the accompanying Managements Annual Report on Internal Control over
Financial Reporting under Item 15. Our responsibility is to express an opinion on these financial
statements and an opinion on the companys internal control over financial reporting
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
audits to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements included
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 evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.

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

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

In our opinion, the financial
statements referred to above present fairly, in all material respects, the financial
position of the Company and its subsidiaries as of December 31, 2007 and 2006, and the
results of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2007, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of December
31, 2007, based on criteria established in Internal Control  Integrated Framework
issued by the COSO.

As
discussed in note 1k to the consolidated financial statements, the Company changed its
method of accounting for uncertainty in income taxes in 2007. In addition, as discussed in
note 1q to the consolidated financial statements, the Company changed its method of
accounting for stock-based compensation to employees commencing July 1, 2005.

|                 |                                    
|---------------- | -----------------------------------
|
|
|
|
|Tel Aviv, Israel | /s/ Kesselman & Kesselman          
|April 16, 2008   | Certified Public Accountants (Isr.)

F - 2

---

---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 CONSOLIDATED BALANCE SHEETS
 (U.S. dollars in thousands)

|                                                                                   | December 31
|---------------------------------------------------------------------------------- | -----------
|
|
|
|
|A  s   s  e  t  s                                                                  |            
|CURRENT ASSETS:                                                                    |            
|Cash and cash equivalents                                                          |            
|Marketable securities  (note 9a)                                                   |            
|Bank deposits (note 9e)                                                            |            
|Trade receivables (note 9b)                                                        |            
|Other current assets (note 9c)                                                     |            
|Inventories (note 9d)                                                              |            
|                                                                                   |            
|T  o  t  a  l    current assets                                                    |            
|                                                                                   |            
|LONG-TERM INVESTMENTS:                                                             |            
|Marketable securities (note 9a)                                                    |            
|Other (notes 1c, 3a, 9e)                                                           |            
|                                                                                   |            
|                                                                                   |            
|                                                                                   |            
|PROPERTY AND EQUIPMENT- net (note 2):                                              |            
|                                                                                   |            
|DEFERRED ISSUANCE COSTS,net of accumulated amortization (note 1g)                  |            
|                                                                                   |            
|T  o  t  a  l    assets                                                            |            
|                                                                                   |            
|Liabilities and shareholders' equity                                               |            
|CURRENT LIABILITIES:                                                               |            
|Trade payables                                                                     |            
|Accrued expenses and other payables (note 9f)                                      |            
|Deferred income (note 9g)                                                          |            
|                                                                                   |            
|T  o  t  a  l   current liabilities                                                |            
|                                                                                   |            
|LONG-TERM LIABILITIES:                                                             |            
|Accrued severance pay and other (notes 3, 1k)                                      |            
|Convertible subordinated notes (note 4)                                            |            
|                                                                                   |            
|T  o  t  a  l   long-term liabilities                                              |            
|                                                                                   |            
|COMMITMENTS AND CONTINGENT LIABILITY (note 5)                                      |            
|T  o  t  a  l   liabilities                                                        |            
|                                                                                   |            
|SHAREHOLDERS' EQUITY(note 6):                                                      |            
|Share capital - ordinary shares of no par value                                    |            
|(authorized: 50,000,000 shares; issued: December 31, 2006 - 18,326,374 shares;     |            
|December 31, 2007 - 18,987,573 shares; outstanding: December 31, 2006 - 15,681,535 |            
|shares; December 31, 2007 - 16,342,734 shares) and additional paid in capital      |            
|Accumulated deficit                                                                |            
|Accumulated other comprehensive loss                                               |            
|Treasury shares, at cost  (2,644,839 ordinary shares)                              |            
|                                                                                   |            
|T  o  t  a  l    shareholders' equity                                              |            
|                                                                                   |            
|T  o  t  a  l   liabilities and shareholders' equity                               |            
|                                                                                   |            

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

F - 3

---

---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (U.S. dollars in thousands, except per share data)

|                                                 | Year ended December 31
|------------------------------------------------ | ----------------------
|
|
|
|
|REVENUES(note 9h)                                |                       
|COST OF REVENUES(note 9i)                        |                       
|                                                 |                       
|GROSS PROFIT                                     |                       
|RESEARCH AND DEVELOPMENT EXPENSES - net(note 9j) |                       
|SELLING, GENERAL AND ADMINISTRATIVE              |                       
|EXPENSES                                         |                       
|                                                 |                       
|OPERATING INCOME (LOSS)                          |                       
|INCOME FROM DEVALUATION OF CONVERSION            |                       
|FEATURE EMBEDDED IN CONVERTIBLE NOTES(note 4)    |                       
|FINANCIAL INCOME- net (note 9k)                  |                       
|LITIGATION SETTLEMENT INCOME(note 9l)            |                       
|OTHER INCOME(note 9l)                            |                       
|                                                 |                       
|NET INCOME (LOSS)                                |                       
|                                                 |                       
|EARNINGS (LOSS) PER SHARE ("EPS") *(note 9n):    |                       
|Basic                                            |                       
|                                                 |                       
|Diluted                                          |                       
|                                                 |                       
|                                                 |                       
|WEIGHTED AVERAGE NUMBER OF SHARES                |                       
|USED IN COMPUTATION OF EPS*:                     |                       
|Basic                                            |                       
|                                                 |                       
|Diluted                                          |                       
|                                                 |                       

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

F - 4

---

---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
 (U.S. dollars in thousands)

|                                                              | Share capital and additional
paid in capital |  |  |        | 
|------------------------------------------------------------- | -------------------------------------------- |  |  | ------ | 
|
|
|
|
|BALANCE AT JANUARY 1, 2005                                    |                                              |  |  | 13,183 | 
|CHANGES DURING 2005:                                          |                                              | 
|Net income                                                    |                                              |  |  |        | 
|Exercise of options granted to employees                      |                                              |  |  | 1,446  | 
|Compensation related to employee stock option grants          |                                              |  |  |        | 
|                                                              |                                              |  |  |        | 
|BALANCE AT DECEMBER 31, 2005                                  |                                              |  |  | 14,629 | 
|CHANGES DURING 2006:                                          |                                              | 
|Net income                                                    |                                              |  |  |        | 
|Exercise of options granted to employees                      |                                              |  |  | 1,053  | 
|Compensation related to employee stock option grants          |                                              |  |  |        | 
|                                                              |                                              |  |  |        | 
|BALANCE AT DECEMBER 31, 2006                                  |                                              |  |  | 15,682 | 
|CHANGES DURING 2007:                                          |                                              | 
|Net loss                                                      |                                              |  |  |        | 
|Unrealized losses on available-for-sale marketable securities |                                              |  |  |        | 
|                                                              |                                              |  |  |        | 
|T  o  t  a  l   comprehensive loss                            |                                              |  |  |        | 
|                                                              |                                              |  |  |        | 
|Initial adoption of FIN 48                                    |                                              |  |  |        | 
|Exercise of options granted to employees                      |                                              |  |  | 661    | 
|Compensation related to employees stock option grants         |                                              |  |  |        | 
|                                                              |                                              |  |  |        | 
|BALANCE AT DECEMBER 31, 2007                                  |                                              |  |  | 16,343 | 
|                                                              |                                              |  |  |        | 

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

F - 5

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---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (U.S. dollars in thousands)

|                                                                           | Year ended December 31
|-------------------------------------------------------------------------- | ----------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                                      |                       
|Net income (loss) for the year                                             |                       
|Adjustments to reconcile net income (loss) to net cash provided by         |                       
|(used in) operating activities:                                            |                       
|Depreciation and amortization:                                             |                       
|Property and equipment                                                     |                       
|Deferred issuance costs                                                    |                       
|Trading marketable securities, net                                         |                       
|Capital gain from the sale of long-term investment                         |                       
|Unrealized interest, premium amortization and currency differences on      |                       
|marketable securities                                                      |                       
|Increase (decrease) in accrued severance pay                               |                       
|Compensation related to employee stock option grants, net                  |                       
|Devaluation of conversion feature embedded in convertible notes            |                       
|Adjustments in the value of convertible notes                              |                       
|Increase in other long-term liabilities                                    |                       
|Changes in operating assets and liabilities:                               |                       
|Decrease (increase) in trade receivables and other receivables             |                       
|Decrease in trade payables, accrued expenses                               |                       
|and other payables                                                         |                       
|Decrease in deferred income                                                |                       
|Decrease (increase) in inventories                                         |                       
|                                                                           |                       
|Net cash provided by (used in) operating activities                        |                       
|                                                                           |                       
|CASH FLOWS FROM INVESTING ACTIVITIES:                                      |                       
|Purchase of property and equipment                                         |                       
|Bank deposits, net                                                         |                       
|Change in funds in respect of accrued severance pay, net                   |                       
|Investment in  long term investments                                       |                       
|Proceeds from long-term investments                                        |                       
|Proceeds from marketable securities held to maturity                       |                       
|Proceeds from marketable securities available for sale                     |                       
|Purchase of marketable securities held to maturity                         |                       
|Purchase of marketable securities available for sale                       |                       
|                                                                           |                       
|Net cash provided by (used in) investing activities                        |                       
|                                                                           |                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                                      |                       
|Short-term bank loan, net                                                  |                       
|Long-term bank loan repaid                                                 |                       
|Exercise of options granted to employees                                   |                       
|Issuance of convertible subordinated notes, net of $917,000 issuance costs |                       
|                                                                           |                       
|Net cash provided by (used in) financing activities                        |                       
|                                                                           |                       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                       |                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT                                    |                       
|BEGINNING OF YEAR                                                          |                       
|                                                                           |                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT                                    |                       
|END OF YEAR                                                                |                       
|                                                                           |                       
|SUPPLEMENTARY DISCLOSURE OF CASH FLOW                                      |                       
|INFORMATION - CASH PAID DURING THE YEAR FOR:                               |                       
|Interest paid                                                              |                       
|                                                                           |                       
|Advances paid to income tax authorities                                    |                       
|                                                                           |                       

