---

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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, 2005
| | -------------------------------------------

# 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
None | Name of each exchange on which registered
|------------------------ | -----------------------------------------
|                         |                                          

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

|Ordinary Shares, no par value
|-----------------------------
|                             
|(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, 2005, the Registrant had outstanding 14,629,431 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.

oYes   xNo



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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



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# PART I

All
share and per share information in this Annual Report has been adjusted to give
retroactive effect to (i) a one-for-five reverse split of our ordinary shares that became
effective as of November 27, 2002 and (ii) 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 ADVISORS
|------- |  | -----------------------------------------------------

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, 2004 and 2005 and each
of the years ended December 31, 2003, 2004 and 2005 are derived from our audited
consolidated financial statements set forth elsewhere in this Annual Report, which have
been prepared in accordance with generally accepted accounting principles in the United
States. The selected consolidated financial data for the years ended December 31, 2001 and
2002 and as of December 31, 2001, 2002 and 2003 are derived from our audited consolidated
financial statements not appearing in 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.



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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       |                        
|Amortization and impairment   |                        
|of goodwill                   |                        
|                              |                        
|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
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 and results of
operations.

Risks relating to our business and industry

We have a history of substantial
losses and might not sustain profitability.

During
2002, 2003 and 2004, we incurred aggregate operating losses of approximately $61.9
million. We also incurred significant operating losses in the years prior to 2002. We
incurred a significant portion of our operating losses during the period through 2003,
when our primary business was the sale of asymmetric digital subscriber line, or ADSL,
products, which we no longer sell. Since 2001, we have made significant investments in
technology projects, mainly for new telecom equipment products addressing high
transmission of data for the metropolitan area, through our subsidiary, Corrigent Systems
Inc. We only began to recognize significant revenues from sales of these products in the
second half of 2004. As a result, we were able to generate both operating income and net
income for the first time in 2005. We cannot be sure that we will be able to continue to
be profitable for any sustained period of time.

5

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Our revenues in 2004 and 2005 were
dependent on sales of one product line to one telecom carrier in Japan, and we expect to
continue to depend on sales of this product line to this customer for a substantial
majority of our revenues in 2006. The loss of this customer, or a significant decrease in
revenues from it, would have a material adverse effect on our results of operations.

Almost
all of our revenues in 2004 and all of our revenues in 2005 were the result of the sales
of our metro products, the Corrigent CM-100. Approximately 81.5% of our revenues in 2004
and 99.8% of our revenues in 2005 were derived from sales of these products to KDDI, a
Japanese telecom carrier. We expect that substantially all of our revenues in 2006 will be
comprised of sales of Corrigent CM-100 products to KDDI. 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. KDDI is purchasing the
CM-100 for initial coverage deployment in its metropolitan area network. We do not know
when KDDI will conclude its initial deployment of our metro products. It is likely that
once this stage is concluded, additional demand for the CM-100 product from KDDI will be
derived from growth in the number of subscribers for new IP services offered by KDDI. We
cannot predict whether 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. The loss of this customer, or a significant
decrease in revenues from it, would have a material adverse effect on our results of
operations. We will need to make sales to additional customers and to develop additional
products to be able to sustain profitability for any period of time.

We have a history of extreme
fluctuations in our cash from operations and might not sustain positive cash flow from
operations.

In
2003, we used $16.1 million of cash in our operating activities. In 2004 we generated
$938,000 of cash from operating activities and in 2005 we generated $72.6 million of 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 do not expect to continue to generate significant amounts of
cash from operations in 2006 and expect to use cash in our operating activities in the
six-month period ending June 30, 2006 as we will be recognizing revenue in the first half
of 2006 with respect to sales that were paid for in 2005.

We depend on third party
distributors in Japan 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 have
been made through Net One Systems Co., Ltd. and, since 2005, primarily through OKI
Electric Industry Co., Ltd., distributors located in Japan. Our relationship with OKI
began in 2005 and we do not have a long history of dealing with them. We are dependent on
their marketing and sales efforts to convince KDDI and other customers or end-users in
Japan to purchase our products and to provide local support services. If either of our
distributors terminates or adversely changes its relationships 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.

6

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

Sales
of the Corrigent CM-100 product line are dependent on the capital equipment plans 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 experience 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 products in Japan,
which 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. Telecom equipment sales in Japan are subject to high quality and strict
delivery requirements. We have limited experience in making sales into the Japanese market
and could face business requirements for quality, delivery, service and support that we
may not meet. Since significantly all of our sales in 2006 are expected to be in Japan,
failure to meet these requirements could have a material adverse effect on our results of
operations.

WilTel Communications, a company
that recently became a customer for our CM-100 product, was subsequently acquired by Level
3 Communications. We cannot predict the affect this acquisition will have on sales of our
products to WilTel.

WilTel
Communications, a wholesale telecommunications carrier in the United States, selected our
CM-100 product in late 2005 for deployment in its metropolitan networks. Soon after the
selection, WilTel was acquired by Level 3 Communications, another U.S.-based wholesale
telecommunications carrier. It is expected that Level 3 Communications will seek to create
a single unified metropolitan area network, as well as to reduce the number of equipment
suppliers to the combined company. Level 3 Communications is currently evaluating the need
for the CM-100 product in its network. We cannot predict the affect this acquisition will
have on sales of our products to WilTel. If Level 3 Communications elects to eliminate the
CM-100 product from its metro architecture, our sales to WilTel will be adversely
affected.

7

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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 television services and 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 is limited today. It is
expected that these services will emerge first with carriers in Asia and later in Europe
and the United States. 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.

The slow down in capital
expenditures by telecommunications service providers in prior years had a material adverse
effect on our results of operations. Another down turn in technology spending could have a
material adverse effect on our results of operations.

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 economy and the telecommunications market. Recent and continuing
consolidation of telecommunication carriers in the United States is expected to reduce the
number of telecommunication equipment vendors and to increase price pressures. Capital
investment by wireline telecom carriers in 2005 with respect to metro networks moderately
exceeded 2004 levels. We are uncertain as to whether the improvement in technology
spending will continue. A slow capital investment environment in Asia, the United States
and Europe is likely to have negative effect on the demand for new technologies and new
types of equipment. This could have an adverse effect on us as we attempt 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. Almost all of our research and development and other operating expenses in 2005
were related to our CM-100 product. 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 Corrigent CM-100 product line.

8

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# We may need additional
financing to continue our growth.

We
may need to raise additional capital to continue our longer term expansion plans. To the
extent that we cannot fund our activities through our resources and any cash we may
generate from operations, we may need to raise equity or debt funds through public or
private financing. We may be unable to obtain additional financing on acceptable terms or
at all. To obtain funds through arrangements with strategic partners or others, we may
need to relinquish rights to certain of our technologies or potential markets.

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 dependant on resilient packet ring, or RPR, multi protocol
label switching, or MPLS, and a range of emerging technologies that address migration to a
metropolitan area IP metro ring network at a 10 giga bits per second transmission rate. 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 and MPLS technologies in the metropolitan area may not
fully develop, whether as a result of competition, alternative technologies, such as
Ethernet over fiber in the metro area, changes in technology, product standards or
otherwise. Our success depends on the acceptance of our products and technologies and the
purchase of high-transmission services from 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 such target markets. This would leave us with a small market
to address.

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 and MPLS have been recently adopted and 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 to
have our products 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 telephone 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
telephone 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.

9

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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.

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 telephone 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 shorter life cycles for our
products. Shorter 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 announcements by others or successfully develop or
market new products.

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 2006 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 the
guidance we provided, 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:

10

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| |  | 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  telephone  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 policies as a
result of changes in the commercial terms between us and our customers;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 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.

11

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

In
2004 and 2005, 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 $54.8 million as of December 31, 2005, as well as the related amount of deferred
income, which was $28.7 million as of December 31, 2005, will be required to be
recognized. This would result in a one time recognition of a significant amount 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 2004 and 2005, we
will likely recognize revenues over a shorter period of time than in 2004 and 2005 and
could experience extreme fluctuations in our quarterly revenues, cash flows and results of
operations.

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

Telephone
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 are 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. 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.

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. Increased competition could
adversely affect our future revenues and ability to remain profitable due to pricing
pressure, loss of market share and other factors. 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.

12

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The
competitors in our markets are numerous and we expect competition to increase in the
future. The principal competitors for our products include Alcatel, Cisco Systems, Inc.,
ECI Telecom Ltd., Fujitsu,  Hitachi, Huwaei, Lucent Technologies Inc., Nortel Networks, Siemens AG
and UTStarcom.

Government
regulation of telephone 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, the Corrigent CM-100 product line
addresses high bandwidth packets, and is 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. Telephone companies in
the markets in other countries in which we will 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., 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 since 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.

Our
expected 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; and
| | - | --------------------------------------------------------------------------------------

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

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 in many cases requires us to
maintain higher inventory levels. This increases our need for working capital and
increases the risk of an inventory write-off. If we cannot obtain sufficient 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 new 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 new telecommunications industry regulations requiring the use of
environmentally-friendly materials in telecommunications equipment. For example, pursuant
to a European Community directive, telecom equipment suppliers are required to stop using
specified materials that are not environmentally friendly by July 1, 2006. In
addition, telecom equipment suppliers are required under this directive to eliminate the
lead solders from their products by 2010. 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 do not expect to be able to comply with this directive
in 2006. We will attempt to comply with this directive in 2007. This 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 expenses with respect to the re-design of
our products. 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. In addition, manufacturers of
components that we use in our products that do not comply with these regulations may
decide to stop manufacturing these components prior to the July 2006 compliance date.
Similarly, 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 the second half of 2004. Because of the recent deployment of these
products, we cannot predict the level or expense of warranty claims that we will
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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# We are subject to
international business risks.

We
have sold our Corrigent 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:

| |  | 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
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 will be harmed.

Our
growth and 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.

We have experienced a period of
rapid growth, and if we cannot adequately manage our growth, our results of operations
will suffer.

We
have experienced rapid growth in our operations from sales of our metro products and our
anticipated future growth 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 our expansion, 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 grow our business, our expenses may increase
and our results of operations may be adversely affected.

15

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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. 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, although our prices are determined in U.S.
dollars, we link payments due to us from sales of products and services to local
currencies of the countries in which we operate. We hold cash deposits in the currencies
we operate with, that is, in U.S dollar, Japanese Yen and Israeli Shekel, or NIS. In 2006,
we expect that substantially all of our revenues will be derived from Japan and will be
linked to the Yen and a major part of our expenses will be denominated in U.S. dollars and
in NIS. We currently do not use hedge instruments. We are likely to face risks from
fluctuations of the Yen and the NIS compared to the U.S. dollar, the functional currency
in our financial statements. In 2005, 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. A further increase of the value of the U.S. dollar against the Yen in 2006
would cause a decrease in our revenues and gross profit.

# 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, and other financial instruments. Some
of these bonds and instruments may be rated below investment grade or 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, 2005, see Item 11  Quantitative and
Qualitative Disclosures About Market Risk-Interest Rate Risk Management.

16

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# We are subject to
taxation in several countries.

Because
we operate in several countries, mainly in Israel, Japan and the U.S., 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 or
Japan. 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 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.

We have not yet evaluated our
internal controls over financial reporting in compliance with Section 404 of the
Sarbanes-Oxley Act.

We
are required to comply with the internal control evaluation and certification requirements
of Section 404 of the Sarbanes-Oxley Act by no later than the end of our 2006 fiscal year.
We have only recently begunthe process of determining whether our existing
internal controls over financial reporting systems is compliant with Section 404. This
process may divert internal resources and will take a significant amount of time and
effort to complete. If it is determined that we are not in compliance with Section 404, we
may be required to implement new internal control procedures and reevaluate our financial
reporting. We may experience higher than anticipated operating expenses as well as higher
independent auditor fees during the implementation of these changes and thereafter.
Further, we may need to hire additional qualified personnel in order for us to be
compliant with Section 404. If we are unable to implement these changes effectively or
efficiently, it could harm our operations, financial reporting or financial results and
could result in our being unable to obtain an unqualified report on internal controls from
our independent auditors.

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 Islamic movement responsible for many attacks against Israelis,
won the majority of the seats in the Parliament of the Palestinian Authority. The election
of a majority of Hamas-supported candidates is expected to be a major obstacle to
relations between Israel and the Palestinian Authority, as well as to the stability in the
Middle East as a whole.

17

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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.

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 annual military reserve duty. 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.

Almost
all of our revenues in 2006 are expected to be generated in Japanese Yen, 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 would adversely affect the amount of
revenues we report in our financial statements. We could be further exposed to risk that
the rate of inflation in Israel may exceed the rate of devaluation of the New Israeli
Shekel in relation to the Japanese Yen, U.S. dollar and other foreign currencies or that
the timing of such devaluation lags behind inflation in Israel. In that event, the dollar
cost of our operations in Israel would increase and our U.S. dollar-measured results of
operations would be adversely affected. For example, in 2004 the value of the U.S. dollar
declined in relation to the New Israeli Shekel by 1.6%, while inflation increased by 1.2%.
As a result, our salary expenses, which are primarily linked to the New Israeli Shekel,
increased in U.S. dollar terms. In 2005, the value of the U.S. dollar increased in
relation to the New Israeli Shekel by 6.8%, while inflation increased by only 2.4%. As a
result, our salary expenses, which are primarily linked to the New Israeli Shekel,
decreased in U.S. dollar terms. Subject to such exchange rate differences as of the end of
each reporting period, we may incur higher or lower expenses.

18

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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, and a focus of that offices resources on the support of venture
stage companies rather than more developed companies, it is expected that the amount of
grants we receive in the future will be lower than in prior years, if we receive any at
all. We did not receive any grants for our research and development in 2005. This resulted
in an increase in our research and development expenses.

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 5  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 that we currently
receive require us to meet several conditions and may be terminated or reduced in the
future, which would increase our taxes.

We
benefit from 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 canceled.

These
tax benefits may not continue in the future at their current levels or at any level. From
time to time, we submit requests for expansion of our approved enterprise programs or for
new programs to be designated as approved enterprises. These requests might not be
approved, particularly in light of difficult economic conditions in Israel. The
termination or reduction of these tax benefits could seriously harm our financial
condition and results of operations. For more information about Approved Enterprises, see
Item 5B  Liquidity and Capital Resources  Effective Corporate Tax Rates
in Israel below and Note 6a to the financial statements included elsewhere in this
annual report.

We may be required to pay stamp
duty on agreements executed by us on or after June 1, 2003. This would increase our taxes.

The
Israeli Stamp Duty on Documents Law, 1961, or the Stamp Duty Law, provides that most
documents signed by Israeli companies are subject to a stamp duty, generally at a rate of
between 0.4% and 1% of the value of the subject matter of such document. It has been
common practice in Israel not to pay such stamp duty unless a document is filed with a
governmental authority or with the courts. As a result of an amendment to the Stamp Duty
Law that came into effect on June 1, 2003, the Israeli tax authorities have approached
many companies in Israel and requested disclosure of all agreements signed after June 1,
2003 with the aim of collecting stamp duty on such agreements. Although it is not yet
possible to evaluate the effect, if any, on us of the amendment to the Stamp Duty Law,
there could be a material adverse affect our results of operations.

19

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Under
an order published in December 2005, the obligation to pay stamp duty was cancelled with
respect to documents signed on or after January 1, 2006.

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 almost all these parties reside outside the United
States. Any judgment obtained in the United States against such parties may be
unenforceable outside the United States.

It
is not clear whether civil liabilities under the Securities Act and the Securities
Exchange Act can be enforced in Israel. 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.
| | - | ----------------------------------------------------------------------------------

Foreign
money judgments enforced in Israel, are generally awarded in New Israeli Shekels, based on
the U.S. Dollar/NIS exchange rate in effect on the date of payment. The NIS can be
converted into non-Israeli currency and transferred out of Israel. Pending collection, the
amount of the NIS-denominated judgment is linked to the Israeli CPI and accrues interest
at the annual statutory rate set by Israeli law. Judgment creditors bear the risk of
unfavorable exchange rates.

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.

20

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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 Market for our Ordinary Shares

Holders
of our ordinary shares who are U.S. residents face income tax risks.

Based
on the composition of our gross income and the composition and value of our gross assets
during 2005, we do not believe that we would be treated as a passive foreign investment
company, or PFIC, for U.S. federal income tax purposes for the 2005 tax year. It is
likely, however, we would be deemed to have been a PFIC in 2002, 2003 and 2004. In
addition, there can be no assurance that we will not be treated as a PFIC for any
subsequent tax year. If we are a PFIC for any tax year, U.S. holders who owned 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.

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 1, 2006, Eric Paneth, our Chairman and Chief Executive Officer, and Izhak Tamir,
our President, each beneficially owned an aggregate of 1,294,063 ordinary shares
representing 8.2% of our outstanding ordinary shares, including 480,000 ordinary shares
issuable upon the exercise of options that are currently vested. Subject to the decision
of our audit committee, each of Mr. Paneth and Mr. Tamir might also be entitled to
exchange his vested options to purchase shares of Corrigent common stock for options to
purchase approximately 400,000 of our ordinary shares (based on data as of March 1, 2006).
For a further explanation of this possible exchange, see Item 6E Share
Ownership  Exchange of Corrigent Options.

21

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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.

In
addition, pursuant to a plan approved by our shareholders at the Annual General Meeting in
June 2005, we may offer holders of vested options to purchase Corrigent common stock at a
price of $0.01 per share that have been issued to employees and directors of Corrigent and
Orckit the opportunity to exchange those options for vested options to purchase our
ordinary shares at a price of $0.01 per share. Based on the terms of the plan, as of March
1, 2006, the maximum number of options for our ordinary shares that could have been issued
in exchange for options to purchase Corrigent shares would have been options for
approximately 1,500,000 of our ordinary shares (excluding approximately 500,000 of our
shares issuable pursuant to exchanges already made). The issuance of this number of shares
to employees and directors of Orckit and Corrigent 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
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. Since January 1, 2004, our share price has fluctuated from a
low of $4.82 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;
| | - | ---------------------------------------------------------------------------------------

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

| |  | 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.
| | - | ---------------------------------------------------------------------------------

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.

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 Stock 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 New Israeli Shekels 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.

23

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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 significant revenues from sales of these products in the
second half of 2004 and were able to generate operating income and net income for the
first time in 2005.

# Major Developments since
January 1, 2005

We
continued in 2005 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-100 product line, which consists of telecommunications equipment supporting high
bandwidth services over fiber networks in telecommunications networks located in
metropolitan, or metro, areas. In 2005, we continued to sell our CM-100 product to KDDI in
Japan for their national deployment of a new metropolitan area network that is expected to
carry 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 2005 were related to our efforts to develop and market the
CM-100 product line. WilTel, a U.S. based wholesale telecommunications carrier, selected
CM-100 for deployment in its metro ring network in late 2005. Level 3 Communications
acquired WilTel after this selection and, as part of the reorganization of their network
after the acquisition, Level 3 is evaluating the need of WilTel for CM-100 products.

