ORCKIT COMMUNICATIONS LTD.
                                       (An Israeli Corporation)
                                2003 CONSOLIDATED FINANCIAL STATEMENTS




<PAGE>




                                      ORCKIT COMMUNICATIONS LTD.
                                       (An Israeli Corporation)
                                2003 CONSOLIDATED FINANCIAL STATEMENTS





                                          TABLE OF CONTENTS



<TABLE>
<CAPTION>

                                                                      PAGE
<S>                                                                 <C>
             REPORT OF INDEPENDENT AUDITORS                            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-26
</TABLE>




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


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

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

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

<PAGE>


                         REPORT OF INDEPENDENT AUDITORS



To the shareholders of

ORCKIT COMMUNICATIONS LTD.


We have audited the consolidated balance sheets of Orckit Communications Ltd.
(the "Company") and its subsidiaries as of December 31, 2002 and 2003, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
2003. These financial statements are the responsibility of the Company's 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 auditing standards generally accepted
in Israel and in the United States, 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 aforementioned consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2002 and 2003 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, 2003, in conformity with accounting principles generally accepted in the
United States.




Tel Aviv, Israel                                /S/ Kesselman & Kesselman
      February 22, 2004                    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
<PAGE>


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

<TABLE>
<CAPTION>

                                                                                               December 31
                                                                                          ----------------------
                                                                                            2002          2003
                                                                                          ---------    ---------
<S>                                                                                       <C>          <C>
                                            A S S E T S
CURRENT ASSETS:
    Cash and cash equivalents                                                             $  10,165    $  10,048
    Marketable securities  (note 10a)                                                        43,139       31,302
    Bank deposits (note 10d)                                                                 10,545          273
    Trade receivables (note 10b)                                                                786          147
    Other receivables (note 10c)                                                              2,443        1,596
    Inventories                                                                                 100          100
                                                                                          ---------    ---------
           T o t a l  current assets                                                         67,178       43,466
                                                                                          ---------    ---------
LONG-TERM INVESTMENTS:
    Marketable securities (note 10a)                                                         46,576       31,160
    Other (note 10d)                                                                          8,403        9,465
                                                                                          ---------    ---------
                                                                                             54,979       40,625
                                                                                          ---------    ---------
LONG-TERM LOAN TO A RELATED PARTY (note 2)                                                    7,000
                                                                                          ---------
PROPERTY AND EQUIPMENT - net  (note 3):                                                       6,070        2,093
                                                                                          ---------    ---------
DEFERRED ISSUANCE COSTS, net of accumulated amortization (note 1g)                              623          147
                                                                                          ---------    ---------
           T o t a l  assets                                                              $ 135,850    $  86,331
                                                                                          =========    =========
                               LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
    Trade payables                                                                        $   4,827    $   3,108
    Accrued expenses and other payables (note 10e)                                            7,158        5,878
                                                                                          ---------    ---------
           T o t a l current liabilities                                                     11,985        8,986
                                                                                          ---------    ---------
LONG-TERM LIABILITIES:
    Accrued severance pay (note 4)                                                            3,265        3,435
    Convertible subordinated notes (note 5)                                                  38,179       16,238
                                                                                          ---------    ---------
           T o t a l long-term liabilities                                                   41,444       19,673
                                                                                          ---------    ---------
COMMITMENTS (note 6)
                                                                                          ---------    ---------
           T o t a l liabilities                                                             53,429       28,659
                                                                                          ---------    ---------
SHAREHOLDERS' EQUITY (note 7):
    Share capital - ordinary shares of no par value and paid-in capital
       (authorized 10,000,000 shares; issued: December 31, 2002 - 4,979,593 shares;
       December 31, 2003 - 5,216,593 shares; outstanding: December 31, 2002 - 4,979,593
       shares; December 31, 2003 - 4,334,980 shares)                                        322,227      325,512
    Deferred compensation                                                                    (2,023)      (2,797)
    Accumulated deficit                                                                    (237,783)    (259,399)
    Treasury shares, at cost  (881,613 ordinary shares)                                                   (5,644)
                                                                                          ---------    ---------
           T o t a l  shareholders' equity                                                   82,421       57,672
                                                                                          ---------    ---------
           T o t a l liabilities and shareholders' equity                                 $ 135,850    $  86,331
                                                                                          =========    =========
</TABLE>


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.


                                       F-3
<PAGE>


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


<TABLE>
<CAPTION>

                                                           Year Ended December 31
                                                     -----------------------------------
                                                       2001         2002          2003
                                                     ---------    ---------    ---------
<S>                                                  <C>          <C>          <C>
REVENUES (note 10f)                                  $ 141,647    $  53,420    $   1,683
COST OF REVENUES (note 10g)                            112,007       32,963          748
                                                     ---------    ---------    ---------
GROSS PROFIT                                            29,640       20,457          935
RESEARCH AND DEVELOPMENT EXPENSES - net (note 10h)      19,085       19,291       15,003
SELLING, GENERAL AND ADMINISTRATIVE
    EXPENSES                                            16,993       14,699       12,656
AMORTIZATION AND IMPAIRMENT OF GOODWILL (note 10i)      26,101
                                                     ---------    ---------    ---------
OPERATING LOSS                                         (32,539)     (13,533)     (26,724)
FINANCIAL INCOME  - net (note 10j)                      33,395       17,616        5,108
                                                     ---------    ---------    ---------
NET INCOME (LOSS) FOR THE YEAR                       $     856    $   4,083    $ (21,616)
                                                     =========    =========    =========

EARNINGS (LOSS) PER SHARE ("EPS") (note 10k):
    Basic                                            $   *0.18    $    0.83    $   (4.99)
                                                     =========    =========    =========
    Diluted                                          $   *0.18    $    0.79    $   (4.99)
                                                     =========    =========    =========
WEIGHTED AVERAGE NUMBER OF SHARES
    USED IN COMPUTATION OF EPS:
    Basic                                               *4,632        4,932        4,332
                                                     =========    =========    =========
    Diluted                                             *4,875        5,163        4,332
                                                     =========    =========    =========
</TABLE>

* After giving retroactive effect to the one-for-five reverse share split, see
note 7a(2).






     THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.