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

F - 6

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---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

# NOTE 1 
SIGNIFICANT ACCOUNTING POLICIES:

| | a. | General:
| | -- | --------

| | 1) | Nature
of operations
| | -- | --------------------

| | Orckit
Communications Ltd. (Orckit) is an Israeli corporation. Orckit and its
subsidiaries (together  the Company) are engaged in the design,
development, manufacture and marketing of advanced telecom equipment, targeting high
capacity broadband services. The Companys revenues were derived from sales of
products in its CM-100 product line, which is transport telecommunication equipment
targeting high capacity packetized metropolitan networks.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
CM-100 product line, and the Companys new product line, the CM-4000 (which is in
its final development stage), were initiated and funded by Orckit through its subsidiary,
Corrigent Systems Inc. (Corrigent).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has entered into distribution agreements with one customer relating to the
deployment in Japan of its CM-100 products. Under the distribution agreements and related
terms, the Company is obligated to provide warranty and support services with respect to
products purchased. The substantial majority of the Companys revenues in the three
year period ended December 31, 2007 were related to these agreements, See note 9h.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Functional
currency
| | -- | -------------------

| | The
currency of the primary economic environment in which the operations of the Company are
conducted is the U.S. dollar (dollar or $), since most purchases
of materials and components are made in dollars, most of the financing activities of the
Company are in dollars and most of its assets are denominated in dollars.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Transactions
and balances originally denominated in dollars are presented in their original amounts.
Balances in non-dollar currencies are translated into dollars using historical and
current exchange rates for non-monetary and monetary balances, respectively. For
non-dollar transactions reflected in the statements of operations, the exchange rates at
transaction dates are used. Depreciation and amortization and changes in inventories
derived from non-monetary items are based on historical exchange rates. The resulting
currency transaction gains or losses are carried to financial income or expenses, as
appropriate.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Accounting
principles
| | -- | ---------------------

| | The
consolidated financial statements are prepared in accordance with generally accepted
accounting principles (GAAP) in the United States.
| | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | Use
of estimates in the preparation of financial statements
| | -- | -----------------------------------------------------------

| | The
preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the reported years.
Actual results could differ from those estimates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 7

---

---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | b. | Principles
of consolidation
| | -- | ---------------------------

| | The
consolidated financial statements include the financial statements of Orckit and its
subsidiaries. Intercompany balances and transactions have been eliminated.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Marketable
securities and other investments:
| | -- | --------------------------------------------

| | 1) | Marketable
securities
| | -- | ---------------------

| | Debt
securities that the Company plans to hold to maturity, and based on its assessment, has
the ability to hold to maturity, are classified as held to maturity and are
recorded at amortized cost. The premium or discount is amortized over the period to
maturity and included in financial income or expenses.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Debt
securities that the Company considers selling prior to maturity are           classified
as available-for-sale. These securities are reported at fair value,           with
unrealized gains and losses reported as a separate component of           comprehensive
income (loss) in shareholders equity. Realized gains and           losses on sales
of securities, as well as premium or discount amortization, are           included in the
consolidated statement of operations as financial income or           expenses. The
Company does not hold these securities for trading purposes. These           securities
are classified as short-term investments.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Other
investments
| | -- | -----------------

| | These
investments include severance pay funds (December 31, 2006  $3.2 million; December
31, 2007  $3.5 million), long-term bank deposits (December 31, 2006  $1.5
million) and an equity long-term investment (December 31, 2006  $1 million;
December 31, 2007  $1.1 million) recorded at cost.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Inventories
| | -- | -----------

| | Inventories,
are valued at the lower of cost or market. Cost is determined as follows:
| | --------------------------------------------------------------------------------------

| | Raw
materials and supplies  on moving average.
| | -----------------------------------------------

| | Finished
products  on basis of production costs:
| | -------------------------------------------------

| | Raw
materials and supplies  on moving average basis.
| | -----------------------------------------------------

| | Labor
and production cost  on average basis.
| | ---------------------------------------------

| | Cost
of finished products that are manufactured completely by subcontractors are determined
based on the specific cost of each product.
| | ---------------------------------------------------------------------------------------------------------------------------------------

| | e. | Property
and equipment:
| | -- | -----------------------

| | 1) | These
assets are stated at cost.
| | -- | --------------------------------

| | 2) | The
assets are depreciated by the straight-line method on the basis of their
          estimated useful life, as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------

| |                                   | Years
| | --------------------------------- | -----
|
|
|
|
| | Computers, software and equipment |      
| | Office furniture and equipment    |      

| | Leasehold
improvements are amortized by the straight-line method, over the term of the lease, or
over the estimated useful life of the improvements  whichever is shorter.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 8

---

---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

| | f. | Impairment
in value of property and equipment
| | -- | ---------------------------------------------

| | Long-lived
assets, held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not be
recoverable. Under FAS 144, if the sum of the expected future cash flows (undiscounted
and without interest charges) of long-lived assets is less than the carrying amount of
such assets, an impairment loss would be recognized, and the assets would be written down
to their estimated fair values.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Deferred
issuance costs
| | -- | -----------------------

| | Issuance
costs of convertible subordinated notes, in the original amount of $ 917,000, were
deferred and are amortized over the period from issuance date to March 2012 (see note 4).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | h. | Treasury
shares
| | -- | ---------------

| | Company
shares purchased by the Company are presented as a reduction of shareholders equity,
at their cost to the Company.
| | ---------------------------------------------------------------------------------------------------------------------------

| | i. | Revenue
recognition
| | -- | -------------------

| | Revenues
from sales of products are recognized when delivery occurs and title passes to the
customer, provided that appropriate signed documentation of an arrangement exists, the
fee is fixed or determinable and collectibility is reasonably assured.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EITF Issue No. 03-5,
Applicability of AICPA Statement of Position 97-2 to Non-Software Deliverables in an
Arrangement Containing More-Than-Incidental Software affirms that the revenue
recognition guidance in Statement of Position 97-2 (SOP 97-2) also applies to
non-software deliverables, such as computer hardware, if the software is essential to the
functionality of the non-software deliverables, as is the case with the Companys
deliverables. According to SOP 97-2, revenues from sales of software products are
recognized when, in addition to the criteria mentioned above, vendor-specific objective
evidence (VSOE) of fair value for undelivered elements exists. VSOE is
typically based on the price charged when an element is sold separately or, if an element
is not sold separately, on the price established by authorized management, if it is
probable that the price, once established, will not be changed when this element is
commercially sold.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company grants customer post-contract hardware and software support services (PCS)
in connection with its sales. Accordingly, since VSOE of the fair value of PCS can not be
determined, the Company recognizes revenue for the entire arrangement ratably over the
term of the PCS.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company does not, in the normal course of business, provide a right of return to its
customers.
| | ---------------------------------------------------------------------------------------------------

| | The
deferred income balance as of December 31, 2006 and 2007 equals the amount of revenues
that were due on delivery, but deferred, less applicable product, warranty and other
costs. See also note 9g.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cost of delivered products is offset against deferred revenues and not presented as
inventory  finished goods, since the title has passed to the customer upon delivery.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | j. | Provision
for warranty
| | -- | ----------------------

| | The
Company grants warranty servicing for products sold. The Company expenses such warranty
costs at the time revenues from the related sales are recognized (see also note 1i.
above). The annual provision is calculated as a percentage of sales, based on
historical experience.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | k. | Uncertainty
in income taxes
| | -- | ---------------------------

| | As
of January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes  an Interpretation of FASB Statement No. 109 (FIN
48). FIN 48 specifies how tax benefits for uncertain tax positions are to be recognized,
measured, and derecognized in financial statements; requires certain disclosures of
uncertain tax positions; specifies how reserves for uncertain tax positions should be
classified on the balance sheet; and provides transition and interim-period guidance,
among other provisions.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | l. | Research
and development expenses
| | -- | ---------------------------------

| | Research
and development expenses, which consist mainly of labor costs, are charged to income as
incurred. Government grants received for development of projects are recognized as a
reduction of these expenses.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | Allowance
for doubtful accounts
| | -- | -------------------------------

| | The
allowance in respect of trade receivables is determined for specific debts doubtful of
collection. See also note 9b.
| | ------------------------------------------------------------------------------------------------------------------------