# 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 $862,000 in 2003,
$3.9 million in 2004 and $1.9 million in 2005. 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
current product line, the CM-100, was developed by our subsidiary, Corrigent Systems Inc.
The CM-100 solution 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, voice and storage.

24

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Our
CM-100 metropolitan product line is an optical transport solution that can handle not only
the growing demand for video and 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 the technical specifications required by existing synchronous voice
transmission on optical media, or SONET, transfer protocol. The CM-100 product line is
designed to provide the benefits of both Ethernet and SONET 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 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 Gigabits per second, or Gbps. A majority
of the metropolitan area rings are currently operating at a capacity of 2.5Gbps 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 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.

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. A small amount of sales
was also made to Vic Tokai, a regional telecom provider in Japan targeting Ethernet-based services. Sales to our
customers in Japan are made through distributors. Sales to KDDI accounted for approximately 81.5 % of our revenues
in 2004 and 99.8% of our revenues in 2005. We expect that substantially all of our revenues in 2006 will be derived
from sales of the CM-100 to KDDI. KDDI is deploying 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, that is, voice over IP, data
services over the Internet, video services and cellular transmission services.

In
late 2005, the CM-100 was selected for deployment by WilTel, a U.S. wholesale
telecommunications carrier subsequently acquired by Level 3 Communications. No revenues
were derived from WilTel in 2005. Level 3 Communications is re-evaluating the need for
CM-100 products in its converged network following this acquisition.

In
2005, we opened offices in Korea and India, as well as increased the resources allocated
for marketing and sales activities in our office in Japan. 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.

25

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# Metro Transport Telecom
Markets, Technology and Products

The Metro Transport
Market

The
fiber optic networks of many telephone 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, cellular networks. Coupled together, these data services (voice over
IP, Internet access, video services and cellular network services) are referred to as
quadruple play services. 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
of high 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. In 2004 and 2005, U.S. telecom
carriers began plans for expansion of fiber rings in metro areas, promoting connectivity
of fiber to the premise and fiber to the curb. 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 address very high speed transmissions of data services over fiber networks.

Telephone
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 expected
future 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, data traffic often exhibits a bursty nature, with
dynamically varying levels of utilization of communication channels, as opposed to voice
traffic which normally requires constant levels of channel utilization. Substantially all
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 up to 10Gbps 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 legacy voice and other circuit-based
data 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, to a lesser extent, 2.5 Gbps, 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 high definition 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.

26

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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.

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.

RPR.
Resilient packet ring, or RPR, is an emerging technology that is being
          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 approved in June, 2004. Corrigent has been instrumental in
          establishing this standard, serving actively as a member of the industry work
          group charged with defining the RPR protocol.

RPR
is being developed as an alternative to SONET transport for networks that support high
levels of data traffic, while allowing carriers to maintain traditional SONET attributes,
such as resiliency. Resiliency refers to the ability to employ a back-up or alternate
route in the event of a system or optical fiber failure, as well as the fast restoration
of service in the event of any other failure. RPR is expected to allow carriers to conduct
performance monitoring of transmission rates, traffic volume, and failures and alarms,
comparable to the monitoring available with traditional SONET-based networks.

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 multiprotocolbecause 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 expected to be
adopted as networks begin to carry more and different mixtures of traffic.

RPRs Advantages
over Existing Data and Voice Transport Protocols

We
believe that RPR is a more efficient voice and data transport protocol than traditional
SONET rings that have been retrofitted to handle data traffic for the following reasons:

27

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| | Usage
of a single fiber ring and spatial reuse capabilities.SONET utilizes only one ring
of optical fibers. A second ring is available in case of a failure in the first ring, but
is otherwise not used. This creates unutilized capacity in SONET, as half of the network
capacity is idle during normal operations. RPR enables the use of this redundant
bandwidth under normal operating conditions, while maintaining the redundancy
capabilities. In addition, RPR supports spatial reuse, which allows the re-use of the
same ring bandwidth over different spans of the ring.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Statistical
multiplexing qualities.With SONET, data transmitted from one specific network
element, or node, to another may be sent only using bandwidth that has been dedicated for
that transmission. RPR increases bandwidth efficiency by allowing data transmissions to
be broken up into packets and inserted in bandwidth that might have otherwise been
dedicated (but not used) for a separate transmission. This process is called statistical
multiplexing. When less than all network users are actively transmitting or receiving
data at the same time, it results in a more efficient utilization of the total available
bandwidth on a network.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 technical specifications. The CM-100 product line is designed to
provide the benefits of both Ethernet and SONET 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, RPR, and MPLS technologies to effectively support a
range of SONET services, Ethernet, Time Division Multiplexer, or TDM, services which 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 interoperate with both legacy
SONET and emerging MPLS core devices. Our product can support transmission capacities of
up to 10 Gbps and interfaces with:

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

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

| |  | 10
Gigabit Ethernet, and
| | - | ------------------------

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

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

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

| | n | 155
Mbps SONET interface (known also as OC3);
| | - | ---------------------------------------------

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

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

The
CM-100 product line is designed to deliver both Ethernet and TDM/Sonet based
services over a packet-based network. These services are carried over MPLS tunnels over an
RPR ring in a packetized form that is expected to enable 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
2006, we expect to focus on the development of additional software features and hardware
capabilities of 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,
carried over IP networks that include video transmission over the cellular network. In
addition, we expect to invest resources with respect to the development of hardware and
software capabilities that will allow higher transmission capacity for the CM product line
as a result of specific requirements of our customers to support their network
architectures. This higher transmission capacity will allow for more types of high
bandwidth services supported by a converged metro network based on the CM-100 platform.

# Sales, Marketing and
Service

Sales
and Marketing. We market our products to telephone 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 the United States, Japan, Korea and India. 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, 2005, overall marketing and sales efforts
were conducted by approximately 32 employees located in Israel, the United States and
Japan.

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

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

Substantially
all of our revenues in 2004 and 2005 were generated from our CM-100 metro product line,
with sales to KDDI accounting for 81.5% of our revenues in 2004 and 99.8% of our revenues
in 2005. We expect to depend on purchases by a limited number of telecommunication
carriers for our product revenues.

In
2003, our revenues were generated from sales of our FastInternet DSL product line. We no
longer sell these DSL products.

Telco
Approval Process. Telephone 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 telephone 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
telephone companies and regulatory issues affecting telephone companies. A telephone
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
telephone 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. Telephone 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 telephone companies and acceptance of new data
services by subscribers, as well as our ability to develop new technologies and sell new
products.

30

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Telco
Services and Support. We offer repair services as part of our warranty services and
technical support services for our products. We do not offer installation services. We
expect that our local distributor or reseller will provide 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 during working hours and provide product training to our carrier
customers on a case-by-case basis. In Japan, we deliver the CM-100 products to our
resellers and they are responsible for installations. Second level support services that
address identification and documentation of field failures are provided by our office in
Japan.

Our
CM-100 products are subject to a fourteen-month warranty and support protection period.
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 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.

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, and, in limited
amounts, by Vic Tokai, a regional telecom provider in Japan targeting Ethernet-based
services. WilTel, a U.S. wholesale telecommunications carrier selected the CM-100 for
deployment in late 2005. WilTel was subsequently acquired by Level 3 Communications, which
currently is reevaluating this selection and its network needs after this acquisition.

Sales
to our customers in Japan are made through distributors. Our sales to KDDI in Japan are
made pursuant to agreements and related terms of sale with OKI and to a lesser extent with
NetOne Systems, two distributors of telecom and enterprise products in Japan. We provide a
fourteen-month product warranty and post-contract hardware and software support services
with respect to products sold. Our distributors provide on-site product support services
and training. Our distribution agreements set general distribution terms regarding sales
to KDDI. Our distributors submit purchase orders for products on an as needed basis.

# Manufacturing

We
use 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.

Telephone
company orders are short-term and typically involve short delivery time frames. We expect
that the manufacture of products will be mainly against purchase orders, although we are
likely to order products based on sales forecasts only 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
telephone companies.

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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.

# 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 standards-setting organizations and are always 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 are making efforts to comply with the
European Unions Restriction of Hazardous Substances Directive that requires telecom
equipment suppliers to stop the usage of some materials that are not environmentally
friendly by July 1, 2006. However, we believe that we will not be able to comply with this
directive until 2007. These materials include cadmium, hexavalent chromium, lead, mercury,
polybrominated biphenyls and polybrominatel diphenyl ethers. Under the directive, an
extension for compliance through 2010 was granted with respect to the usage of lead in
solders in telecommunication equipment. We expect that other countries, including
countries we operate in, will adopt similar directives or other additional regulations.

# 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 telephone
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.

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, Cisco Systems, Inc., ECI Telecom Ltd., Fujitsu, Hitachi, Huwaei, Lucent
Technologies Inc., Nortel Networks, Siemens AG 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. 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
December 29, 2005, Luminous Networks, Inc. filed a lawsuit against Corrigent and Orckit in
the Supreme Court of the State of New York, County of New York. The complaint alleges that
Corrigent and Orckit breached a nondisclosure and confidentiality agreement and alleges
that Corrigent and Orckit committed tortious interference with prospective economic
advantage. Corrigent and Orckit filed an answer on February 13, 2006 denying the
allegations in the complaint. We believe that this 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 proceedings.

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

List
of Significant Subsidiaries

Corrigent
 Systems  Inc.,  a  subsidiary,  is a Delaware  corporation.  As of March 1, 2006,
 Orckit  owned approximately 93% of the shares of Corrigent Systems on a fully-diluted
basis.

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

Our
principal offices in Tel Aviv occupy approximately 50,000 square feet of rental space
rented through a series of leases. Our major lease in Tel Aviv expires in December 2007.
We have an option to terminate these lease agreements with six months prior written
notice. We also maintain offices in San Jose, California, Tokyo, Japan and, in 2005,
opened offices in 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.

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|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.

|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 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 in 2004 and 2005 were 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 and do not expect to generate additional revenues from them. We
expect to generate substantially all of our revenues in 2006 from the sale of our metro
products.

The
end-user base for our products is comprised primarily of large telephone companies, and
has historically been concentrated in each year among a small number of telcos. Sales to
KDDI accounted for approximately 81.5% of our revenues in 2004 and 99.8% of our revenues
in 2005. We expect that in 2006 substantially all of our sales will also be to KDDI. We
expect that we will continue to experience high customer concentration for the foreseeable
future.

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.

Substantially
all of our operating expenses in 2005 related to research and development expenses,
selling, general and administrative expenses and capital expenditures for the operations
and support related to our CM-100 product and related technologies.

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Prior
to 2005, we generated operating losses in each of our past five years. Our revenues were
insignificant in 2003 and the first half of 2004. We began for the first time to generate
revenues from sales of our metro products in the second half of 2004. In 2005, we
generated over $100 million of revenues from sales of our metro products, while
controlling our operating expenses, and were able to generate operating and net income for
the first time.

The
telecommunications equipment market is undergoing continuous and rapid 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 very 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 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. Some of those judgments can be
subjective and complex, and consequently actual results may differ from those estimates.

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 subjective
judgments. We base our judgments on past experience and various other assumptions that are
believed to be reasonable under the circumstances. Please refer to Note 1 to our
consolidated financial statements included in this Annual Report for a summary of all of
our significant accounting policies.

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Revenue Recognition

Revenues
from sales of products are recognized when title passes to the customer, provided that
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
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 and 2005, 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. Accordingly, revenues for substantially all sales in 2004 and 2005 are
being recognized ratably over the fourteen-month term of the PCS. Deferred income of $28.7
million as of December 31, 2005, represents $54.8 million of deferred revenues less the
$26.1 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.

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. We will re-evaluate in 2006 the existence of VSOE regarding our sales
made to KDDI after the termination of the term of the first PCS services that we provided
with respect to CM-100 products. If we are able to determine the VSOE, we will recognize
the balance of the deferred income, including the related deferred revenues and deferred
expenses, with respect to that VSOE.

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Under
GAAP, we may be required to change our revenue recognition policies, including the method
in 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.

Provision for doubtful
accounts

Allowances
for doubtful accounts are determined based on an analysis made for each of our customers.
If bad debts are found to be higher than expected, we may need to increase these
provisions and our bad debt expenses. As of March 1, 2006, we had collected all of the
trade receivables that appeared on our balance sheet as of December 31, 2005.

Provision for servicing
products under warranty

Sales
of our metro products to KDDI are subject to warranty for a period of fourteen months. The
majority of our legacy DSL products were sold subject to up to a three-year warranty
period. We have agreed to indemnify our customers in some circumstances against liability
from defects in our products. In some cases our indemnity also covers indirect damages. We
provide an estimate for warranty expense at the time revenues from the related sales are
recognized. The annual provision for warranty and PCS 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 and PCS 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.

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 expected volatility of our share price and
expected life of the option. 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. The total amount expensed by us in 2005 for stock-based compensation was
$616,000, of which $263,000 was recorded 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, 2005, there was
approximately $2.0 million of total unrecognized stock-based compensation expense related
to non-vested stock-based compensation arrangements granted by us. That expense is
expected to be recognized by us over a weighted-average period of 1.6 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.
          The substantial majority of our revenues of $11.3 million in 2004 and all of our
          revenues of $101.2 million in 2005 was generated from sales of our CM-100
          product line to KDDI. We expect that substantially all of our revenues in 2006
          will result from sales of the CM-100 product line to KDDI. In 2003, our revenues
          were insignificant as we transitioned our business from legacy DSL products to
          the development of new metro products. We do not expect to generate additional
          revenues from the sale of our legacy DSL products.

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
repayment of grants received from the Office of the Chief Scientist. Gross profit was
$49.4 million (48.8% of revenues) in 2005 compared to $5.4 million (47.7% of revenues) in
2004 and $935,000 (55.6% of revenues) in 2003. The substantial majority of our gross
profit in 2005 and 2004 was a result of sales of our CM-100 products, which commenced in
the second half of 2004.

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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 $5.8 million in 2003, $2.7 million in
2004 and $173,000 in 2005. Our research and development expenses were higher in 2005
compared to 2004, mainly due to an increase in the number of research and development
employees and in the costs of materials and the use of sub-contractors for the continued
development of the CM-100 product line. We anticipate that we will incur a similar or
higher level of research and development expenditures in 2006 compared with 2005. We
expect that the amount of government research grants in 2006 will be insignificant, if
any, due to the policy of Israels Office of the Chief Scientist to focus on venture
stage companies and requirement to repay grants from all sources of revenues, without
regard to sales related to the project funded.

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 increased in 2005 compared to 2004 due to an increase in
marketing, promotion and sales activities with respect to the increased efforts of
distribution of our metro products. These expenses decreased in 2004 compared to 2003 due
to a reduction of our marketing and sales activities related to our legacy DSL products.
We expect that marketing and sales expenses will increase in 2006 as we increase our
marketing activities and sales efforts as we attempt to expand the distribution of our
metro products.

Financial
Income, net. Financial income consists primarily of interest on short term and long
term investments and on bank deposits. Prior to 2004, it also included gain on early
retirement of our convertible subordinated notes. Through 2004, financial expense
consisted primarily of interest payments with respect to our convertible subordinated
notes, bank loans and amortization of the issuance costs of our convertible subordinated
notes. It also included exchange rate differentials. In 2005, financial expense consisted
primarily of interest payments with respect to bank loans and exchange rate differentials.

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During
2003, we retired $22.0 million principal amount of our convertible subordinated notes,
resulting in a gain of $3.1 million. In 2004, we retired the remaining balance of our
convertible subordinated notes in a principal amount of $16.2 million at par value. This
retirement did not result in a financial gain.

Financial
income, net was $5.1 million in 2003, $1.5 million in 2004 and $2.6 million in 2005. The
fluctuations in our financial income were primarily driven by the financial income derived
in 2003 from the principal amount of notes retired and the prices at which they were
retired, net of interest payments. In 2005, exchange rate currency losses also impacted
our financial income, net mainly due to fluctuations of the Japanese 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.

Other
Income. Other income consisted of capital gain in the amount of $2.4 million that we
recognized in 2005 in connection with a sale for $4.2 million of our holdings in Siliquent
Technologies Inc., a venture backed private technology entity.

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

As
of December 31, 2005, the majority of our assets in non-dollar currencies are in Japanese
Yen (Yen) and in New Israeli Shekels (NIS). 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. Such a devaluation
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).

Almost
all of our sales in 2005 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 rate between the U.S. dollar and
Yen. Due to the strengthening of the U.S. dollar exchange rate against the Yen in 2005,
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 2004.

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 2004 and 2005, the devaluation rate of the Yen against the U.S. dollar:

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|Years EndedDecember 31, | Israeli Inflation
Rate | Israeli
Devaluation Rate | Israel Inflation Adjusted
for Devaluation | Japanese
Devaluation Rate
|----------------------- | ---------------------- | ------------------------ | ----------------------------------------- | -------------------------
|
|
|
|
|2001                    | 1.4                    | 9.3                      | (7.8)                                     | n\a                      
|2002                    | 6.5                    | 7.3                      | (0.8)                                     | n\a                      
|2003                    | (1.9)                  | (7.6)                    | 5.7                                       | n\a                      
|2004                    | 1.2                    | (1.6)                    | 2.8                                       | (4.1)                    
|2005                    | 2.4                    | 6.8                      | (4.4)                                     | 14.3                     

|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 used cash from operations to finance our operations.

Our
working capital (total current assets net of total current liabilities) decreased from
$34.5 million as of December 31, 2003 to $16.5 million as of December 31, 2004 and to
$(6.3) million in 2005. The decrease in our working capital has occurred as a result of
the following: a) through 2004, using our cash to fund our operating losses and to
repurchase our convertible subordinated notes; b) our decision to invest funds in
long-term marketable securities, which are not included in working capital; and c) using
short-term borrowings in the amount of $31.0 million at the end of 2004 to purchase the
remaining principal amount of our convertible subordinated notes and to provide working
capital in anticipation of increased sales.

We
had cash, cash equivalents, long-term marketable securities and bank deposits of $117.8
million as of December 31, 2005, compared to $77.2 million as of December 31, 2004 and
compared to $79.0 million as of December 31, 2003. Since all of our revenues in 2005 were
recognized ratably over a 14-month period from product delivery, due to the inability to
value the PCS services, the increase of cash, cash equivalents and marketable securities
did not result in a corresponding increase in revenues recognized in 2005. Therefore, it
is expected that a significant portion of our revenues in the six-months ending June 30,
2006 will not generate cash since the cash related to such revenues was already received
by us in 2005 and as a result, our balance of cash, cash equivalents, long-term marketable
securities and bank deposits is likely to decline as of June 30, 2006.

