---

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# UNITED STATES

# SECURITIES AND
EXCHANGE COMMISSION

# WASHINGTON, D.C. 20549

# FORM 20  F

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

# OR

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

| | For
the fiscal year ended December 31, 2004
| | -------------------------------------------

# OR

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

| | For
the transition period from  ___________________ to ___________________
Commission file
number 0-28724
| | ---------------------------------------------------------------------------------------------------------



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

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

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

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

|Title of each class
None | Name of each exchange on which registered
|------------------------ | -----------------------------------------
|                         |                                          

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

|Ordinary Shares, No Par Value
|-----------------------------
|                             
|(Title of Class)             

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

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

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

As
of December 31, 2004, the Registrant had outstanding 4,394,382 Ordinary Shares, no par
value.

Indicate
by check mark whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes x
Noo

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

Item 17 o     Item 18 x



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# PART I

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

|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS
|------- | -----------------------------------------------------

| | Not
applicable
| | --------------

|ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE
|------- | ---------------------------------------

| | Not
applicable
| | --------------

|ITEM 3. | KEY INFORMATION
|------- | ---------------

|A. | SELECTED
FINANCIAL DATA
|-- | -----------------------

The
following selected consolidated financial data as of December 31, 2003 and 2004 and each
of the years ended December 31, 2002, 2003 and 2004 are derived from our audited
consolidated financial statements set forth elsewhere in this Annual Report, which have
been prepared in accordance with generally accepted accounting principles in the United
States. The selected consolidated financial data for the years ended December 31, 2000 and
2001 and as of December 31, 2000, 2001 and 2002 are derived from audited consolidated
financial statements not appearing in this Annual Report. The selected consolidated
financial data set forth below should be read in conjunction with Item 5. Operating
and Financial Review and Prospects and the consolidated financial statements and the
notes thereto and the other financial information appearing elsewhere in this Annual
Report.

On
June 30, 2000, our business was formally divided into two separate companies: (i) Tikcro
Technologies Ltd. (formerly named Tioga Technologies Ltd.), an Israeli company, to which
we transferred substantially allof our former semiconductor business, and (ii)
Orckit, which continued to own and operate the telecom equipment businesses. As part of
the spin-off, we transferred to Tikcro substantially all the assets and liabilities
constituting our semiconductor business in exchange for Tikcro ordinary shares, and
distributed all of those Tikcro shares as a stock dividend to our shareholders on a share
for share basis. The results of Tikcro are included in our financial statements through
June 30, 2000.

All
share and share price information in this Annual Report has been adjusted to give
retroactive effect to (i) an adjustment allocating 44% of our share price to each share of
Orckit and 56% of our share price to each share of Tikcro for all periods prior to our
spin-off of Tikcro on June 30, 2000 and (ii) a one-for-five reverse split of our ordinary
shares that became effective as of November 27, 2002.

On
February 28, 2005, we announced that our Board of Directors had approved a three-for-one
stock split of our ordinary shares. This split is subject to the approval by our
shareholders of an increase in our authorized share capital from 10,000,000 to 50,000,000
shares. Assuming shareholder approval at a Special Meeting of Shareholders to be held on
March 31, 2005, we expect that the stock split will occur in April 2005. All share and
share price information that we provide after the effective date of the split will be
adjusted to give retroactive effect to this proposed three-for-one stock split.



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|                                  | 2000 | 2001 | 2002 | 2003     | 2004
|--------------------------------- | ---- | ---- | ---- | -------- | ----
|
|
|
|
|Revenues                          |      |      | $    | 131,867  |     
|Cost of revenues                  |      |      |      | 133,671  |     
|                                  |      |      |      |          |     
|Gross profit (loss)               |      |      |      | (1,804   | )   
|                                  |      |     
|Research and development expenses |      |      |      | 31,970   |     
|                                  |      |     
|Less grants                       |      |      |      | 1,110    |     
|Research and development          |      |     
|expenses, net                     |      |      |      | 30,860   |     
|Selling, general and              |      |     
|administrative expenses           |      |      |      | 33,561   |     
|                                  |      |     
|Acquisition of research and       |      |     
|development In-process            |      |      |      | 28,976   |     
|Amortization and impairment of    |      |     
|goodwill                          |      |      |      | 14,334   |     
|Operating loss                    |      |      |      | (109,535 | )   
|Financial income, net             |      |      |      | 1,975    |     
|Other income                      |      |      |      | 906      |     
|                                  |      |      |      |          |     
|Net income (loss)                 |      |      | $    | (106,654 | )   
|                                  |      |     
|Net income (loss) per share -     |      |     
|basic                             |      |      | $    | (24.6    | )   
|Net income (loss) per share -     |      |     
|diluted                           |      |      | $    | (24.6    | )   
|Weighted average number of        |      |     
|ordinary shares                   |      |     
|outstanding-basic                 |      |      |      | 4,332    |     
|Weighted average number of        |      |     
|ordinary shares                   |      |     
|outstanding-diluted               |      |      |      | 4,332    |     

3

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

---

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

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

| | Not
applicable
| | --------------

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

| | Not
applicable
| | --------------

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

We
believe that the occurrence of any one or some combination of the following factors could
have a material adverse effect on our business, financial condition and results of
operations.

Risks Relating to Our Business and Industry

We have a history of substantial
losses and might not become profitable .

During
2002, 2003 and 2004, we incurred aggregate operating losses of approximately $61.9
million. We also incurred significant operating losses in the years prior to 2002. We
incurred a significant portion of our operating losses during the period through 2002 when
our primary business was the sale of asymmetric digital subscriber line, or ADSL,
products. We no longer sell these products. Since 2001 we have invested significant funds
in technology projects, mainly for new telecom equipment products addressing high
transmission of data for the metropolitan area, through our Corrigent subsidiary. We may
not be able to achieve profitability. We only began to recognize significant revenues from
sales of these products in the second half of 2004. Even if we are able to recognize
enough revenues to achieve profitability, we may not be able to sustain it.

4

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

Almost
all of our revenues in 2004 were the result of the first commercial sales of our metro
products, the Corrigent CM-100, with approximately 81.5% of our revenues derived from
sales of these products to KDDI, a Japanese telecom carrier. We expect that substantially
all of our revenues in 2005 will be comprised of sales of Corrigent CM-100 products to
KDDI. We do not know for how long a period of time KDDI will continue to purchase products
from us. The loss of this customer, or a significant decrease in revenues from it, would
have a material adverse effect on our results of operations. We will need to make sales to
additional customers and development additional products to be able to sustain
profitability for any period of time.

We depend of a third party
distributor in Japan for the sale of our products. If this distributor does not succeed in
selling our products, or if we are not able to maintain our relationship with it, our
results of operations will suffer.

Our
sales of products to KDDI are made through Net One Systems Co., Ltd., a distributor
located in Japan. We are dependent on Net Ones marketing and sales efforts to
convince KDDI and other customers or end-users in Japan to purchase our products. If Net
One terminates or adversely changes its relationship with us, we may be unsuccessful in
replacing them. The loss of this distributor could impair our ability to sell our products
and materially adversely affect our results of operations.

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

Sales
of the Corrigent CM-100 product line are dependent on the capital equipment plans of
telecom carriers for metro network equipment. The purchasing patterns of telecom carriers
for this type of expansion project are subject to high volatility. While product
selections and subsequent deliveries may last several years, the purchasing pattern during
the deployment period is highly uncertain and accordingly, our revenues are likely to be
subject to high volatility.

Substantially all of our sales are
currently being made in Japan. We have minimal experience in selling and servicing
products in Japan, which could materially adversely impact our results of operations.

Substantially
all of our sales are currently being made in Japan, a country in which we do not have any
prior sales experience. Telecom equipment sales in Japan are subject to high quality and
strict delivery requirements. We have no experience in making sales into the Japanese
market and could face business requirements for quality, delivery, service and support
that we will not meet. Since significantly all of our sales in 2005 are expected to be in
Japan, failure to meet these requirements could have a material adverse effect on our
results of operations.

5

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

Service
applications that drive the demand for our metro telecommunication products are related to
the offering of television services and other media services by telecommunication carriers
over data networks. These type of services require very high bandwidth for packet-based
transmissions and, as a result, require an upgrade of metropolitan, or metro, network
equipment and access equipment. The availability of these services is very limited today.
It is expected that these services will emerge first with carriers in Asia and in later
stages by carriers in Europe and the United States. The launch of these services requires
significant capital investment in equipment by telecom carriers in the access and metro
networks for a range of products, as well as for content packages to be provided by the
telecommunication carriers. Delays in the launch of these services or slow subscriber
additions to these services, will likely have an adverse effect on the demand for our
metro products.

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

The
global economic deterioration and economic uncertainty in the telecommunications market
resulted in a curtailment of capital investment by telecommunications carriers and service
providers beginning late in 2000 and continuing into 2003. There is still uncertainty with
respect to the direction of the economy and the telecommunications market. A trend towards
consolidation of telecommunication carriers in the United States is expected to reduce the
number of telecommunication equipment vendors and to increase price pressures. Capital
investment by wireline telecom carriers in 2004 with respect to metro networks moderately
exceeded 2003 levels. We are uncertain as to whether the improvement in technology
spending will continue. A slow capital investment environment in Asia, the United States
and Europe is likely to have negative effect on the demand for new technologies and new
types of equipment. This could have an adverse affect on us as we attempt to sell our new
products. The prior decline in technology spending and capital expenditures reduced our
revenues and, if recent trends of improvement reverse, there would like be a material
adverse effect of our results of operations.

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

We
continue to fund Corrigents development of telecom solutions capable of supporting
high bandwidth services in telecommunications networks located in metropolitan areas. The
majority of our operating expenses in 2004 were related to this effort. We could generate
negative cash flow from operations if revenues are not high enough to fund these operating
expenses. Accordingly, our financing of Corrigents operations could reduce our cash
balances and impede our ability to develop new products in addition to the Corrigent
CM-100 product line.

# We may need additional
financing to continue our growth.

To
the extent that we cannot fund our activities through our existing resources, we may need
to raise funds through public or private financing. We may be unable to obtain additional
financing on acceptable terms or at all and we may have to significantly curtail our
operations. To obtain funds through arrangements with strategic partners or others, we may
need to relinquish rights to certain of our technologies or potential markets.