| | n. | Cash
equivalents
| | -- | ----------------

| | The
Company considers all highly liquid investments, which include short-term bank deposits
(up to three months from date of deposit) that are not restricted as to withdrawal or
use, to be cash equivalents.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | o. | Earnings
(loss) per share
| | -- | -------------------------

| | Basic
earnings (loss) per share is computed by dividing net income (loss) by the weighted
average number of shares outstanding during each year, net of treasury shares.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
computing diluted earnings per share, for the years ended December 31, 2005 and 2006, the
potential dilutive effect of outstanding stock options was taken into account using the
treasury stock method. The convertible subordinated notes and the outstanding stock
options have been excluded from the calculation for the year ended December 31, 2007 due
to their anti-dilutive effect. See also note 9n.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | p. | Comprehensive
income (loss)
| | -- | ---------------------------

| | The
Companys comprehensive income (loss) consists of its net income (loss) and, in the
year ended December 31, 2007, of unrealized gains and losses derived from marketable
securities classified as available for sale under FAS 115 (See also note 1c above).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

| | q. | Stock
based compensation
| | -- | ------------------------

| | On
July 1, 2005, the Company adopted Financial Accounting Standards No. 123 Accounting
for Stock-Based Compensation (FAS 123), as amended by Statement of
Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure (FAS 123 (R)) under which
compensation cost for employee stock option plans is measured using the fair value-based
method as defined in FAS 123 (R). Before the adoption of FAS 123 (R) compensation cost
for employee stock option plans was measured using the intrinsic value based method of
accounting. (See also note 6d.)
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has applied the modified prospective application transition method, as permitted
by FAS 123(R). Accordingly, commencing July 1, 2005, compensation cost for the unvested
portion of previously granted awards that remained outstanding on that date are
recognized on a going forward basis as the related services are rendered, based on the
awards grant date fair value as previously calculated for the pro forma disclosure
under FAS 123 with respect to those outstanding awards.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 107
(SAB 107). SAB 107 provides supplemental implementation guidance on FAS
123(R), including guidance on valuation methods, inventory capitalization of share-based
compensation cost, income statement effects, disclosures and other issues. SAB 107
requires share-based payments to be classified in the same expense line items as cash
compensation. The Company has applied the provisions of SAB 107 in its adoption of FAS
123(R).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company elected to recognize compensation cost for an award with only service conditions
that has a graded vesting schedule using the straight-line method over the requisite
service period for the entire award.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the effect on net income and earnings per share assuming the
Company had applied the fair value recognition provisions of FAS 123 to its stock-based
employee compensation through June 30, 2005:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                 | Year ended December 31, 2005
| | ----------------------------------------------- | ----------------------------
|
|
|
|
| | Net income , as reported                        |                             
| | Add: stock based employee compensation          |                             
| | expense, included in reported net               |                             
| | income for the period                           |                             
| | prior to July 1, 2005, see above                |                             
| | Deduct: stock based employee                    |                             
| | compensation expense determined                 |                             
| | under the fair value method for all awards      |                             
| | for the period prior to July 1, 2005, see above |                             
| |                                                 |                             
| | Pro forma net income                            |                             
| |                                                 |                             
| | Earnings  per share:                            |                             
| | Basic - as reported                             |                             
| | Basic - pro forma                               |                             
| | Diluted - as reported                           |                             
| | Diluted - pro forma                             |                             

F - 11

---

---

ORCKIT COMMUNICATIONS LTD. (An Israeli Corporation)
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

| | r. | Deferred
income taxes
| | -- | ---------------------

| | Deferred
taxes are determined utilizing the asset and liability method, based on the estimated
future tax effects differences between the financial accounting and tax bases of assets
and liabilities under the applicable tax laws. Valuation allowances are included in
respect of deferred tax assets when it is more likely than not that no such assets will
be realized. See note 7d.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Taxes
which would apply in the event of disposal of investments in non-Israeli subsidiaries
have not been taken into account in computing deferred taxes, as it is the Companys
policy to hold these investments, and not to realize them.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | s. | Shipping
and handling fees and costs
| | -- | ------------------------------------

| | Shipping
and handling costs are classified as a component of cost of revenues.
| | ------------------------------------------------------------------------------

| | t. | Accrual
for legal costs
| | -- | -----------------------

| | In
instances where legal costs are expected to be incurred in connection with a loss
contingency, the Company accrues for legal costs that are reasonably estimable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | u. | Recently
issued accounting pronouncements:
| | -- | ------------------------------------------

| | 1) | In
September 2006, the FASB issued Statement of Financial Accounting
               Standards No. 157, Fair Value Measurements (SFAS
               157). SFAS 157 defines fair value, establishes a framework and gives
               guidance regarding the methods used for measuring fair value, and expands
               disclosures about fair value measurements. SFAS 157 is effective for
               financial statements issued for fiscal years beginning after November 15,
               2007, and interim periods within those fiscal years (January 1, 2008, for
the                Company). The Company is currently assessing the impact that SFAS 157
may have                on its results of operations and financial position.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | In
February 2007, the FASB issued Statement of Financial
               Accounting Standards No. 159, The Fair Value Option for
Financial                Assets and Financial LiabilitiesIncluding an amendment of
FASB Statement                No. 115 (SFAS 159). SFAS 159 is
expected to expand the                use of fair value accounting but does not affect
existing standards which                require certain assets or liabilities to be
carried at fair value. The objective                of SFAS 159 is to improve financial
reporting by providing companies with the                opportunity to mitigate
volatility in reported earnings caused by measuring                related assets and
liabilities differently without having to apply complex hedge                accounting
provisions.  Under
SFAS 159, a company may choose, at its initial application or at other specified election
dates, to measure eligible items at fair value and report unrealized gains and losses on
items for which the fair value option has been elected in earnings at each subsequent
reporting date. SFAS 159 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years (January 1, 2008, for the Company). If the Company is to elect the fair value option
for its existing assets and liabilities, the effect as of the adoption date, shall be
reported as a cumulative-effect adjustment to the opening balance of retained earnings .
The Company is currently assessing the impact that SFAS 159 may have on its financial
position.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES (continued):

| | 3) | In
June 2006, the Emerging Issues Task Force (EITF), reached a consensus on
               Issue No. 06-01, Accounting for Consideration Given by a
Service                Provider to Manufacturers or Resellers of Equipment Necessary for
an                End-Customer to Receive Service from the Service Provider (EITF
No.                06-01). EITF 06-01 provides guidance on the accounting for
consideration given                to third party manufacturers or resellers of equipment
which is required by the                end-customer in order to utilize the service from
the service provider. EITF                06-01 is effective for fiscal years beginning
after June 15, 2007 (January                1, 2008, for the Company). The Company
is currently assessing the impact that                EITF 06-01 may have on its results
of operations and financial position.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4) | In
June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue
               No. 07-03, Accounting for Nonrefundable Advance Payments for Goods
or                Services Received to Be Used in Future Research and Development
Activities               (EITF No. 07-03). EITF No. 07-03 requires that
nonrefundable advance payments                for goods or services that will be used or
rendered for future research and                development activities be deferred and
amortized over the period that the goods                are delivered or the related
services are performed, subject to an assessment of                recoverability. The
provisions of EITF 07-03 will be effective for financial                statements issued
for fiscal years beginning after December 15, 2007, and                interim periods
within those fiscal years (January 1, 2008, for the Company).                The Company
is currently assessing the impact that EITF 07-03 may have on its                results
of operations and financial position.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 2  PROPERTY
AND EQUIPMENT:

| | Composition
of assets, grouped by major classification, is as follows:
| | ----------------------------------------------------------------------

| |                                                  | December 31
| | ------------------------------------------------ | -----------
|
|
|
|
| | Cost:                                            |            
| | Computers, software and equipment                |            
| | Office furniture and equipment                   |            
| | Leasehold improvements                           |            
| |                                                  |            
| |                                                  |            
| | Less - accumulated depreciation and amortization |            
| |                                                  |            
| |                                                  |            
| |                                                  |            

| | Depreciation
and amortization expenses totaled $2,390,000, $2,160,000 and $1,719,000 in the years
ended December 31, 2005, 2006 and 2007, respectively. In the year ended December 31,
2007, the Company discarded fixed assets which were no longer in use. This did not have
any effect on the statement of operations since all discarded assets were fully
depreciated.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 3  SEVERANCE
PAY:

| | a. | Israeli
labor laws and agreements require payment of severance pay upon           dismissal of an
employee or upon termination of employment in certain other           circumstances. The
Companys severance pay liability to its employees,           mainly based upon
length of service and the latest monthly salary (one           months salary for
each year worked), is reflected by a balance sheet           accrual under accrued
severance pay and other. The Company records           the liability as if it were
payable at each balance sheet date on an           undiscounted basis.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
liability is partly funded by purchase of insurance policies or pension funds and by
deposit of funds in dedicated deposits. The amounts funded are included in the balance
sheet under long term investments  other. The policies are the Companys
assets and under labor agreements, subject to certain limitations, they may be
transferred to the ownership of the beneficiary employees. The amounts funded as of
December 31, 2006 and 2007 are approximately $3,173,000 and $3,454,000, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According to
substantially all of the Companys current agreements, the Company makes regular
deposits with insurance companies in order to secure employees rights upon
retirement. Thus, in accordance with these agreements, the Company is fully relieved from
any severance pay liability. The liability accrued in respect of these employees and the
amounts funded, as of the agreement date, are not reflected in the balance sheets, since
the amounts funded are not under the control and management of the Company.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for severance pay liability as contemplated by EITF 88-1 Determination
of Vested Benefit Obligation for a Defined Benefit Pension Planand, accordingly,
records the obligation on an undiscounted basis as if it were payable at each balance
sheet date.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | The amounts of pension and severance
pay expense were $1.1 million, $1.2 million and $1.3 million for the years ended December
31, 2005, 2006 and 2007, respectively, of which $800,000, $1.0 million and $1.3 million in
the years ended December 31, 2005, 2006 and 2007, respectively, were in respect of the
insurance policies that were expensed but not reflected in the balance sheet as described
above.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
Company expects to contribute approximately $1.7 million in 2008 to           insurance
companies and pension funds, in respect of its severance pay           liabilities
expected for 2008 operations.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | The
Company does not expect to pay any future benefits to its employees upon           their
normal retirement age in the years 2008 through 2017 since there are no           current
employees who reach retirement age until year 2017.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
statement in item d above does not include amounts that might be paid to employees who
will cease working for the Company before their normal retirement age.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 4 
CONVERTIBLE SUBORDINATED NOTES:

| | On March 27, 2007 Orckit issued in a
private placement of approximately $25.0 million principal amount of convertible
subordinated notes (the Notes). The Notes were issued at their par value of
NIS 107 million. The Notes are due in 2017, linked to the Israeli consumer price index
(CPI) and pay interest, in NIS, semi-annually at the rate per annum of 6%,
linked to the Israeli CPI. Holders of the Notes have the right to request repayment of the
principal amount (par value linked to the Israeli CPI) in March 2012. The Notes are
convertible at the election of the holders, at any time, into ordinary shares of Orckit at
the initial conversion price of NIS 52.5 (equivalent to $12.50 per share on issuance date)
if the conversion occurs within three years of issuance and at the initial conversion
price of NIS 63 (equivalent to $15.00 per share on issuance date) if the conversion occurs
thereafter, in each case subject to adjustment for customary events. Orckit has the right
to force conversion of the Notes if the market price of its ordinary shares exceeds $30.00
per share in 20 trading days within any consecutive 30 day period, subject to adjustment
for customary events. Orckit listed the Notes on the Tel Aviv Stock Exchange. Based on the
conversion rate applicable at December 31, 2007, the Notes are convertible into 2,038,095
ordinary shares of the Company.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company has determined that the
conversion feature of the notes is an embedded derivative. According to FAS 133 
Accounting for Derivative Instruments and Hedging Activities (FAS
133), if an embedded derivative is indexed to the reporting entitys own stock
and would be classified in shareholders equity if it was a freestanding derivative,
that embedded derivative is not considered a derivative for purposes of FAS 133. Since the
conversion price of the notes is denominated in NIS, while the Companys functional
currency is the U.S. dollar, this embedded derivative would not be classified in
shareholders equity if it were a freestanding derivative; therefore the conversion
feature is a derivative which should be accounted for under FAS 133. Since the economic
characteristics and risks of the conversion feature are not clearly and closely related to
the economic characteristics and risks of the host contract  the notes, and since
the notes are not recorded at fair value, the conversion option is separated and measured
as a derivative.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company measured the fair value of the conversion feature on the issuance date at
approximately $4.8 million. Since approximately $25 million was raised, the remaining $20
million was allocated to the Notes, thereby creating a discount and increasing the
effective interest rate. The discount is amortized over the period from issuance date to
March 2012, the earliest possible repayment date. The amortized balance of the discount
at December 31, 2007 was $816,000. The conversion feature is evaluated at each reporting
period, and the difference in fair value is recorded as financial income or expense.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2007, mainly due to the decline in the Companys share price, partly
offset by the change in the NIS-USD exchange rate the fair value of the conversion
feature decreased by approximately $3.5 million (See also note 9k.)
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of the notes at December 31, 2007, as traded on the Tel Aviv Stock Exchange,
is approximately $23.4 million.
| | ---------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 5 
COMMITMENTS AND CONTINGENT LIABILTY:

| | a. | Royalty
commitment
| | -- | ------------------

| | The
Company is committed to pay royalties to the Government of Israel on proceeds from sales
of products whose research and development was funded, in part, by Government grants. At
the time the grants were received, successful development of the related projects was not
assured.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the case of failure of a project that was partly financed by royalty-bearing Government
participations, the Company is not obligated to pay any royalties to the Government.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
royalty rate, based on the sales of products resulting from funded research and
development projects, was fixed at 3% during the first three years and 4-5% thereafter.
Royalties are paid biannually and are payable up to 100% of the amount of such grants,
with the addition of annual interest based on LIBOR. Royalty expenses are classified as
part of cost of revenues.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event that any of the manufacturing rights or technology is transferred out of
Israel, subject to the approval of the Government of Israel, the Company would be
required to pay royalties at a higher rate and an increased aggregate payback amount in
the range of 120% to 300% of the grants received, based on the applicable project. The
total aggregate contingent liability of the Company in respect of royalties to the
Government of Israel at December 31, 2007 was approximately $8.7 million (excluding
interest accrued).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Royalty
expenses totaled $3.5 million, $2.2 million and $712,000 in the years ended December 31,
2005, 2006 and 2007, respectively, and are included in the statements of operations in
cost of revenues.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Lease
commitments
| | -- | -----------------

| | The
Company has entered into several operating lease agreements with respect to its offices.
The main agreement is for the premises it uses in Israel. The Company has an option to
terminate this lease agreement with a six-month notice in advance.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
projected rental payments for the first six-month period in 2008, at rates in effect at
December 31, 2007, are approximately $630,000.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | Lease
expenses totaled $935,000, $873,000 and $898,000 in the years ended December 31, 2005,
2006 and 2007, respectively.
| | -------------------------------------------------------------------------------------------------------------------------

F - 16

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---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5  COMMITMENTS AND
CONTINGENT LIABILTY (continued):

| | c. | Employment
agreement
| | -- | --------------------

| | In
1993, the Company entered into an employment agreement with each of the Companys
CEO and President, who serve as Chairman of the Board of Directors and as a director,
respectively (hereafter  the Executives). These agreements were
extended several times without modification of the employment terms. The original
agreement of each provided, among other things, for an annual bonus based on specified
percentages of the Companys pre-tax income for the applicable year. Upon analyzing
the expected results for 2005, the Company concluded that the bonus based on pre-tax
income for 2005 was going to be significant. With the consent of the Executives, the
Company reduced the rate of the annual bonus based on pre-tax income and eliminated any
such bonus for 2005 with respect to the first $15.0 million of pre-tax income, as
detailed below. The related bonus for each of the Executives would have been
approximately $1.1 million under the original agreement. Pursuant to the amended
agreement, the related bonus for each of them in 2005 was approximately $217,000.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pursuant to the amended employment of
each of the Executives, each is entitled to an annual bonus based on results of operations
for 2006 and each subsequent fiscal year, equal to the sum of: (i) 1.0% of the first $5.0
million of pre-tax income; (ii) 2.0% of pre-tax income between $5.0 million and $15.0
million; (iii) 3.0% of pre-tax income in excess of $15.0 million; and (iv) 0.25% of
revenues. However, for 2005, the bonus with respect to pre-tax income was payable only to
the extent that the amount of pre-tax income exceeded $15.0 million and then only to the
extent of 3% of the excess. The rate of the bonus based on revenues, equal to 0.25% of the
Companys revenues in each year, was not modified from the original agreement.
Pursuant to the amended agreement, the related bonus for each of them for the year ended
December 31, 2007 was approximately $25,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
original employment agreement of each of the Executives provided for a base salary
payable in NIS, linked to the Israeli CPI, and customary employee benefits, such as
managersinsurance and employment fund, which are grossed up to cover income tax
liabilities, and a company car (or, at the employees election, a cash payment added
to the base salary in lieu of a car). Under the original employment agreement, the base
salary and employee benefits increased by 15% per year. Accordingly, the base salary and
employee benefits for each of the Executives for 2005 would have been approximately
$630,000 (based on the exchange rate on March 31, 2005 of NIS 4.361 to one U.S. dollar).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In the amended employment agreements,
the Company has reduced the base salary and employee benefits for 2005 of each of the
Executives, effective January 1, 2005, to the amount of NIS equal to $570,000 (based on
the exchange rate on March 31, 2005 of NIS 4.361 to one U.S. dollar) and reduced the
annual percentage used to adjust base salary from 15% to 5%, but subject to adjustments
pursuant to the Israeli CPI beginning in 2006. These amounts do not include the bonus
payments. The dollar equivalent of the salary will fluctuate in accordance with
fluctuations of the exchange rate of the NIS to the U.S. dollar. There also may be
adjustments as a result of changes in tax, national insurance and other applicable laws
from time to time. In the year ended December 31, 2007, the base salary and employee
benefits for each of the Executives totaled approximately $686,000.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 5  COMMITMENTS AND
CONTINGENT LIABILTY(continued):