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

We
used approximately $16.2 million in cash in April 2004 to redeem the remaining outstanding
principal amount of our convertible subordinated notes. We believe that we have sufficient
working capital to meet our anticipated working capital and capital expenditure
requirements for 2006 and 2007. 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.

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Net Cash Provided by/Used
in Operating Activities

In
2005, we generated $72.6 million of cash from operating activities primarily as a result
of our net income and a decrease of $54.1 million of trade receivables and other
receivables, offset by a decrease of $9.0 million in trade payables and accrued expenses
and an increase of $6.9 million in deferred income. A substantial majority of the sales
related to the receivables collected by us in 2005 were not recognized as revenue in 2005.
The decrease in the accounts receivable balance as of December 31, 2005 in comparison to
December 31, 2004 resulted from a decrease in deliveries to customers in the last quarter
of 2005 in comparison to the last quarter of 2004.

In
2004, we generated $938,000 of cash from operating activities primarily as a result of an
increase in trade payables, and deferred income and trading of marketable securities,
offset in part by our net loss and an increase in trade receivables. In 2003, we used
$16.1 million of cash in operating activities, primarily as a result of our net loss,
decreases in payables and non-cash gain from the early retirement of our convertible
subordinated notes, offset in part by depreciation and impairment of property and
equipment, amortization of deferred compensation related to employee stock option grants
and trading marketable securities.

Net 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 $862,000 in 2003,
$3.9 million in 2004 and $1.9 million in 2005. Our capital expenditures in 2005, 2004 and
2003 were primarily for the procurement of telecommunications equipment and related
software tools.

In
2005 and 2004, our investing activities also included primarily the receipt of $15.0
million in 2005 and $10.0 million in 2004 from marketable securities that came to
maturity, offset by $63.8 million in 2005 and $3.0 million in 2004 of investments in
marketable securities. In 2003, our investing activities also included the receipt of
$26.3 million of marketable securities, the receipt of $7.0 million from Tikcro in
repayment of our loan to Tikcro and the receipt of $10.3 million from bank deposits.

Convertible Subordinated
Notes

In
March 2000, we sold $125 million aggregate principal amount of 5.75% convertible
subordinated notes due on April 1, 2005. From 2000 to 2004, we repurchased and redeemed
the outstanding balance of the principal amount of our convertible subordinated notes for
an aggregate amount of $70.4 million. As a result, as of December 31, 2004, there were no
convertible subordinated notes outstanding. The repurchase and redemption of convertible
subordinated notes constituted our primary use of cash in financing activities in 2003 and
2004.

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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 date 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 anticipating an increase of sales. This loan
was fully repaid in January 2005.

Loan to Tikcro

As
part of the spin-off of Tikcro, we loaned $20 million to Tikcro at an interest rate of
approximately 6% per annum. The loan was required to be repaid by March 1, 2005. In 2002,
Tikcro repaid $13.0 million of the principal of this loan from the proceeds of a
transaction it entered into with STMicroelectronics. In May 2003, Tikcro announced the
closing of the sale of its remaining operating assets to STMicroelectronics. Promptly
thereafter, Tikcro repaid the remaining amounts outstanding under this loan.

Repurchases of our
Ordinary Shares

During
2003, we repurchased for $5.6 million in cash approximately 2,646,000 of our ordinary
shares.

# 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, commonly
referred to as the R&D Law. In June 2005, an amendment to the R&D Law
came into effect, which intends to make the R&D Law more compatible with the global
business environment by, among other things, relaxing restrictions on the transfer of
manufacturing rights outside Israel and on the transfer of OCS-funded know-how outside of
Israel, as described below.

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,
2005, we recognized research and development grants in an aggregate amount of
approximately $8.7 million. As of December 31, 2005, total contingent liabilities to the
Office of the Chief Scientist were approximately $6.6 million. Since the budget for grants
continues to be cut and the focus for grants is shifting to venture stage companies, we
may not receive additional grants.

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 4% 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.

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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 is
expected to include 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, to increase the rate of interest accruing on
grants by 1% per year. The amendment is expected to have retroactive
effect from January 1, 2006, 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 the approval of the Chief Scientist, some 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 recent amendment to 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, the increased royalty rate and repayment amount will 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 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 of 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 34%
for the 2005 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: 31% for the 2006 tax year, 29%
for the 2007 tax year, 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 (as
further discussed below) may be considerably less.

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. 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 this law, 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 up to 25% for the remainder of the five-year period of tax
benefits. The exemption is applicable as long as the gains are not distributed. Upon
distribution, a 25% tax rate will apply, as described below.

After
the applicable benefit period expires, income generated from these Approved Enterprise
programs, including 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, will be
subject to tax at the full corporate tax rate.

45

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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 Benefiting Enterprise. A company wishing to receive the tax benefits
afforded to a Benefiting 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 Benefiting 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 Benefiting 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. See Item 18 Financial Statements. Under Israeli
tax law, at December 31, 2005, we had accumulated losses for tax purposes amounting to
approximately $130 million. These losses are available indefinitely to offset future
taxable business income. As of December 31, 2005, our carry forward of capital losses for
tax purposes were $38 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.

If
we declare cash dividends, we will pay those dividends in New Israeli Shekels. 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.

46

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# Inventory

Inventory
in 2005 consisted primarily of finished products and raw materials, in 2004 primarily of
finished products, and in 2003 of raw materials for the assembly of our products. Our
inventory was $3.3 million as of December 31, 2005, $5.5 million as of December 31, 2004
and $100,000 as of December 31, 2003. The decrease in inventory levels in 2005 resulted
from a decrease in the volume of finished products due to a lower volume of shipments
expected in the first quarter of 2006 in comparison to the first quarter of 2005. The
increase in inventory levels in 2004 resulted from a build up of product inventories for
the supply of our CM-100 products.

|C. | RESEARCH
AND DEVELOPMENT
|-- | ------------------------

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 118 employees as of December 31, 2003, 104
employees as of December 31, 2004, and 133 as of December 31, 2005, most of whom are
located in Israel and hold engineering or other advanced technical degrees. The number of
research and development employees was similar in the years 2003 and 2004 since we
maintained our research and development efforts, focusing on new product lines. The number
of research and development employees increased in 2005 compared with 2004 because we
increased our research and development efforts related to our CM-100 product line. Our
gross research and development expenses were approximately $20.8 million in 2003, $17.7
million in 2004 and $16.3 million in 2005. 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 $5.8 million in 2003, $2.7 million in 2004 and
$173,000 in 2005.

In
2005, the majority of our research and development work was focused on the CM-100 product
line, addressing software and hardware capabilities. We expect that these efforts will
continue and comprise substantially all of our 2006 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.

|D. | TREND
INFORMATION
|-- | -----------------

In
2005, the capital investment expenditures of wireline telecom carriers for metro equipment
were similar to capital expenditure levels in 2004. It is expected that capital investment
of wireline telecom carriers in metro equipment in 2006 will be similar or slightly higher
than the levels in 2005. The introduction of new services to residential users and
enterprises is expected to require significantly higher bandwidth support over metro
networks. In areas where new high bandwidth services are likely to be 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
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
handheld devices.

47

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|E. | OFF-BALANCE
SHEET ARRANGEMENTS
|-- | ------------------------------

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

|F. | TABULAR
DISCLOSURE OF CONTRACTUAL OBLIGATIONS
|-- | ---------------------------------------------

The
following table of our material contractual obligations as of December 31, 2005 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)
|------------------------------ | -------------------------------------
|
|
|
|
|Operating Lease Obligations    | 730                                  
|Purchase Obligations           | 2,952                                
|Other Long-Term Liabilities   
|Reflected on our Balance Sheet
|under U.S. GAAP                | 60,880                               
|                               |                                      
|Total                          | 64,562                               

---

| | 1 | Our major premises leases allow for early termination upon advance notice.
               Accordingly, this amount reflects lease payments for the applicable notice
               period. For total projected annual rent payments, see note 4b to our financial
               statements for the year ended December 31, 2005. The amount is presented in the
               1-3 years column since this is the average life period of our lease obligations.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2 | These amounts reflect the trade payables, accrued expenses, deferred income and
               other payables presented in our balance sheet.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| | 3 | This amount reflects our accrued severance pay liability. 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. Out of this amount, $3.3 million
               has been previously funded by our contributions to employee plans.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

48

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In
addition, as of December 31, 2005, our contingent liability to the Office of the
Chief Scientist in respect of grants received was approximately $6.6 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   | 56  | Chairman of the Board and Chief Executive Officer            
|Izhak Tamir   | 53  | President and Director                                       
|Ehud Rokach   | 42  | Chief Executive Officer of Corrigent Systems                 
|Aviv Boim     | 39  | Chief Financial Officer                                      
|Eran Tamir    | 48  | Vice President Operations                                    
|Leon Bruckman | 48  | Vice President, Chief Technology Officer of Corrigent Systems
|Zvi Menahemi  | 38  | Vice President, R&D of Corrigent Systems                     
|Akio Ogiso    | 51  | Vice President, Asia Pacific of Corrigent Systems            
|Yair Shamir   | 60  | Outside Director                                             
|Miri Gelbman  | 54  | Outside Director                                             
|Moshe Nir     | 56  | Outside Director                                             
|Jed M. Arkin  | 42  | Director                                                     
|Moti Motil    | 53  | 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 a
          technical department head in the Israeli Government. From 1983 until 1985, he
          was employed by Linkabit Inc., in San Diego, California. Mr. Paneth holds an
          advanced engineering degree from the Israel Institute of Technology, commonly
          known as the Technion. Since January 2000, Mr. Paneth has been a director of
          Tikcro Technologies Ltd.

Mr.
          I. Tamir has been President and a Director of Orckit since its founding in
          1990. Mr. Tamir has served as a Director of Gilat Satellite Networks Ltd. and
of           Scopus Video Networks 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.
From 1978           to 1985, he was a senior engineer in the Israeli Government. Mr.
Tamir holds an           engineering degree from the Technion and an M.B.A. from Tel Aviv
University. Mr.           Tamir has been chairman of the board of directors of Tikcro
since January 2000           and its chief executive officer since August 2003.

Mr.
          Rokach joined Orckit in 1992 and has served as Chief Operating Officer of
          Orckit since February 2000 and as Chief Executive Officer of Corrigent Systems
          since October 2000. From 1998 to 2000, Mr. Rokach served as Vice
          PresidentNetwork Access Systems. From 1992 to 1998, Mr. Rokach held
          several research and development and other positions with Orckit. From 1987 to
          1992, he was a senior engineer with the Israeli Government. Mr. Rokach holds an
          engineering degree from the Technion.

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Mr.
          Boim joined Orckit as Chief Financial Officer in February 1998. From August
          1996 until February 1998, he was a banker with BT Alex. Brown Incorporated, an
          investment banking firm. From August 1993 until August 1996, Mr. Boim was a
vice           president of Giza Ltd., Tel Aviv, an investment banking firm. Mr. Boim
holds a           B.A. and an M.A. in economics and management from Tel Aviv University
and an           L.L.B. from Tel Aviv University Law School.

Mr.
          E. Tamir joined Orckit as Vice President Operations in April 2000. From
1996           until 2000, Mr. E. Tamir, who was one of founders of Wizcom Technologies
Ltd.,           served as vice president operations of Wizcom. From 1990 until 1996, Mr.
E.           Tamir served as director of worldwide logistics of Indigo Ltd. From 1985 to
          1990, Mr. E. Tamir served as director of acquisitions of Scitex Corporation
Ltd.           Mr. E Tamir holds a B.Sc. in Machine Engineering from Tel Aviv University
and is           a business economics graduate of the Israeli Institute for Management.

Mr.
          Bruckman joined Orckit in 1999 and is currently serving as the Chief
          Technology Officer of Corrigent Systems. From September 2000 to February 2005,
          Mr. Bruckman served as Vice President and Chief System Architect of Corrigent
          Systems and from November 1999 to September 2000 Mr. Bruckman served as Vice
          President of system engineering of Corrigent Systems. From April 1996 to
October           1999, Mr. Bruckman was Vice President of research and development and
system           engineering at HyNEX, which was acquired by Cisco. From August 1982 to
March           1996, Mr. Bruckman held several positions with the access division of
Tadiran           Telecommunications, of which the last position was director of research
and           development. Mr. Bruckman holds a B.Sc. in Electrical Engineering from the
          Technion Institute and an MBA from Bar-Ilan University, Israel.

Mr.
          Menahemi has been Vice President of R&D of Corrigent Systems since
April           2005. From January 2000 until April 2005, 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 was served as a
senior           engineer in the Israeli Defense Forces. Mr. Menahemi holds a B.Sc.
degree in           Electrical Engineering from Tel Aviv University.

Mr.
          Ogiso has been Vice President of Asia Pacific 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.
          Shamir has been a Director of Orckit since October 1995. Mr. Shamir has
          served as the Chairman of the Board of Israel Aircraft Industries since July
          2005. He served as the Chairman of the Board of EL-AL Airlines from May 2004
          until January 2005. He served as the Chairman of VCON Telecommunications Ltd.,
          an Israeli technology company listed on Le Nouveau Marche in France,
from           2001 to 2005. He also served as its Chief Executive Officer from 1998 to
2004.           Since April 2000, Mr. Shamir has also served as chairman of Catalyst
Investment           L.P., an Israeli venture capital firm. From July 1995 through
February 1997, Mr.           Shamir served as the Executive Vice President of The
Challenge Fund LLP, the           general partner of the Challenge Fund-Etgar, L.P. From
December 1993 to July           1995, he served as the Chief Executive Officer of Elite
Food Industries Ltd. Mr.           Shamir served as Executive Vice President and general
manager of Israel           operations of Scitex Corporation Ltd. from February 1988
through December 1994.           Mr. Shamir is a director of Mercury Interactive Corp.,
DSP Group Corporation,           and the Chairman of Shamir Optical Industry Ltd. Mr.
Shamir holds a B.Sc. in           Electrical Engineering from the Technion and has served
on the board of           governors of the Technion since 1993.

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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 (CRM).

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.
          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. 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 C.P.A.

Mr.
          Arkin has been a Director of Orckit since August 2001. Since January 2000,
          Mr. Arkin has served as Chairman of MadahCom Communications Ltd., a
manufacturer           of digital wireless public alerting systems. Since March 2005, he
has served as           a director of Shamir Optical Industries (Nasdaq: SHMR). 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.

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.

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

The
aggregate direct remuneration paid by us to all persons as a group (15 persons, including
two employees who ceased to be officers during 2005) who served in the capacity of
director or executive officer in 2005, including the remuneration of Eric Paneth and Izhak
Tamir detailed below, was approximately $3.7 million, which includes $450,000 of pension,
retirement or similar benefits, expenses reimbursed (including professional and other
business association dues and expenses) and other fringe benefits. In 2005, we granted to
this group (excluding Messrs. Paneth and Tamir) options to purchase an aggregate of
440,500 ordinary shares under the Orckit Israeli Share Incentive Plan. A part of these
options are contingent upon meeting various performance goals in addition to their vesting
period. Excluding options that are contingent upon meeting various performance goals, the
options have an exercise price of $8.25 per share, which represented the market price of
our ordinary shares on the date of grant. In 2005, we granted to each of Eric Paneth and
Izhak Tamir options to purchase 420,000 of our ordinary shares at $27.14 per share, which
represented the market price of our ordinary shares on the date of grant. These options
are fully vested and expire in June 2012.

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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 without modification of the employment terms. The
original agreement of each 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 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.

The
original employment agreement of each of Mr. Paneth and Mr. Tamir provided for a base
salary payable in NIS, linked to the Israeli consumer price index, 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).

In
the amended employment agreements, we have 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 consumer price index 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.

52

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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 Annual
General Meeting held on June 23, 2005.

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

# Nasdaq Requirements

Under
the listing requirements of the Nasdaq Stock Market, 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. Five out of the seven members of our
board of directors, namely, Messrs. Shamir, Arkin, Nir and Motil and Ms. Gelbman, are
independent directors under the Nasdaq requirements. Messrs. Shamir, Nir and Motil and Ms.
Gelbman are the members of our audit committee.

Israeli
Companies Law

We are
also subject to the provisions of the Israeli Companies Law, 5759-1999, and regulations
adopted thereunder.

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 seven directors.

53

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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. 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:

| |  | 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.

Pursuant
to an amendment to the Companies Law, effective as of April 19, 2006, (1) each outside
director must have either accounting and financial expertise or
professional qualifications  (as such terms are defined in regulations
promulgated under the Companies Law) and (2) at least one of the outside directors must
have accounting and financial expertise. These requirements will apply to us
upon the election of one or more outside directors.

54

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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 an additional
three years. 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. Our outside directors are: Mr. Shamir, who was
re-elected to a second three-year term in 2003, and Ms. Gelbman and Mr. Nir, who were
re-elected to a second three-year term in 2005. Accordingly, Mr. Shamirs service on
our board of directors will cease in March 2006.

# 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

Israeli
Companies Law Requirements

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:

55

---

---

| |  | 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 flaws 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. Our audit
committee consists of Mr. Shamir, Mr. Nir, Ms. Gelbman and Mr. Motil.

Nasdaq
Requirements

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.

As
of July 2005, 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 the nominating committee and compensation
committee.

Approval of Related Party
Transactions

Under
the Companies Law and the rules of Nasdaq, the approval of the audit committee is required
to effect 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.

56

---

---

Option
Committee

Our
Option Committee administrates 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. Grants
of options to executive officers and directors require additional approvals pursuant to
the Nasdaq rules and the Companies Law. Messrs. Paneth, Tamir and Shamir (whose term will
end on March 16, 2006) are currently the members of our option committee. The Board
elected Mr. Nir to join the Option Committee as of March 16, 2006.

# 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.

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:

57

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---

| |  | 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:

| |  | 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.
| | - | ---------------------------------------------------------------------------------------

Once
an office holder complies with the above disclosure requirement, the board of directors
may approve a transaction between the company and an office holder, or a third party in
which an office holder has a personal interest. A transaction that is adverse to the
companys interest may not be approved.

If
the transaction is an extraordinary transaction, approval of both the audit committee and
the board of directors is required, in that order. Under specific circumstances,
shareholder approval may also be required. A director who has a personal interest in a
proposed transaction which is considered at a meeting of the board of directors or the
audit committee generally may not be present at this meeting or vote on this matter,
unless a majority of the members of the board of directors or the audit committee, as the
case may be, has a personal interest in the matter. If a majority of members of the board
of directors has a personal interest therein, shareholder approval is also required.

58

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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:

| |  | 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 7A of this Annual
Report.

|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                              |                   
|                                             |                   

59

---

---

Our
number of employees increased by 38 between December 31, 2004 and December 31, 2005 mainly
due to an increase in the number of employees engaged in product development.