                                       F-4
<PAGE>


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

<TABLE>
<CAPTION>

                                                                                    Share Capital
                                                                                  ------------------
                                                                                  Number of            Additional
                                                                                   Shares *             Paid-in      Deferred
                                                                               (In Thousands)  Amount   Capital    Compensation
                                                                                  ---------    -----   ---------    ----------
<S>                                                                                  <C>      <C>     <C>                 <C>
BALANCE AT JANUARY 1, 2001                                                            4,495    $ 663   $ 313,321
CHANGES DURING 2001:
    Net income
    Conversion of convertible subordinated notes into shares                             30        3         246
    Exercise of options granted to employees                                            350       44         723
    Deferred compensation related to employee stock option grants                                          7,214        (7,214)
    Amortization of deferred compensation related to employee
       stock option grants                                                                                               3,651
                                                                                  ---------    -----   ---------    ----------
BALANCE AT DECEMBER 31, 2001                                                          4,875      710     321,504        (3,563)
CHANGES DURING 2002:
    Net income
    Exercise of options granted to employees                                            105       13
    Amortization of deferred compensation related to employee
       stock option grants                                                                                               1,540
    Cancellation of ordinary shares par value                                                   (723)        723
                                                                                  ---------    -----   ---------    ----------
BALANCE AT DECEMBER 31, 2002                                                          4,980      -,-     322,227        (2,023)
CHANGES DURING 2003:
    Net loss
    Issuance of shares to employees, exchangeable to options, see note 7a(5)            600                2,496        (2,496)
    Exercise of options granted to employees                                            237                  112
        Acquisition of treasury stock                                                  (882)
    Exchange of shares into options, see note 7a(5)                                    (600)               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
                                                                                  ---------    -----   ---------    ----------
BALANCE AT DECEMBER 31, 2003                                                          4,335    $ -,-   $ 325,512    $   (2,797)
                                                                                  =========    =====   =========    ==========
</TABLE>


<TABLE>
<CAPTION>

                                                                                                                 TOTAL
                                                                                  ACCUMULATED      TREASURY   SHAREHOLDERS'
                                                                                    DEFICIT         SHARES       EQUITY
                                                                                  ------------    ----------    ---------
<S>                <C>                                                            <C>                 <C>       <C>
BALANCE AT JANUARY 1, 2001                                                        $   (242,722)                 $  71,262
CHANGES DURING 2001:
    Net income                                                                             856                        856
    Conversion of convertible subordinated notes into shares                                                          249
    Exercise of options granted to employees                                                                          767
    Deferred compensation related to employee stock option grants                                                     -,-
    Amortization of deferred compensation related to employee
       stock option grants                                                                                          3,651
                                                                                  ------------    ----------    ---------
BALANCE AT DECEMBER 31, 2001                                                          (241,866)                    76,785
CHANGES DURING 2002:
    Net income                                                                           4,083                      4,083
    Exercise of options granted to employees                                                                           13
    Amortization of deferred compensation related to employee
       stock option grants                                                                                          1,540
    Cancellation of ordinary shares par value                                                                         -,-
                                                                                  ------------    ----------    ---------
BALANCE AT DECEMBER 31, 2002                                                          (237,783)                    82,421
CHANGES DURING 2003:
    Net loss                                                                           (21,616)                   (21,616)
    Issuance of shares to employees, exchangeable to options, see note 7a(5)                                          -,-
    Exercise of options granted to employees                                                                          112
        Acquisition of treasury stock                                                                 (5,644)      (5,644)
    Exchange of shares into options, see note 7a(5)                                                                   -,-
    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                                                               2,399
                                                                                  ------------    ----------    ---------
BALANCE AT DECEMBER 31, 2003                                                      $   (259,399)   $   (5,644)   $  57,672
                                                                                  ============    ==========    =========
</TABLE>

* The figures for 2001 are after giving retroactive effect to the one-for-five
reverse share split, see note 7a(2).


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.


                                       F-5
<PAGE>


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

<TABLE>
<CAPTION>

                                                                                Year Ended December 31
                                                                           --------------------------------
                                                                             2001        2002        2003
                                                                           --------    --------    --------
<S>                                                                        <C>         <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
    Net income (loss) for the year                                         $    856    $  4,083    $(21,616)
    Adjustments to reconcile net income (loss) to net cash provided by
        (used in) operating activities:
        Depreciation and amortization:
           Property and equipment                                             4,074       3,568       3,039
           Deferred charges                                                   3,411         393         139
        Impairment of property and equipment                                                          1,800
        Goodwill and other identifiable intangible assets impairment         23,400
        Trading marketable securities, net                                  (33,214)      1,596       4,623
        Gain from early extinguishment of convertible subordinated notes    (34,108)    (13,199)     (3,125)
        Interest on long-term investments                                                (1,245)     (2,019)
        Increase (decrease) in accrued severance pay                           (798)        105         170
       Amortization of deferred compensation related to employee
           stock option grants, net                                           3,651       1,540       2,399
        Changes in operating assets and liabilities:
           Decrease in trade receivables and other receivables               22,209       8,580       1,486
           Decrease in trade payables, accrued expenses
               and other payables                                           (31,564)     (7,954)     (2,999)
           Decrease in inventories                                           40,083       9,197         -,-
                                                                           --------    --------    --------
    Net cash provided by (used in) operating activities                      (2,000)      6,664     (16,103)
                                                                           --------    --------    --------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchase of property and equipment                                       (2,415)     (1,842)       (862)
    Bank deposits, net                                                       33,015       2,565      10,272
    Funds in respect of accrued severance pay                                    (8)        758        (557)
    Long term investments                                                                              (499)
    Collection of long-term loan granted                                                 13,000       7,000
    Maturities of marketable securities held to maturity                                             26,310
    Purchase of marketable securities held to maturity                                  (35,596)     (1,667)
                                                                           --------    --------    --------
    Net cash provided by (used in) investing activities                      30,592     (21,115)     39,997
                                                                           --------    --------    --------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Cost of acquisition of treasury shares                                                           (5,644)
    Exercise of options granted to employees                                    767          13         112
    Early extinguishment of convertible subordinated notes                  (17,825)    (14,488)    (18,479)
                                                                           --------    --------    --------
    Net cash used in financing activities                                   (17,058)    (14,475)    (24,011)
                                                                           --------    --------    --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         11,534     (28,926)       (117)
BALANCE OF CASH AND CASH EQUIVALENTS AT
    BEGINNING OF YEAR                                                        27,557      39,091      10,165
                                                                           --------    --------    --------
BALANCE OF CASH AND CASH EQUIVALENTS AT
    END OF YEAR                                                            $ 39,091    $ 10,165    $ 10,048
                                                                           ========    ========    ========

SUPPLEMENTARY DISCLOSURE OF CASH FLOW
    INFORMATION - CASH PAID DURING THE YEAR FOR:
    Interest                                                               $  6,527    $  3,152    $  1,077
                                                                           ========    ========    ========
    Advances to income tax authorities                                     $     40    $     96    $     95
                                                                           ========    ========    ========
</TABLE>




THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.