| | The employment agreement of each of
the Executives is not for a specific term and requires six months advance notice by either
the Company or the employee to terminate the employment agreement. Upon termination of the
employment for any reason by either the Company or by one of the Executives, the Company
would make a severance payment equal to the Executives last monthly salary
multiplied by the number of years that he worked for the Company. According to Israeli
labor law, this is the amount of severance generally payable to any employee who is
terminated by his employer. In the event that the employment of any of the Executives is
terminated under circumstances in which the Company would not be required to pay the full
amount of such severance pursuant to Israeli labor law, his non-competition period will be
extended from one to two years in consideration for receiving the additional amount. Since
the Company reserves for these severance payments in the financial statements on an
ongoing basis, as required by generally accepted accounting principles, the Company does
not expect to recognize an additional accounting expense for these severance payments upon
the termination of employment. Neither employment agreement provides for any other
payments or golden parachutes upon termination of employment. The amendments
to the employment agreements with the Executives were approved by the shareholders at
Orckits Annual General Meeting held on June 23, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Contingent
liabilities
| | -- | ----------------------

| | In
2006, the Company became subject to litigation regarding the alleged non-fulfillment of
contract obligations. The Company has provided for that claim.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 6 
SHAREHOLDERS EQUITY:

| | a. | Share
capital:
| | -- | --------------

| | 1) | Orckits
ordinary shares are traded in the United States on the Nasdaq           Global Market,
under the symbol ORCT and on the Tel Aviv stock           Exchange in Israel.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6  SHAREHOLDERS
EQUITY:(continued):

| | 2) | Treasury
shares
| | -- | ---------------

| | The
Company holds 2,644,839 ordinary shares of Orckit acquired at a cost of $5,644,000. For
as long as such ordinary shares are owned by the Company, they have no rights and,
accordingly, are neither eligible to participate in or receive any future dividends which
may be paid to shareholders of Orckit nor are they entitled to participate in, be voted
at, or be counted as part of the quorum for, any meeting of shareholders of Orckit.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | Exercise
of options
| | -- | -------------------

| | Under
the Employee Share Option Plan (see note 6b. below), options to purchase 1,446,285,
1,052,104 and 661,199 ordinary shares were exercised in the years ended December 31,
2005, 2006 and 2007, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Employee
Share Option Plan
| | -- | --------------------------

| | Commencing
July 1, 2005, the Company early adopted FAS 123(R). See also note 1q. The Company
recorded compensation costs of $616,000, $855,000 and $2,664,000 for the years ended
December 31, 2005, 2006, and 2007, respectively. The compensation cost for the year ended
December 31, 2005 included $353,000 which was recorded after July 1, 2005, according to
FAS 123(R). No income tax benefit was recognized in the income statement for options
granted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In February 1994, Orckits Board
of Directors approved an Employee Share Option Plan (the Plan). The total
aggregate number of shares authorized for which options could be granted under the Plan
(as amended in 2003), was 13,122,883 at December 31, 2007, of which options to purchase
6,534,844 shares have been exercised, options to purchase 5,169,234 shares have been
granted and are outstanding and options to purchase 1,418,805 are available for future
grant. Option awards are granted with an exercise price as determined by the Company.
Option awards generally vest over up to five years and generally have seven to eight years
contractual terms.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of an amendment to Section 102 of the Tax Ordinance as part of the 2003 Israeli
tax reform, and pursuant to an election made by the Company thereunder, gains derived by
employees (which term includes directors) in Israel arising from the shares acquired
pursuant to the exercise of options granted to them through a trustee under Section 102
of the Tax Ordinance after January 1, 2003, will generally be subject to a flat capital
gains tax rate of 25%, if held by the trustee for the minimum period required by law.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The Company grants two types of
awards, (a) non-performance options, which are options with a vesting period, but no
additional performance criteria, and (b) performance goals options, which are contingent
upon meeting various performance goals.  Certain performance goals options are, in
addition to their performance goals, subject to a vesting period which commences upon
meeting the performance goals.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6  SHAREHOLDERS
EQUITY(continued):

| | Non
performance options:
| | ------------------------

| | The
fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model. Expected volatilities are based on historical volatility of the
Companys share price (eliminating nonrecurring one-time events) and other factors.
The Company uses historical data to estimate option exercise and employee termination
within the valuation model. The expected term of options granted represents the period of
time that options granted are expected to be outstanding based on historical behavior of
employees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
risk-free rate for periods within the expected life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant. The following assumptions were made
in the computation of the fair value of each option award using the Black-Scholes
option-pricing model.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                          | Year ended December 31
| | ------------------------ | ----------------------
|
|
|
|
| | Expected dividend yield  |                       
| |                          |                       
| | Expected volatility      |                       
| |                          |                       
| | Risk-free interest rate  |                       
| |                          |                       
| | Expected life - in years |                       
| |                          |                       

| | A
summary of option activity for both non-performance options (options with a vesting
period, but no additional performance criteria) and performance goals options (options
that in addition to their vesting period, are contingent upon meeting various performance
goals) under the Plan as of December 31, 2007, and changes during the year then ended is
presented below:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Options                          | Number of options | Weighted
average
exercise price
(per option) | Weighted average
remaining
contractual term | Aggregate
intrinsic
value (in
thousands)
| | -------------------------------- | ----------------- | -------------------------------------------- | ------------------------------------------- | ----------------------------------------
|
|
|
|
| | Non performance options -        |                   |                                              |                                             |                                         
| | Outstanding at January 1, 2007   |                   |                                              |                                             | 2,900,260                               
| | Granted (1)                      |                   |                                              |                                             | 735,193                                 
| | Exercised                        |                   |                                              |                                             | (638,399                                
| | Forfeited or expired             |                   |                                              |                                             | (219,470                                
| |                                  |                   |                                              |                                             |                                         
| | Outstanding at December 31, 2007 |                   |                                              |                                             | 2,777,584                               
| |                                  |                   |                                              |                                             |                                         
| | Exercisable at December 31, 2007 |                   |                                              |                                             | 2,313,656                               
| |                                  |                   |                                              |                                             |                                         

| | (1) | Includes exchange of a certain amount of options for Corrigent stock for Orckit shares. (see note 6c.)
| | --- | ------------------------------------------------------------------------------------------------------

F - 20

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6  SHAREHOLDERS
EQUITY(continued):

| | The
weighted-average grant-date fair value of this type of option granted during the years
2005, 2006, and 2007 was $5.25 , $2.72 , and $ 2.55, respectively. The total intrinsic
value of options exercised during the years ended December 31, 2005, 2006, and 2007, was
$24.2 million, $23.4 million, and $3.6 million, respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, there was $1.6 million of total unrecognized compensation cost
related to these nonvested share-based compensation arrangements granted under the Plan.
That cost is expected to be recognized over a weighted-average period of 2.4 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2005, the Company modified the exercise price of 59,600 share options held by 11
employees. As a result of that modification, the Company recognized additional
compensation expense of $16,000 and $16,000 for the years ended December 31, 2006 and
2007, respectively. See also note 6c below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2007, the Company modified the exercise price of 177,000 share options held by 27
employees. As a result of that modification, the Company recognized additional
compensation expense of $85,400 for the year ended December 31, 2007. See also note 6c
below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Performance
based options:
| | --------------------------

| | These
awards include options that are contingent upon meeting various performance goals. The
fair value of these options was estimated on the date of grant using the same option
valuation model used for non- performance options. When the Company assumes that
performance goals will not be achieved, no compensation cost has been recorded with
respect thereto. Upon reaching the point in time when the Company believes that the
performance goals will be achieved, the Company will record a catch-up of share based
compensation expenses for all vesting periods completed through that date.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair value of each option award is estimated on the date of grant using the Black-Scholes
option-pricing model. Expected volatilities are based on historical volatility of the
Companys share price (eliminating nonrecurring one-time events) and other factors.
The Company uses historical data to estimate option exercise and employee termination
within the valuation model. The expected term of options granted represents the period of
time that options granted are expected to be outstanding based on historical behavior of
employees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
risk-free rate for periods within the expected life of the option is based on the U.S.
Treasury yield curve in effect at the time of grant.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | The
following assumptions were made in the computation of the fair value of each of these
option awards using the Black-Scholes option-pricing model.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

|                         | Year ended December 31
|------------------------ | ----------------------
|
|
|
|
|Expected dividend yield  |                       
|                         |                       
|Expected volatility      |                       
|                         |                       
|Risk-free interest rate  |                       
|                         |                       
|Expected life - in years |                       
|                         |                       