Our
number of employees increased by 11 between December 31, 2003 and December 31, 2004 due to
an increase in the number of employees required to support the initiation of commercial
sales of our metro products.

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 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%.

A
general practice followed by us, although not legally required, is the contribution of
funds on behalf of most of its employees to a fund known as Managers Insurance. This
fund provides employees with a lump sum payment upon retirement or with payments on
account of severance pay, if legally entitled, upon termination of employment. Each
employee who agrees to participate in the Managers Insurance plan contributes an
amount equal to 5% of such employees base salary and the employer contributes
approximately 15% of such salary, which 15% includes the 8.3% for severance pay.

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

As
of March 1, 2006, Messrs. Eric Paneth and Izhak Tamir, each beneficially owned 1,294,063
ordinary shares, or 8.2% 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. In
addition, each of Messrs. Eric Paneth and Izhak Tamir hold stock options of Corrigent.
Pursuant to the exchange program described below under Exchange of Corrigent
Options, on or after June 23, 2007, such options might be exchanged for options of
the Ordinary Shares of Orckit. Including the options that might be granted in exchange for
their options in Corrigent (based on data as of March 1, 2006), Messrs. Paneth and Tamir
each would own approximately 1,700,000 ordinary shares, or 10.4% of our outstanding
ordinary shares, as of March 1, 2006.

60

---

---

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

At
December 31, 2005, outstanding options to purchase a total of 3,769,670 ordinary shares
had been granted by us pursuant to our share incentive plan, of which options to purchase
a total of 1,991,362 ordinary shares were held by our directors and officers (13 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 $28 per share, vest mainly over up to periods of
four years, and have expiration dates which range from 2006 to 2015.

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 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
is 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, will determine the persons who will be offered to exchange and the
amount and terms of such exchange. Our audit committee will determine the amount and terms
with respect to exchanges of Corrigent stock options held by Messrs. Paneth and Tamir,
which will be on substantially the same terms as those of other option holders and will
not occur prior to June 23, 2007. 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 will be covered by a Registration Statement on Form
S-8 filed with the SEC under the Securities Act of 1933, as amended.

Corrigent
will not issue any additional options. Since the outstanding Corrigent options vest
through the end of 2008, it is expected that the series of exchanges will not be completed
earlier than the end of 2008. During 2005 our option committee approved certain exchanges,
effective as of January 1, 2006, of approximately 3% of Corrigent capital stock on a fully diluted basis for options to
purchase approximately 497,000 of Orckits ordinary shares. Following these
exchanges, Orckits holding in Corrigent was increased from 90% to approximately 93%
of Corrigents capital stock on a fully diluted basis. After giving effect to this
exchange, as of March 1, 2006, additional options to purchase approximately 1,500,000
ordinary shares of Orckit (excluding shares of Orckit issuable pursuant Orckit options as
a result of exchanges for Corrigent options already made) that could be issued in exchange
for Corrigent options.

61

---

---

We
will not be required to record an expense in our financial statements under U.S. generally
accepted accounting principles in connection with these exchanges to the extent that the
fair value of the Orckit options that we grant in exchange for Corrigent options does not
exceed the fair value of the Corrigent options being exchanged. Our audit committee and
board of directors determined that the fair market value of 10% of the outstanding capital
stock of Corrigent (on a fully diluted basis) at the time the exchange program was
approved was equal to the value of 10% of the outstanding ordinary shares of Orckit (on a
fully diluted basis).

If
further exchanges are made based on the approval of our shareholders, that is, the fair
market values of the exchangeable options are equal, then we will not record an expense in
our financial statements in connection with the exchange. As a result, in any exchange, we
will not issue Orckit options that represent a percentage of the fully diluted ownership
of Orckit that is greater than the percentage of the fully diluted ownership of Corrigent
represented by the Corrigent options to be exchanged. For example, if an exchange is for
stock options constituting 2.5% of the outstanding capital stock of Corrigent (on a fully
diluted basis), then we would issue in this exchange the lesser of (i) an amount of
options for Ordinary Shares of Orckit equal to the fair market value of these Corrigent
stock options on the exchange date or (ii) options for Ordinary Shares constituting 2.5%
of the Ordinary Shares of Orckit outstanding (on a fully diluted basis after giving effect
to such issuance) on the exchange date.

|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.

As
of March 1, 2006, each of Eric Paneth and Izhak Tamir beneficially owns 8.2% of our
ordinary shares and collectively beneficially own approximately 15.8% of our ordinary
shares. Including options which might be granted in exchange for stock options of
Corrigent held by Messrs. Paneth and Tamir (based on data as of March 1, 2006), as of
March 1, 2006, each of Messrs. Paneth and Tamir would beneficially own 10.4% of our
ordinary shares and they collectively would beneficially own approximately 19.8% of our
ordinary shares.

Accordingly,
Messrs. Paneth and Tamir, if they voted together, may have the power to control the
outcome of matters submitted to a vote of our shareholders, including the approval of
significant change of control transactions.

The
following table sets forth, as of March 1, 2006, 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 major shareholders are the
same. As of March 1, 2006, 15,386,734 of our ordinary shares were outstanding.

62

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|Identity of Person or Group                                  | Amount Owned | Percent of Class
|------------------------------------------------------------ | ------------ | ----------------
|
|
|
|
|Eric Paneth (1)                                              |              |                 
|                                                             |              |                 
|Izhak Tamir (2)                                              |              |                 
|                                                             |              |                 
|Phylon Fund Limited and affiliate (3)                        |              |                 
|                                                             |              |                 
|Oberweis Asset Management, Inc. (4)                          |              |                 
|                                                             |              |                 
|All directors and executive officers as a group (13 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
the next 60 days but excludes ordinary shares issuable upon the exercise           of
options that may be issued in the future in exchange for stock options of
          Corrigent held by each of them (see Item 6.E above). 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/A of Phylon Fund Limited and Phylon Investment Advisers           LLP
filed on February 1, 2006 with the Securities and Exchange Commission.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Based
on a Schedule 13G of Oberweis Asset Management, Inc filed on February 14,           2006
with the Securities and Exchange Commission.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Includes
1,172,302 ordinary shares which may be purchased pursuant to options
          exercisable within sixty days following March 1, 2006. As discussed in Item 6.E
          above, stock options of Corrigent held by directors and executive officers of
          Orckit may be exchanged for options of Orckit.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of March 31, 2004, each of Mr. Paneth and Mr. Tamir beneficially owned 2,255,313 ordinary
shares, or 16.7% of our outstanding ordinary shares. The reduction in each of their
holdings was caused principally by (i) the waiver on February 14, 2005 of an option to
purchase 420,000 ordinary shares at a 10% premium over the market price on the date of
exercise, (ii) the vesting of 3,750 options which were not vested within 60 days from
March 31, 2004 (iii) the sale of 300,000 ordinary shares on Nasdaq between February 1,
2005 and April 26, 2005, (iv) the sale of 450,000 ordinary shares on Nasdaq between July
1, 2005 and February 27, 2006 pursuant to a trading plan under Rule 10b5-1(c) entered into
in May 2005 with respect to 600,000 ordinary shares and (v) the transfer of 215,000
ordinary shares on December 8, 2005 to a blind trust for a period of two years, offset by
(vi) the grant on June 23, 2005 of an option to purchase 420,000 ordinary shares at the
market price on the date of grant with a seven year term. The objective of the blind trust
referenced in clause (v) above is to extract value from the volatility of the shares while
enabling Messrs. Paneth and Tamir to maintain their holdings in the shares, subject to
market conditions. Commencing March 2006, the trust will run a yield enhancement program
with respect to the shares. The program will be run by actively managing the selling and
buying back of options with respect to the shares. Shares of the trust might be assigned
and delivered pursuant to transactions effected under the program. After two years, if the
trust is not extended, the shares owned by the trust at that time will be distributed from
the trust back to Messrs. Paneth and Tamir. The foregoing information is based on reports
on Schedule 13D filed with the SEC by Messrs. Paneth and Tamir.

63

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As
of March 1, 2006, there were 32 holders of record of our ordinary shares in the United
States who collectively held approximately 80% 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.

|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 2004, Tikcro paid us
$100,000. Fees to be paid by Tickro for 2005 were reduced to $72,000. Fees to be paid by
Tickro for 2006 were reduced to $48,000.

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.

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

|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 4  Information on the
Company  Legal Proceedings.

# Dividend Policy

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

64

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# Significant Changes

No
significant change has occurred since December 31, 2005, except as otherwise disclosed in
this annual report.

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

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

Our
ordinary shares are quoted on the Nasdaq Stock 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 the Nasdaq Stock Market. The price per share of our
ordinary shares and share count has been retroactively adjusted to reflect the (i)
three-for-one stock split of our ordinary shares as of April 5, 2005 and (ii) one-for-five
reverse share split effective as of November 27, 2002.

|Calendar Year | Price Per Share
|------------- | ---------------
|
|
|
|
|2005          |                
|              |                
|2004          |                
|              |                
|2003          |                
|              |                
|2002          |                
|              |                
|2001          |                

65

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|Calendar Period                        | Price Per Share
|-------------------------------------- | ---------------
|
|
|
|
|2006                                   |                
|                                       |                
|First  Quarter (through March 8, 2006) |                
|                                       |                
|2005                                   |                
|                                       |                
|First Quarter                          |                
|                                       |                
|Second Quarter                         |                
|                                       |                
|Third Quarter                          |                
|                                       |                
|Fourth Quarter                         |                
|                                       |                
|2004                                   |                
|                                       |                
|First Quarter                          |                
|                                       |                
|Second Quarter                         |                
|                                       |                
|Third Quarter                          |                
|                                       |                
|Fourth Quarter                         |                
|                                       |                
|                                       |                
|
|
|
|2006                                   |                
|                                       |                
|February                               |                
|                                       |                
|January                                |                
|                                       |                
|2005                                   |                
|                                       |                
|December                               |                
|                                       |                
|November                               |                
|                                       |                
|October                                |                
|                                       |                
|September                              |                

66

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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.

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

|Calendar Period                        | Price Per Share
|-------------------------------------- | ---------------
|
|
|
|
|2006                                   |                
|                                       |                
|First  Quarter (through March 8, 2006) |                
|                                       |                
|2005                                   |                
|                                       |                
|First Quarter                          |                
|                                       |                
|Second Quarter                         |                
|                                       |                
|Third Quarter                          |                
|                                       |                
|Fourth Quarter                         |                
|                                       |                
|2004                                   |                
|                                       |                
|First Quarter                          |                
|                                       |                
|Second Quarter                         |                
|                                       |                
|Third Quarter                          |                
|                                       |                
|Fourth Quarter                         |                

|Calendar Month | Price Per Share
|-------------- | ---------------
|
|
|
|
|2006           |                
|               |                
|February       |                
|               |                
|January        |                
|               |                
|2005           |                
|               |                
|December       |                
|               |                
|November       |                
|               |                
|October        |                
|               |                
|September      |                

67

---

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The
share prices as presented above in US dollars were originally denominated in New Israeli
Shekels and were converted to US dollars using the average exchange rate between the US
dollar and the New Israeli Shekels for the presented period.

Our
shares began trading on the Tel-Aviv Stock Exchange in April 2002. The trading volume of
our shares on the TASE in 2002 was insignificant and, accordingly, we do not believe sales
price information with respect to the limited trading of our ordinary shares on TASE in
2002 is meaningful.

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

Not
applicable

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

Our
ordinary shares are quoted on the Nasdaq Stock 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 ASSOCIATIONS
|-- | ---------------------------------------

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 of association, which was filed with the Israeli registrar of companies.

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# 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 meeting.
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.

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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 of 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.

70

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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.

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.

71

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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.

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.

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;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  | 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:

| |  | 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.

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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 bank loan agreements, see: Liquidity and Capital
Resources 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.

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 current provisions of 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 of which are subject to change, possibly with
retroactive effect. 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 partnership  (or other entity taxable as a corporation or a partnership)
 created or               organized 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
| | - | --------------------------------------------------------------------------------------------------------------------------------

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| |  | a
trust, if either (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 alternative minimum tax, or any aspect of state, local or
non-U.S. federal tax laws. In addition, this summary is directed only to U.S. Holders that
hold our ordinary shares as capital assets 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, or other pass-through
entities, 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 and holders, directly, indirectly or through attribution, of 10% or more
(by vote or value) of our outstanding ordinary shares. If a partnership is a beneficial
owner of our ordinary shares, the U.S. federal income tax treatment of a partner in the
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 such
partnerships ownership of our ordinary shares.

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 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 sold. This gain or loss will be
long-term capital gain or loss if the ordinary shares sold have been held for more than
one year at the time of the sale, exchange or other taxable 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, 2008. 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 sale, exchange or other taxable disposition is one year or less,
such gain or loss will be a short-term capital gain or loss. See
Israel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
sale, exchange or other taxable disposition of ordinary shares generally is deductible
only against capital gains and not against ordinary income, except that in the case of
non-corporate U.S. Holders, a capital loss is deductible to the extent of capital gains
plus ordinary income up to $3,000. In general, any capital gain recognized by a U.S.
Holder upon the sale, exchange or other taxable disposition of ordinary shares will be
treated as U.S.-source income for U.S. foreign tax credit purposes. Under the tax treaty
between the United States and Israel, gain derived from the sale, exchange or other
taxable disposition of ordinary shares by a U.S. Holder who is a resident of the United
States for purposes of the treaty and who sells the ordinary shares within Israel may be
treated as foreign-source income for U.S. foreign tax credit purposes.

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A
U.S. Holders tax basis in his, her or its ordinary shares generally will be the
purchase price paid therefore by such U.S. Holder. 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 sale or other taxable disposition of ordinary shares, the
amount realized will be based on the spot rate on the settlement date of such
sale or other 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 sale or other 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 the 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
sale or other taxable disposition and the settlement date. Any such currency gain or loss
would generally 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 sale or other
taxable disposition of ordinary shares.

# Treatment of
Distributions

For
U.S federal income tax purposes, the amount of a distribution with respect to our ordinary
shares will equal the amount of cash, the fair market value of any property distributed
and the amount of any Israeli taxes withheld as described below under Israel 
Tax on Dividends. Other than distributions in liquidation or in redemption of stock
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, 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 rate applicable to
their receipt of any dividends paid with respect to our ordinary shares.

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A
dividend paid by us in NIS will be included in the income of U.S. Holders at the 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 dollar value. Any subsequent gain or loss
upon the conversion of the NIS into dollars or other disposition of the NIS will be
taxable as ordinary income or loss and will be treated as U.S.-source income or loss for
U.S. foreign tax credit purposes.

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 limitation on the deduction of investment interest expense 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 dividends on our
ordinary shares. U.S. Holders that do not elect to claim a foreign tax credit may instead
claim a deduction for Israeli income tax withheld. 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).

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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 composition of our gross income and the composition and value of our gross assets
during 2005, we do not believe that we were a PFIC in 2005. However, it is likely, under
the approach set forth in the legislative history to the 1997 Act, that we would have been
classified as a PFIC in 2002, 2003 and 2004, primarily because (a) a significant portion
of our assets consisted of cash, short- and long-term deposits and marketable securities
from the remaining proceeds of our offerings, and (b) the relatively low public market
valuation of our ordinary shares. In addition, there can be no assurance that we will not
be deemed a PFIC in any future tax year.

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
future 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 at the rate applicable to deficiencies for 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
would instead be equal to the decedents basis, if lower.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

78

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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 satisfy the requirements for
PFIC classification, the U.S. Holder may avoid the consequences of PFIC classification for
subsequent years if he 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 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.

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 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
regulations which in many instances have yet to be promulgated and which may have
retroactive effect. 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.

79

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# 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. Backup withholding will not
apply, however, 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. 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. 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.

Israel

The
following discussion, which represents a summary of 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 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.

# 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 both residents and 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 consumer price index, 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.

Generally,
up until the 2006 tax year, capital gains tax was imposed on Israeli residents at a rate
of 15% on real gains derived on or after January 1, 2003 from the sale of shares in, among
others, (i) Israeli companies publicly traded on Nasdaq or a recognized stock market in a
country that has a treaty for the prevention of double taxation with Israel; or (ii)
companies traded on both the TASE and Nasdaq or a recognized stock market outside of
Israel (such as Orckit). This tax rate was contingent upon the shareholder not claiming a
deduction for financing expenses in connection with such shares (in which case the capital
gain was taxed at a rate of 25%), and did not apply to: (i) the sale of shares to a
relative (as defined in the Israeli Income Tax Ordinance); (ii) the sale of shares by
dealers in securities who are taxed at corporate tax rates for corporations and at
marginal tax rates of up to 49% for individuals; (iii) the sale of shares by shareholders
that report in accordance with the Income Tax Law (Inflationary Adjustments), 5745-1985,
referred to as the Inflationary Adjustments Law, who were taxed at corporate tax rates for
corporation and at marginal tax rates of up to 49% for individuals; or (iv) the sale
of shares by shareholders who acquired their shares prior to the issuers initial
public offering (that may be subject to a different tax arrangement).

80

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As
of January 1, 2006, the tax rate 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 shares, unless such companies were not subject to the Adjustments
Law (or certain regulations) at the time of publication of the aforementioned amendment to
the Tax Ordinance that came into effect on January 1, 2006, 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.

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 Inflationary 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 an Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary of or is 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.

81

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# 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, royalties and interest,
as well as non-passive income from services rendered in Israel. On distributions of
dividends other than bonus shares, or stock dividends, we would be required to withhold
income tax at the source at the following rates: (i) for dividends distributed prior to
January 1, 2006  25%; (ii) for dividends distributed on or after January 1, 2006
 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 Benefiting 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 Benefiting Enterprise), 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%. For more information on Approved Enterprises, please refer to Item 5B of
this annual report.

|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.

82

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

Not
applicable

|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 most of our
revenues in Japanese Yen but incur a majority of our salaries and related expenses and
part of our other expenses in New Israeli Shekels.

From
time to time, in managements discretion, we engage in hedging or other transactions
intended to manage risks relating to foreign currency exchange rates. As of March 1, 2006,
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, 2005 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.

| | New IsraeliShekels | Japanese Yen(3) | Total
| | ------------------ | --------------- | -----
| | (7.8)              | 21.5            | 13.7 

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 13.7 million). A devaluation of 5% of the U.S. dollar compared to the NIS
          would cause an increase in expenses of approximately $390,000. A devaluation of
          5% of the U.S. dollar compared to the Japanese Yen would cause a decrease in
          expenses of approximately $1.1 million.

83

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

3)       
          As of March 1, 2006, the balance sheet exposure in Japanese Yen was
          approximately $22.5 million.