                                       F-6
<PAGE>


                           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 that is
               engaged in the design, development, manufacture and marketing of
               advanced telecom equipment, targeting high capacity broadband
               services. In the reported years, substantially all of the
               Company's revenues were derived from the sale of ADSL (Asymmetric
               Digital Subscriber Line) broadband equipment. Revenues from this
               product line have decreased significantly and the Company does
               not expect to derive significant revenues from this product line.

               Orckit has initiated and funded a number of technology projects
               that are being developed by subsidiaries of Orckit, including the
               development, manufacturing and marketing of RPR-based telecom
               equipment by Corrigent Systems, and DSL-based telecom equipment
               by Spediant Systems.

          2)   FUNCTIONAL CURRENCY

               The currency of the primary economic environment in which the
               operations of the Company and its subsidiaries are conducted is
               the U.S. dollar ("dollar"or "$"), since most of their revenues
               were and are expected to be earned in dollars, most purchases of
               materials and components are made in dollars, most of the
               financing activities of the Company are in dollars and most of
               its assets are denominated in dollars.

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

          3)   ACCOUNTING PRINCIPLES

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

          4)   USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS

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


                                       F-7
<PAGE>


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

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

     B.   PRINCIPLES OF CONSOLIDATION

          The consolidated financial statements include the financial statements
          of the Company and its subsidiaries.

          Intercompany balances and transactions have been eliminated.

     C.   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 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.

     D.   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:

<TABLE>
<CAPTION>


                                                                      Years
                                                                      -----
<S>                                                                    <C>
                  Computers, software and equipment                    3-5
                  Office furniture and equipment                      6-16
</TABLE>



               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.

     E.   IMPAIRMENT IN VALUE OF PROPERTY AND EQUIPMENT

          Effective January 1, 2002, the Company adopted FAS 144 "Accounting for
          the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). FAS 144
          require that long-lived assets, held and used by an entity be 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.

     F.   GOODWILL AND OTHER IDENTIFIABLE INTANGIBLE ASSETS

          Prior to January 1, 2002, the Company amortized goodwill and other
          identifiable intangible assets in equal annual installments, over a
          period of 3 years. In addition, the Company accounted for the
          impairment of goodwill and other identifiable intangible assets in
          accordance with FAS 121 "Accounting for the Impairment of Long-Lived
          Assets and for the Long-Lived Assets to be Disposed of". As a result,
          in 2001 the Company wrote off its remaining goodwill and other
          identifiable intangible assets.


                                       F-8
<PAGE>


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

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          Effective January 1, 2002, the Company adopted FAS 142 "Goodwill and
          Other Intangibles Assets". However, the Company had neither goodwill
          nor other identifiable intangible assets in 2002. Accordingly, this
          adoption has no effect on the results of operations for 2002 and 2003.

          The following table illustrates the Company's net income adjusted to
          eliminate the effect of goodwill amortization expense for 2001:


<TABLE>
<CAPTION>

                                         Year Ended December 31
                                   ----------------------------------
                                     2001 *      2002         2003
                                   ---------   ---------   ----------
                                 In Thousands, Except for Per Share Data
                                   ----------------------------------
<S>                                <C>         <C>         <C>
Net income (loss), as reported     $     856   $   4,083   $  (21,616)
Add back - goodwill amortization       2,701         -,-          -,-
                                   ---------   ---------   ----------
Adjusted net income (loss)         $   3,557   $   4,083   $  (21,616)
                                   =========   =========   ==========
Earnings (loss) per share:
    Basic - as reported            $    0.18   $    0.83   $    (4.99)
    Basic - adjusted               $    0.77   $    0.83   $    (4.99)
    Diluted - as reported          $    0.18   $    0.79   $    (4.99)
    Diluted - adjusted             $    0.73   $    0.79   $    (4.99)
</TABLE>



               * The entire unamortized balance of goodwill, in the amount of
               $23.4 million, was written off in 2001, see also note 10i.

     G.   DEFERRED ISSUANCE COSTS

          Issuance costs of convertible subordinated notes, in the original
          amount of $ 4,531,000, are amortized by the straight-line method, in
          proportion to the balance of notes outstanding, over the period from
          issuance date to the maturity date. Upon the retirement of any notes,
          the unamortized balance is adjusted proportionately.

     H.   TREASURY SHARES

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

     I.   REVENUE RECOGNITION

          Revenues from sales of products are recognized when title passes to
          the customer, provided that appropriate signed documentation of the
          arrangement, such as a contract, purchase order or letter of
          agreement, has been received, the fee is fixed or determinable and
          collectibility is reasonably assured.

     J.   PROVISION FOR SERVICING PRODUCTS UNDER 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. The annual provision is calculated as a percentage of
          the sales, based on historical experience.


                                       F-9
<PAGE>


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

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

     K.   RESEARCH AND DEVELOPMENT EXPENSES

          Research and development expenses are charged to income as incurred.
          Governments 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 note 10b.

     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 earning per share is computed by dividing the 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 10k.

          Weighted average number of ordinary shares outstanding used in the
          computation of the basic and diluted net income (loss) per share has
          been calculated after giving retroactive effect in all the reported
          periods to a one-for-five reverse share split effective as of November
          27, 2002 (see note 7a(2)).

     O.   COMPREHENSIVE INCOME

          The Company has no comprehensive income components other than net
          income (loss).

     P.   STOCK BASED COMPENSATION

          The Company accounts 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. Under APB 25, compensation cost for employee stock
          option plans is measured using the intrinsic value based method of
          accounting (see also note 7a(5)). 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
          assuming the Company had accounted for employee stock option grants
          using the fair value-based method defined in FAS 123.


                                      F-10
<PAGE>


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

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          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

<TABLE>
<CAPTION>
                                            Year Ended December 31
                                      -----------------------------------
                                        2001         2002          2003
                                      --------    ---------    ----------
                                    In Thousands, Except for Per Share Data
                                      -----------------------------------
<S>                                   <C>         <C>          <C>
Net income (loss), as reported        $    856    $   4,083    $  (21,616)
Add: stock based employee
    Compensation expense,
    included in reported net income
    (loss)                               3,651        1,540         2,399
Deduct: stock based employee
    Compensation expense
    determined under fair value
    method for all awards              (10,824)      (2,916)       (3,177)
                                      --------    ---------    ----------
Pro forma net income (loss)           $ (6,317)   $   2,707    $  (22,394)
                                      ========    =========    ==========


Earnings (loss) per share:
    Basic - as reported               $   0.18    $    0.83    $    (4.99)
    Basic - pro forma                 $  (1.15)   $    0.55    $    (5.17)
    Diluted - as reported             $   0.18    $    0.79    $    (4.99)
    Diluted - pro forma               $  (1.15)   $    0.52    $    (5.17)
</TABLE>



     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 (see also note 8).