F - 21

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6  SHAREHOLDERS
EQUITY(continued):

| | A
summary of option activity for non-performance under the Plan as of December 31, 2007,
and changes during the year then ended is presented below:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | Options                          | Number of options | Weightedaverageexerciseprice (per
option) | Weighted average
remaining
contractual term | Aggregate
intrinsic
value (in
thousands)
| | -------------------------------- | ----------------- | ----------------------------------------- | ------------------------------------------- | ----------------------------------------
|
|
|
|
| | Outstanding at January 1, 2007   |                   |                                           |                                             | 820,000                                 
| | Granted                          |                   |                                           |                                             | 1,892,950                               
| | Exercised                        |                   |                                           |                                             | (22,800                                 
| | Forfeited                        |                   |                                           |                                             | (298,500                                
| |                                  |                   |                                           |                                             |                                         
| | Outstanding at December 31, 2007 |                   |                                           |                                             | 2,391,650                               
| |                                  |                   |                                           |                                             |                                         

| | The
weighted-average grant-date fair value of this type of option granted during the years
2006 and 2007 was, $2.03 and $2.09, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------

| | The
total intrinsic value of options exercised during the year ended December 31, 2007was
$213,000.
| | ---------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, there was $3.5 million of total unrecognized compensation cost
related to these nonvested share-based compensation arrangements granted under the Plan.
That cost is expected to be recognized over a weighted-average period of 2.6 years. When
the Company assumes that performance goals will not be achieved, these options are
included with a fair value of $0 and no compensation cost as been recorded with respect
thereto.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During 2007, the Company modified
certain terms of 1,363,566 share options held by 130 employees. As a result of that
modification, the Company recognized additional compensation expense of $164,000 for the
year ended December 31, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

| | c. | Grant
of stock and option plans of subsidiaries
| | -- | -----------------------------------------------

| | In
2001, the Board of Directors of Orckits major subsidiary, Corrigent, approved an
employee share option plan (the Corrigent Subsidiary Plan). Corrigent
granted, and reserved for grant, shares and options under its Plan, as applicable, to its
employees, officers and directors and to personnel of Orckit, including employees,
officers and directors of Orckit. As determined by the respective stock option committee,
the exercise price of options granted is zero, which represents the value of the shares
on the grant date. The vesting period of options granted is up to four years from the
date of grant.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2005, on a fully diluted basis, Orckits holding in Corrigent was
approximately 90%.
| | -------------------------------------------------------------------------------------------------------

| | At
the grant date, the intrinsic value and the weighted fair value of options granted by
Corrigent was $0. Accordingly, no compensation expense in respect of the options granted
was recorded other than the amortization of $1.3 million, $2.3 million and $200,000 of
compensation expense measured upon exchange of Orckit shares in 2003, 2004 and 2005,
respectively, See note 6d below. At the annual general meeting of shareholders held on
June 23, 2005, Orckits shareholders approved a plan for potential exchanges of
Corrigents options for options for up to 10% of the outstanding Ordinary Shares of
Orckit. Under the terms of the plan, all the outstanding stock options of Corrigent are
exchangeable for options to purchase shares of Orckit in an exchange ratio calculated
based on the ratio between the fair market value of Corrigent and Orckit. Under the terms
of the plan, only vested stock options of Corrigent will be offered to be exchanged
commencing January 1, 2006. On July 18, 2005, Orckits option committee approved an
exchange, effective as of January 1, 2006, of a certain amount of Corrigents
options for approximately 500,000 Orckit options. The exchange was accounted for
according to FAS 123R, and since the exchange was based on the ratio between the fair
market value of Corrigent and Orckit, no additional compensation expense was recognized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In 2007, following an approval by
Orckits audit committee, an exchange of an additional amount of Corrigents
options for Orckit options occurred. The exchange included all Corrigent options held by
the Executives. Following the occurrence of this exchange, the aggregate number of Orckit
options issuable for the remaining Corrigent options would be approximately 500,000. The
exchange was accounted for according to FAS 123R, and since the exchange was based on the
ratio between the fair market value of Corrigent and Orckit, no additional compensation
expense was recognized.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6  SHAREHOLDERS
EQUITY (continued):

| | d. | Subsidiary
Employee Share Incentive Plan
| | -- | ----------------------------------------

| | In
January 2003, Orckit adopted the Orckit Communications Ltd. 2003 Subsidiary
Employee Share Incentive Plan (the 2003 Plan). Pursuant to the 2003
Plan and subject to applicable laws and regulations, Orckit issued, for no consideration,
1,800,000 of its ordinary shares to employees of its subsidiaries, excluding directors of
the Company. The shares were duly authorized and validly issued, fully paid and
non-assessable. The shares were deposited with a trustee and were to vest after a period
of 3 years. According to the 2003 Plan, the shares issued may be exchanged at any time by
the Company, in its discretion, for a number of options to purchase shares of the
applicable subsidiary.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2003, 180,000 shares were forfeited and 1,620,000 shares were exchanged to options to
purchase shares of subsidiaries. Substantially all of these exchanged options were
subject to vesting through January 2005. The accounting treatment applied in respect of
the 2003 Plan, under APB 25, was variable accounting until the exchange occurred.
Accordingly, compensation in respect of the grant of the shares was measured according to
the share price of Orckit and updated to reflect the changes in the share price through
the date of the exchange. The compensation measured totaled approximately $3.8 million,
which is to be amortized over the vesting period of the options granted, and of which
approximately $1.3 million, $2.3 million and $200,000 were amortized in 2003, 2004 and
2005, respectively. Upon the exchange, the 2003 Plan became a fixed plan and the
compensation was fixed according to the share price of Orckit on that date. At the date
of exchange, the intrinsic value of options to purchase shares of subsidiaries granted to
employees was zero.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Dividends
| | -- | ---------

| | In
the event cash dividends are declared by the Company, such dividends will be declared and
paid in Israeli currency.
| | ----------------------------------------------------------------------------------------------------------------------

| | f. | Shareholder
Bonus Rights Plan
| | -- | -----------------------------

| | On
November 21, 2001, Orckits Board of Directors adopted a Shareholder Bonus Rights
Plan (the Rights Plan) pursuant to which share purchase bonus rights (the
Rights) were distributed on December 6, 2001, at the rate of one Right
for each of Orckits ordinary shares held by shareholders of record as of the close
of business on that date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 24

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 6  SHAREHOLDERS
EQUITY (continued):

| | The
Rights Plan is intended to help ensure that all of the Companys shareholders are
able to realize the long-term value of their investment in the Company in the event of a
potential takeover which does not reflect the full value of the Company and is otherwise
not in the best interests of the Company and its shareholders. The Rights Plan is also
intended to deter unfair or coercive takeover tactics.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Rights will be exercisable and transferable apart from Orckits ordinary shares only
if a person or group becomes an Acquiring Person by acquiring beneficial
ownership of 15% or more of Orckits ordinary shares, subject to certain exceptions
set forth in the Rights Plan, or commences a tender or exchange offer upon consummation
of which such person or group would become an Acquiring Person. Subject to certain
conditions described in the Rights Plan, once the Rights become exercisable, the holders
of Rights, other than the Acquiring Person, will be entitled to purchase ordinary shares
at a discount.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 7  TAXES ON
INCOME:

| | a. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959 (the
Law)
| | -- | -----------------------------------------------------------------------------------------

| | Under
the Law, by virtue of the approved enterprise status granted to the
enterprises of Corrigent, the holder of the approved enterprise status is
entitled to various tax benefits, including the following:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1) | Reduced
tax rates
| | -- | -----------------

| | The
period of tax benefits is 7 years, commencing in the first year in which the Company
earns taxable income from the approved enterprise, subject to certain limitations. Income
derived from the approved enterprise is tax exempt for a period of 2 years, after which
the income from these enterprises is taxable at the rate of 25% for 5 years, the
remainder of the period of tax benefits.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Conditions
for entitlement to the benefits
| | -- | ------------------------------------------

| | The entitlement to the above benefits
is conditional upon fulfilling the conditions stipulated by the Law, regulations published
thereunder and the instruments of approval for the specific investments in approved
enterprises. In the event of failure to comply with these conditions, the benefits may be
reduced or cancelled and the Company may be required to refund the amount of the benefits,
in whole or in part, with the addition of linkage differences to the Israeli CPI and
interest.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the event of distribution of cash dividends out of income which was tax exempt as above,
the Company would have to pay 25% tax in respect of the amount distributed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 25