6

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---

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

The
markets for products by Corrigent are dependant on resilient packet ring, or RPR, and
multi protocol label switching, or MPLS, technologies. They are also dependent on the need
to support legacy services and new data services over a single unified metro network. The
market for products based on RPR and MPLS technologies in the metropolitan area may not
fully develop, whether as a result of competition, alternative technologies, such as
Ethernet over fiber in the metro area, changes in technology, product standards or
otherwise. Our success depends on the acceptance of the products and technologies of
Corrigent. We have no control over the development of these target markets. Even if our
technologies are accepted, relationships with providers of telecommunications services
must be developed in order to be successful. Furthermore, competing technologies in the
targeted areas may be utilized in the majority of such target markets. This would leave
Corrigent with a small market to address.

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

Industry-wide
standards for RPR and MPLS were adopted or are in advanced stages of industry adoption.
The adoption of standards different from those currently used by us could result in us
having to incur additional time and expense to have our products comply with these
standards. Standards may be adopted by various industry groups or may be proprietary and
nonetheless accepted broadly in the industry. The failure to support evolving standards
could limit acceptance of our products. Since these products will be integrated into
networks consisting of elements manufactured by various companies, they must support a
number of current and future industry standards and practices. It may take us a
significant amount of time to develop and design products incorporating these new
standards. We may also have to pay licensing fees to the developers of the technologies
that constitute newly adopted standards.

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

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

7

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

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

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

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

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

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

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

The
market for our products is characterized by:

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

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

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

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

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

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

Our quarterly results of
operations have fluctuated significantly in the past, and these fluctuations might
continue.

The
following factors have affected our quarterly results of operations in the past and are
likely to affect our quarterly results of operations in the future:

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

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

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

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

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

8

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

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

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

| |  | funding
required for the operations of Corrigent;
| | - | -------------------------------------------------

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

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

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

Telephone
companies typically require prompt delivery of products. Sales are typically shipped in
the same quarter in which we receive a purchase order. As a result, we are required to
maintain or have available sufficient inventory levels or make advance lengthy lead-time
component orders to satisfy anticipated demand on a timely basis. Rapid technological
change, evolving industry standards or shifts in demand can also result in shorter life
cycles for our inventory. This increases the risk of decreases in selling prices,
inventory obsolescence and associated write-offs, all of which could adversely affect our
results of operations.

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

The
market for our products is intensely competitive, and we expect competition to increase in
the future. Many of our current and potential competitors are large and established
companies and have better name recognition and greater financial, technical,
manufacturing, marketing and personnel resources than we have. Increased competition could
adversely affect our future revenues and ability to become profitable on an operating
basis through pricing pressure, loss of market share and other factors.

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

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

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

9

---

---

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

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

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

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

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

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

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

We
obtain a number of key semiconductor components used in our products from single source
providers. In order to have an adequate supply of components with a long lead-time for
delivery, we have ordered significant quantities of components from our single source
supplier in advance of receiving a purchase order from our customer. A shortage in the
supply of key semiconductor and other components could affect our ability to manufacture
and deliver our products and result in lower revenues. We may be unable to find
alternative sources in a timely manner, if at all, if any of our single source suppliers
were unwilling or unable to provide us with key components. In addition, supply from
single source suppliers limits our ability to purchase components at competitive prices
and in many cases requires us to maintain higher inventory levels. This increases our need
for working capital and increases the risk of an inventory write-off. If we cannot obtain
sufficient key components as required, or develop alternative sources if and as required
in the future, product shipments may be delayed or reduced. This could adversely affect
our end-user relationships, business and results of operations.

10

---

---

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

Any
significant product returns or claims under our purchase orders could have a material
adverse effect on our business and results of operations. We offer complex products that
may contain errors, defects or failures when introduced or as new versions are released.
If we deliver products with defects, errors or bugs or if we undergo a product recall as a
result of errors or failures, market acceptance of our products could be lost or delayed
and we could be the subject of substantial negative publicity. This could have a material
adverse effect on our business and results of operations. We commenced commercial sales of
our metro product in the second half of 2004. Because of the recent deployment of these
products, we cannot predict the level or expense of warranty claims that we will
experience. We have agreed to indemnify our customers in some circumstances against
liability from defects in the products sold by us and expect to continue to provide a
similar indemnity in connection with future sales. In some cases our indemnity also covers
indirect damages. Product liability claims could seriously harm our business, financial
condition and results of operations.

# We are subject to
international business risks.

We
have sold our Corrigent products mainly in Japan and are marketing our products primarily
in Asia, the United States and Europe. Accordingly, we are subject to the risks inherent
in international business, including:

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

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

| |  | tariffs
and other trade barriers;
| | - | ---------------------------------

| |  | local
taxation;
| | - | ---------------

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

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

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

We
depend on a limited number of key personnel who would be difficult to replace. If we lose
the service of these individuals, our business will be harmed.

Orckits
growth and success largely depends on the managerial and technical skills of members of
senior management. If any of them is unable or unwilling to continue with us, our results
of operations could be materially and adversely affected.

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

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

11

---

---

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

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

# We face foreign exchange
currency risks.

We operate in a number of territories
and, although our prices are determined in U.S. dollars, we link payments due to us from
sales of products and services to local currencies of the countries in which we operate.
In 2005, we expect that significantly all of our revenues will be derived from Japan and
will be linked to the Yen. We currently do not use hedge instruments. We are likely to
face risks from fluctuations of the Yen and the New Israeli Shekel compared to the U.S.
dollar, the operating currency used in our financial statements. In 2004, the value of the
U.S. dollar decreased against the Yen. If the value of the U.S. dollar were to increase
against the Yen, we would recognize lower dollar revenues and gross profit in our
financial statements.

# We are subject to risks
from our financial investments.

We invest the majority of our cash on
hand in a variety of financial instruments, including different types of corporate and
government bonds, and other financial instruments.  Some of these bonds and
instruments may be rated below investment grade or not rated. If the obligor of any
of the bonds or instruments we hold defaults or undergoes a reorganization in bankruptcy,
we may lose all or a portion of our investment in such obligor.  This will harm
our financial condition.  For information on the types of our investments as of
December 31, 2004, see Item 11  Quantitative and Qualitative Disclosures About
Market Risk-Interest Rate Risk Management.

# We are subject to
taxation in several countries.

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

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

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

12

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Risks
relating to our operations in Israel.

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

Our
principal offices and many of our subcontractors and suppliers are located in Israel.
Accordingly, political, economic and military conditions in Israel affect our operations.
Since the establishment of the State of Israel in 1948, a number of armed conflicts have
taken place between Israel and its Arab neighbors. A state of hostility, varying in degree
and intensity, has led to security and economic problems for Israel. Since October 2000,
there has been a marked increase in hostilities between Israel and the Palestinians. We
cannot predict how the death of Yasser Arafat will affect the relations between Israel and
the Palestinians. The future of relations between Israel and the Palestinian Authority is
uncertain, and the execution of Israels plan of disengagement from the Gaza Strip
and some parts of the West Bank may serve to further disrupt the balance within the
Palestinian Authority and affect the overall stability of the region. Any armed conflicts
or political instability in the region could negatively affect local business conditions
and harm our results of operations. We cannot predict the effect on Orckit of the increase
in the degree of violence by Palestinians against Israel or the effect of military action
elsewhere in the Middle East. Furthermore, several countries restrict doing business with
Israel and Israeli companies, and additional companies may restrict doing business with
Israel and Israeli companies as a result of the increase in hostilities. This may also
seriously harm our operating results, financial condition and the expansion of our
business.

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

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

13

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

A
substantial majority of our revenues in 2005 are expected to be generated in Japanese Yen,
and to smaller extent in U.S. dollars and other foreign currencies, while the majority of
our payroll expenses and a portion of our other expenses are incurred in New Israeli
Shekels, or NIS, and a significant portion of our cost of revenues is incurred in U.S.
dollars. An increase in the value of the U.S. dollar against the Yen would adversely
affect the amount of revenues we report in our financial statements. As a result, we are
and could be further exposed to risk that the rate of inflation in Israel may exceed the
rate of devaluation of the New Israel Shekel in relation to the Yen, U.S. dollar and other
foreign currencies or that the timing of such devaluation may lag behind inflation in
Israel. In that event, the dollar cost of our operations in Israel would increase and our
U.S. dollar-measured results of operations would be adversely affected. For example, in
2004 the value of the U.S. dollar declined in relation to the New Israeli Shekel by 1.6%,
while there was a positive inflation of 1.2%. As a result, our salary expenses, which are
primarily linked to the New Israeli Shekel, increased in U.S. dollar terms.

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

Since
our inception, we have relied on Israeli government grants for the financing of a
significant portion of our product development expenditures. Due to a continuing reduction
of the budget of Israels Office of the Chief Scientist and a focus of that
offices resources on the support of venture stage companies rather than more
developed companies, it is expected that the amount of grants we receive in the future
will be lower than in prior years, if we receive any at all. This would result in an
increase in our research and development expenses.

According
to Israeli law, any products developed with grants from the Office of the Chief Scientist
are required to be manufactured in Israel, unless we obtain prior approval of a
governmental committee. As a condition to obtaining this approval, we may be required to
pay the Office of the Chief Scientist either 120%, 150% or 300% of the grants we received
and to repay these grants at an accelerated rate, depending on the portion of
manufacturing performed out side Israel. We have obtained an approval from the Office of
the Chief Scientist forto manufacture outside Israel. We intend to keep sufficient
manufacturing activities in Israel so that we will be subject to a repayment percentage of
up to 150% of the grants we received. In addition, we are prohibited from transferring to
third parties in Israel the technology developed with these grants without the prior
approval of a governmental committee and we are prohibited from transferring such
technology to third parties outside Israel. See Item 5  Operating and
Financial Review and Prospects  Liquidity and Capital Resources  Government
and Other Grants for additional information about these programs of the Office of
the Chief Scientist.