     R.   SHIPPING AND HANDLING FEES AND COSTS

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

     S.   ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF
          BOTH LIABILITIES AND EQUITY

          In May 2003, the FASB issued FAS No. 150, "Accounting for Certain
          Financial Instruments with Characteristics of both Liabilities and
          Equity" (FAS 150). FAS 150 establishes standards for how an issuer
          classifies and measures certain financial instruments with
          characteristics of both liabilities and equity. FAS 150 is effective
          for financial instruments entered into or modified after May 31, 2003,
          and otherwise (except for certain instruments) is effective at the
          beginning of the first interim period beginning after June 15, 2003.
          Effective July 1, 2003, the Company adopted FAS 150. The adoption of
          FAS 150 did not have a material effect on the company's financial
          position or results of operations.


                                      F-11
<PAGE>


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

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

     T.   GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES

          In November 2002, the FASB issued Interpretation No. 45, " Guarantor's
          Accounting and Disclosure Requirements for Guarantees, Including
          Indirect Guarantees of Indebtedness of Others " ("FIN 45"). FIN 45
          requires that a liability be recorded on the guarantor's balance sheet
          upon issuance of a guarantee. In addition, FIN 45 requires disclosures
          about the guarantees that an entity has issued.
          For U.S. GAAP purposes, the company has applied the recognition
          provisions of FIN 45 prospectively to guarantees issued or modified
          after December 31, 2002 as required by the interpretation. The
          recognition provisions of FIN 45 did not have a material effect on the
          company's consolidated financial statements. See note 10e for
          additional disclosures required under FIN 45.

     U.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS:

          1)   FIN 46 AND FIN 46 (REVISED)

               In January 2003, the FASB issued FASB Interpretation No. 46,
               "Consolidation of Variable Interest Entities" (FIN 46). Under FIN
               46, entities are separated into two populations: (1) those for
               which voting interests are used to determine consolidation (this
               is the most common situation) and (2) those for which variable
               interests are used to determine consolidation. FIN 46 explains
               how to identify Variable Interest Entities (VIEs) and how to
               determine when a business enterprise should include the assets,
               liabilities, non controlling interests, and results of activities
               of a VIE in its consolidated financial statements. Since issuing
               FIN 46, the FASB has proposed various amendments to the
               Interpretation and has deferred its effective dates. Most
               recently, in December 2003, the FASB issued a revised version of
               FIN 46 (FIN 46-R), which also provides for a partial deferral of
               FIN 46. This partial deferral established the effective dates for
               public entities to apply FIN 46 and FIN 46-R based on the nature
               of the variable interest entity and the date upon which the
               public company became involved with the variable interest entity.
               In general, the deferral provides that (i) for variable interest
               entities created before February 1, 2003, a public entity must
               apply FIN 46-R at the end of the first interim or annual period
               ending after March 15, 2004, and may be required to apply FIN 46
               at the end of the first interim or annual period ending after
               December 15, 2003, if the variable interest entity is a special
               purpose entity, and (ii) for variable interest entities created
               after January 31, 2003, a public company must apply FIN 46 at the
               end of the first interim or annual period ending after December
               15, 2003, as previously required, and then apply FIN 46-R at the
               end of the first interim or annual reporting period ending after
               March 15, 2004.
               The Company has currently no variable interests in any VIE.
               Accordingly, the Company believes that the adoption of FIN 46 and
               FIN 46-R will not have material impact on its financial position,
               results of operations and cash flows.


                                      F-12
<PAGE>


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

NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (continued):

          2)   FAS 132 (REVISED)

               In December 2003, the FASB issued SFAS No. 132 (revised 2003),
               "Employers' Disclosures about Pensions and Other Postretirement
               Benefits, an amendment of FASB Statements No. 87, 88 and 106, and
               a revision of FASB Statement No. 132 ("FAS 132 (revised 2003)")
               ". This Statement revises employers' disclosures about pension
               plans and other postretirement benefit plans. It does not change
               the measurement or recognition of those plans. The new rules
               require additional disclosures about the assets, obligations,
               cash flows, and net periodic benefit cost of defined benefit
               pension plans and other postretirement benefit plans.
               Part of the new disclosures provisions are effective for 2003
               calendar year-end financial statements, and accordingly have been
               applied by the company in these consolidated financial
               statements. The rest of the provisions of this Statement, which
               have a later effective date, are currently being evaluated by the
               Company.

     V.   RECLASSIFICATIONS

          Certain comparative figures have been reclassified to conform to the
          current year presentation.


NOTE 2 - LONG-TERM LOAN TO A RELATED PARTY

     In 2000, a loan agreement was entered into with Tikcro Technologies Ltd.
     ("Tikcro", previously known as Tioga Technologies Ltd.) as part of the
     spin-off of the Company's semiconductor business to Tikcro. The agreement
     provided for borrowings in the amount of up to $20 million with loans
     bearing interest at rate of approximately 6% per annum. Tikcro borrowed $20
     million under this loan agreement.

     During 2002, Tikcro repaid $ 13.0 million in principal amount of the loan.
     In 2003, Tikcro paid the remaining principal balance outstanding on the
     loan plus accrued interest.


NOTE 3 - PROPERTY AND EQUIPMENT

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


<TABLE>
<CAPTION>

                                           December 31
                                        -----------------
                                        2002           2003
                                        -------   -------
                                           In Thousands
                                        -----------------
<S>                                     <C>       <C>
Cost:
    Computers, software and equipment   $16,090   $16,931
    Office furniture and equipment        1,375     1,380
    Leasehold improvements                2,175     2,190
                                        -------   -------
                                        $19,640   $20,501
                                        -------   -------
Less - accumulated depreciation
    and amortization                     13,570    18,408
                                        -------   -------
                                        $ 6,070   $ 2,093
                                        =======   =======
</TABLE>



                                      F-13
<PAGE>


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

NOTE 3 - PROPERTY AND EQUIPMENT (continued):

     Depreciation expenses totaled $ 4,074,000, $ 3,568,000 and $ 3,039,000 in
     the years ended December 31, 2001, 2002 and 2003, respectively.

     In addition, 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 ADSL product line (see also note 1a)


NOTE 4 - 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 the 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 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, 2002 and 2003 are approximately
          $ 2,150,000 and $ 2,707,000, respectively.

          In several of the Company's agreements, the Company makes regular
          deposits with the insurance companies for securing 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.

     B.   The amounts of pension and severance pay expense were $ 1,001,000, $
          844,000 and $ 776,000 for the years ended December 31, 2001, 2002 and
          2003, respectively, of which $ 15,000 in 2003 was 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 in 2004, $ 900,000 to the insurance
          companies and pension funds, in respect of its severance pay
          liabilities expected for 2004 operations.