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---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7  TAXES ON INCOME(continued):

| | b. | Tax
rates applicable to income from other sources:
| | -- | --------------------------------------------------

| | 1) | Income
from other sources in Israel
| | -- | -----------------------------------

| | Income
not eligible for approved enterprise benefits mentioned in note 7a. above is taxed at the
regular rate. Amendments to the Israeli Income Tax Ordinance were enacted that gradually
reduce the corporate tax rate from 36% to 25%, in the following manner: the rate for 2004
 35%, 2005  34%, 2006  31%, 2007  29%, 2008  27%, 2009
 26% and 2010 and thereafter  25%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Income
of non-Israeli subsidiaries
| | -- | ----------------------------------

| | Non-Israeli
subsidiaries are taxed according to the tax laws in their countries of residence.
| | ---------------------------------------------------------------------------------------------

| | c. | Measurement
of the results for tax purposes under the Income Tax           (InflationaryAdjustments)
Law, 1985
| | -- | --------------------------------------------------------------------------------------------------------------

| | Results
for tax purposes are measured on a real basis adjusted for the increase in the
Israeli CPI. As explained in note 1a(2), the financial statements are presented in
dollars. The difference between the change in the Israeli CPI and the NIS-dollar exchange
rate, both on annual and cumulative bases, causes a difference between taxable income and
income reflected in these financial statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
a bill which passed in the Knesset (the Israeli parliament), the provisions of the
Inflationary Adjustments Law will no longer apply to the Company in 2008 and thereafter.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Paragraph
9 (f) of FAS 109, Accounting for Income Taxes, prohibits the recognition of
deferred tax liabilities or assets that arise from differences between the financial
reporting and tax bases of assets and liabilities that are measured from the local
currency into dollars using historical exchange rates, and that result from changes in
exchange rates or indexing for tax purposes. Consequently, the abovementioned differences
were not reflected in the computation of deferred tax assets and liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Deferred
income taxes
| | -- | ---------------------

| | At
December 31, 2007, the Company had accumulated tax losses amounting to approximately $195
million (December 31, 2006  approximately $138 million) and carry forward capital
losses for tax purposes of approximately $ 52 million (December 31, 2006  $ 39
million). These losses are mainly denominated in NIS and linked to the Israeli CPI.
Accumulated business tax losses are available indefinitely to offset future taxable
business income, and carry forward capital losses for tax purposes are available
indefinitely to offset future capital gains only. Orckit and each of its subsidiaries are
assessed on a stand-alone basis. As a result, accumulated tax losses in each of the
entities can offset future taxable business income only in the entity in which they were
generated. Substantially all of the carryforward amounts have no expiration date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2007, the Company had a net deferred tax asset (mostly in respect of carry
forward losses and capital losses), in the amount of approximately $64 million (December
31, 2006  approximately $41 million). A valuation allowance for the entire amount
of such asset was set up, and consequently no deferred tax asset is recorded in the
balance sheet, since it is more likely than not that the deferred tax assets will not be
realized in the foreseeable future.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

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---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 7  TAXES ON INCOME(continued):

| | e. | Uncertain
Tax positions:
| | -- | ------------------------

| | As
described in note 1k above, the Company adopted the provisions of FIN 48 as of January 1,
2007.
| | --------------------------------------------------------------------------------------------------

| | As
a result of the adoption of FIN 48, as of that date, the Company recognized a liability
for unrecognized tax benefits in amount of $167,000. This change was accounted for as a
cumulative effect of a change in accounting principle that is reflected in the financial
statements as a decrease in the balance of retained earnings as of January 1, 2007.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Following
is a reconciliation of the total amounts of the Companys unrecognized tax benefits
at the beginning and the end of the year ended on December 31, 2007:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                           | In thousands
| | --------------------------------------------------------- | ------------
|
|
|
|
| | Balance at beginning of year                              |             
| | Increases in unrecognized tax benefits as a result of tax |             
| | positions taken during a prior period                     |             
| |                                                           |             
| |                                                           |             
| | Balance at end of year                                    |             
| |                                                           |             

| | A
summary of open tax years by major jurisdiction is presented below:
| | ---------------------------------------------------------------------

|Jurisdiction: | Years:   
|------------- | ---------
|
|
|
|
|Israel        | 2003-2007
|United States | 2002-2007
|Japan         | 2003-2007

| | f. | Tax
rate reconciliation
| | -- | -----------------------

| | In
2007, 2006, and 2005 the main reconciling item from the statutory tax rate of the Company
(2007  29%, representing a theoretical tax benefit of approximately $3.5 million;
2006  31%, representing a theoretical tax expense of approximately $1.6 million;
2005  34%, representing a theoretical tax expense of approximately $7.6 million) to
the effective tax rate (0%) is the use of carry forward tax losses to offset income in
2006 and 2005 and the set up of a valuation allowance against the deferred tax asset
created in respect of the losses in 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | g. | Tax
assessments
| | -- | ---------------

| | Orckit
has received final assessments through the year ended December 31, 2000. The Companys
subsidiaries have not been assessed since incorporation. Tax assessments filed by Orckit
and subsidiaries through the year ended December 31, 2002 are considered to be final.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

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---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

# NOTE 8  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT:

| | a. | Balances
in non-dollar currencies:
| | -- | ----------------------------------

| | 1) | As
follows:
| | -- | -----------

|            | December 31
|----------- | -----------
|
|
|
|
|Assets      |            
|            |            
|Liabilities |            
|            |            

| | The
U.S. dollar amounts above mainly  represent  balances in Israeli currency and
                         Japanese Yen ("Yen").
| | --------------------------------------------------------------------------------------------------------------------------------

| | 2) | Data
regarding the rate of exchange and the Israeli CPI:
| | -- | --------------------------------------------------------

| |                                                 | Year ended December 31
| | ----------------------------------------------- | ----------------------
| |                                                 | 2005                  
|
|
|
| | Rate of devaluation (evaluation) of the Israeli
| | currency against the dollar                     | 6.8%                  
| | Rate of devaluation (evaluation) of the Yen    
| | against the dollar                              | 14.3%                 
| | Rate of increase (decrease) in the Israeli CPI  | 2.4%                  
| | Exchange rate at end of year - $ 1=             | NIS 4.603             

F - 28

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 8  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT (continued):

| | b. | Fair
value of financial instruments
| | -- | -----------------------------------

| | The
fair value of financial instruments included in working capital is usually identical or
close to their carrying value.
| | --------------------------------------------------------------------------------------------------------------------------

| | As
to the fair value of the Companys securities that are held to maturity, see note 9a.
| | ----------------------------------------------------------------------------------------

| | As
to the fair value of the Companys convertible subordinated notes, see note 4.
| | ---------------------------------------------------------------------------------

| | c. | Concentrations
of credit risks
| | -- | ------------------------------

| | At
December 31, 2006 and 2007, substantially all of the Companys cash and cash
equivalents were held by international and Israeli banks. Substantially all of the Companys
marketable securities were held by international and Israeli banks. Such securities
represented debentures issued by a number of US and Israeli corporations and agencies.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company evaluates on a current basis its financial exposure with any financial
institution or commercial issuer.
| | --------------------------------------------------------------------------------------------------------------------

| | All
of the trade receivable balance at December 31, 2006 and 2007 was derived from one
customer. The Company is of the opinion that the exposure to credit risk relating to
these trade receivables is limited.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | As
of December 31, 2007, the Company had unutilized credit lines of
          approximately $20 million.
| | -- | --------------------------------------------------------------------------------------------------------

# NOTE 9 
SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

| | Balance
sheets:
| | ---------------

| | a. | Marketable
securities:
| | -- | ----------------------

| | Consist
of:
| | -----------

| |                                                 | December 31
| | ----------------------------------------------- | -----------
|
|
|
|
| | Classified as "held to maturity"                |            
| | Classified as "available for sale"              |            
| |                                                 |            
| |                                                 |            
| |                                                 |            
| |                                                 |            
| | Held-to-maturity marketable securities          |            
| |                                                 |            
| | The securities mature over the following years: |            
| |                                                 |            
| | Mature within 12 months - Classified as         |            
| | short-term investments                          |            
| | Mature after one year up to 12 years            |            
| |                                                 |            
| |                                                 |            
| |                                                 |            

F - 29

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | At
December 31, 2007, the fair value of the Companys held-to-maturity tradable
securities, which consist of corporate and government debt securities, was $67.2 million
(December 31, 2006  $71.7 million). The difference between the carrying amounts and
the fair value results from a decrease in market value in comparison to the amortization
of the premium paid for the securities in the amount of approximately $37,000 (December
31, 2006  $253,000). It is expected that the debt securities will not be settled at
a price less than the amortized cost of the investment.  Because the Company has the
ability and intent to hold this investment until a recovery of fair value, which may be
maturity, it does not consider the investment in these debentures to be
other-than-temporarily impaired at December 31, 2007.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to a change in the Israeli tax regulations that came into effect on January 1, 2006,
which eliminated certain tax benefits that the Company was entitled to, the Company sold,
in 2006, approximately $45.6 million of its held to maturity securities, as permitted by
FAS 115. These sales of the securities resulted in a loss of approximately $1.0 million.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Available
for sale marketable securities
| | ----------------------------------------

| | At December 31, 2007, the fair value
of the Companys available for sale tradable securities, which consist of Israeli
corporate debt securities, was $5.7 million. These securities mature as follows:
 $270,000  within one year and  $5,450,000  over a period of  2  years to
 13  years. Unrealized losses of $604,000 are reported as a separate component of
comprehensive income (loss) in shareholders equity, since the Company believes that
these losses are not other-than-temporary. In cases that an other-than-temporary decline
in fair value of a security occurs, an impairment charge would be recorded. The Company
considers various factors in determining whether to recognize an impairment charge,
including the length of time and the extent to which the fair value has been below the
cost basis, the current financial condition of the investee and the Companys intent
and ability to hold the investment for a period of time sufficient to allow for any
anticipated recovery in market value. As of December 31, 2007, the Company did not record
any impairment charges on its available for sale marketable securities.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Trade
receivables:
| | -- | ------------------

| |               | December 31
| | ------------- | -----------
|
|
|
|
| | Open accounts |            
| |               |            

| | The
allowance for doubtful accounts balance of $79,000 at January 1, 2005 was reduced to zero
due to the write off of bad debts. The allowance for doubtful accounts at December 31,
2005, 2006 and 2007 was zero.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 30