14

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

We
benefit from certain government programs and tax benefits, particularly as a result of the
Approved Enterprise status of most of our existing facilities. If we fail to
meet eligibility conditions in the future, the tax benefits could be canceled and we may
be required to refund the tax benefits already received. The applicable law regarding
approved enterprise programs will expire on March 31, 2005. Accordingly, requests for new
programs or expansions that are not approved on or before March 31, 2005 will not confer
any tax benefits, unless the term of the law is extended beyond March 31, 2005. On January
12, 2005, a bill was submitted to the Israeli parliament providing for certain changes to
the applicable law regarding approved enterprise programs. Among others, the bill proposes
changes to both the criteria and procedure for obtaining Approved Enterprise status for an
investment program, and changes to the grants and tax benefits afforded in certain
circumstances to Approved Enterprises. The proposed amendment is expected to apply to new
investment programs following the enactment of the bill into law. In order to enact the
bill as legislation, the bill must be approved by the Israeli parliament and
published.  We cannot predict whether the bill will eventually be enacted into law
and what changes it might implement.

These
tax benefits may not continue in the future at their current levels or at any level. From
time to time, we submit requests for expansion of our approved enterprise programs or for
new programs to be designated as approved enterprises. These requests might not be
approved, particularly in light of difficult economic conditions in Israel. The
termination or reduction of these tax benefits could seriously harm our financial
condition and results of operations.

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

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

In
January 2005, an order was signed that gradually cancels the obligation to pay stamp duty,
until the complete cancellation as of January 1, 2008. Pursuant to this order, as of
January 1, 2005, stamp duty is no longer chargeable on, among other documents, loan
agreements.

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

Service
of process upon our directors and officers and our Israeli auditors may be difficult to
effect in the United States because almost all these parties reside outside the United
States. Any judgment obtained in the United States against such parties may be
unenforceable outside the United States.

15

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It
is not clear whether civil liabilities under the Securities Act and the Securities
Exchange Act can be enforced in Israel. However, subject to time limitations, Israeli
courts may enforce a U.S. judgment in a civil matter, if:

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

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

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

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

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

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

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

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

The
Israeli Companies Law generally requires that a merger be approved by the board of
directors and a majority of the shares voting on the proposed merger. Upon the request of
any creditor of a party to the proposed merger, a court may delay or prevent the merger if
it concludes that there is a reasonable concern that, as a result of the merger, the
surviving company will be unable to satisfy its obligations. In addition, a merger may not
be completed unless at least 70 days have passed since the filing of the requisite merger
proposal by each party with the Israeli Registrar of Companies.

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

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

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Risks Relating to the Market for Our Ordinary Shares

Holders
of our ordinary shares who are United States residents face income tax risks.

It
is likely that we would be deemed to have been a passive foreign investment company, or
PFIC, for 2002, 2003 and 2004. Our treatment as a PFIC could result in a reduction in the
after-tax return to United States holders of our ordinary shares, thus causing a reduction
in the value of our shares, and could trigger the application of certain United States tax
reporting requirements. For U.S. federal income tax purposes, we are treated as a PFIC for
any taxable year in which either:

| |  | 75%
or more of our gross income is passive income, or
| | - | -----------------------------------------------------

| |  | at
least 50% of the average value of all of our assets for the taxable year produce, or are
held for the production of, passive income.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

For
this purpose, passive income includes dividends, interest, royalties, rents, annuities and
the excess of gains over losses from the disposition of assets which produce passive
income. As a result of our relatively substantial cash and investment assets and the
relatively low value of our ordinary shares, it is likely that we would be deemed to have
been a PFIC in 2002, 2003 and 2004 under the asset test. We could also be deemed a PFIC in
future years. A separate determination must be made each year as to whether we are a PFIC.
As a result, our PFIC status may change.

Highly
complex rules apply to any U.S. holder of our ordinary shares if we are treated as a PFIC
for U.S. federal income tax purposes for any year during such U.S. holders holding
period. Accordingly, U.S. holders are urged to consult their tax advisors regarding the
application of these tax rules.

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

# We do not intend to pay
cash dividends.

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

# Two shareholders may be
able to control Orckit.

As
of February 28, 2005, Eric Paneth and Izhak Tamir, our largest shareholders, each
beneficially owns an aggregate of 563,021 ordinary shares representing 12.3% of our
outstanding ordinary shares, including 20,000 ordinary shares issuable upon the exercise
of options that are currently vested. Both are executive officers and members of our Board
of Directors. Currently, Messrs. Paneth and Tamir are not party to a shareholders
agreement. However, if Messrs. Paneth and Tamir act together, they may have the power to
control the outcome of matters submitted for the vote of shareholders, including the
approval of significant change in control transactions. The equity interest in Orckit of
Mr. Paneth and Mr. Tamir may make certain transactions more difficult and result in
delaying or preventing a change in control of Orckit unless approved by one or both of
them.

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Our shareholder bonus rights plan
and the conversion features of the Corrigent Option Plan may delay, prevent or make more
difficult a hostile acquisition of Orckit, which could depress our share price.

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

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

The
market price for our ordinary shares, as well as the prices of shares of other technology
companies, has been volatile. The following factors may cause significant fluctuations in
the market price of our ordinary shares:

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

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

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

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

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

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

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

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

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

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

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

Our
ordinary shares are listed for trading on the Nasdaq Stock Market, or Nasdaq, and on The
Tel-Aviv Stock Exchange, or TASE. Trading in our ordinary shares on these markets is made
in different currencies (U.S. dollars on Nasdaq and New Israeli Shekels on TASE), and at
different times (resulting from different time zones, different trading days and different
public holidays in the United States and Israel). Actual trading volume on the TASE is
lower compared with trading volume on Nasdaq, and as such could be subject to higher
volatility. The trading prices of our ordinary shares on these two markets often differ,
resulting from the factors described above, as well as differences in exchange rates. Any
decrease in the trading price of our ordinary shares on one of these markets could cause a
decrease in the trading price of our ordinary shares on the other market.

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

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

Our
History

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

# Major Developments since
January 1, 2004

We
continued to fund the development and marketing efforts of the technology and products of
our subsidiary Corrigent Systems, addressing the need for solutions capable of supporting
very high bandwidth services. Corrigent is in the process of developing and
commercializing the CM-100 product line, which consists of telecommunication equipment
supporting high bandwidth services over fiber networks in telecommunications networks
located in metropolitan, or metro, areas. In 2004, we ceased our other activities, mainly
the development of products by our subsidiary Spediant Systems, in an effort to focus our
attention and resources exclusively on the Corrigent metro opportunity. To the extent that
cash flow from Corrigents operations is insufficient to fund its operations, we
intend to continue to fund the operations of Corrigent from our existing working capital.
Substantially all of our operating expenses in 2004 were related to the efforts of
Corrigent to develop the CM-100 product line and of Spediant to develop projects which
were halted in 2004.

Corrigent Systems

Corrigent
is developing the CM-100, a product line of telecommunication transport equipment capable
of supporting high bandwidth data and voice services in metro networks. Our target
customers are telecommunications service providers active in metropolitan areas, with a
focus on incumbent local exchange carriers. The Corrigent CM-100 solution is designed to
enable the provision and management of data and voice transport services in an efficient
manner that is expected to reduce the costs of transport service providers. Supporting
fiber-optic infrastructures, Corrigent CM-100 supports a wide range of interfaces for
data, voice and storage.

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The
Corrigent CM-100 solution is designed to comply with telecommunications standards and to
support emerging telecommunications protocols. It is designed for efficient transport of
Internet protocol information, while providing the reliability necessary for the transport
of voice and high quality data services.

Corrigent
has granted, and reserved for grant, options under the Corrigent Stock Option Plan and
other employee plans, as applicable, to its employees, consultants, officers and
directors. In addition, in order to attract and retain highly qualified personnel of
Orckit, employees, officers and directors of Orckit were reserved and granted shares and
options to purchase shares of Corrigent. As of December 31, 2004, Corrigent had granted,
or reserved for future grant, options and shares to the directors, employees and
consultants of Corrigent and Orckit, at a nominal price, representing approximately 10% of
its share capital on a fully diluted basis. At the discretion of Orckit and Corrigent,
these securities are convertible into Orckits ordinary shares. As of December 31,
2004, Orckits equity interest in Corrigent represented approximately 90% of
Corrigents shares on a fully diluted basis.

Spediant Systems

Spediant
was established by us as a technology project to engage in the development of products and
technologies that address the needs of service providers for fiber-speed broadband
services over the existing copper wire infrastructure. Spediants products were
intended to primarily address the demand for Ethernet-based services.Spediant
products were designed to allow providers to increase their broadband services offerings
and customer bases, deliver greater bandwidth to small and medium enterprises, or SMEs,
and obviate the need for capital expenditures associated with deployment of new fiber. In
2004, we ceased the activities of Spediant in order to focus our attention and resources
exclusively on Corrigent. Accordingly, the majority of Spediants personnel were
terminated.

# Principal Capital
Expenditures

Our
principal capital expenditures to date have been the purchase of equipment and other
software tools used in our business. These purchases totaled $1.8 million in 2002,
$900,000 in 2003 and $3.9 million in 2004. We used internal resources to finance these
capital expenditures.

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

General

The
market in which we operate targets incumbent local telephone companies in Asia, the U.S.
and Europe. We predominantly target the emerging market for metro transport products with
our Corrigent CM-100 product line, which addresses the need for high data transmissions.
In 2004, we were selected by KDDI, Japan, to deliver the Corrigent CM-100 product line for
a nationwide metro build-up to support high bandwidth, packet-based services.
Substantially all of our sales in 2004 were of the CM-100 product to KDDI and Vic Tokai.

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Metro
Transport Telecom Markets, Technology and Products

The
Metro Transport Market

The
fiber optic networks of many telephone companies in metropolitan areas are experiencing a
shift from carrying primarily voice traffic to carrying a growing mix of data and voice
traffic. Data traffic volumes carried over these metropolitan area networks are surpassing
voice traffic volumes. Data traffic is forecasted for further growth over the coming
years. This increase in data relative to voice traffic is mainly a result of the rapid
growth of the Internet and local area networks.