# Interest Rate Risk
Management

As
of December 31, 2005, we had $33.6 million of cash and cash equivalents, $11.7 million of
short-term marketable securities, $70.9 million of long-term marketable securities and
$1.5 million of long-term bank deposits. Our trading securities mature as follows: $11.7
million in 2006, and $70.9 million over a period from 2007 to 2009. Due to the relatively
short-term maturities of the Companys cash, deposits and securities portfolio, 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
|-------- |  | -----------------------

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, 2005. 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 principal executive officer and principal 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.

84

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In
addition, there were no changes in our internal control over financial reporting that
occurred during 2005 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 Form 20-F and is independent
as defined in the applicable regulations.

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

On
March 30, 2004, our board of directors 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
|--------- |  | --------------------------------------

In
the annual meeting held in June 2005, 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:

|                   | 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.
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.

85

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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 2005 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 of the Company, 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.

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

Attached.  See
Item 19(a).

86

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

|(a) | The
following consolidated financial statements and related auditors          report
are filed as part of this Annual Report:
|--- | ------------------------------------------------------------------------------------------------------------------------------

|                                                            | Page      
|----------------------------------------------------------- | ----------
|
|
|
|
|Table of Contents to 2005 Consolidated Financial Statements | F-1       
|Report of Independent Registered Public Accounting Firm     | F-2       
|                                                           
|Consolidated Financial Statements:                         
|Balance Sheets at December 31, 2004 and 2005                | F-3       
|Statements of Operations for the Years Ended               
|December 31, 2003, 2004 and 2005                            | F-4       
|Statements of Changes in Shareholders' Equity for the      
|Years Ended December 31, 2003, 2004 and 2005                | F-5       
|Statements of Cash Flows for the Years Ended               
|December 31, 2003, 2004 and 2005                            | F-6       
|Notes to Financial Statements                               | F-7 - F-33

|(b) | Exhibits:
|--- | ---------

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

87

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

|1.1* |  | Memorandum
of Association, as amended.
|---- |  | --------------------------------------

|1.29 |  | 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.
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.19 |  | 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).
|---- |  | -----------------------------------

|4.86 |  | Promissory
Note dated March 30, 2004 made by Orckit Communications Ltd. to HSBC Bank USA
|---- |  | ----------------------------------------------------------------------------------------

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

|4.118 |  | Letter
of undertaking dated December 5, 2005 of Orckit Communications Ltd. to Bank Hapoalim B.M.
|----- |  | ------------------------------------------------------------------------------------------------

|4.128 |  | Undertaking
dated December 5, 2005 of Orckit Communications Ltd. to Bank Hapoalim B.M.
|----- |  | --------------------------------------------------------------------------------------

|4.138 |  | Debenture
dated December 5, 2005 of Orckit Communications Ltd. to Bank Hapoalim B.M.
|----- |  | ------------------------------------------------------------------------------------

|4.148 |  | Debenture
dated December 5, 2005 of Corrigent Systems Ltd. to Bank Hapoalim B.M
|----- |  | -------------------------------------------------------------------------------

|4.15* |  | Amended
and Restated Employment Agreement, dated as of June 23, 2005, between Orckit
Communications                 Ltd. and Eric Paneth.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------

|4.16* |  | Amended
and Restated Employment Agreement, dated as of June 23, 2005, between Orckit
Communications                 Ltd. and Izhak Tamir.
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------

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

88

---

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|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.
|----- |  | ------------------------------------------------------------------------------------

---

| | 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 Communications Ltd.s Annual Report on           Form 20-F
for the fiscal year ended December 31, 2004.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

|9 | Incorporated
by reference to Orckit Communication Ltd.s Registration           Statement on Form
S-8 (File No. 333-131991).
|- | ----------------------------------------------------------------------------------------------------------------------------

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

89

---

---

# 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:    March 9, 2006
| |  | ------------------------------------------------------------------------------------------------------

90

---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)2005 CONSOLIDATED FINANCIAL STATEMENTS



---

---

ORCKIT COMMUNICATIONS LTD.(An Israeli Corporation)2005 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-33

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

---

---



REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the
shareholders ofORCKIT COMMUNICATIONS LTD.

We have
audited the consolidated balance sheets of Orckit Communications Ltd. (the
Company) and its subsidiaries as of December 31, 2004 and 2005, and the
related consolidated statements of operations, of changes in shareholders
equity and of cash flows for each of the three years in the period ended
December 31, 2005. These financial statements are the responsibility of the
Companys Board of Directors and management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted
our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States) and with auditing standards generally accepted
in Israel, including those prescribed by the Israeli Auditors (Mode of
Performance) Regulations, 1973. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by the Companys Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our
opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2004 and 2005 and the
consolidated results of their operations, the changes in shareholders equity
and their cash flows for each of the three years in the period ended December
31, 2005, in conformity with accounting principles generally accepted in the
United States.

As discussed
in note 1p to the consolidated financial statements, effective July 1, 2005,
the Company changed its method for accounting for stock-based compensation to
employees, to conform with Statement of Financial Accounting Standard No. 123
(Revised).

|                   |  |                                    
|------------------ |  | -----------------------------------
|Tel Aviv,
  Israel |  | /s/ Kesselman & Kesselman          
|March
  12,   2006 |  | Certified Public Accountants (Isr.)

Kesselman & Kesselman is a member of PricewaterhouseCoopers
International Limited, a company limited by guarantee registered in England and
Wales

F-2

---

---



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

|                                                                                            |  |               |          |      |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------- | -------- | ---- | - | -------- | -
|                                                                                            |  | December
  31 |         
|                                                                                            |  |               |         
|                                                                                            |  | 2004          |          | 2005 |  
|                                                                                            |  |               |          |      |  
|                                                                                            |  |               |          |      |   |          |  
|Assets                                                                                      |  |               |          |      |   |          |  
|CURRENT
  ASSETS:                                                                           |  |               |          |      |   |          |  
|Cash and cash equivalents                                                                   |  | $             | 26,615   |      | $ | 33,647   |  
|Marketable securities (note 8a)                                                             |  |               | 25,354   |      |   | 11,732   |  
|Bank deposits (note 8d)                                                                     |  |               | 6,811    |      |   | -        |  
|Trade receivables (note 8b)                                                                 |  |               | 54,814   |      |   | 702      |  
|Other receivables (note 8c)                                                                 |  |               | 1,492    |      |   | 1,520    |  
|Inventories                                                                                 |  |               | 5,533    |      |   | 3,330    |  
|                                                                                            |  |               |          |      |   |          |  
|Total current assets                                                                        |  |               | 120,619  |      |   | 50,931   |  
|                                                                                            |  |               |          |      |   |          |  
|LONG-TERM
  INVESTMENTS:                                                                    |  |               |          |      |   |          |  
|Marketable securities (note 8a)                                                             |  |               | 18,441   |      |   | 70,881   |  
|Other (notes 1c, 3a, 8d)                                                                    |  |               | 5,255    |      |   | 4,394    |  
|                                                                                            |  |               |          |      |   |          |  
|                                                                                            |  |               | 23,696   |      |   | 75,275   |  
|                                                                                            |  |               |          |      |   |          |  
|PROPERTY
  AND EQUIPMENT - net
  (note 2):                                                  |  |               | 4,211    |      |   | 3,740    |  
|                                                                                            |  |               |          |      |   |          |  
|Total assets                                                                                |  | $             | 148,526  |      | $ | 129,946  |  
|                                                                                            |  |               |          |      |   |          |  
|Liabilities and shareholders equity                                                        |  |               |          |      |   |          |  
|CURRENT
  LIABILITIES:                                                                      |  |               |          |      |   |          |  
|Bank loans (note 8e)                                                                        |  | $             | 31,000   |      |   | -        |  
|Trade payables                                                                              |  |               | 25,824   |      |   | 9,282    |  
|Accrued expenses and other payables (note
8f)                                               |  |               | 11,645   |      |   | 19,173   |  
|Deferred income (note 8g)                                                                   |  |               | 35,662   |      |   | 28,736   |  
|                                                                                            |  |               |          |      |   |          |  
|Total current liabilities                                                                   |  |               | 104,131  |      |   | 57,191   |  
|                                                                                            |  |               |          |      |   |          |  
|LONG-TERM
  LIABILITIES -                                                                   |  |               |          |      |   |          |  
|Accrued severance pay (note 3)                                                              |  |               | 4,131    |      |   | 3,689    |  
|                                                                                            |  |               |          |      |   |          |  
|COMMITMENTS
  AND CONTINGENT LIABILITY (note 4)                                             |  |               |          |      |   |          |  
|                                                                                            |  |               |          |      |   |          |  
|Total liabilities                                                                           |  |               | 108,262  |      |   | 60,880   |  
|                                                                                            |  |               |          |      |   |          |  
|SHAREHOLDERS
  EQUITY (note 5):                                                            |  |               |          |      |   |          |  
|Share capital - ordinary shares of no par value and
paid-in capital                         |  |               |          |      |   |          |  
|(authorized: December 31, 2004 - 30,000,000
shares; December 31, 2005- 50,000,000 shares;   |  |               |          |      |   |          |  
|issued: December 31, 2004 - 15,827,985 shares;
December 31, 2005 -
  17,274,270 shares;     |  |               |          |      |   |          |  
|outstanding: December 31, 2004  13,183,146
shares; December 31, 2005 - 14,629,431 shares)* |  |               | 325,656  |      |   | 332,015  |  
|Deferred compensation                                                                       |  |               | (217     | )    |   |          |  
|Accumulated deficit                                                                         |  |               | (279,531 | )    |   | (257,305 | )
|Treasury shares, at cost (2,644,839 ordinary
shares)*                                       |  |               | (5,644   | )    |   | (5,644   | )
|                                                                                            |  |               |          |      |   |          |  
|Total shareholders equity                                                                  |  |               | 40,264   |      |   | 69,066   |  
|                                                                                            |  |               |          |      |   |          |  
|Total liabilities and shareholders
equity                                                  |  | $             | 148,526  |      | $ | 129,946  |  
|                                                                                            |  |               |          |      |   |          |  

* After giving retroactive effect to the three-for-one stock split in
April 2005, see note 5a(2).

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 |        
|                                                               |  |                          |        
|                                                               |  | 2003                     |         | 2004 |   | 2005    |  
|                                                               |  |                          |         |      |   |         |  
|                                                               |  |                          |         |      |   |         |   |   |         | 
|REVENUES(note 8h)                                              |  | $                        | 1,683   |      | $ | 11,276  |   | $ | 101,247 | 
|COST OF REVENUES(note 8i)                                      |  |                          | 748     |      |   | 5,901   |   |   | 51,872  | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|GROSS PROFIT                                                   |  |                          | 935     |      |   | 5,375   |   |   | 49,375  | 
|RESEARCH AND DEVELOPMENT EXPENSES -net
(note 8j)               |  |                          | 15,003  |      |   | 15,043  |   |   | 16,147  | 
|SELLING, GENERAL AND ADMINISTRATIVE
  EXPENSES                 |  |                          | 12,656  |      |   | 11,993  |   |   | 16,086  | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|OPERATING INCOME (LOSS)                                        |  |                          | (26,724 | )    |   | (21,661 | ) |   | 17,142  | 
|FINANCIAL INCOME -net (note 8k)                                |  |                          | 5,108   |      |   | 1,529   |   |   | 2,636   | 
|OTHER INCOME(note 8l)                                          |  |                          |         |      |   |         |   |   | 2,448   | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|NET INCOME (LOSS)                                              |  | $                        | (21,616 | )    | $ | (20,132 | ) | $ | 22,226  | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|EARNINGS (LOSS) PER SHARE (EPS)*(note
8n):                   |  |                          |         |      |   |         |   |   |         | 
|Basic                                                          |  | $                        | (1.66   | )    | $ | (1.54   | ) | $ | 1.59    | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|Diluted                                                        |  | $                        | (1.66   | )    | $ | (1.54   | ) | $ | 1.30    | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|WEIGHTED AVERAGE NUMBER OF SHARES USED IN
COMPUTATION OF EPS*: |  |                          |         |      |   |         |   |   |         | 
|Basic                                                          |  |                          | 12,996  |      |   | 13,074  |   |   | 13,984  | 
|                                                               |  |                          |         |      |   |         |   |   |         | 
|Diluted                                                        |  |                          | 12,996  |      |   | 13,074  |   |   | 16,345  | 
|                                                               |  |                          |         |      |   |         |   |   |         | 

* After giving retroactive effect to the three-for-one stock split in
April 2005, see note 5a(2).

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                       |        |        |   |                                |  |                         |         |                       |   |                   |  
|                                                                                                                                                                                      |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |  
|                                                                                                                                                                                      |  | Number of
  shares *
  (in thousands) |        | Amount |   | Additional
  paid-in
  capital |  | Deferred
  Compensation |         | Accumulated
  deficit |   | Treasury
  shares |   | Total
  shareholders
  equity |         
|                                                                                                                                                                                      |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                |         
|                                                                                                                                                                                     
|BALANCE AT JANUARY 1, 2003                                                                                                                                                            |  |                                       | 14,940 |        | $ | -,-                            |  | $                       | 322,227 |                       | $ | (2,023            | ) | $                              | (237,783 | ) |   |        |   | $ | 82,421  |  
|CHANGES DURING 2003:                                                                                                                                                                  |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                |          |   |   |        |   |   |         |  
|Net loss                                                                                                                                                                              |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                | (21,616  | ) |   |        |   |   | (21,616 | )
|Issuance of shares to employees,
  exchangeable to options, see note 5a(5)                                                                                                            |  |                                       | 1,800  |        |   |                                |  |                         | 2,496   |                       |   | (2,496            | ) |                                |          |   |   |        |   |   | -,-     |  
|Exercise of options granted to employees                                                                                                                                              |  |                                       | 711    |        |   |                                |  |                         | 112     |                       |   |                   |   |                                |          |   |   |        |   |   | 112     |  
|Acquisition of treasury stock                                                                                                                                                         |  |                                       | (2,645 | )      |   |                                |  |                         |         |                       |   |                   |   |                                |          |   |   | (5,644 | ) |   | (5,644  | )
|Exchange of shares into options, see note
  5a(5)                                                                                                                                     |  |                                       | (1,800 | )      |   |                                |  |                         | 1,284   |                       |   | (1,284            | ) |                                |          |   |   |        |   |   | -,-     |  
|Amortization of deferred compensation
  related to employee stock option grants, net of elimination of paid-in
  capital in respect of employee stock option grants due to forfeiture |  |                                       |        |        |   |                                |  |                         | (607    | )                     |   | 3,006             |   |                                |          |   |   |        |   |   | 2,399   |  
|                                                                                                                                                                                      |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                |          |   |   |        |   |   |         |  
|BALANCE AT DECEMBER 31, 2003                                                                                                                                                          |  |                                       | 13,006 |        |   | -,-                            |  |                         | 325,512 |                       |   | (2,797            | ) |                                | (259,399 | ) |   | (5,644 | ) |   | 57,672  |  
|CHANGES DURING 2004:                                                                                                                                                                  |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                |          |   |   |        |   |   |         |  
|Net loss                                                                                                                                                                              |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                | (20,132  | ) |   |        |   |   | (20,132 | )
|Exercise of options granted to employees                                                                                                                                              |  |                                       | 177    |        |   |                                |  |                         | 144     |                       |   |                   |   |                                |          |   |   |        |   |   | 144     |  
|Amortization of deferred compensation
  related to employee stock option grants                                                                                                       |  |                                       |        |        |   |                                |  |                         |         |                       |   | 2,580             |   |                                |          |   |   |        |   |   | 2,580   |  
|                                                                                                                                                                                      |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                |          |   |   |        |   |   |         |  
|BALANCE AT DECEMBER 31, 2004                                                                                                                                                          |  |                                       | 13,183 |        |   | -,-                            |  |                         | 325,656 |                       |   | (217              | ) |                                | (279,531 | ) |   | (5,644 | ) |   | 40,264  |  
|CHANGES DURING 2005:                                                                                                                                                                  |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                |          |   |   |        |   |   |         |  
|Net income                                                                                                                                                                            |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                | 22,226   |   |   |        |   |   | 22,226  |  
|Deferred compensation related to employee
  stock option grants                                                                                                                       |  |                                       |        |        |   |                                |  |                         | 46      |                       |   | (46               | ) |                                |          |   |   |        |   |   | -,-     |  
|Exercise of options granted to employees                                                                                                                                              |  |                                       | 1,446  |        |   |                                |  |                         | 5,960   |                       |   |                   |   |                                |          |   |   |        |   |   | 5,960   |  
|Compensation related to employee stock
  option grants                                                                                                                                |  |                                       |        |        |   |                                |  |                         | 353     |                       |   | 263               |   |                                |          |   |   |        |   |   | 616     |  
|                                                                                                                                                                                      |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                |          |   |   |        |   |   |         |  
|BALANCE AT DECEMBER 31, 2005                                                                                                                                                          |  |                                       | 14,629 |        | $ | -,-                            |  | $                       | 332,015 |                       | $ | -,-               |   | $                              | (257,305 | ) | $ | (5,644 | ) | $ | 69,066  |  
|                                                                                                                                                                                      |  |                                       |        |        |   |                                |  |                         |         |                       |   |                   |   |                                |          |   |   |        |   |   |         |  

* The figures prior to
January 1, 2005 are after giving retroactive effect to three-for-one stock
split in April 2005, see note 5a(2).