NOTE 5 - CONVERTIBLE SUBORDINATED NOTES:

     A.   Under an Offering Memorandum dated March 7, 2000, the Company issued $
          125,000,000 principal amount of convertible subordinated notes (the
          "Notes") that are due on April 1, 2005. The Notes bear interest at an
          annual rate of 5.75% payable April 1 and October 1 of each year.
          Unless previously redeemed, the Notes are convertible by the holder at
          any time through maturity into ordinary shares of the Company and
          Tikcro. The conversion rate is equal to 2.34962 ordinary shares of
          Orckit plus 11.7481 ordinary shares of Tikcro for each $ 1,000
          principal amount of Notes. The Notes are redeemable at the option of
          the Company, in whole or in part, at any time on or after April 1,
          2003 at the redemption price, plus interest accrued to the redemption
          date. Each holder of Notes will have the right to cause the Company to
          purchase all of such holder's Notes in the event of a change of
          control in the Company, for cash or shares, at the election of the
          Company.


                                      F-14
<PAGE>


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

NOTE 5 - CONVERTIBLE SUBORDINATED NOTES (continued):

     B.   EARLY EXTINGUISHMENT OF THE NOTES

          During 2001, 2002 and 2003, the Company retired $ 53.6 million, $ 28.2
          million and $ 22.0 principal amount of the Notes. As of December 31,
          2003, the total principal amount of Notes outstanding was $ 16.2
          million.

          The Company has recorded in financial income gains of $ 34.1 million,
          $ 13.2 million and $ 3.1 million from early extinguishments of Notes
          in the years ended December 31, 2001, 2002 and 2003, respectively.

     C.   In January 2003, the Company repurchased from Clal Electronic
          Industries Ltd. ("Clal"), at the time a related party, 616,590 of
          Orckit's ordinary shares and $12.5 million principal amount of
          Orckit's Notes for a total consideration of approximately $14.7
          million in cash. The Company attributed $11 million of the
          consideration to the principal amount of the Notes and accrued
          interest and $ 3.7 million of the consideration to the repurchase of
          the shares.

     D.   On January 15, 2004, Orckit announced that its Board of Directors had
          approved the redemption of all of the outstanding Notes. The
          redemption price is equal to the principal amount of the Notes plus
          accrued and unpaid interest to the redemption date. The Notes are
          expected to be redeemed in full on April 1, 2004.

NOTE 6 - COMMITMENTS:

     A.   ROYALTY COMMITMENT

          The Company is committed to pay royalties to the Government of Israel
          on proceeds from sales of products 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 or development
          resulting from funded research and development projects, was fixed at
          3% during the first three years and 4-5% thereafter. Royalties are
          payable up to 100% of the amount of such grants, with the addition of
          annual interest based on LIBOR. The total aggregate contingent
          liability of the Company and its subsidiaries in respect of royalties
          to the Government of Israel at December 31, 2003 was approximately $12
          million.

          In the event that any of the manufacturing rights or technology are
          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 pay back amount in the range of 120%
          to 300% of the grants received, based on the applicable project.

     B.   LEASE COMMITMENTS

          The Company has entered into one main operating lease agreement for
          the premises it uses. The Company has an option to terminate this
          agreement by giving a six month notice in advance.
          The projected annual rental payments for 2004, at rates in effect at
          December 31, 2003, are approximately $ 500,000.


                                      F-15
<PAGE>


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

NOTE 7 - 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". As of April
               2002, the Company's ordinary shares also began to trade on the
               Tel-Aviv Stock Exchange.

          2)   REVERSE SHARE SPLIT

               On November 12, 2002, the Company's shareholders approved a
               one-for-five reverse share split, pursuant to which every five
               ordinary shares were combined into one ordinary share. Prior to
               the reverse share split, the shareholders of the Company approved
               an amendment to the Article of Association of the Company,
               changing the Ordinary Shares of NIS 0.10 par value into Ordinary
               Shares with no par value. All share and per share data included
               in these financial statements have been retroactively adjusted to
               reflect the one-for-five reverse share split, which was effective
               as of November 27, 2002. The conversion ratio of the Notes and
               the number of options and their exercise price were adjusted as a
               result of the reverse share split.

          3)   TREASURY SHARES

               During 2003, the Company acquired 881,613 ordinary shares of the
               Company at a cost of $ 5,644,000 (see also note 5c).

          4)   EXERCISE OF OPTIONS

               Under the Employee Share Option Plan (see b. below), options to
               purchase 349,907, 105,466, and 237,368 ordinary shares were
               exercised in the years ended December 31, 2001, 2002 and 2003,
               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,
               600,000 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, 60,000 shares were forfeited and 540,000 shares were
               exchanged to options to purchase shares of subsidiaries. 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, of which in 2003 approximately $1.3 was amortized. 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 that employees received was zero.


                                      F-16
<PAGE>


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


NOTE 7 - SHAREHOLDERS' EQUITY (continued):

     B.   EMPLOYEE SHARE OPTION PLAN:

          1)   On February 18, 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 2,198,047 at December 31,
               2003, of which options to purchase 132,007 and 457,723 shares, at
               December 31, 2002 and 2003, respectively, were available for
               future grant. With respect to options
               outstanding at December 31, 2003, see (2) below. Each option can
               be exercised to purchase one ordinary share having the same
               rights as the other ordinary shares. The shares underlying these
               options were registered with the United States Securities and
               Exchange Commission.

               The options usually vest linearly over a period of up to 5 years
               as determined on the date of grant.

          2)   A summary of the status of the Plan as of December 31, 2001, 2002
               and 2003, and changes during the years ended on those dates is
               presented below.


<TABLE>
<CAPTION>

                                                                Year Ended December 31
                                          ---------------------------------------------------------------------
                                                2001(1)                  2002                        2003
                                          -------------------   ------------------------    -------------------
                                                       Weighted                Weighted                  Weighted
                                                       Average                 Average                   Average
                                                       Exercise                Exercise                  Exercise
                                            Number      Price     Number        Price         Number      Price
                                          ----------    -----   ----------    ----------    ----------    -----
<S>                                        <C>          <C>        <C>        <C>              <C>        <C>
Options outstanding at beginning
    of year                                1,257,537    $10.2      829,429    $      6.7       837,723    $ 7.2
Changes in options during the year:
    Granted, at market value                 255,420    $ 5.0      190,000    $      3.6       232,500    $ 3.5
    Exercised                               (349,907)   $ 2.3     (105,466)                   (237,368)   $ 0.5
    Forfeited                               (333,621)   $23.2      (76,240)   $      1.7      (158,216)   $ 4.2
                                          ----------            ----------                  ----------
Options outstanding at year-end              829,429    $ 6.7      837,723    $      7.2       674,639    $ 9.0
                                          ==========            ==========                  ==========
Options exercisable at year-end              327,355    $12.3      431,903    $     10.8       399,411    $12.9
                                          ==========            ==========                  ==========
Weighted average fair value of
    options granted during the year (2)                 $ 7.5                 $      3.8                  $ 4.0
                                                        =====                 ==========                  =====
</TABLE>


               (1)  In 2001, options to purchase 720,000 shares granted during
                    2001 and earlier years, with a weighted average exercise
                    price of $30.50 per share, were re-priced to the par value
                    of the ordinary shares.