Offerings
of high data services at rates of ten mega bits per second (Mbps), 20 Mbps, and up to 100
Mbps have reached many millions of subscribers in a number of Asian markets, including
Japan and Korea. These services are offered either over fiber connections or a combination
of fiber and fast access technologies, such as ADSL release 2 (ADSL2), Very High Speed
Digital Subscriber Line (VDSL), wireless or cable networks. In 2004, U.S. telecom carriers
began plans for expansion of fiber rings in metro areas, promoting connectivity of fiber
to the premise (FTTP) and fiber to the curb (FTTC). Connecting subscribers with fiber is
expected to allow for significantly higher speed services, mainly data and video services
and, as a result, will require an upgrade of metro telecom equipment with technologies
that address very high speed transmissions of data over fiber networks.

Telephone
companies have typically managed their data transfer capacity needs through their existing
transport technologies. These technologies were originally designed for transporting voice
services. These traditional solutions, however, are not designed to support expected
future levels of data traffic. Traditional networks are also inefficient when transporting
data as they fail to utilize inherent differences in the type of network support that is
required for the transmission of data traffic. Data traffic is generally less susceptible
to corruption resulting from minor time delays and less time-sensitive than voice
traffic.In addition, data traffic often exhibits a bursty nature, with dynamically
varying levels of utilization of communication channels, as opposed to voice traffic which
normally requires constant levels of channel utilization.

A
range of new solutions are being developed to address the need of carriers and service
providers to be able to support higher levels of data traffic within and between
metropolitan areas, commonly referred to as metro transport. One type of solution,
consisting of a router or switch that transports packets of data, focuses on the
characteristics of data traffic without supporting legacy voice and other circuit-based
data services. In this type of solution, data services and legacy services are run and
maintained in different metro networks. Another type of solution, attempts to take
advantage of the characteristics of data traffic while continuing to support traditional
voice traffic over a converged metro network. We offer this second type of solution that
supports both packets of data and traditional circuit-based voice and data services over
the same network. We expect that the metro transport solution for the transmission of
traditional voice and increased data traffic will combine the efficient transport of data
services based on Ethernet protocol with high reliability voice services based on
SONET/SDH protocol.

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

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

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Ethernet.
          Ethernet is the most widely-installed local area network, or LAN, technology.
It           is often used incollege dormitoriesand office buildings. The
          most commonly installed Ethernet systems are called 10BASE-T and provide
          transmission speeds up to 10 Mbps.

RPR.
Resilient packet ring, or RPR, is an emerging technology that is being           designed
to integrate Ethernet data protocols for the efficient transmission of           data
with traditional SONET voice protocols. An industry standard for RPR, IEEE
          802.17, was approved in June, 2004. Corrigent has been instrumental in
          establishing this standard, serving actively as a member of the industry work
          group charged with defining the RPR protocol.

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

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

RPRs Advantages
over Existing Data and Voice Transport Protocols

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

| |  | Usage
of a single fiber ring and spatial reuse capabilities.
| | - | ------------------------------------------------------------

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

| |  | Statistical
multiplexing qualities
| | - | ----------------------------------

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

Corrigent CM-100
Product

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

Corrigents
CM-100 product line utilizes SONET, RPR, and MPLS technologies to effectively support a
range of SONET services, Ethernet, Time Division Multiplexer, or TDM, services which are
commonly used for voice transmissions, and other data services. This product line is being
designed to interoperate with both legacy SONET and emerging MPLS core devices. Our
product supports 2.5 Gigabits per second, or Gbps, and 10 Gbps ring speeds and interfaces
with:

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

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

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

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

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

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

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

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

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

23

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The
CM-100 product line was first delivered for commercial deployment in 2004. In 2004 our
product was selected for a commercial deployment by KDDI Corporation in Japan and also by
Vic Tokai, a regional telecom provider in Japan targeting Ethernet-based services. Sales
to our customers in Japan are made through distributors.

Our
sales to KDDI in Japan are made pursuant to an agreement and related terms of sale with
NetOne Systems, a distributor of telecom and enterprise products in Japan. We provide a
fourteen-month product warranty and post-contract hardware and software support services
with respect to products sold. NetOne Systems provides on-site product support services
and training. The agreement sets general distribution terms regarding sales to KDDI.
NetOne submits purchase orders for products on an as needed basis.

In
2005, we expect to focus on the development of additional software features and hardware
capabilities of the CM-100 product line, to support customer requirements and address
emerging service applications of triple play, that is, a bundled service
offering by telecom carriers to residential subscribers which is comprised of voice
services, Internet connection and a range of video and other media services that address
high transmission rates (typically of 10 Mbps and beyond), all over IP protocols.

# Sales, Marketing and
Service

Sales
and Marketing. Our marketing efforts are directed at telephone companies. Marketing
efforts may also be made pursuant to original equipment manufacturers, strategic alliances
and other distribution arrangements. We believe that the participation in technology
committees involved in the establishment of industry standards is a strong marketing tool.
As of December 31, 2004, overall marketing and sales efforts were conducted by
approximately 28 employees located in Israel, the United States and Japan.

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

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

Substantially
all of our revenues in 2004 were generated from our CM-100 metro product line, with 81.5%
of our revenues generated from sales to KDDI. In 2002 and 2003, our revenues were
generated from sales of our FastInternet DSL product line. We no longer sell these DSL
products.

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

24

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---

The
length of the approval process is affected by a number of factors, including the
complexity of the product involved, technological and budgetary priorities of the
telephone companies and regulatory issues affecting telephone companies. A telephone
company will usually conduct technical trials after completing a laboratory evaluation
that tests a new products function and performance against industry standards. After
completion of technical trials, field trials simulate operations to evaluate performance
and to assess ease of installation and operation. In subsequent market trials, a telephone
company will attempt to determine the content requirements, the estimated number of
subscribers and optimized pricing for the service. During this stage, telephone companies
establish procedures, train employees to install and maintain the new product and obtain
feedback on the product from their customers and operations personnel. Throughout the
approval process, we commit senior technical and marketing personnel to participate in
technology, field and market trials and to actively support the evaluation efforts.

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

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

Telco
Services and Support. We offer repair services as part of our warranty services and
technical support services for our products. We do not offer installation services. We
expect that our local distributor or reseller will provide first level of service and
support. More extensive repair and technical support is offered at our headquarters in
Israel pursuant to software support and hardware warranty obligations. We also offer
telephone support during working hours and provide product training to our carrier
customers on a case-by-case basis.

The
majority of the DSL products we shipped are subject to a three-year warranty period. Our
new Corrigent products sold to date are subject to a fourteen month warranty and support
protection period. Our warranty generally covers defects in materials or workmanship and
failure to meet published specifications, but excludes damages caused by improper use and
all other express or implied warranties. In the event that there are material deficiencies
or defects in the design or manufacture of our products, the affected products could be
subject to recall. Exposure to indirect damages arising from failures covered by warranty
could be significant. We have received claims for compensation from certain of our
customers due to warranty related matters. We believe that our potential liability in
connection with these claims is not material.

25

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Customers
and End-users. We expect to depend on purchases by a handful of telecommunication
carriers for our product revenues. We have previously sold our products either directly to
telephone companies or through original equipment manufacturers, distributors or strategic
partners from whom telephone companies then purchase our products.

# Manufacturing

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

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

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

Competition

We
compete on the basis of technological capability, price, customer service, product
features, adherence to standards, quality, reliability, availability and technical
support. With respect to our metro products, competition is expected to be based primarily
on technological capability and the ability to develop a product that can be manufactured
and sold with a cost structure that will allow for mass deployment to customers of
telephone companies. Many of our competitors and potential competitors have greater
financial, technological, manufacturing, marketing and personnel resources than we have.

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

# Intellectual Property
Rights

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

26

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# Legal Proceedings

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

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

List
of Significant Subsidiaries

Corrigent
 Systems Inc., a subsidiary,  is a Delaware  corporation.  As of December 31, 2004,
 Orckit owned approximately 90% of the shares of Corrigent Systems on a fully-diluted
basis.

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

Our
principal offices and production facilities in Tel Aviv occupy approximately 50,000 square
feet of rental space rented through a series of leases. Our major lease in Tel Aviv
expires in 2006. We have an option to terminate these lease agreements with six
months prior written notice. Based on market environment, we believe that
alternative leases in Tel Aviv are available at similar terms. We also maintain offices in
San Jose, California and Tokyo, Japan. We believe that these facilities are adequate for
our current needs and that suitable additional or substitute space will be available when
needed.

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

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

A.
          OPERATING RESULTS

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

27

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# Overview

Orckit
was founded in 1990. We are an Israeli corporation engaged in the design, development,
manufacture and marketing of telecom equipment that enables transmission of broadband
services. The substantial majority of our revenues in 2004 were derived from the sale of
our metro products, the CM-100 product line, to KDDI and Vic Tokai in Japan. Our
historical revenues that were generated through December 31, 2003 were derived from the
sale of systems and customer premises modems based on digital subscriber line, or DSL,
technology. We have terminated the sale of these DSL products and do not expect to
generate additional revenues from them. We expect to generate substantially all of our
revenues in 2005 from the sale of our metro products.

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

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

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

Substantially
all of our operating expenses in 2004 related to research and development expenses,
selling, general and administrative expenses and capital expenditures for the operations
and support of Corrigent and, to lesser extent, of Spediant, an operation that we halted
in 2004.

We
have generated operating losses in each of our past five years. Our revenues were
insignificant in 2003 and the first half of 2004. We began for the first time to generate
revenues from sales of our metro products in the second half of 2004. We will need to
generate significant revenues from sales of our metro products at sufficient gross profit
levels, while controlling our operating expenses, if we are to be able to generate income
from operations and net income.

The
telecommunications equipment market is undergoing continuous and rapid change. Companies
from Asia, particularly from China, are leveraging the success they have in supplying
products to telecom carriers in their local markets. Asian equipment manufacturers have
targeted carriers in Europe, Asia and the Middle East. These equipment vendors have access
to lower cost research and development resources, and are able to sell their products to
government-owned local carriers. These manufacturers are likely to become strong
competitors in the markets we target. As a result, we are focusing our resources on
bringing to market highly advanced products with innovative technology components. We also
concentrate on cost efficiencies in our design process to be able to respond to expected
price competition going forward.