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

F-5

---

---



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

|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
|                                                                                                     |  | Year ended
  December 31 |        
|                                                                                                     |  |                          |        
|                                                                                                     |  | 2003                     |         | 2004 |   | 2005    |  
|                                                                                                     |  |                          |         |      |   |         |  
|                                                                                                    
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                                |  |                          |         |      |   |         |   |   |         |  
|Net income (loss) for the year                                                                       |  | $                        | (21,616 | )    | $ | (20,132 | ) | $ | 22,226  |  
|Adjustments to reconcile net income (loss)
  to net cash provided by (used in) operating activities: |  |                          |         |      |   |         |   |   |         |  
|Depreciation and amortization:                                                                       |  |                          |         |      |   |         |   |   |         |  
|Property and equipment                                                                               |  |                          | 3,039   |      |   | 1,781   |   |   | 2,390   |  
|Deferred charges                                                                                     |  |                          | 139     |      |   | 147     |   |   | -,-     |  
|Impairment of property and equipment                                                                 |  |                          | 1,800   |      |   | -,-     |   |   | -,-     |  
|Trading marketable securities, net                                                                   |  |                          | 4,623   |      |   | 10,937  |   |   | 9,594   |  
|Gain from early extinguishment of
  convertible subordinated notes                                   |  |                          | (3,125  | )    |   | -,-     |   |   | -,-     |  
|Capital gain from the sale of long-term
  investment                                                 |  |                          | -,-     |      |   | -,-     |   |   | (2,448  | )
|Interest and premium amortization on
  long-term investments                                         |  |                          | (2,019  | )    |   | 780     |   |   | 350     |  
|Increase (decrease) in accrued severance
  pay                                                       |  |                          | 170     |      |   | 696     |   |   | (442    | )
|Amortization of deferred compensation related
  to employee stock option grants, net                 |  |                          | 2,399   |      |   | 2,580   |   |   | 616     |  
|Changes in operating assets and
  liabilities:                                                       |  |                          |         |      |   |         |   |   |         |  
|Decrease (increase) in trade receivables
  and other receivables                                     |  |                          | 1,486   |      |   | (54,563 | ) |   | 54,084  |  
|Increase (decrease) in trade payables, accrued
  expenses and other payables                         |  |                          | (2,999  | )    |   | 28,483  |   |   | (9,014  | )
|Increase (decrease) in deferred income                                                               |  |                          | -,-     |      |   | 35,662  |   |   | (6,926  | )
|Decrease (increase) in inventories                                                                   |  |                          | -,-     |      |   | (5,433  | ) |   | 2,203   |  
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|Net cash provided by (used in) operating
  activities                                                |  |                          | (16,103 | )    |   | 938     |   |   | 72,633  |  
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                                |  |                          |         |      |   |         |   |   |         |  
|Purchase of property and equipment                                                                   |  |                          | (862    | )    |   | (3,899  | ) |   | (1,919  | )
|Bank deposits, net                                                                                   |  |                          | 10,272  |      |   | (280    | ) |   | 5,311   |  
|Change in funds in respect of accrued
  severance pay, net                                           |  |                          | (557    | )    |   | (641    | ) |   | 454     |  
|Investment in (proceeds from) long term
  investments                                                |  |                          | (499    | )    |   | (1,407  | ) |   | 4,355   |  
|Collection of long-term loan granted                                                                 |  |                          | 7,000   |      |   | -,-     |   |   | -,-     |  
|Maturities of marketable securities held to
  maturity                                               |  |                          | 26,310  |      |   | 9,950   |   |   | 15,083  |  
|Purchase of marketable securities held to
  maturity                                                 |  |                          | (1,667  | )    |   | (3,000  | ) |   | (63,845 | )
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|Net cash provided by (used in) investing
  activities                                                |  |                          | 39,997  |      |   | 723     |   |   | (40,561 | )
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                                |  |                          |         |      |   |         |   |   |         |  
|Short-term bank loan, net                                                                            |  |                          | -,-     |      |   | 15,000  |   |   | (15,000 | )
|Long-term bank loan received (repaid)                                                                |  |                          | -,-     |      |   | 16,000  |   |   | (16,000 | )
|Cost of acquisition of treasury shares                                                               |  |                          | (5,644  | )    |   | -,-     |   |   | -,-     |  
|Exercise of options granted to employees                                                             |  |                          | 112     |      |   | 144     |   |   | 5,960   |  
|Early extinguishment of convertible
  subordinated notes                                             |  |                          | (18,479 | )    |   | (16,238 | ) |   | -,-     |  
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|Net cash provided by (used in) financing
  activities                                                |  |                          | (24,011 | )    |   | 14,906  |   |   | (25,040 | )
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                               |  |                          | (117    | )    |   | 16,567  |   |   | 7,032   |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT
  BEGINNING OF YEAR                                          |  |                          | 10,165  |      |   | 10,048  |   |   | 26,615  |  
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|BALANCE OF CASH AND CASH EQUIVALENTS AT END
  OF YEAR                                                |  | $                        | 10,048  |      | $ | 26,615  |   | $ | 33,647  |  
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|SUPPLEMENTARY DISCLOSURE OF CASH FLOW
  INFORMATION - CASH PAID DURING THE YEAR FOR:                 |  |                          |         |      |   |         |   |   |         |  
|Interest paid                                                                                        |  | $                        | 1,077   |      | $ | 674     |   | $ | 349     |  
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  
|Advances paid to income tax authorities                                                              |  | $                        | 95      |      | $ | 62      |   | $ | 44      |  
|                                                                                                     |  |                          |         |      |   |         |   |   |         |  

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

F-6

---

---



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) and its subsidiaries (together - the
  Company) is an Israeli corporation engaged in the design, development,
  manufacture and marketing of advanced telecom equipment, targeting high
  capacity broadband services. In 2004 and 2005, substantially all of the
  Companys revenues were derived from the sale of the CM-100 product line,
  which is a transport telecommunication equipment targeting high capacity
  packetized metropolitan networks. In 2003, substantially all of the Companys
  revenues were derived from the sale of ADSL (Asymmetric Digital Subscriber
  Line) broadband equipment for access networks. The Company does not expect to
  have additional revenues from the ADSL broadband equipment line.
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | The CM-100
  product line, which since 2004 has generated substantially all of the
  Companys revenues, was initiated and funded by Orckit as a technology
  project through its subsidiary, Corrigent Systems Inc.(Corrigent).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | During 2004,
  the Company entered into a distribution agreement relating to the  deployment in Japan of its CM-100
  products. During 2005, the Company signed follow-on agreements
  addressing  the same opportunity.
  Under the distribution agreements and related terms, the Company is obligated
  to provide warranty and support services with respect to products purchased.
  Purchases of products are made pursuant to purchase orders. The substantial
  majority of the Companys revenues in 2004 and 2005 related to these
  agreements, see note 8h.                                                                                                                                                                                                           
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  | 2)       | Functional currency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                  |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |          | The currency
  of the primary economic environment in which the operations of the Company
  and each of its subsidiaries 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.                                                                                                            

F-7

---

---



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

|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- | -------------------------------- | --------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES:
|           |                                 
|           |                                  | 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.
|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | b.                               | Principles of consolidation                                                                                    
|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                  | The
  consolidated financial statements include the financial statements of the
  Company and its subsidiaries.
|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                  | Intercompany
  balances and transactions have been eliminated.                                                 
|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | c.                               | Marketable securities and other investments:                                                                   
|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                  | 1)                                                                                                              | Marketable securities                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                  |                                                                                                                 | Marketable
  securities classified as trading securities are recorded at fair market
  value, with unrealized gains and losses included in financial income or
  expenses.                                                                                                                                                                                                                                                   
|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                  |                                                                                                                 | 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)                                                                                                              | Other investments                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                  |                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                  |                                                                                                                 | These
  investments include severence pay funds, long-term bank deposits and other
  long-term investments.                                                                                                                                                                                                                                                                                                                  

F-8

---

---



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

|           |                                  |                                                                                          |                                                                                                                                             |                                                        
|---------- | -------------------------------- | ---------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES:
|           |                                 
|           | 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
  overhead component - 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 |  | 2-5   |  | 
| | Office
  furniture and equipment    |  | 6-10  |  | 

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

F-9

---

---



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

|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|---------- | ------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|           | h.                                          | 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. 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
  change before market introduction.
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|           |                                             | The Company
  granted customer post-contract hardware and software support services (PCS)
  in connection with sales in 2004 and 2005. Accordingly, where VSOE of the
  fair value of PCS could 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. In multiple element arrangements where VSOE of undelivered
  elements does not exist, the Company recognizes revenues upon delivery of
  those undelivered elements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|           |                                             | The deferred
  income balance as of December 31, 2004 and 2005 equals the amount of revenues
  that were invoiced and due on delivery, but deferred, less applicable product,
  PCS and warranty costs. See also note 8g.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          
|           |                                             | The cost of
  the delivered products are offset from deferred revenues and not presented as
  inventory  finished goods, since the title has passed to the customer upon
  delivery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|           | i.                                          | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|           | j.                                          | Provision for warranty                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | 
|           |                                             | The Company
  grants warranty servicing for products sold. The Company provides for such
  warranty at the time revenues from the related sales are recognized (see also
  1h. above). The annual provision is calculated as a percentage of the sales,
  based on historical experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

F-10

---

---



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

|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|---------- | ------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES(continued):
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           | k.                                          | 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 the expenses.                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           | l.                                          | Allowance for doubtful accounts                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           |                                             | The
  allowance in respect of trade receivables has been determined for specific
  debts doubtful of collection. See also note 7c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           | m.                                          | 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.                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           | n.                                          | Earnings (loss) per share                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           |                                             | Basic
  earnings per share is computed by dividing net income (loss) by the weighted
  average number of shares outstanding during each year, net of treasury and
  restricted shares.                                                                                                                                                                                                                                                                                                                                                                                                                    
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           |                                             | In computing
  diluted earning per share, the potential dilutive effect of outstanding stock
  options was taken into account using the treasury stock method. See also note
  8n.                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           | o.                                          | Comprehensive income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           |                                             | The Company
  has no comprehensive income components other than net income (loss).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           | p.                                          | Stock based compensation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           |                                             | Until June
  30, 2005, the Company accounted for employee stock based compensation in
  accordance with Accounting Principles Board Opinion (APB) No. 25
  Accounting for Stock Issued to Employees (APB 25) and related
  interpretations. On July 1, 2005 the Company adopted 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). Under APB 25, compensation cost for employee stock option
  plans was measured using the intrinsic value based method of accounting (see
  also note 5a(5)).

F-11

---

---



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

|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|---------- | -------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                              | 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 accordance
  with Statement of Financial Accounting Standards (FAS) No. 123 of the
  Financial Accounting Standards Board of the United States (FASB) -
  Accounting for Stock-Based Compensation, the Company discloses pro forma
  data, for periods prior to the adoption of FAS 123 (R), assuming the Company
  had accounted for employee stock option grants using the fair value-based
  method defined in FAS 123.
|           |                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                                              | The
  following table illustrates the effect on net income (loss) and earnings
  (loss) 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                  |        
| |                                                                                                                                                                |  |                                         |        
| |                                                                                                                                                                |  | 2003                                    |         | 2004 |   | 2005    |  
| |                                                                                                                                                                |  |                                         |         |      |   |         |  
| |                                                                                                                                                                |  | In thousands, except for per share data |        
| |                                                                                                                                                                |  |                                         |        
| |                                                                                                                                                                |  |                                         |         |      |   |         |   |   |        |  
| | Net income
  (loss), as reported                                                                                                                               |  | $                                       | (21,616 | )    | $ | (20,132 | ) | $ | 22,226 |  
| | Add: stock based employee compensation
  expense, included in reported net income (loss) (2005  for the period prior
  to July 1, see above)                  |  |                                         | 2,399   |      |   | 2,580   |   |   | 263    |  
| | Deduct: stock based employee compensation
  expense determined under the fair value method for all awards (2005  for the
  period prior to July 1, see above) |  |                                         | (3,177  | )    |   | (3,027  | ) |   | (5,147 | )
| |                                                                                                                                                                |  |                                         |         |      |   |         |   |   |        |  
| | Pro forma
  net income (loss)                                                                                                                                  |  | $                                       | (22,394 | )    | $ | (20,579 | ) | $ | 17,342 |  
| |                                                                                                                                                                |  |                                         |         |      |   |         |   |   |        |  
| | Earnings
  (loss) per share *:                                                                                                                                 |  |                                         |         |      |   |         |   |   |        |  
| | Basic - as reported                                                                                                                                            |  | $                                       | (1.66   | )    | $ | (1.54   | ) | $ | 1.59   |  
| | Basic - pro forma                                                                                                                                              |  | $                                       | (1.72   | )    | $ | (1.57   | ) | $ | 1.24   |  
| | Diluted - as reported                                                                                                                                          |  | $                                       | (1.66   | )    | $ | (1.54   | ) | $ | 1.30   |  
| | Diluted - pro forma                                                                                                                                            |  | $                                       | (1.72   | )    | $ | (1.57   | ) | $ | 1.00   |  

| |                                                                                                                                                           | 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | * Earnings
  (loss) per share data for 2003 and 2004 are calculated after giving
  retroactive  effect to the
  three-for-one share split see note 5a(2).

F-12

---

---



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

|           |                                             
|---------- | --------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | q. | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |    | Taxes which
  would apply in the event of disposal of investments in non-Israeli
  subsidiaries have not been taken into account in computing the deferred
  taxes, as it is the Companys policy to hold these investments, and not to
  realize them.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| | r. | Shipping and handling fees and costs                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |    | Shipping and
  handling costs are classified as a component of cost of revenues.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| | s. | Recently issued accounting pronouncements:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |    | FAS 151 Inventory Costs - an amendment of ARB 43, Chapter 4                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |    | In November
  2004, the FASB issued FAS No. 151, Inventory Costs - an amendment of ARB 43,
  Chapter 4 (FAS 151).  This Statement
  amends the guidance in ARB No. 43, Chapter 4, Inventory Pricing, to clarify
  the accounting for abnormal amounts of idle facility expense, freight,
  handling costs and wasted material, requiring that these items be recognized
  as current-period charges.  In
  addition, this Statement requires that the allocation of fixed production
  overheads to the costs of conversion be based on the normal capacity of the
  production facilities.  This Statement
  will be effective for inventory costs incurred during fiscal years beginning
  after June 15, 2005 (January 1, 2006 for the Company); however earlier
  application of FAS 151 is permitted.
  The provisions of this Statement shall be applied prospectively.  The Company does not expect this Statement
  to have a material effect on its financial statements or its results of
  operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | 
| |    | FAS 154 - Accounting Changes and Error Corrections - a replacement of
  APB Opinion No. 20 and FASB Statement No. 3                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

F-13

---

---



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

|           |                                             
|---------- | --------------------------------------------
|NOTE 1    | SIGNIFICANT ACCOUNTING POLICIES (continued):

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June
  2005, the Financial Accounting Standards Board issued FAS No. 154,
  Accounting Changes and Error Corrections - a replacement of APB Opinion No.
  20 and FASB Statement No. 3.  This
  Statement generally requires retrospective application of changes in
  accounting principles to financial statements in respect of prior
  periods.  Previously, Opinion No. 20
  required that most voluntary changes in accounting principle were recognized
  by including the cumulative effect of changing to the new accounting
  principle in net income of the period of the change.  FAS 154 applies to all voluntary changes
  in accounting principle.  It also
  applies to changes required by an accounting pronouncement in the unusual
  circumstance that the pronouncement does not include specific transition
  provisions.  When a pronouncement
  includes specific transition provisions, those provisions should be followed.  This Statement shall be effective for
  accounting changes and corrections of errors made in fiscal years beginning
  after December 15, 2005 (Year ending December 31, 2006 for the Company).  The Company does not expect the adoption
  of this statement to have a material impact on its results of operations,
  financial position or cash flow.

|           |                                                                         
|---------- | ------------------------------------------------------------------------
|NOTE 2    | PROPERTY AND EQUIPMENT                                                  
|           |                                                                         
|           | Composition
  of assets, grouped by major classification, is as follows:

| |                                                                                                                                                               |  |              |        |      |   |        | 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------ | ------ | ---- | - | ------ | 
| |                                                                                                                                                               |  | December 31  |       
| |                                                                                                                                                               |  |              |       
| |                                                                                                                                                               |  | 2004         |        | 2005 |  
| |                                                                                                                                                               |  |              |        |      |  
| |                                                                                                                                                               |  | In thousands |       
| |                                                                                                                                                               |  |              |       
| |                                                                                                                                                               |  |              |        |      |   |        | 
| | Cost:                                                                                                                                                         |  |              |        |      |   |        | 
| | Computers, software and equipment                                                                                                                             |  | $            | 20,788 |      | $ | 22,674 | 
| | Office furniture and equipment                                                                                                                                |  |              | 1,407  |      |   | 1,408  | 
| | Leasehold improvements                                                                                                                                        |  |              | 2,205  |      |   | 2,235  | 
| |                                                                                                                                                               |  |              |        |      |   |        | 
| |                                                                                                                                                               |  | $            | 24,400 |      | $ | 26,317 | 
| | Less -
  accumulated depreciation and amortization                                                                                                            |  |              | 20,189 |      |   | 22,577 | 
| |                                                                                                                                                               |  |              |        |      |   |        | 
| |                                                                                                                                                               |  | $            | 4,211  |      | $ | 3,740  | 
| |                                                                                                                                                               |  |              |        |      |   |        | 
| |                                                                                                                                                              
| | Depreciation
  and amortization expenses totaled $ 3,039,000, $ 1,781,000 and
  $2,390,000 in the years ended December 31, 2003, 2004 and 2005, respectively.

F-14

---

---



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. 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, 2004 and 2005 are
  approximately $3,348,000 and $2,894,000,respectively.          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In
  substantially all of the Companys current agreements, the Company makes
  regular deposits with the insurance companies in order to secure the employee
  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 the 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 was payable at each balance sheet date.                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | b. | The amounts
  of pension and severance pay expense were $776,000, $905,000 and $1,120,000
  for the years ended December 31, 2003, 2004 and 2005, respectively, of which
  $15,000, $300,000 and $800,000 in 2003, 2004 and 2005, 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 $1.3 million in 2006 to the insurance
  companies and pension funds, in respect of its severance pay liabilities
  expected for 2006 operations.                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | d. | The Company
  does not expect to pay any future benefits to its employees upon their normal
  retirement age in the years 2006 through 2015 since there are no current
  employees who reach retirement age until year 2015.                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | The
  statement in item d above does not include amounts that might be paid to
  employees who will cease working with the Company before their normal
  retirement age.                                                                                                                                                                                                                                                                                                                                                                   

F-15

---

---



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

|           |                                      |                                                                                                                                                                                                                                                                                                                                                                                            
|---------- | ------------------------------------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4    | 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 sales.
|           |                                      |                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                      | 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, 2005 was approximately $6.6 million.                                                                                                                                                                                                                       
|           |                                      |                                                                                                                                                                                                                                                                                                                                                                                            
|           | 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 annual rental payments for 2006, at rates in effect at December 31,
  2005, are approximately $1 million.                                                                                                                                                                                                                                                                  
|           |                                      |                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                      | Lease
  expenses totaled $ 803,000, $785,000 and $935,000 in the years ended December
  31, 2003, 2004 and 2005, respectively.                                                                                                                                                                                                                                                             

F-16

---

---



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

|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|---------- | ------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4    | 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 Directors). 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.  No bonus was paid
  under this provision in 2003 or 2004. 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 Directors, 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 Directors 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 of each of the Directors, 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.                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                  | The original
  employment agreement of each of the Directors provided for a base salary
  payable in NIS, linked to the Israeli consumer price index, 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).                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                  | In the
  amended employment agreements, the Company has 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 consumer price index 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.                                                                                                                                                                                                                                                                                                                                                                                                                                               

F-17

---

---



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

|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                               
|---------- | ------------------------------------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4    | COMMITMENTS AND CONTINGENT LIABILTY (continued):
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                  | The
  employment agreement of each of the Directors 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 the Company or by the
  one of the Directors, the Company would make a severance payment equal to the
  Director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 any of the Directors 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 Directors were approved by the shareholders at the Annual
  General Meeting held on June 23, 2005.                                                                                                                                                                                                                                                                                                                               
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | d.                                               | Contingent liability                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           |                                                  | The Company
  is subject to commercial litigation regarding the alleged breach of a
  non-disclosure agreement. The Company can not assess the amount of expenses
  that it could be liable to pay as a result of resolving these claims. The
  Company has provided for such claims; see also note 1i.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|NOTE 5    | SHAREHOLDERS EQUITY:                           
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|           | a.                                               | Share capital:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                  | 1)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | The
  Companys ordinary shares are traded in the United States on the Nasdaq
  National Market, under the symbol ORCT. Beginning in April 2002, the
  Companys ordinary shares were also traded on the Tel-Aviv Stock Exchange in
  Israel.                                                                                                                                                               
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                  | 2)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Stock split                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | On February 27, 2005, the Companys board
  of directors approved a three-for-one stock split, effected in the form of a 200% stock
  dividend, as of April 5, 2005. All share and per share data included
  in these financial statements have been retroactively adjusted to reflect the
  stock split. The number of options and their exercise prices were also
  adjusted as a result of the stock split.