               (2)  The fair value of each option grant is estimated on the date
                    of grant, inter alia, using the Black-Scholes option-pricing
                    model with the following weighted average assumptions:
                    Dividend yield is 0% for all years, expected volatility:
                    2001 - 115%; 2002 - 81%; 2003 - 59%. Risk-free interest
                    rate: 2001 - 4.00%; 2002 - 4.00%; 2003 1.5% and average
                    expected life of approximately 3 years.


                                      F-17
<PAGE>


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

NOTE 7 - SHAREHOLDERS' EQUITY (continued):

          3)   The following table summarizes information about options
               outstanding at December 31, 2003:
<TABLE>
<CAPTION>

                           Options Outstanding                                      Options Exercisable
---------------------------------------------------------------------     ------------------------------------
                    Number             Weighted                               Number
                Outstanding At         Average          Weighted           Exercisable At         Weighted
   Range of       December 31,         Remaining         Average             December 31,         Average
Exercise Price      2003 (1)       Contractual Life    Exercise Price           2003           Exercise Price
--------------      --------       ----------------    --------------           ----           --------------
   $                                     YEARS                $                                       $
   -                                     -----                -                                       -
<S>                 <C>                   <C>              <C>                 <C>                   <C>
  0                 200,318               6.2                  0               158,493                  0
 3-7                265,840               9.4                3.5                49,570                3.5
 8-15                36,000               8.3                8.3                19,375                8.3
20-30                83,759               4.4               21.6                83,760               21.6
30-60                88,722               5.6               34.1                88,213               34.1
                    -------                                                    -------
                    674,639                                  9.0               399,411               12.9
                    =======                                                    =======
</TABLE>


               (1)  Including options to purchase 200,000 ordinary shares at a
                    weighted average exercise price of $3.1 that were granted to
                    directors of the Company.

     C.   GRANT OF STOCK AND OPTION PLANS OF SUBSIDIARIES

          The Board of Directors of the Company's subsidiaries, Corrigent
          Systems and Spediant Systems, approved employee share option plans
          (the "Corrigent Subsidiary Plan", the "Spediant Subsidiary Plan", and
          together, the "Subsidiaries Plans"). Each of Corrigent Systems and
          Spediant Systems has granted, and reserved for grant, shares and
          options under its respective Subsidiary Plan and other plans, 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, 2003, on a fully
          diluted basis, Orckit `s holding in each of Corrigent and Spediant was
          approximately 70%.

          The intrinsic value and the weighted fair value of options granted by
          the subsidiaries is $ 0. Accordingly, no compensation expense in
          respect of the options granted was recorded other than $ 1.3 million
          amortization of compensation measured upon exchange of Orckit shares,
          see a(5) above.

     D.   DIVIDENDS

          In the event cash dividends are declared by the Company, such
          dividends will be declared and paid in Israeli currency.


                                      F-18
<PAGE>


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


NOTE 7 - 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 generally 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 8 - 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 its enterprise, the Company 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 which the Company earns taxable income from the approved
               enterprise, subject to certain limitations. Income derived from
               the approved enterprise is tax exempt for a period of 2 years,
               after which the income from these enterprises is taxable at the
               rate of 25% for 5 years, the remainder of the period of tax
               benefits.

          2)   CONDITIONS FOR ENTITLEMENT TO THE BENEFITS

               The entitlement to the above benefits is conditional upon the
               Company's 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.


                                      F-19
<PAGE>


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


NOTE 8 - TAXES ON INCOME (continued):

     B.   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(3), 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.

     C.   TAX RATES APPLICABLE TO INCOME FROM OTHER SOURCES:

          1)   INCOME FROM OTHER SOURCES IN ISRAEL

               Income not eligible for approved enterprise benefits mentioned in
               a. above is taxed at the statutory corporate rate of 36%.

          2)   INCOME OF NON-ISRAELI SUBSIDIARIES

               Non-Israeli subsidiaries are taxed according to the tax laws in
               their countries of residence.

     D.   DEFERRED INCOME TAXES

          At December 31, 2003, the Company and it subsidiaries had accumulated
          tax losses amounting to approximately $ 130 million (December 31, 2002
          - approximately $88 million) and carryforward capital losses for tax
          purposes of approximately $ 40 million (December 31, 2002 - $ 35
          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, hence accumulated tax losses in each of the
          entities can offset future taxable business income in the entity they
          were generated.

          At December 31, 2003, the Company and its subsidiaries had net
          deferred tax asset (mostly in respect of carryforward losses and
          capital losses), in the amount of approximately $ 44 million (December
          31, 2002 - approximately $40 million; December 31, 2001 -
          approximately $36 million). A valuation allowance for the entire
          amount of such asset was set up, and consequently no deferred tax
          asset is recorded in the balance sheet, since it is more likely than
          not that the deferred tax assets will not be realized in the
          foreseeable future.


                                      F-20
<PAGE>


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


NOTE 8 - TAXES ON INCOME (continued):

     E.   TAX RATE RECONCILIATION

          In 2003, the main reconciling item from the statutory tax rate of the
          Company (36%, representing a theoretical tax benefit of approximately
          $ 8 million) to the effective tax rate (0%) is the non-recognition of
          tax benefits in respect of tax losses incurred in the reported year.
          In 2002 and 2001, the main reconciling item from the statutory tax
          rate of the Company (36%, representing theoretical tax expenses of
          approximately $ 1.5 million and $300,000 respectively) to the
          effective tax rate (0%) is the utilization of carryforward tax losses
          for which deferred taxes were not created in previous years.

     F.   TAX ASSESSMENTS

          The Company has received final assessments through the year ended
          December 31, 2000.


NOTE 9 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT:

     A.   BALANCES IN NON-DOLLAR CURRENCIES:

          1)   As follows:
<TABLE>
<CAPTION>
                         December 31, 2003
                         -----------------
                           in Thousands
                           ------------
<S>                           <C>
                Assets        4,979
                              -----
                Liabilities   8,290
                              =====
</TABLE>



               The above mainly represents balances in Israeli currency.