28

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---

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

# Critical Accounting
Policies and Estimates

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

The
Company is also subject to risks and uncertainties that may cause actual results to differ
from estimates and assumptions, such as changes in the economic environment, competition,
foreign exchange, taxation and governmental programs. Certain of these risks,
uncertainties and assumptions are discussed in Item 3.D  Risk Factors. To facilitate
the understanding of our business activities, described below are certain accounting
policies that are relatively more important to the portrayal of our financial condition
and results of operations and that require managements subjective judgments. We base
our judgments on past experience and various other assumptions that are believed to be
reasonable under the circumstances. Please refer to Note 1 to our consolidated financial
statements included in this Annual Report for a summary of all of our significant
accounting policies.

Revenue Recognition

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

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

29

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In
2004, we granted customer post-contract hardware and software support services, or PCS, in
our sales to KDDI. The VSOE of the fair value of the PCS relating to these sales could not
be determined. Accordingly, revenues for the entire arrangement will be recognized ratably
over the fourteen-month term of the PCS. Deferred income of $35.7 million on our balance
sheet as of December 31, 2004, represents the amount of deferred revenues less the cost of
goods associated with these revenues, including assembly and testing, contracting fees,
materials and operational overhead expenses. We expect to recognize deferred revenues
ratably over the applicable PCS period.

Allowances
for trade receivables are determined based on an analysis made for each of our customers.
If bad debts are found to be higher than expected, we may need to increase these
provisions.

Provision for servicing
products under warranty

Sales
of our metro products to KDDI are subject to warranty for a period of fourteen months. The
majority of our legacy DSL products were sold subject to up to a three-year warranty
period. With respect to legacy products, we have agreed to indemnify our customers in some
circumstances against liability from defects in our products. In some cases our indemnity
also covers indirect damages. We provide an estimate for warranty expense at the time
revenues from the related sales are recognized. The annual provision for warranty and PCS
is calculated as a percentage of the sales, based on historical experience, or where
historical experience is not available, based on management estimates for expenses which
may be required, to cover the amounts necessary to settle product-related matters existing
as of the balance sheet date and which may arise during the warranty and PCS period.

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

30

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# Results of Operations

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

|                                             | 2002 | 2003 | 2004
|-------------------------------------------- | ---- | ---- | ----
|
|
|
|
|Revenues                                     |      |      |     
|                                             |      |     
|Cost of revenues                             |      |      |     
|                                             |      |      |     
|                                             |      |     
|Gross profit                                 |      |      |     
|                                             |      |     
|Research and development expenses, net       |      |      |     
|                                             |      |     
|Selling, general and administrative expenses |      |      |     
|                                             |      |     
|                                             |      |      |     
|Loss from operations                         |      |      |     
|                                             |      |     
|Financial income, net                        |      |      |     
|                                             |      |      |     
|                                             |      |     
|Net income (loss)                            |      |      |     
|                                             |      |      |     

Revenues.       The
substantial majority of our revenues of $11.3 million in 2004 was generated
          from sales of the Corrigent CM-100 product line to KDDI. We expect that
          substantially all of our revenues in 2005 will result from sales of the CM-100
          product line to KDDI.

Historically,
prior to December 31, 2003, our revenues consisted primarily of DSL-based product and
related services. During 2003, our revenues were insignificant as we transitioned our
business from legacy DSL products to the development of new metro products. Revenues in
2003 decreased to $1.7 million from $53.4 million in 2002. Product revenues in 2002
resulted primarily from sales of DSLAM and DSL-based modem products. The decline in our
revenues in 2003 was primarily a result of the selection of competing products by our
customers, as well as the continued slowdown in capital expenditures in the
telecommunications industry. We do not expect to generate additional revenues from the
sale of our legacy DSL products.

Gross
Profit. Cost of revenues consists primarily of raw materials, subcontracting costs,
costs for integration, assembly and testing of finished products and the repayment of
grants received from the Office of the Chief Scientist. Gross profit was $5.4 million
(47.7% of revenues) in 2004 compared to $935,000 (55.6% of revenues) in 2003 and $20.5
million (38.3% of revenues) in 2002. The substantial majority of our gross profit in 2004
was a result of sales of our new products, which commenced in the second half of 2004. The
improvement of gross profit in 2003 was primarily due to a decrease in the cost of
components and assembly for products sold.

31

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Operating
Expenses

|                                    | Year Ended December 31,($ in millions) | % Change
2003 VS. 2002 | % Change
2004 VS. 2003
|----------------------------------- | -------------------------------------- | ---------------------- | ----------------------
|
|
|
|
|Research and development, net       |                                        |                        |                       
|Selling, general and administrative |                                        |                        |                       
|Total operating expenses            |                                        |                        |                       

Research
and Development Expenses, net. Research and development expenditures consist primarily
of materials, depreciation and salaries and related costs for engineering and technical
personnel and subcontracting costs associated with developing new products and features.
Our costs for research and development are expensed as incurred. Grants from the
government of Israel for research and development are offset against our gross research
and development expenditures. Research grants were $3.0 million in 2002, $5.8 million in
2003 and $2.7 million in 2004. Our research and development expenses were lower in 2004
compared to 2003, mainly due to a decrease in the costs of materials and the use of
sub-contractors. These lower expenses were offset by a decrease in the research and
development grants we received. Our research and development expenses decreased in 2003
compared to 2002, mainly due to an increase in research grants, as well as a decrease in
the consumption of research and development materials and the use of sub-contractors. We
anticipate that we will incur a similar or higher level of research and development
expenditures in 2005 compared with 2004. We expect that amounts of government research
grants in 2005 will be lower than in 2004, if any, due to continuing reductions in the
budget of Israels Office of the Chief Scientist and its policy to focus on venture
stage companies.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses
consist primarily of costs relating to promotion, trade shows, compensation costs for
marketing and sales personnel, and other general corporate expenses. Selling, general and
administrative expenses decreased in 2004 compared to 2003 and in 2003 compared to 2002
due to a reduction of our marketing and sales activities related to our legacy DSL
products. We expect that marketing and sales expenses will increase in 2005 as we increase
our marketing activities and sales efforts in connection in an attempt to increase the
distribution of our metro products.

Financial
Income, net. Financial income consists primarily of interest on short term and long
term investments and on bank deposits and of gain on early retirement of our convertible
subordinated notes. Financial expense consists primarily of interest payments in respect
of convertible subordinated notes and amortization of convertible subordinated notes
issuance costs. In 2002, we recognized interest income of $2.9 million from a long-term
loan we granted to Tikcro. Of this amount, $1.9 million was for interest accrued in
previous years.

Due
to our adoption of FAS 145, effective January 1, 2002, we reclassified in 2002, to
financial income, gains from the early retirement of our convertible subordinated notes
that were previously recorded as an extraordinary gain. During 2002, we retired $28.2
million principal amount of our convertible subordinated notes, resulting in a gain of
$13.2 million. During 2003, we retired $22.0 million principal amount of our convertible
subordinated notes, resulting in a gain of $3.1 million. In 2004, we retired the remaining
balance of our convertible subordinated notes in a principal amount of $16.2 million at
par value. This retirement did not result in financial gains. Accordingly, as of December
31, 2004, there were no convertible subordinated notes outstanding.

32

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Financial
income, net was $17.6 million in 2002, $5.1 million in 2003 and $1.5 million in 2004. The
fluctuations in our financial income were primarily driven by the financial income derived
from the principal amount of notes retired in the respective years and the prices at which
they were retired.

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

As
of December 31, 2004, the majority of our assets in non-dollar currencies are in Japanese
Yen (Yen) and in New Israeli Shekels (NIS). A devaluation of the Yen or NIS in relation to
the U.S. dollar would have the effect of decreasing the dollar value of assets in Yen or
NIS of Orckit, to the extent the underlying value is Yen or NIS based. Such a devaluation
also would have the effect of reducing the U.S. dollar amount of any liabilities of
Orckit, which are payable in NIS (unless such payables are linked to the U.S. dollar).

Most
of our sales in 2004 were denominated in Yen. A substantial part of our expenses,
principally payroll and payments to Israeli vendors, is in NIS, while a significant
portion of the cost of goods sold is in U.S. dollar. Our results of operations are
adversely affected by increases in the rate of inflation in Israel when such increases are
not offset by a corresponding devaluation of the new Israeli shekel against the U.S.
dollar. The results are also affected by the currency rate between the U.S. dollar and
Yen. Due to the weakening of the U.S. dollar exchange rate against the Yen in 2004, sales
that were denominated in Yen were recognized based on lower Yen/U.S. Dollar exchange
rates, resulting in higher revenues and gross margins and lower losses. A strengthening of
the U.S. dollar against the Yen in 2005 would adversely impact our results of operations.

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

The
following table presents information about the rate of inflation in Israel, the rate of
devaluation of the NIS and Yen against the U.S. dollar for 2004, and the rate of inflation
of Israel adjusted for the devaluation:

|Years Ended
December 31, | Israeli Inflation
Rate | Israeli
Devaluation Rate | Israel Inflation Adjusted
for Devaluation | Japanese
Devaluation Rate
|------------------------ | ---------------------- | ------------------------ | ----------------------------------------- | -------------------------
|
|
|
|
|2000                     |                        |                          |                                           | 0.0                      
|2001                     |                        |                          |                                           | 1.4                      
|2002                     |                        |                          |                                           | 6.5                      
|2003                     |                        |                          |                                           | (1.9                     
|2004                     |                        |                          |                                           | 1.2                      

33

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# B. LIQUIDITY AND CAPITAL
RESOURCES

Orckit
has financed its operations primarily through sales of equity, issuance of convertible
notes and the receipt of grants to fund research and development, as well as from bank
loan proceeds.

Our
working capital (total current assets net of total current liabilities) decreased from
$55.2 million as of December 31, 2002 to $34.5 million as of December 31, 2003 and further
decreased to $16.5 million as of December 31, 2004. The decrease in our working capital
has occurred as a result of the following: a) our move to full turnkey contracting, which
reduced our inventories in 2002 and 2003; b) using our cash to fund our operating losses
and to repurchase our convertible subordinated notes; c) our decision to invest funds in
long-term marketable securities, which are not included in working capital; and d)
short-term borrowings in the amount of $31.0 million to purchase the remaining principal
amount of our convertible subordinated notes and to provide working capital in
anticipation of increased sales.