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---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| |    |                       | December 31
| | -- | --------------------- | -----------
|
|
|
|
| | c. | Other current assets: |            
| |    | Government of Israel  |            
| |    | Prepaid expenses      |            
| |    | Sundry                |            
| |    |                       |            
| |    |                       |            
| |    |                       |            
| |    |                       |            
| | d. | Inventories:          |            
| |    | Raw materials         |            
| |    | Finished goods        |            
| |    |                       |            
| |    |                       |            
| |    |                       |            

| | In
the years ended December 31, 2007 and 2006, the Company wrote-off inventory in the amount
of $960,000 and $940,000 respectively due to technological obsolescence.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Bank
deposits
| | -- | -------------

| | At
December 31, 2006, the Company had a bank deposit in the amount of $1.5 million
classified as other long-term investments. At December 31, 2007 this deposit is
classified as a short-term investment since its maturity will occur in 2008. The deposit
is denominated in dollars and bears annual interest at a rate of 5.1%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 31

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---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | f. | Accrued
expenses and other payables:
| | -- | ------------------------------------

| |                                                              | December 31
| | ------------------------------------------------------------ | -----------
|
|
|
|
| | Accrued expenses in respect of deferred income, see g. below |            
| | Employees and employee institutions                          |            
| | Provision for vacation pay                                   |            
| | Provision for warranty *                                     |            
| | Accrued royalties                                            |            
| | Accrued interest                                             |            
| | Executives, see note 5c                                      |            
| | Sundry                                                       |            
| |                                                              |            
| |                                                              |            
| |                                                              |            

| |                                                          | Year ended December 31
| | -------------------------------------------------------- | ----------------------
|
|
|
|
| | * The changes in the balance during the year:            |                       
| | Balance at beginning of year                             |                       
| | Payments made under the warranty                         |                       
| | Product warranties issued for new sales                  |                       
| | Changes in accrual in respect of pre-existing warranties |                       
| |                                                          |                       
| | Balance at end of year                                   |                       
| |                                                          |                       

| | g. | Deferred
income:
| | -- | ----------------

| |                                             | December 31
| | ------------------------------------------- | -----------
|
|
|
|
| | Revenues to be recognized in future periods |            
| | Applicable product costs                    |            
| | Applicable PCS, warranty and other costs    |            
| |                                             |            
| |                                             |            
| |                                             |            

| |                                               | Year ended December 31
| | --------------------------------------------- | ----------------------
|
|
|
|
| | * The changes in the balance during the year: |                       
| | Balance at beginning of year                  |                       
| | Recognized during the year                    |                       
| | Deferred income relating to new sales         |                       
| |                                               |                       
| | Balance at end of year                        |                       
| |                                               |                       

F - 32

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---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | Statements
of operations:
| | -------------------------

| | h. | Segment
information and revenues from principal customers
| | -- | ---------------------------------------------------------

| | The
Company operates in one operating segment.
| | ----------------------------------------------

| | Disaggregated
financial data is provided below as follows: (1) revenues by geographic area; and (2)
revenues from principal customers:
| | --------------------------------------------------------------------------------------------------------------------------------------

| | 1) | Geographic
information
| | -- | ----------------------

| | Following
is a summary of revenues by geographic area. The Company sells its products mainly to
telecommunications carriers. Revenues are attributed to geographic areas based on the
location of the end users as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                 | Year ended December 31
| | --------------- | ----------------------
|
|
|
|
| | Japan           |                       
| | Other countries |                       
| |                 |                       
| |                 |                       
| |                 |                       

| | Most
of the Companys property and equipment is located in Israel.
| | ------------------------------------------------------------------

| | 2) | Revenues
from principal customers  revenues from a single customer that           exceeds
10% of total revenues in the relevant year:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------

| |            | Year ended December 31
| | ---------- | ----------------------
|
|
|
|
| | Customer A |                       
| |            |                       

| | i. | Cost
of revenues:
| | -- | -----------------

| |                                            | Year ended December 31
| | ------------------------------------------ | ----------------------
|
|
|
|
| | Materials consumed, subcontractors         |                       
| | and other production expenses              |                       
| | Payroll and related expenses               |                       
| | Depreciation                               |                       
| | Decrease (increase) in inventories of      |                       
| | finished products                          |                       
| | Other (in 2007 mainly decrease in warranty |                       
| | provision)                                 |                       
| |                                            |                       
| |                                            |                       
| |                                            |                       

| | The
Company currently procures a number of major components of its products from single
source suppliers.
| | ---------------------------------------------------------------------------------------------------------

F - 33

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---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | j. | Research
and development expenses  net:
| | -- | ----------------------------------------

| |    |                                                       | Year ended December 31
| | -- | ----------------------------------------------------- | ----------------------
|
|
|
|
| |    | Total expenses                                        |                       
| |    | Less - grants and participations, see note 5a         |                       
| |    |                                                       |                       
| |    |                                                       |                       
| |    |                                                       |                       
| |    |                                                       |                       
| | k. | Financial income - net:                               |                       
| |    |                                                       |                       
| |    | Income:                                               |                       
| |    | Interest on bank deposits                             |                       
| |    | Gain and interest on marketable securities            |                       
| |    | Other (including currency transaction gains)          |                       
| |    |                                                       |                       
| |    |                                                       |                       
| |    |                                                       |                       
| |    |                                                       |                       
| |    | Expenses:                                             |                       
| |    | Interest in respect of convertible subordinated notes |                       
| |    | and bank loans                                        |                       
| |    | Amortization of convertible subordinated              |                       
| |    | notes issuance costs and discount                     |                       
| |    | Loss from the sale of marketable securities           |                       
| |    | Other (mainly currency transaction                    |                       
| |    | losses and bank charges)                              |                       
| |    |                                                       |                       
| |    |                                                       |                       
| |    |                                                       |                       
| |    |                                                       |                       
| |    |                                                       |                       

| | l. | Litigation
settlement income and other income
| | -- | ---------------------------------------------

| | i) | Other
income
| | -- | ------------

| | During
2005, the Company sold an investment in another company in a venture stage, for a
consideration of $4.4 million. The investment was previously recorded at cost in the
amount of $1.9 million.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ii) | Litigation
settlement income
| | --- | ----------------------------

| | During
2007, the Company won a claim against a supplier of semiconductor chips that was acquired
by Conexant Systems Inc. The claim was filed with the International Centre for Dispute
Resolution (the international division of the American Arbitration Association) (ICDR).
The claim was for damages Orckit incurred in the period from 2001 through 2003 in regard
to semiconductor chips that were used in Orckits legacy DSL products.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
final amount of indemnification was resolved in a settlement agreement which granted
Orckit a payment of $14.2 million plus attorney fees.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | m. | Transactions
with related parties:
| | -- | ----------------------------------

| | 1. | Commencing
July 1, 2003, the Company provides Tikcro, a related party, with           certain
administrative services. The amount paid by Tikcro for such services in           the
years ended December 31, 2007 and 2006 was $48,000 (In the year ended           December
31, 2005  $72,000)
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Regarding
transactions with the Executives, see notes 5c and 6c.
| | -- | ----------------------------------------------------------------

| | n. | Earnings
(loss) per share:
| | -- | --------------------------

| |                                              | Year ended December 31
| | -------------------------------------------- | ----------------------
|
|
|
|
| | Numerator - Basic                            |                       
| | Net income (loss)                            |                       
| |                                              |                       
| | Denominator - Basic                          |                       
| | Weighted average ordinary shares outstanding |                       
| | (net of treasury shares)                     |                       
| |                                              |                       
| |                                              |                       
| | Basic net income (loss) per share            |                       
| |                                              |                       
| |                                              |                       
| | Numerator - Diluted                          |                       
| | Net income (loss)                            |                       
| | Minority share in subsidiary's net income -  |                       
| | assuming exercise of Corrigent's options     |                       
| |                                              |                       
| |                                              |                       
| |                                              |                       
| | Denominator - Diluted                        |                       
| | Weighted average ordinary shares outstanding |                       
| | Dilutive potential of ordinary shares        |                       
| | equivalents - options                        |                       
| |                                              |                       
| |                                              |                       
| |                                              |                       
| | Diluted net income (loss) per share          |                       
| |                                              |                       

| | As of December 31, 2005, 2006 and
2007 options in the total amount of 1,270,000, 1,932,077 and 5,169,234, respectively, were
not taken into account, because of their anti dilutive effect or because performance based
options did not have goals which were probable to be met.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, 2,038,000 shares which could result from the conversion of
convertible subordinated notes were not taken into account because of their anti-dilutive
effect.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

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