F-18

---

---



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

|           |                                  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|---------- | -------------------------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 5    | SHAREHOLDERS EQUITY(continued):
|           |                                 
|           |                                  | 3) | Treasury shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|          
|           |                                  |    | During 2003,
  the Company acquired 2,644,839 ordinary shares of the Company at a cost of
  $5,644,000.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|           |                                  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           |                                  | 4) | Exercise of options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|           |                                  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           |                                  |    | Under the
  Employee Share Option Plan (see note 5b. below), options to purchase 712,104,
  178,206 and 1,446,285 ordinary shares were exercised in the years ended
  December 31, 2003, 2004 and 2005, respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|           |                                  |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | 
|           |                                  | 5) | In January
  2003, the Company 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, the Company 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 nonassessable. 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. Significantly all of these exchanged
  options were subject to vesting through January 2005. The accounting
  treatment applied in respect of the plan is 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 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.

F-19

---

---



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

|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|---------- | -------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|           |                                 
|NOTE 5    | SHAREHOLDERS EQUITY(continued):
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           | b.                               | Employee Share Option Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  | Commencing
  July 1, 2005, the Company early adopted FAS 123(R), see also note 1p. The
  Company recorded compensation costs of $ 2,399,000, $ 2,580,000, and $
  616,000 for the years ended December 31, 2003, 2004, and 2005, respectively.
  The compensation cost for the year ended December 31, 2005 includes $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 the options granted.                                                                                                                                                                                                                                                              
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  | In February
  1994, the Company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 8,886,142
  at December 31, 2005, of which options to purchase 4,821,541 shares have been
  exercised, options to purchase 3,769,670 shares have been granted and are
  outstanding and options to purchase 294,931 are available for future
  grant.  Option awards are granted with
  an exercise price as determined by the Company. Option awards generally vest
  over four years and generally have seven year contractual terms.                                                                    
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  | 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 is derived from the output of the option
  valuation model and represents the period of time that options granted are
  expected to be outstanding. The risk-free rate for periods within the
  contractual 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 |     |     
| |                            |  |                          |     |     
| |                            |  | 2003                     |     | 2004 |  | 2005 |   | 
| |                            |  |                          |     |      |  |      |   | 
| | Expected
  dividend yield  |  |                          | 0   | %    |  | 0    | % |  | 0   | % | 
| |                            |  |                          |     |      |  |      |   |  |     |   | 
| | Expected
  volatility      |  |                          | 59  | %    |  | 40   | % |  | 53  | % | 
| |                            |  |                          |     |      |  |      |   |  |     |   | 
| | Risk-free
  interest rate  |  |                          | 1.5 | %    |  | 2.0  | % |  | 3.9 | % | 
| |                            |  |                          |     |      |  |      |   |  |     |   | 
| | Expected
  life - in years |  |                          | 2.5 |      |  | 2.4  |   |  | 2.6 |   | 
| |                            |  |                          |     |      |  |      |   |  |     |   | 

F-20

---

---



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

|           |                                 
|---------- | --------------------------------
|NOTE 5    | SHAREHOLDERS EQUITY(continued):

| |  |                                                                                                                                    
| |  | -----------------------------------------------------------------------------------------------------------------------------------
| |  | A summary of
  option activity under the Plan as of December 31, 2005, 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) |     
|                                   |  |                     |            |                                                    |   |                                                   |  |                                                |     
|                                  
|Outstanding
  at January 1, 2005   |  |                     | 4,008,348  |                                                    | $ | 4.5                                               |  |                                                |      |  |  |        | 
|Granted (1)(2)                     |  |                     | 1,603,900  |                                                    | $ | 17.22                                             |  |                                                |      |  |  |        | 
|Exercised                          |  |                     | (1,446,285 | )                                                  | $ | 4.11                                              |  |                                                |      |  |  |        | 
|Forfeited or expired               |  |                     | (396,293   | )                                                  | $ | 5.84                                              |  |                                                |      |  |  |        | 
|                                   |  |                     |            |                                                    |   |                                                   |  |                                                |      |  |  |        | 
|Outstanding
  at December 31, 2005 |  |                     | 3,769,670  |                                                    | $ | 9.91                                              |  |                                                | 5.97 |  |  | 44,484 | 
|                                   |  |                     |            |                                                    |   |                                                   |  |                                                |      |  |  |        | 
|Exercisable
  at December 31, 2005 |  |                     | 1,877,255  |                                                    | $ | 14.55                                             |  |                                                | 5.53 |  |  | 18,453 | 
|                                   |  |                     |            |                                                    |   |                                                   |  |                                                |      |  |  |        | 

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Includes
  options that in addition to their vesting period, 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-contingent options. The Company assumes that performance goals will not
  be achieved, therefore these options are included above with a fair value of
  $0 and no compensation cost as been recorded in their respect.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | (2) | Includes
  options to purchase 840,000 shares granted to the Companys CEO and to the
  Companys President (420,000 options each) at $27.14 per share, which
  represented the market price of the Companys ordinary shares on the date of
  grant. These options are fully vested and expire in June 2012.                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | The
  weighted-average grant-date fair value of options granted during the years
  2003, 2004, and 2005 was $0.17, $0.70, and $5.25, respectively. The total
  intrinsic value of options exercised during the years ended December 31,
  2003, 2004, and 2005, was $2.6 million, $1.0 million, and $24.2 million,
  respectively.                                                                                                                                     
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |     | A summary of
  the status of the Companys nonvested options as of December 31, 2005, and
  changes during the year ended December 31, 2005, is presented below:                                                                                                                                                                                                                                                                                                       

| |                                  |  |                     |            |                                              |  |      |  | 
| | -------------------------------- |  | ------------------- | ---------- | -------------------------------------------- |  | ---- |  | 
| | Nonvested options                |  | Number of
  options |            | Weighted
  average
  grant-date
  fair value |  |     
| |                                  |  |                     |            |                                              |  |     
|
| | Nonvested at
  January 1, 2005   |  |                     | 2,620,515  |                                              |  | 0.42 |  | 
| | Granted                          |  |                     | 1,603,900  |                                              |  | 5.25 |  | 
| | Vested                           |  |                     | (1,936,269 | )                                            |  | 2.57 |  | 
| | Forfeited                        |  |                     | (395,731   | )                                            |  | 0.75 |  | 
| |                                  |  |                     |            |                                              |  |      |  | 
| | Nonvested at
  December 31, 2005 |  |                     | 1,892,415  |                                              |  | 1.35 |  | 
| |                                  |  |                     |            |                                              |  |      |  | 

F-21

---

---



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

|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|---------- | -------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5    | SHAREHOLDERS EQUITY(continued):
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  | As of
  December 31, 2005, there was $1,970,603 of total unrecognized compensation
  cost related to nonvested share-based compensation arrangements granted under
  the Plan. That cost is expected to be recognized over a weighted-average
  period of 1.6 years. The total fair value of options vested during the year
  ended December 31, 2005 was approximately $5 million.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  | 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 $7,000 for the year ended December 31,
  2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           | c.                               | Grant of stock and option plans of subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  | In 2001, the
  Board of Directors of the Companys major subsidiary, Corrigent, approved an
  employee share option plan (the Corrigent Subsidiary Plan). Corrigent has
  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 grant day. The
  vesting period of options granted is up to four years from the date of grant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  | As of
  December 31, 2004 and 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 5a(5) above. At
  the annual general meeting of shareholders held on June 23, 2005 the
  Company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s
  options. Following the occurrence of this exchange, which occurred in January
  and February, 2006, Orckits holding in Corrigent increased from 90% to
  approximately 93% on a fully diluted basis.
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           | d.                               | Dividends                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                                  | In the event
  cash dividends are declared by the Company, such dividends will be declared
  and paid in Israeli currency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-22

---

---



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

|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                               
|---------- | -------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 5    | SHAREHOLDERS
EQUITY(continued):
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                               
|           | e.                               | Shareholder
Bonus Rights Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                               
|           |                                  | On November
  21, 2001, the Company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 the Companys 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 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 the Companys ordinary shares
  only if a person or group becomes an Acquiring Person by acquiring
  beneficial ownership of 15% or more of the Company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 from the market price.
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                               
|NOTE 6    | 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 Corrigentthe 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.
|           |                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                                                                                                                                                                                                                                                                                                                                                                                               

F-23

---

---



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

|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | 
|---------- | --------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 6    | TAXES ON INCOME(continued):
|           |                            
|           |                             | 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
  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 consumer price index (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.                                                                                                                                                                                                                                                                                                                                                                                   
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|           | 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 6a. above is
  taxed at the regular rate. Through December 31, 2003, the corporate tax rate
  in Israel was 36%. In July 2004 and in August 2005, amendments to the Israeli
  Income Tax Ordinance were enacted. One of the provisions of these amendments
  is that the corporate tax rate is to be gradually reduced 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
  (Inflationary Adjustments) 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.                                                                                                               
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|           |                             | 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.

F-24

---

---



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

|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|---------- | --------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 6    | TAXES ON INCOME(continued):
|           |                            
|           | d.                          | Deferred income taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|           |                             | At December
  31, 2005, the Company and its subsidiaries had accumulated tax losses
  amounting to approximately $130 million (December 31, 2004 - approximately
  $134 million) and carry forward capital losses for tax purposes of
  approximately $ 38 million (December 31, 2004 - $ 39 million). These losses are
  mainly denominated in NIS, linked to the Israeli CPI and are available indefinitely
  to offset future taxable business income. The Company 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
  in the entity in which they were generated.
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|           |                             | At December
  31, 2005, the Company and its subsidiaries had a net deferred tax asset (mostly
  in respect of carry forward losses and capital losses), in the amount of
  approximately $41 million (December 31, 2004 - approximately $37 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.                                                                                                                                                                     
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|           | e.                          | Tax rate reconciliation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|           |                             | In 2005, the
  main reconciling item from the statutory tax rate of the Company (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 2005. In 2004 and 2003, the main reconciling item from the
  statutory tax rate of the Company (36% and 35%, representing theoretical tax
  benefit of approximately $ 7.0 million and $8.0 million respectively) to the
  effective tax rate (0%) is the release of valuation allowance provided
  against the deferred taxes created in respect of carry forward tax losses
  (see note 1q).                                     
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|           | f.                          | Tax assessments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|           |                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | 
|           |                             | The Company
  has received final assessments through the year ended December 31, 2000. The
  Companys subsidiaries have not been assessed since incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-25

---

---



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

|           |                                            |                                    |             | 
|---------- | ------------------------------------------ | ---------------------------------- | ----------- | 
|NOTE 7    | FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:
|           |                                           
|           | a.                                         | Balances in non-dollar currencies:
|           |                                            |                                    |            
|           |                                            | 1)                                 | As follows:

| |             |  |                       |        | 
| | ----------- |  | --------------------- | ------ | 
| |             |  | December
  31,
  2005 |       
| |             |  |                       |       
| |             |  | In thousands          |       
| |             |  |                       |       
| |             |  |                       |        | 
| | Assets      |  |                       | 26,407 | 
| |             |  |                       |       
| | Liabilities |  |                       | 12,609 | 
| |             |  |                       |       

| |  |    |                                                                                                                            
| |  | -- | ---------------------------------------------------------------------------------------------------------------------------
| |  |    | The
U.S. dollar amounts above mainly represent balances in Japanese Yen (Yen) and
to lesser extent  in Israeli currency.
| |  |    |                                                                                                                            
| |  | 2) | Data
  regarding the rate of exchange and the Israeli CPI:                                                                 

| |                                                                               |  |                          |           |      |  |           |  |  |           | 
| | ----------------------------------------------------------------------------- |  | ------------------------ | --------- | ---- |  | --------- |  |  | --------- | 
| |                                                                               |  | Year ended
  December 31 |          
| |                                                                               |  |                          |          
| |                                                                               |  | 2003                     |           | 2004 |  | 2005      | 
| |                                                                               |  |                          |           |      |  |           | 
| |                                                                               |  |                          |           |      |  |           |  |  |           | 
| | Rate of devaluation (evaluation) of the
  Israeli Currency against the dollar |  |                          | (7.6)%    |      |  | (1.6)%    |  |  | 6.8%      | 
| | Rate of evaluation of the Yen against the
  dollar                            |  |                          |           |      |  | (4.1)%    |  |  | 14.3%     | 
| | Rate of increase (decrease) in the Israeli
  CPI                              |  |                          | (1.9)%    |      |  | 1.2%      |  |  | 2.4%      | 
| | Exchange rate at end of year - $ 1=                                           |  |                          | NIS 4.379 |      |  | NIS 4.308 |  |  | NIS 4.603 | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                     | 
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| | 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
  8a(2).                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                     | 
| | c. | Concentrations of credit risks                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                     | 
| |    | At December
  31, 2004 and 2005, substantially all of the Companys and its subsidiaries
  cash and cash equivalents were held by Israeli and international bank
  institutions. Substantially all of the Companys marketable securities were
  held by international bank institutions. 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, 2005 were derived from one customer.
  The Company is of the opinion that the exposure to credit risk relating to
  these trade receivables is limited. In regard of the trade receivable balance
  at December 31, 2004, an appropriate allowance for doubtful accounts has been
  included in the accounts, see note 8b.                   

F-26

---

---



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

|           |                                                |                        |                                                                                                                                                                                                                  | 
|---------- | ---------------------------------------------- | ---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|NOTE 8    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:
|           |                                               
|           | Balance sheets:                               
|           |                                                |                       
|           | a.                                             | Marketable securities:
|           |                                                |                        |                                                                                                                                                                                                                 
|           |                                                | 1)                     | Trading securities                                                                                                                                                                                              
|           |                                                |                        |                                                                                                                                                                                                                  | 
|           |                                                |                        | At December
  31, 2004, the Company held trading securities in the amount of $ 9.5 million.
  At December 31, 2005, there were no such securities. These securities were
  classified as short-term investments.
|           |                                                |                        |                                                                                                                                                                                                                  | 
|           |                                                | 2)                     | Held-to-maturity marketable securities                                                                                                                                                                          
|           |                                                |                        |                                                                                                                                                                                                                  | 
|           |                                                |                        | The securities
  mature over the following years:                                                                                                                                                               

| |                                                                  |  |                    |        |      |   |        | 
| | ---------------------------------------------------------------- |  | ------------------ | ------ | ---- | - | ------ | 
| |                                                                  |  | December
  31      |       
| |                                                                  |  |                    |       
| |                                                                  |  | 2004               |        | 2005 |  
| |                                                                  |  |                    |        |      |  
| |                                                                  |  | In
  thousands     |       
| |                                                                  |  |                    |       
| |                                                                  |  | Carrying
  amounts |       
| |                                                                  |  |                    |       
| |                                                                  |  |                    |        |      |   |        | 
| | Mature within 12 months - Classified as
  short-term investments |  | $                  | 15,760 |      | $ | 11,731 | 
| | Mature after 1 year up to 4 years                                |  |                    | 18,441 |      |   | 70,881 | 
| |                                                                  |  |                    |        |      |   |        | 
| |                                                                  |  | $                  | 34,201 |      | $ | 82,612 | 
| |                                                                  |  |                    |        |      |   |        | 

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December
  31, 2005, the fair value of the Companys held-to-maturity tradable
  securities was $ 81.8 million (December 31, 2004 - $ 31.6 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 $840,000 (December 31,
  2004  $2.5 million). It is expected that the debt securities would 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, 2005.

F-27

---

---



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

|           |                                                          
|---------- | ---------------------------------------------------------
|NOTE 8    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION(continued):

| |    |                    |                                        |  |                |        |      |   |     | 
| | -- | ------------------ | -------------------------------------- |  | -------------- | ------ | ---- | - | --- | 
| |    |                    |                                        |  | December
  31  |       
| |    |                    |                                        |  |                |       
| |    |                    |                                        |  | 2004           |        | 2005 |  
| |    |                    |                                        |  |                |        |      |  
| |    |                    |                                        |  | In
  thousands |       
| |    |                    |                                        |  |                |        |      |   |     | 
| | b. | Trade receivables: |                                        |  |                |        |      |   |    
| |    |                    |                                        |  |                |        |      |   |     | 
| |    |                    | Open accounts                          |  | $              | 54,893 |      | $ | 702 | 
| |    |                    | Less - allowance for doubtful accounts |  |                | 79     |      |   | -,- | 
| |    |                    |                                        |  |                |        |      |   |     | 
| |    |                    |                                        |  | $              | 54,814 |      | $ | 702 | 
| |    |                    |                                        |  |                |        |      |   |     | 

| |                                  |  |                          |     |      |   |      |   |   |     |  
| | -------------------------------- |  | ------------------------ | --- | ---- | - | ---- | - | - | --- | -
| |                                  |  | Year ended
  December 31 |    
| |                                  |  |                          |    
| |                                  |  | 2003                     |     | 2004 |   | 2005 |  
| |                                  |  | In
  thousands           |    
| |                                  |  |                          |    
| | Allowance for doubtful accounts: |  |                          |     |      |   |      |   |   |     |  
| | Balance at beginning of year     |  | $                        | 83  |      | $ | 83   |   | $ | 79  |  
| | Increase during the year         |  |                          | 63  |      |   |      |   |   |     |  
| | Bad debt written off             |  |                          | (63 | )    |   | (4   | ) |   | (79 | )
| |                                  |  |                          |     |      |   |      |   |   |     |  
| | Balance at end of year           |  | $                        | 83  |      | $ | 79   |   |   | -,- |  
| |                                  |  |                          |     |      |   |      |   |   |     |  

| |    |                   |                                     |  |                |       |      |   |       | 
| | -- | ----------------- | ----------------------------------- |  | -------------- | ----- | ---- | - | ----- | 
| |    |                   |                                     |  | December
  31  |      
| |    |                   |                                     |  |                |      
| |    |                   |                                     |  | 2004           |       | 2005 |  
| |    |                   |                                     |  |                |       |      |  
| |    |                   |                                     |  | In
  thousands |      
| |    |                   |                                     |  |                |      
| | c. | Other receivables |                                     |  |                |       |      |   |      
| |    |                   |                                     |  |                |       |      |   |       | 
| |    |                   | Employees and employee institutions |  | $              | 42    |      | $ | 13    | 
| |    |                   | Government of Israel                |  |                | 743   |      |   | 780   | 
| |    |                   | Prepaid expenses                    |  |                | 683   |      |   | 709   | 
| |    |                   | Sundry                              |  |                | 24    |      |   | 18    | 
| |    |                   |                                     |  |                |       |      |   |       | 
| |    |                   |                                     |  | $              | 1,492 |      | $ | 1,520 | 
| |    |                   |                                     |  |                |       |      |   |       | 

| |    |                                                                                                                                                                                                                                                                                                                                                                                                                    | 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | d. | Bank deposits                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | At December
  31, 2005, the Company had bank deposits in the amount of $ 1.5 million
  classified as long-term investments, which are denominated in dollars and
  bear annual interest at a rate of 5.1%. At December 31, 2004, the Company
  had bank deposits in the amount of $ 6.8 million classified among current
  assets, which are denominated in dollars and bear annual interest at a rate
  of 4.29%.