We
had cash, cash equivalents, long-term marketable securities and bank deposits of $77.2
million as of December 31, 2004 compared to $79.0 million as of December 31, 2003. The
majority of this amount was held in securities denominated in U.S. dollars. In January
2005, we repaid $15.0 million of our bank borrowings that were outstanding as of December
31, 2004. The remaining $16.0 million of our outstanding bank borrowings are due to be
repaid in May and July 2005.

We
used approximately $16.2 million in cash in April 2004 to redeem the remaining outstanding
principal amount of our convertible subordinated notes. We believe that we have sufficient
working capital to meet our anticipated working capital and capital expenditure
requirements for 2005 and 2006. If we do not have available sufficient cash to finance our
operations, we may be required to obtain equity or debt financing. We cannot be certain
that we will be able to obtain additional financing on acceptable terms or at all.

Net Cash Provided by/Used
in Operating Activities

In
2004, we generated $938,000 of cash from operating activities primarily as a result of an
increase in trade payables, and deferred income and trading of marketable securities,
offset in part by our net loss and an increase in trade receivables. In 2003, we used
$16.1 million of cash in operating activities, primarily as a result of our net loss,
decreases in payables and non-cash gain from the early retirement of our convertible
subordinated notes, offset in part by depreciation and impairment of property and
equipment, amortization of deferred compensation related to employee stock option grants
and trading marketable securities. In 2002, we generated $6.7 million of cash from
operating activities primarily as a result of decreases in inventories and receivables and
depreciation and amortization, offset in part by the non-cash gain from the early
retirement of our convertible subordinated notes and a decrease in payables.

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Net Cash Provided by/Used
in Investing Activities

Our
principal investing activity relating to our operations has been the purchase of equipment
and other fixed assets used in our business. These purchases totaled $1.8 million in 2002,
$900,000 in 2003 and $3.9 million in 2004. Our capital expenditures in 2004 and 2003 were
primarily for the procurement of telecommunications equipment and related software tools.
In 2004, our investing activities also included the receipt of $10.0 million from
marketable securities that came to maturity, offset by $3.0 million of investments in
marketable securities. In 2003, our investing activities also included the receipt of
$26.3 million of marketable securities, the receipt of $7.0 million from Tikcro in
repayment of our loan to Tikcro and the receipt of $10.3 million from bank deposits. In
2002, our investing activities also included $35.6 million of investments in marketable
securities, offset by the receipt of $13.0 million from Tikcro in repayment of our loan to
Tikcro.

Convertible Subordinated
Notes

In
March 2000, we sold $125 million aggregate principal amount of 5.75% convertible
subordinated notes due on April 1, 2005. From 2000 to 2004, we repurchased and redeemed
the outstanding balance of all of the principal amount of our convertible subordinated
notes for an aggregate amount of $70.4 million. As a result, as of December 31, 2004,
there were no convertible subordinated notes outstanding. The repurchase and redemption of
convertible subordinated notes constituted our primary use of cash in financing activities
in 2002, 2003 and 2004.

Bank Borrowings

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

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

Loan to Tikcro

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

Repurchases of our
Ordinary Shares

During
2003, we repurchased for $5.6 million in cash approximately 882,000 of our ordinary
shares.

# Government and Other
Grants

The
Government of Israel encourages research and development projects through the Office of
Chief Scientist of the Israeli Ministry of Industry, Trade and Labor, pursuant to the Law
for the Encouragement of Industrial Research and Development, 1984, commonly referred to
as the R&D Law. Under the R&D Law, a research and development plan
that meets specified criteria is eligible for a grant of up to 50% of certain approved
research and development expenditures. The plan must be approved by the Office of the
Chief Scientist.

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Since
our inception, we have relied on grants from the Office of the Chief Scientist to finance
a portion of our product development expenditures. During the three years ended December
31, 2004, we recognized research and development grants in an aggregate amount of
approximately $11.5 million. As of December 31, 2004, total contingent liabilities to the
Office of the Chief Scientist were approximately $10.0 million. Since the budget for
grants continues to be cut and the focus for grants is shifting to venture stage
companies, we cannot estimate the amount of additional grants we will receive, if any.

Under
the terms of the grants we received from the Office of Chief Scientist, we are obligated
to pay royalties of 3% during the first three years following commencement of royalty
payments, and 4% to 5% thereafter. Royalties are payable up to 100% of the amount of such
grants, or up to a higher percentage as detailed below, linked to the U.S. Dollar, plus
annual interest at LIBOR. The payment of royalties is on all revenues received in
connection with the sale of the products developed pursuant to the funded plans, including
revenues from licensed ancillary services.

The
R&D Law generally requires that a product developed under a program be manufactured in
Israel. However, upon the approval of the Chief Scientist, some of the manufacturing
volume may be performed outside of Israel, provided that the grant recipient pays
royalties at an increased rate, which may be substantial, and the aggregate repayment
amount is increased to 120%, 150% or 300% of the grant, depending on the portion of the
total manufacturing volume that is performed outside of Israel. We have obtained an
approval from the Office of the Chief Scientist for manufacturing outside Israel. We
intend to keep sufficient manufacturing activities in Israel so that we will be subject to
a repayment percentage of up to 150% of the grants we received. Effective April 1, 2003,
the R&D Law also allows for the approval of grants in cases in which the applicant
declares that part of the manufacturing will be performed outside of Israel or by
non-Israeli residents and the research committee is convinced that doing so is essential
for the execution of the program. This declaration will be a significant factor in the
determination of the Office of Chief Scientist whether to approve a program and the amount
and other terms of benefits to be granted. For example, the increased royalty rate and
repayment amount will be required in such cases.

The
R&D Law also provides that know-how developed under an approved research and
development program may not be transferred to third parties in Israel without the approval
of the research committee. Such approval is not required for the sale or export of any
products resulting from such research or development. The R&D Law further provides
that the know-how developed under an approved research and development program may not be
transferred to any third parties outside Israel.

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

Draft
legislation was submitted in December 2004 by the Israeli government proposing an
amendment to the R&D Law to make it more compatible with the global business
environment by, among other things, relaxing restrictions on the transfer of manufacturing
rights outside Israel and on the transfer of Chief Scientist funded know-how outside of
Israel. As described above, currently, the R&D Law permits the Chief Scientist to
approve the transfer of manufacturing rights outside Israel in consideration of payment of
higher royalties. The proposed amendments further permit the Chief Scientist, among other
things, to approve the transfer of manufacturing rights outside Israel in exchange for
substitute manufacturing of other products being conducted in Israel, in lieu of the
increased royalties. The proposed amendment further enables, under certain circumstances
and subject to the Chief Scientists prior approval, the transfer of Chief
Scientist-funded know-how outside Israel, in consideration of payment of a portion of the
sale price (according to a formula taking into account the proportion of the Chief
Scientists investment in the grantee minus depreciation), or in exchange
for know-how and cooperation in R&D with non-Israeli companies, without any additional
payment to the Chief Scientist. The proposed amendment is currently pending before the
Finance Committee of the Israeli parliament. We can not be certain as whether or when such
proposed draft legislation will actually be finalized into law and what provisions will be
contained in any law that is adopted.

# Effective Corporate Tax
Rates in Israel

Generally,
Israeli companies are subject to corporate tax on their taxable income at the rate of 35%
for the 2004 tax year, 34% for the 2005 tax year, 32% for the 2006 tax year and 30% for
the 2007 tax year and thereafter, and are subject to capital gains tax at a rate of 25%
for capital gains (other than gains deriving from the sale of listed securities) derived
after January 1, 2003. However, the effective tax rate payable by a company that derives
income from an Approved Enterprise program (as further discussed below) may be
considerably less.

Under
the Law for Encouragement of Capital Investments, 1959, known as the Investments Law, by
virtue of the Approved Enterprise status granted to some of our investment
programs, we are entitled to various tax benefits. The period of tax benefits is seven
years, commencing in the first year in which we earn taxable income from the approved
enterprise, subject to certain limitations. Under this law, our taxable income derived
from an investment program designated as an Approved Enterprise is fully exempt from
corporate tax for a period of two years, after which the income from these enterprises is
taxable at the rate of up to 25% for the remainder of the five-year period of tax
benefits.

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After
the applicable benefit period expires, income generated from these Approved Enterprise
programs, including income generated from the grant of a usage right with respect to
know-how developed by the Approved Enterprise, income generated from royalties and income
derived from a service which is auxiliary to such usage right or royalties, provided that
such income is generated within the Approved Enterprises ordinary course of
business, under the terms and conditions set by the Approved Enterprise programs, will be
subject to tax at the full corporate tax rate. We may apply for additional programs or for
an extension of our existing programs; however, there can be no assurance that our
application will be approved or that we will receive future benefits. The Investments Law
will expire on March 31, 2005, unless its term will be extended. Accordingly, requests for
new programs or expansions of existing programs that are not approved on or before March
31, 2005 will not confer any tax benefits, unless the term of the law is extended. On
January 12, 2005, a bill was submitted to the Israeli parliament providing for certain
changes to the Investments Law. Among others, the bill proposes certain changes to both
the criteria and procedure for obtaining Approved Enterprise status for an investment
program, and changes to the grants and tax benefits afforded in certain circumstances to
Approved Enterprises. The proposed amendment is expected to apply to new investment
programs following the enactment of the bill into law. We can not be certain that this
amendment will be adopted or the provisions that will be contained in any amendment that
is adopted.

Part
of our income has been generated through our Approved Enterprises. If a company that has
elected the alternative package distributes to its shareholders a cash
dividend from tax-exempt income attributable to it, it would incur a tax liability on the
amount distributed at the rate (10% to 25%) which would have been applicable had the
company not elected the alternate package, and it will have to withhold tax at the rate of
15% with respect to the dividend distributed. Orckits taxes outside of Israel,
mainly in Japan and the United States, are dependent on our operations in each
jurisdiction as well as relevant laws and treaties. See Item 18 Financial
Statements. Under Israeli tax law, at December 31, 2004, we had accumulated losses
for tax purposes amounting to approximately $134 million. These losses are available
indefinitely to offset future taxable business income. As of December 31, 2004, our carry
forward of capital losses for tax purposes were $39 million.