          2)   Data regarding the rate of exchange and the Israeli CPI:
<TABLE>
<CAPTION>

                                                                          Year Ended December 31
                                                                       ----------------------------
                                                                       2001         2002      2003
                                                                       -----        -----     -----
<S>                                                                     <C>        <C>        <C>
                Rate of devaluation (evaluation) of the Israeli
                    Currency against the dollar                         9.3%       7.3%      (7.6)%
                Rate of increase (decrease) in the Israeli CPI          1.4%       6.5%      (1.9)%
                Exchange rate at end of year - $ 1=                  NIS 4.416  NIS 4.737  NIS 4.379
</TABLE>

     B.   FAIR VALUE OF FINANCIAL INSTRUMENTS

          The fair value of financial instruments included in working capital
          and of the Notes 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 10a(2).


                                      F-21
<PAGE>


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


NOTE 9 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):

     C.   CONCENTRATIONS OF CREDIT RISKS

          At December 31, 2002 and 2003, primarily all of the Company's and its
          subsidiaries' cash and cash equivalents were held by Israeli and
          International bank institutions. Primarily all of the Company's
          marketable securities were held by international bank institutions.
          Such securities represented debentures issued by a number of
          corporations. The Company evaluates on a current basis its financial
          exposure with any financial institution or commercial issuer.

          The Company is of the opinion that the exposure to credit risk
          relating to trade receivables is limited. An appropriate allowance for
          doubtful accounts is included in the accounts.


NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

     BALANCE SHEETS:

     A.   MARKETABLE SECURITIES:

          1)   TRADING SECURITIES

               At December 31, 2003, the Company held trading securities in the
               amount of $ 20.5 million (December 31, 2002 - $ 25.1 million).
               These securities are classified as short-term investments.

          2)   HELD-TO-MATURITY TRADABLE SECURITIES

               The securities mature over the following years:
<TABLE>
<CAPTION>

                                                           December 31
                                                       -----------------
                                                         2002      2003
                                                       -------   -------
                                                          in Thousands
                                                       -----------------
                                                        Carrying Amounts
                                                       -----------------
<S>                                                    <C>       <C>
                Classified as short-term investments   $16,856   $10,054
                Due after 1 year up to 4 years          46,576    31,160
                                                       -------   -------
                                                       $63,432   $41,214
                                                       =======   =======
</TABLE>


               At December 31, 2003, the fair value of the Company's
               held-to-maturity tradable securities is $ 42.2 million (December
               31, 2002 - $ 64.1 million). The difference between the carrying
               amounts and the fair value is a result of unrealized gains in the
               amount of approximately $1 million (December 31, 2002 -
               $700,000).


                                      F-22
<PAGE>


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


NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>

                                                                 December 31
                                                               ------------------
                                                                2002        2003
                                                               -------    -------
                                                                  in Thousands
                                                               ------------------
<S>                                                            <C>        <C>
        B. TRADE RECEIVABLES:

                      Open accounts                            $   869    $   230
                      Less - allowance for doubtful accounts        83         83
                                                               -------    -------
                                                               $   786    $   147
                                                               =======    =======
                  Allowance for doubtful accounts:
                      Balance at beginning of year             $   549    $    83
                      Increase (decrease) during the year         (466)
                                                               -------    -------
                      Balance at end of year                   $    83    $    83
                                                               =======    =======
        C. OTHER RECEIVABLES

                      Employees and employee institutions      $   133    $    63
                      Government of Israel                         813        996
                      Prepaid expenses                             778        493
                      Sundry                                       719         44
                                                               -------    -------
                                                               $ 2,443    $ 1,596
                                                               =======    =======
</TABLE>


     D.   BANK DEPOSITS

               At December 31, 2003, the Company had short-term bank deposits -
               denominated in dollars in the amount of $ 300,000, and long-term
               bank deposits - denominated in dollars and bearing annual
               interest at a fixed rate of 4.42% - in the amount of $ 6.3
               million.

     E.   ACCRUED EXPENSES AND OTHER PAYABLES:

<TABLE>
<CAPTION>

                                                                      December 31
                                                                    ---------------
                                                                     2002     2003
                                                                    ------   ------
                                                                      in Thousands
                                                                    ---------------
<S>                                                                 <C>      <C>
                Employees and employee institutions                 $1,375   $2,088
                Provision for vacation pay                           1,654    2,162
                Provision for servicing products under warranty *    1,218      434
                Accrued royalties                                      772      122
                Accrued interest                                       549      233
                Sundry                                               1,590      839
                                                                    ------   ------
                                                                    $7,158   $5,878
                                                                    ======   ======
</TABLE>




                                      F-23
<PAGE>


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


NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

<TABLE>
<CAPTION>

                                                                                December 31
                                                                            ------------------
                                                                              2002      2003
                                                                            -------    -------
                                                                               in Thousands
                                                                            ------------------
<S>                                                                         <C>        <C>
        * The changes in the balance during the year:
                 Balance at beginning of year                               $ 2,330    $ 1,218
                 Payments made under the warranty                              (122)       (98)
                 Product warranties issued for new sales                        658         34
                 Changes in accrual in respect of pre-existing warranties    (1,648)      (720)
                                                                            -------    -------
                 Balance at end of year                                     $ 1,218    $   434
                                                                            =======    =======
</TABLE>


     STATEMENTS OF OPERATIONS:

     F.   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:

<TABLE>
<CAPTION>

                                      Year Ended December 31
                                  ------------------------------
                                    2001       2002        2003
                                  --------   --------   --------
                                          in Thousands
                                  ------------------------------
<S>                               <C>        <C>        <C>
                Israel            $  2,268   $    463   $     35
                United States      111,336     44,811
                Europe              23,319      7,601      1,510
                Other countries      4,724        545        138
                                  --------   --------   --------
                                  $141,647   $ 53,420   $  1,683
                                  ========   ========   ========
</TABLE>


               Most of the Company's property and equipment are located in
               Israel.