F-28

---

---



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

|           |                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|---------- | ---------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
|           |                                                           
|           | e.                                                         | Bank loans                                                                                                                                                                                                                                                                                                                                                                       
|           |                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|           |                                                            | The balance
  at December 31, 2004 consisted of a short-term bank loan of $15 million and
  current maturities of long-term bank loans of $16 million. The loans,
  received in dollars, bore annual interest at a weighted average rate of
  2.94%. In 2005 all bank loans were repaid.                                                                                         
|          
|           |                                                            | In addition,
  in 2004, the Company entered into an agreement for a bank credit facility,
  pursuant to which the Company may, subject to certain conditions, from time
  to time, borrow an aggregate principal amount of up to $20 million. Under the
  terms of the agreement, the amounts will be denominated in dollars and will
  bear interest at Libor plus a fixed rate.
|           |                                                            |                                                                                                                                                                                                                                                                                                                                                                                  
|           | f.                                                         | Accrued expenses and other payables:                                                                                                                                                                                                                                                                                                                                             

| |                                                                |  |                |        |      |   |        | 
| | -------------------------------------------------------------- |  | -------------- | ------ | ---- | - | ------ | 
| |                                                                |  | December
  31  |       
| |                                                                |  |                |       
| |                                                                |  | 2004           |        | 2005 |  
| |                                                                |  |                |        |      |  
| |                                                                |  | In
  thousands |       
| |                                                                |  |                |       
| |                                                                |  |                |        |      |   |        | 
| | Accrued
  expenses in respect of deferred income, see g. below |  | $              | 6,944  |      | $ | 4,352  | 
| | Employees
  and employee institutions                          |  |                | 1,637  |      |   | 7,715  | 
| | Provision
  for vacation pay                                   |  |                | 1,515  |      |   | 686    | 
| | Provision
  for warranty *                                     |  |                | 556    |      |   | 2,768  | 
| | Accrued
  royalties                                            |  |                | 489    |      |   | 2,327  | 
| | Accrued
  interest                                             |  |                | 127    |      |   | -,-    | 
| | Sundry                                                         |  |                | 377    |      |   | 1,331  | 
| |                                                                |  |                |        |      |   |        | 
| |                                                                |  | $              | 11,645 |      | $ | 19,179 | 
| |                                                                |  |                |        |      |   |        | 

| |                                                  |                                                            |  |                |      |      |   |       |  
| | ------------------------------------------------ | ---------------------------------------------------------- |  | -------------- | ---- | ---- | - | ----- | -
| |                                                  |                                                            |  |                |      |      |   |       |  
| |                                                  |                                                            |  | December
  31  |     
| |                                                  |                                                            |  |                |     
| |                                                  |                                                            |  | 2004           |      | 2005 |  
| |                                                  |                                                            |  |                |      |      |  
| |                                                  |                                                            |  | In
  thousands |     
| |                                                  |                                                            |  |                |     
| |                                                  |                                                            |  |                |      |      |   |       |  
| | *  The
  changes in the balance during the year: |                                                            |  |                |      |      |   |      
| |                                                  | Balance at
  beginning of year                             |  | $              | 434  |      | $ | 556   |  
| |                                                  | Payments
  made under the warranty                         |  |                | (107 | )    |   | (640  | )
| |                                                  | Product
  warranties issued for new sales                  |  |                | 382  |      |   | 3,039 |  
| |                                                  | Changes in
  accrual in respect of pre-existing warranties |  |                | (153 | )    |   | (187  | )
| |                                                  |                                                            |  |                |      |      |   |       |  
| |                                                  | Balance at end
  of year                                   |  | $              | 556  |      | $ | 2,768 |  
| |                                                  |                                                            |  |                |      |      |   |       |  

F-29

---

---



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

|           |                                                            |                 
|---------- | ---------------------------------------------------------- | ----------------
|NOTE 8    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
|           |                                                           
|           | g.                                                         | Deferred income:

| |                                               |  |                |         |      |   |         |  
| | --------------------------------------------- |  | -------------- | ------- | ---- | - | ------- | -
| |                                               |  | December
  31  |        
| |                                               |  |                |        
| |                                               |  | 2004           |         | 2005 |  
| |                                               |  |                |         |      |  
| |                                               |  | In
  thousands |        
| |                                               |  |                |        
| |                                               |  |                |         |      |   |         |  
| | Revenues to
  be recognized in future periods |  | $              | 74,491  |      | $ | 54,836  |  
| | Applicable
  product costs                    |  |                | (28,909 | )    |   | (19,943 | )
| | Applicable
  PCS, warranty and other costs    |  |                | (9,920  | )    |   | (6,157  | )
| |                                               |  |                |         |      |   |         |  
| |                                               |  | $              | 35,662  |      | $ | 28,736  |  
| |                                               |  |                |         |      |   |         |  

| |    |                                                                                                                                            |                                                                                                                                                                                                                                  
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | 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 |      
| |                   |  |                          |      
| |                   |  | 2003                     |       | 2004 |   | 2005   | 
| |                   |  |                          |       |      |   |        | 
| |                   |  | In
  thousands           |      
| |                   |  |                          |      
| |                   |  |                          |       |      |   |        |  |   |         | 
| | Japan             |  |                          | -,-   |      | $ | 10,216 |  | $ | 101,247 | 
| | Israel            |  | $                        | 35    |      |   | -,-    |  |   | -,-     | 
| | Europe            |  |                          | 1,510 |      |   | 901    |  |   | -,-     | 
| | Other
  countries |  |                          | 138   |      |   | 159    |  |   | -,-     | 
| |                   |  |                          |       |      |   |        |  |   |         | 
| |                   |  | $                        | 1,683 |      | $ | 11,276 |  | $ | 101,247 | 
| |                   |  |                          |       |      |   |        |  |   |         | 

| |  |  |                                                                      
| |  |  | ---------------------------------------------------------------------
| |  |  | Most of the
  Companys property and equipment are located in Israel.

F-30

---

---



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

|           |                                                            |    |                                                                                                                                         
|---------- | ---------------------------------------------------------- | -- | ----------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
|           |                                                            |    |                                                                                                                                         
|           |                                                            | 2) | Revenues
  from principal customers - revenues from single customers each of which
  exceeds 10% of total revenues in the relevant year:

| |            |  |                          |     |      |   |       |  |   |         | 
| | ---------- |  | ------------------------ | --- | ---- | - | ----- |  | - | ------- | 
| |            |  | Year ended
  December 31 |    
| |            |  |                          |    
| |            |  | 2003                     |     | 2004 |   | 2005  | 
| |            |  |                          |     |      |   |       | 
| |            |  | In
  thousands           |    
| |            |  |                          |    
| |            |  |                          |     |      |   |       |  |   |         | 
| | Customer A |  |                          | -,- |      | $ | 9,195 |  | $ | 101,060 | 
| |            |  |                          |     |      |   |       |  |   |         | 
| | Customer B |  | $                        | 530 |      | $ | 863   |  |   | -,-     | 
| |            |  |                          |     |      |   |       |  |   |         | 

| |    |                  
| | -- | -----------------
| | i. | Cost of revenues:

| |                                                                    |  |                          |     |      |   |        |   |   |        | 
| | ------------------------------------------------------------------ |  | ------------------------ | --- | ---- | - | ------ | - | - | ------ | 
| |                                                                    |  | Year ended
  December 31 |    
| |                                                                    |  |                          |    
| |                                                                    |  | 2003                     |     | 2004 |   | 2005   |  
| |                                                                    |  |                          |     |      |   |        |  
| |                                                                    |  | In
  thousands           |    
| |                                                                    |  |                          |    
|
| | Materials consumed, subcontractors and
  other production expenses |  | $                        | 533 |      | $ | 9,508  |   | $ | 37,497 | 
| | Payroll and related expenses                                       |  |                          |     |      |   | 488    |   |   | 2,161  | 
| | Depreciation                                                       |  |                          | 199 |      |   | 340    |   |   | 1,283  | 
| | Decrease (increase) in inventories of
  finished products          |  |                          |     |      |   | (5,433 | ) |   | 4,061  | 
| | Other                                                              |  |                          | 16  |      |   | 998    |   |   | 6,870  | 
| |                                                                    |  |                          |     |      |   |        |   |   |        | 
| |                                                                    |  | $                        | 748 |      | $ | 5,901  |   | $ | 51,872 | 
| |                                                                    |  |                          |     |      |   |        |   |   |        | 

| |    |                                                                                                              
| | -- | -------------------------------------------------------------------------------------------------------------
| |    | The Company
  currently procures a number of major components of its products from single
  source suppliers.
| |    |                                                                                                              
| | j. | Research and development expenses - net:                                                                     

| |                                                |  |                          |        |      |   |        |  |   |        | 
| | ---------------------------------------------- |  | ------------------------ | ------ | ---- | - | ------ |  | - | ------ | 
| |                                                |  | Year ended
  December 31 |       
| |                                                |  |                          |       
| |                                                |  | 2003                     |        | 2004 |   | 2005   | 
| |                                                |  |                          |        |      |   |        | 
| |                                                |  | In
  thousands           |       
| |                                                |  |                          |       
| |                                                |  |                          |        |      |   |        |  |   |        | 
| | Total
  expenses                               |  | $                        | 20,803 |      | $ | 17,725 |  | $ | 16,320 | 
| |                                                |  |                          |        |      |   |        |  |   |        | 
| | Less -
  grants and participations, see note 4 |  |                          | 5,800  |      |   | 2,682  |  |   | 173    | 
| |                                                |  |                          |        |      |   |        |  |   |        | 
| |                                                |  | $                        | 15,003 |      | $ | 15,043 |  | $ | 16,147 | 
| |                                                |  |                          |        |      |   |        |  |   |        | 

| |  |                                                                                                                                                                                                                                                                                                                                                                                                 
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 2003, the
  Company recorded an impairment of property and equipment in the amount of
  approximately $1.8 million, representing write-off of property and equipment
  relating to the Companys ADSL product line. The majority of the impairment
  was recorded as research and development expenses. The Company does not
  expect to generate additional revenues from this product line.

F-31

---

---



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

|           |                                                            |                        
|---------- | ---------------------------------------------------------- | -----------------------
|NOTE 8    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
|           |                                                           
|           | k.                                                         | Financial income - net:

| |                                            |  |                          |       |      |   |       |  |   |       | 
| | ------------------------------------------ |  | ------------------------ | ----- | ---- | - | ----- |  | - | ----- | 
| |                                            |  | Year ended
  December 31 |      
| |                                            |  |                          |      
| |                                            |  | 2003                     |       | 2004 |   | 2005  | 
| |                                            |  |                          |       |      |   |       | 
| |                                            |  | In
  thousands           |      
| |                                            |  |                          |      
|
| | Income:                                    |  |                          |       |      |   |       |  |   |       | 
| | Interest on bank deposits                  |  | $                        | 557   |      | $ | 367   |  | $ | 511   | 
| | Gain and interest on marketable securities |  |                          | 2,883 |      |   | 1,883 |  |   | 3,022 | 
| | Gain from early extinguishments of notes * |  |                          | 3,125 |      |   | -,-   |  |   | -,-   | 
| | Interest on long-term loan                 |  |                          | 114   |      |   | -,-   |  |   | -,-   | 
| | Other (including currency transactions)    |  |                          | 62    |      |   | 80    |  |   | 7     | 
| |                                            |  |                          |       |      |   |       |  |   |       | 
| |                                            |  | $                        | 6,741 |      | $ | 2,330 |  | $ | 3,540 | 
| |                                            |  |                          |       |      |   |       |  |   |       | 

| |   |                                                                                                                                                                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | Regarding
  issuance of convertible subordinated notes by the Company in March 2000,
  which were originally due on April 1, 2005, but were extinguished earlier. The
  Company recorded financial income of $ 3.1 million in 2003 from gains on early
  extinguishments of Notes. The redemption of notes in 2004 did not result in
  any financial income.

| |                                                                        |  |                          |       |      |   |       |  |   |       | 
| | ---------------------------------------------------------------------- |  | ------------------------ | ----- | ---- | - | ----- |  | - | ----- | 
| |                                                                        |  | Year ended
  December 31 |      
| |                                                                        |  |                          |      
| |                                                                        |  | 2003                     |       | 2004 |   | 2005  | 
| |                                                                        |  |                          |       |      |   |       | 
| |                                                                        |  | In
  thousands           |      
| |                                                                        |  |                          |      
|
| | Expenses:                                                              |  |                          |       |      |   |       |  |   |       | 
| | Interest in respect of convertible
  subordinated notes and bank loans |  | $                        | 1,114 |      | $ | 566   |  | $ | 219   | 
| | Amortization of convertible subordinated
  notes issuance costs        |  |                          | 139   |      |   | 147   |  |   | -,-   | 
| | Other (2003 and 2005 - mainly currency
  transaction gains and losses) |  |                          | 380   |      |   | 88    |  |   | 685   | 
| |                                                                        |  |                          |       |      |   |       |  |   |       | 
| |                                                                        |  |                          | 1,633 |      |   | 801   |  |   | 904   | 
| |                                                                        |  |                          |       |      |   |       |  |   |       | 
| |                                                                        |  | $                        | 5,108 |      | $ | 1,529 |  | $ | 2,636 | 
| |                                                                        |  |                          |       |      |   |       |  |   |       | 

| |    |                                                                                                                                                                                                            
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | l. | 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.

F-32

---

---



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

|           |                                                            |                                    |                                                                                                                                                                                                                                                                            
|---------- | ---------------------------------------------------------- | ---------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 8    | SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
|           |                                                            |                                   
|           | m.                                                         | Transactions with related parties:
|           |                                                            |                                   
|           |                                                            | 1.                                 | Commencing
  July 1, 2003, the Company provides Tickro, a related party, with certain
  administrative services. The annual consideration for such services in the
  year ended December 31, 2005 was $72,000 (Each of year ended December 31,
  2004 and 2003 - $100,000).
|           |                                                            |                                    |                                                                                                                                                                                                                                                                            
|           |                                                            | 2.                                 | Regarding
  transactions with the Companys CEO and with the Companys president, see
  notes 4c and 5b.                                                                                                                                                                   
|           |                                                            |                                    |                                                                                                                                                                                                                                                                            
|           | n.                                                         | Earnings (loss) per share:        

| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| | ------------------------------------------------------------------------------------- |  | ------------------------ | ------- | ---- | - | ------- | - | - | ------- | -
| |                                                                                       |  | Year ended
  December 31 |        
| |                                                                                       |  |                          |        
| |                                                                                       |  | 2003                     |         | 2004 |   | 2005    |  
| |                                                                                       |  |                          |         |      |   |         |  
| |                                                                                       |  | In
  thousands           |        
| |                                                                                       |  |                          |        
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| | Numerator - Basic                                                                     |  |                          |         |      |   |         |   |   |         |  
| | Net income (loss)                                                                     |  | $                        | (21,616 | )    | $ | (20,132 | ) | $ | 22,226  |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| | Denominator - Basic                                                                   |  |                          |         |      |   |         |   |   |         |  
| | Weighted average ordinary shares outstanding (net of treasury
shares)                 |  |                          | 12,996  |      |   | 13,074  |   |   | 13,984  |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| | Basic net income (loss) per share                                                     |  | $                        | (1.66   | )    | $ | (1.54   | ) | $ | 1.59    |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| | Numerator - Diluted                                                                   |  |                          |         |      |   |         |   |   |         |  
| | Net income                                                                            |  | $                        | (21,616 | )    | $ | (20,132 | ) | $ | 22,226  |  
| | Minority share in subsidiarys net income -assuming exercise of
  Corrigents options |  |                          | -,-     |      |   | -,-     |   |   | (1,017  | )
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| |                                                                                       |  | $                        | (21,616 | )    | $ | (20,132 | ) | $ | 21,209  |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| | Denominator  Diluted                                                                 |  |                          |         |      |   |         |   |   |         |  
| | Weighted average ordinary shares outstanding                                          |  |                          | 12,996  |      |   | 13,074  |   |   | 13,984  |  
| | Dilutive potential of ordinary shares equivalents -
options                           |  |                          |         |      |   |         |   |   | 2,361   |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| |                                                                                       |  |                          | 12,996  |      |   | 13,074  |   |   | *16,345 |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  
| | Diluted net income (loss) per share                                                   |  | $                        | (1.66   | )    | $ | (1.54   | ) | $ | 1.30    |  
| |                                                                                       |  |                          |         |      |   |         |   |   |         |  

| |                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2003 the
  potential effect of the convertible subordinated notes was not taken into
  account, since its effect was anti-dilutive. In 2003 and 2004, the potential
  effect of 2,023,917 and 4,008,348 of the Companys options, respectively, was
  not taken into account, because of their anti-dilutive effect, since the
  Company had net loss applicable to ordinary shares.
| |                                                                                                                                                                                                                                                                                                                                                                                        
| | *                                                                                                                                                                                                                                                                                                                                                                                       | The weighted
  average number of shares used for diluted net income per share calculation
  for the year ended December 31, 2005 taking into account Orckits option
  exchange, see note 5c, as if the exchange was performed on the date it was
  approved by Orckits option committee is 16,593,000. The diluted net earnings
  per share derived from this calculation method is $1.30.

F-33

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---