# Dividend Policy

On
June 30, 2000, we distributed a stock dividend on a share-for-share basis of all our
shares of Tikcro. We have never declared or paid cash dividends on our capital stock. In
the foreseeable future, we intend to use any future earnings for the operation and
expansion of our business. Accordingly, we do not anticipate paying any cash dividends.
Payment of future dividends, if any, will be at the discretion of our board of directors
and the audit committee of the Board and will depend on various factors, such as our
statutory retained earnings, financial condition, operating results and current and
anticipated cash needs.

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

# Inventory

Inventory
in 2004 consisted primarily of finished products, and in 2003 consisted of raw materials
for the assembly of our products. Our inventory was $5.5 million as of December 31, 2004
compared to $100,000 as of December 31, 2003. The increase in inventory levels in 2004
resulted from a build up of product inventories for the supply of Corrigent CM-100
products.

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C.
          RESEARCH AND DEVELOPMENT

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

Our
research and development staff consisted 103 employees as of December 31, 2002, 118
employees as of December 31, 2003 and 104 employees as of December 31, 2004, most of whom
are located in Israel and hold engineering or other advanced technical degrees. As of
December 31, 2004, substantially all of our research and development employees were
employed by Corrigent. The number of research and development employees was similar in the
years 2002 through 2004 since we maintained similar research and development efforts,
focusing on new product lines. Our gross research and development expenses were
approximately $22.3 million in 2002, $20.8 million in 2003 and $17.7 million in 2004.
These expenses were offset by grants from the Office of the Chief Scientist of the
Ministry of Industry, Trade and Labor of the Government of Israel of approximately $3.0
million in 2002, $5.8 million in 2003 and $2.7 million in 2004.

In
2004, the majority of our research and development work was focused on the Corrigent
CM-100 product line, addressing software and hardware capabilities. We expect that these
efforts will continue and comprise of significantly all of 2005 research and development
plan. We expect that we will continue to commit substantial resources to research and
development in the future. We believe that a continued commitment to research and
development is required to maintain our technical excellence and launch new innovative
products in the metro transport and access markets. If our applications for Office of
Chief Scientist grants are not approved or partially approved, or if we elect not to
receive these grants, our net research and development expenses will increase.

D.
          TREND INFORMATION

In
2004, the capital investment expenditures of wireline telecom carriers for metro equipment
were similar to capital expenditure levels in 2003. It is expected that capital investment
of wireline telecom carriers in metro equipment in 2005 will be similar to 2004. The
introduction of new services to residential users and enterprises is expected to require
significantly higher bandwidth support over metro networks. In areas where new high
bandwidth services are likely to be offered, it is expected that demand for more robust
metro products will increase. In response to this trend, we have focused on innovative
telecom products for the metro area, where we expect to see a need for equipment upgrade
over the coming years with the growth of new high bandwidth service offerings. These
services are expected to include triple play services, that is, a bundled
offering of voice, Internet access and high end video services, all based on IP protocols,
offered by traditional telecom carriers.

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E.
          OFF-BALANCE SHEET ARRANGEMENTS

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

F.
          TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The
following table of our material contractual obligations as of December 31, 2004 summarizes
the aggregate effect that these obligations are expected to have on our cash flows in the
periods indicated.

|                                                                         | Payment due by period
($ in thousands)
|------------------------------------------------------------------------ | --------------------------------------
|
|Long-Term Debt Obligations                                               |                                       
|Operating Lease Obligations                                              | 310                                   
|Purchase Obligations                                                     | 5,910                                 
|Other Long-Term LiabilitiesReflected on our Balance Sheetunder U.S. GAAP | 108,262                               
|Total                                                                    | 114,482                               

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|1 | Our major premises leases allow for early termination upon six months prior notice.
Accordingly, this amount reflects lease payments for the applicable notice period. For
total projected annual rent payments, see note 5b to our financial statements for the year
ended December 31, 2004. The amount is presented in the 1-3 years column since this is the
average life period of our lease obligations.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|3 | This amount reflects our accrued severance pay liability. The time of its payment, in
whole or in part, cannot be predicted and as such this amount is presented in the more
than 5 years column. Out of this amount, $3.3 million have been previously funded by our
contributions to employee plans.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, as of December 31, 2004, our contingent liability to the Office of the
Chief Scientist in respect of grants received was approximately $10.0 million. This
liability is required to be repaid only as royalties based on revenues derived from
products (and related services) whose development was funded with these grants.

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

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

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

|Name          | Age | Position                                                            
|------------- | --- | --------------------------------------------------------------------
|
|
|
|
|Eric Paneth   | 55  | Chairman of the Board and Chief Executive Officer                   
|Izhak Tamir   | 52  | President and Director                                              
|Ehud Rokach   | 41  | Chief Executive Officer of Corrigent Systems                        
|Aviv Boim     | 38  | Chief Financial Officer                                             
|Eran Tamir    | 47  | Vice President Operations                                           
|Yoav Wechsler | 50  | Vice President, Research and Development of Corrigent Systems       
|Leon Bruckman | 47  | Vice President, Chief Technology Officer of Corrigent Systems       
|Ido Gur       | 37  | Executive Vice President of Sales and Marketing of Corrigent Systems
|Yair Shamir   | 59  | Outside Director                                                    
|Miri Gelbman  | 53  | Outside Director                                                    
|Moshe Nir     | 55  | Outside Director                                                    
|Jed M. Arkin  | 41  | Director                                                            
|Moti Motil    | 52  | Director                                                            

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

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

Mr.
          I. Tamir has been President and a Director of Orckit since its founding in
          1990. From 1987 until 1989, Mr. Tamir was employed by Comstream Inc., in San
          Diego, California. From 1985 until 1987, he was vice president of A.T.
          Communication Channels Ltd., a subsidiary of Bezeq. From 1978 to 1985, he was a
          senior engineer in the Israeli Government. Mr. Tamir holds an engineering degree
          from the Technion and an M.B.A. from Tel Aviv University. Mr. Tamir has been
          chairman of the board of directors of Tikcro since January 2000 and its chief
          executive officer since August 2003.

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

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

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

Mr.
          Wechsler joined Orckit in October 2000 as Vice President of research and
          development of Corrigent Systems. From August 1999 to July 2000, he served as
          research and development director at One Path Networks. From September 1997 to
          August 1999, Mr. Wechsler held engineering management positions at ADC Teledata.
          Mr. Wechsler holds a B.Sc. and an M.Sc. in Electrical Engineering from the
          Technion.

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

Mr.
          Gur joined Corrigent in 2005 as Executive Vice President of Sales and
          Marketing. From 2003 to 2005, Mr. Gur was Vice President, Sales and Marketing of
          the optical division of ECI Telecom, an Israeli telecommunications company. From
          1998 to 2003 Mr. Gur served in several marketing positions at ECI Telecoms
          optical division, the most senior of which was Vice President Marketing. Mr. Gur
          holds an M.Sc. degree in physics from Tel-Aviv University.

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

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

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

Mr.
          Motil has served since 1996 as Vice President Finance and an associate of
          Palmot Ltd., an investment company based in Israel. From 1991 until 1996, he
          served as Chief Financial Officer of the Israeli subsidiary of Jan-Bell
          Marketing Inc., a retail company. Mr. Motil holds a B.A. degree in economics and
          accounting from Tel-Aviv University and he is a C.P.A.

Mr.
          Arkin has served as Chairman of PeerPressure, Inc., a company that provides
          peer-to-peer content protection systems, since January 2000 and as Chairman of
          MadahCom Communications Ltd., a spread-spectrum communications company, since
          January 2000.  From 1999 to 2001, he served as General Manager of merchant
          banking for Oscar Gruss & Son, a New York-based investment bank.  From
          1995 to 1998, Mr. Arkin served as Vice President of The Challenge Fund, an
          Israeli venture capital firm. He holds a B.A. from St. Johns College in
          Annapolis, Maryland, an M.B.A. from Harvard Business School and a J.D. from
          Harvard Law School.

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

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

The
aggregate direct remuneration paid by Orckit to all persons as a group (15 persons,
including 2 employees who ceased to be officers in 2004) who served in the capacity of
director or executive officer in 2004 was approximately $ 2.3 million, which includes
$400,000 of pension, retirement or similar benefits, expenses reimbursed (including
professional and other business association dues and expenses) and other fringe benefits.
In 2004, we granted to this group options to purchase an aggregate of 214,000 ordinary
shares under the Orckit Israeli Share Incentive Plan. These options have vesting periods
of four years and an exercise price of $16.70 per share, which represented the market
price of our ordinary shares on the date of grant.

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

# Nasdaq Requirements

Under
the listing requirements of the Nasdaq Stock Market, we are required to have an audit
committee, all of whose members are independent as defined in Nasdaqs
rules. Five out of the seven members of our board of directors, namely, Messrs. Shamir,
Arkin, Gelbman, Nir and Motil, are independent directors under the Nasdaq requirements.
Messrs. Shamir, Gelbman, Nir and Motil are the sole members of our audit committee.

# Israeli Companies Law

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

Board of Directors

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

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

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

Outside Directors

Qualifications
of Outside Directors

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

44

---

---

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

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

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

The
term affiliation includes:

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

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

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

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

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

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

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

Election of Outside
Directors

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

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

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

The
initial term of an outside director is three years and may be extended for an additional
three years. Outside directors may be removed from office only by a vote of the holders of
at least 66-2/3% of the ordinary shares voting thereon, or by a court, and only if the
outside directors cease to meet the statutory qualifications for their appointment or if
they violate their duty of loyalty to the company. Each committee of a companys
board of directors that exercises a power of the board of directors is required to include
at least one outside director, except for the audit committee, which is required to
include all the outside directors. Our outside directors are: Mr. Shamir, who was
re-elected to a second three-year term in 2003, and Ms. Gelbman and Mr. Nir, who were
elected in 2002.