               2)   Revenues from principal customers - revenues from single
                    customers each of which exceeds 10% of total revenues in the
                    relevant year:


<TABLE>
<CAPTION>

                                 Year Ended December 31
                             ------------------------------
                               2001       2002        2003
                             --------  --------   --------
                                     in Thousands
                             ------------------------------
<S>                          <C>       <C>       <C>
                Customer A   $ 111,208   $ 43,912
                               =======     ======
                Customer B   $ 20,973    $  7,209   $   530
                               =======     ======     =====
</TABLE>


                                      F-24
<PAGE>


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

NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):

     G.   COST OF REVENUES:
<TABLE>
<CAPTION>

                                                                  Year Ended December 31
                                                              ------------------------------
                                                                2001       2002       2003
                                                              --------   --------   --------
                                                                       in Thousands
                                                              ------------------------------
<S>                                                           <C>        <C>        <C>
                      Materials consumed, subcontractors
                          and other production expenses (*)   $ 84,136   $ 27,702   $    533
                      Payroll and related expenses               3,517      1,207
                      Depreciation                                 631        174        199
                      Decrease in inventories of products
                          in process and finished products      23,723      3,274
                      Other                                                   606         16
                                                              --------   --------   --------
                                                              $112,007   $ 32,963   $    748
                                                              ========   ========   ========
     H.   RESEARCH AND DEVELOPMENT EXPENSES - NET:
                 Total expenses                               $ 22,429   $ 22,266   $ 20,803
                 L e s s - grants and participations,
                     see note 7                                  3,344      2,975      5,800
                                                              --------   --------   --------
                                                              $ 19,085   $ 19,291   $ 15,003
                                                              ========   ========   ========
</TABLE>


          (*)  Including purchases from Tikcro, which amount to $ 1,418,000 and
               $ 200,000 for the years ended December 31, 2001 and 2002,
               respectively.

     I.   AMORTIZATION AND IMPAIRMENT OF GOODWILL

          In 2001, the Company elected to halt operations of an acquired
          subsidiary and filed a request in the Israeli district court for
          liquidation of its assets and debts. As a result, an amount of $23.4
          million which represented all outstanding unamortized goodwill and
          other intangible assets was written off by the Company.

     J.   FINANCIAL INCOME - NET:
<TABLE>
<CAPTION>

                                                                    Year Ended December 31
                                                                 ----------------------------
                                                                  2001       2002     2003
                                                                 -------   -------   -------
                                                                         in Thousands
                                                                 ----------------------------
<S>                                                              <C>       <C>       <C>
                Income:
                    Interest on bank deposits                    $ 3,184   $ 1,207   $   557
                    Gain and interest on marketable securities     2,567     3,819     2,883
                    Gain from early extinguishments of notes      34,108    13,199     3,125
                    Interest on long-term loan (see note 2)                  2,885       114
                    Other                                            595       198        62
                                                                 -------   -------   -------
                                                                 $40,454   $21,308   $ 6,741
                                                                 =======   =======   =======
</TABLE>


                                      F-25
<PAGE>


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

NOTE 10 - SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION (continued):
<TABLE>
<CAPTION>

                                                                 Year Ended December 31
                                                               ---------------------------
                                                                2001      2002      2003
                                                               -------   -------   -------
                                                                     in Thousands
                                                               ---------------------------
<S>                                                            <C>       <C>       <C>
                Expenses:
                    Interest in respect of convertible
                        subordinated notes                     $ 5,862   $ 3,086   $ 1,114
                    Amortization of convertible subordinated
                        notes issuance costs                       710       393       139
                    Other (mainly currency transaction
                        gains and losses) - net                    487       213       380
                                                               -------   -------   -------
                                                                 7,059     3,692     1,633
                                                               -------   -------   -------
                                                               $33,395   $17,616   $ 5,108
                                                               =======   =======   =======
</TABLE>


     K.   NET INCOME (LOSS) PER SHARE
<TABLE>
<CAPTION>

                                                                       Year Ended December 31
                                                                   ------------------------------
                                                                     2001       2002       2003
                                                                   --------   --------   --------
                                                                            in Thousands
                                                                   ------------------------------
<S>                                                                <C>        <C>        <C>
                Numerator - Basic
                    Net income (loss)                              $    856   $  4,083   $(21,616)
                                                                   ========   ========   ========
                Denominator - Basic
                    Weighted average ordinary shares outstanding
                        (net of treasury shares)                      4,632      4,932      4,332
                                                                   ========   ========   ========

                Basic net income (loss) per share                  $   0.18   $   0.83   $  (4.99)
                                                                   ========   ========   ========
                Numerator - Diluted                                $    856   $  4,083   $(21,616)
                                                                   ========   ========   ========
                Denominator - Diluted
                    Weighted average ordinary shares outstanding      4,632      4,932      4,332
                    Dilutive potential of ordinary shares
                        equivalents - options                           243        231
                                                                   --------   --------   --------
                                                                      4,875      5,163      4,332
                                                                   ========   ========   ========
                Diluted net income (loss) per share                $   0.18   $   0.79   $  (4.99)
                                                                   ========   ========   ========
</TABLE>


          The potential effect of the convertible subordinated notes was not
          taken into account, since its effect is anti-dilutive. In 2003, the
          potential effect of the options was not taken into account, since its
          effect is anti-dilutive.



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

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

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


                                      F-26

<PAGE>

                        REPORT OF INDEPENDENT AUDITORS ON
                          FINANCIAL STATEMENT SCHEDULE




To the Board of Directors of
ORCKIT COMMUNICATIONS LTD.


Our audits of the consolidated financial statements of Orckit Communications
Ltd. referred to in our report dated February 22, 2004 also included an audit of
a Schedule - Valuation and Qualifying Accounts for each of the three years in
the period ended December 31, 2003 (the "Schedule"). In our opinion, the
Schedule presents fairly in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.




Tel-Aviv, Israel                                 /s/ Kesselman & Kesselman
    February 22, 2004                      Certified Public Accountants (Israel)













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


                                      F-27

<PAGE>

                           ORCKIT COMMUNICATIONS LTD.
                  SCHEDULE - VALUATION AND QUALIFYING ACCOUNTS
                       Three Years Ended December 31, 2003
                              (U.S. $ In thousands)




<TABLE>
<CAPTION>

                 Column a                       Column B       Column C       Column D          Column E
                 --------                       --------       --------       --------          --------
                                                Balance At    Additions                          Balance
                                               Beginning of   Charged to                        At End of
                                                  Period       Expenses       Deductions         Period
                                                --------       --------       --------          --------
<S>                                               <C>           <C>            <C>                <C>

Allowance for doubtful accounts:
    Year ended December 31, 2003                  $  83         $  63          $  (63)            $  83
                                                   ====          ====           =====              ====
    Year ended December 31, 2002                  $ 549                        $ (466)            $  83
                                                   ====                         =====              ====
    Year ended December 31, 2001                  $ 150         $ 399                             $ 549
                                                   ====          ====                              ====
</TABLE>











                                      F-28

<PAGE>

                           ORCKIT COMMUNICATIONS LTD.
                                  EXHIBIT INDEX

<TABLE>
<CAPTION>

   Exhibit
   Number                                                Title
   ------                                                -----

<S>            <C>
4.7            Spediant Stock Option Plan

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

8.1            Subsidiaries of Orckit Communications Ltd.

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

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

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

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

14.1           Consent of Kesselman & Kesselman, independent auditors of Orckit Communications Ltd.

</TABLE>