45

---

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# Committees

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

Audit Committee

Israeli Companies Law
Requirements

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

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

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

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

The
role of the audit committee is to identify flaws in the management of our business,
including in consultation with the internal auditor and our independent accountants, to
suggest remedial measures and to approve specified related party transactions. Our audit
committee consists of Mr. Yair Shamir, Mr. Moshe Nir, Ms. Miri Gelbman and Mr. Moti Motil.

Nasdaq Requirements

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

Approval of Related Party
Transactions

Under
the Companies Law and the rules of Nasdaq, the approval of the audit committee is required
to effect specified related-party transactions. Under the Companies Law, the audit
committee may not approve an action or a transaction with related parties or with its
office holders unless at the time of approval at least two outside directors are serving
as members of the audit committee and at least one of whom was present at the meeting in
which any approval was granted.

46

---

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Option Committee

Our
Option Committee administrates our share option plan and is empowered, among other things,
to recommend to our Board of Directors option grants, optionees, dates of grant and the
exercise price of options. Messrs. Eric Paneth, Izhak Tamir and Yair Shamir are currently
the members of our option committee.

# Internal Auditor

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

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

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

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

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

Approval of Specified
Related Party Transactions Under Israeli Law

Fiduciary Duties of
Office Holders

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

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

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

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

47

---

---

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

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

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

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

Disclosure of Personal
Interest of an Office Holder

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

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

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

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

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

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

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

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

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

48

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---

Disclosure of Personal
Interests of a Controlling Shareholder

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

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

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

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

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

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

|                                             | As of December 31,
|-------------------------------------------- | ------------------
|
|
|
|
|Numbers of employees by geographic location  |                   
|Israel                                       | 172               
|United States                                | 11                
|Elsewhere                                    | 0                 
|Total workforce                              | 183               
|Numbers of employees by category of activity
|MIS, finance and administration              | 45                
|Research and development                     | 103               
|Manufacturing, testing and quality assurance | 18                
|Sales and marketing                          | 17                
|Total workforce                              | 183               

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

49

---

---

On
December 31, 2003, there was a small decrease in the number of employees compared to
December 31, 2002, mainly because the operations related to our legacy DSL business
decreased.

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

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

Israeli
labor laws and regulations are applicable to all of our employees in Israel. The laws
principally concern matters such as paid annual vacation, paid sick days, the length of
the workday, payment for overtime, insurance for work-related accidents, severance pay and
other conditions of employment. Israeli law generally requires severance pay, which may be
funded, in whole or in part, by Managers Insurance described below, in certain
circumstances, including the retirement or death of an employee or termination of
employment without cause, as defined under Israeli law. The payments to Managers
Insurance in respect of severance obligations amount to approximately 8.3% of wages.
Furthermore, Israeli employees are required to pay predetermined sums to the National
Insurance Institute. The payments to the National Insurance Institute are approximately
16% of wages of which the employee contributes approximately 66% and the employer
contributes approximately 34%.

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

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

As
of February 28, 2005, Messrs. Eric Paneth and Izhak Tamir, each, directly or through a
wholly owned company, beneficially owned 563,021 ordinary shares, or 12.3% of our ordinary
shares, including options to purchase 20,000 of our ordinary shares at no exercise price
per share. Except for Messrs. Paneth and Tamir, none of our executive officers or
directors beneficially owns 1% or more of our outstanding ordinary shares.

At
December 31, 2004, outstanding options to purchase a total of 1,336,116 ordinary shares
had been granted by us pursuant to our share incentive plan, of which options to purchase
a total of 519,703 ordinary shares were held by our directors and officers (15 persons) as
a group. Our share incentive plan is administered by an option committee of our board of
directors, which is empowered, among other things, to recommend to our board of directors
the optionees, dates of grant and the exercise price of options. Unless otherwise decided
by our board of directors or the option committee, options granted under the share
incentive plan are non-assignable except by the laws of descent. The outstanding options
are exercisable at purchase prices which range from $0 to $60 per share, vest mainly over
up to periods of five years, and have expiration dates which range from 2005 to 2013.

50

---

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Subject
to the approval of the Board of Directors of Orckit, and based on the relative fair market
value of Orckit and Corrigent, options granted by Corrigent may be exercised for
securities of Orckit. Corrigent has granted or reserved options representing approximately
10% of its fully diluted equity. See Item 4.A for further information with respect to the
Corrigent Stock Option Plan.

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

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

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

As
of February 28, 2005, each of Eric Paneth and Izhak Tamir beneficially owns 12.3% of our
ordinary shares and collectively beneficially own approximately 24.6% of our ordinary
shares. Accordingly, Messrs. Paneth and Tamir, if they voted together, may have the power
to control the outcome of matters submitted to a vote of our shareholders, including the
approval of significant change of control transactions.

The
following table sets forth, as of February 28, 2005, the number of our ordinary shares,
which constitute our only voting securities, beneficially owned by (i) all shareholders
known to us to own more than 5% of our outstanding ordinary shares, and (ii) all of our
directors and executive officers as a group. The voting rights of all major shareholders
are the same. As of February 28, 2005, 4,540,718 of our ordinary shares were outstanding.

|Identity of Person or Group                                 | Amount Owned | Percent of Class
|----------------------------------------------------------- | ------------ | ----------------
|
|
|
|
|Eric Paneth (1)                                             |              |                 
|Izhak Tamir (2)                                             |              |                 
|Phylon Fund Limited and affiliate (3)                       |              |                 
|All directors and executive officers as a group(13 persons) |              |                 

---

|(1)(2) | Includes,
in the case of each of Messrs. Tamir and Paneth, 20,000 ordinary                shares
issuable upon the exercise of options that are currently vested or vest
               within the next 60 days. As discussed in Item 6.E, securities held by
Messrs.                Tamir and Paneth of Corrigent may be exercised for shares of
Orckit under                certain circumstances.
|------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based
on a Schedule 13G/A, dated February 10, 2005, of Phylon Fund Limited and
               Phylon Investment Advisers LLP filed with the Securities and Exchange
               Commission.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

51

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|(4) | Includes
160,126 ordinary shares which may be purchased pursuant to options
               exercisable within sixty days following February 28, 2005. As discussed in
Item                6.E, securities of Corrigent held by directors and executive officers
of Orckit                may be exercised for shares of Orckit.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

As
of February 28, 2005, there were 30 holders of record of our ordinary shares in the United
States who collectively held approximately 80.5%of our outstanding ordinary
shares. The number of record holders in the United States is not representative of the
number of beneficial holders nor is it representative of where such beneficial holders are
resident since many of these ordinary shares were held of record by brokers or other
nominees.

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

Founding
Agreement for Corrigent Systems

In
connection with the founding of Corrigent Systems, Inc., we entered into founding
agreement with Corrigent, which we established to undertake new technology projects.
Pursuant to the founding agreement, Orckit contributed and transferred to Corrigent a team
of employees and applicable assets and liabilities related to early stage initiation and
development in its business area. Under the founding agreement, Corrigent assumed all
employment-related obligations, accrued benefits and severance pay of our employees who
became employees of Corrigent.In 2004, Orckit continued to fund Corrigent. Certain
of our directors, officers and employees have previously been granted securities in
Corrigent with a nominal exercise price.

Loan Agreement

As
part of the plan of separation relating to the spin-off of Tikcro, we loaned to Tikcro $20
million. This loan bore interest at a rate of approximately 6% per annum and was required
to be repaid by March 1, 2005. In February 2002, Tikcro announced that it had entered into
a set of agreements with ST Microelectronics, pursuant to which it was to receive certain
funding. In 2002, we were repaid $13.0 million of the principal of this loan and accrued
interest due in the amount of $2.9 million. In May 2003, Tikcro announced the closing of
an asset purchase agreement pursuant to which ST Microelectronics acquired all of
Tikcros assets. After the closing of that transaction, Tikcro paid us the remaining
amount outstanding under the loan.

Tikcro Management
Agreement

Following
the sale of Tikcros business to STMicroelectronics in April 2003, we agreed to
provide Tikcro administrative services. For the services rendered in 2004, Tikcro paid us
$100,000. Fees to be paid by Tickro for 2005 were reduced to $72,000.

Clal Electronics
Industries Ltd.

In
January 2003, we retired $12.5 million principal amount of our convertible subordinated
notes and repurchased 616,590 of our ordinary shares held by Clal for aggregate
consideration of $14.7 million.

52

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Siliquent Technologies

Siliquent
Technologies, a provider of technology for the storage network applications industry, was
founded in 2000 as a technology project. In October 2001, Siliquent Technologies, raised
$10.0 million in equity financing from third parties. Certain of our directors, officers
and employees had previously been granted securities in Siliquent with a nominal exercise
price. In 2003, we participated in follow-on investment rounds in Siliquent and increased
our investment by $1.0 million. In 2004, we participated in another follow on investment
rounds in Siliquent for $1.4 million. Orckits ownership interest in Siliquent is not
significant.

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

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

Not
applicable

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

See
Item 18.

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

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

Our
ordinary shares are quoted on the Nasdaq Stock Market and The Tel-Aviv Stock Exchange
under the symbol ORCT. The following table sets forth, for the periods indicated, the high
and low sales prices of our ordinary shares as reported on the Nasdaq Stock Market. The
price per share of our ordinary shares has been retroactively adjusted to reflect the
one-for-five reverse share split effective as of November 27, 2002 and the spin-off of
Tikcro on June 30, 2000, based on the ratio of our share price to Tikcros share
price on that date. This ratio allocated 44% of the price to Orckit and 56% to Tikcro.

On
February 28, 2005, we announced that our Board of Directors had approved a three-for-one
stock split of our ordinary shares. This split is subject to the approval by our
shareholders of an increase in our authorized share capital from 10,000,000 to 50,000,000
shares. Assuming shareholder approval at a Special Meeting of Shareholders to be held on
March 31, 2005, we expect that the stock split will occur in April 2005. All share and
share price information that we provide after the effective date of the split will be
adjusted to give retroactive effect to this proposed three-for-one stock split.

53

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|Calendar Year |  | Price Per Share
|------------- |  | ---------------
|
|
|
|
|2004          |  |                
|2003          |  |                
|2002          |  |                
|2001          |  |                
|2000          |  |                
|              |  |                
|              |  |                
|              |  |                
|
|
|2005          |  |                
|              |  |                
|2004          |  |                
|              |  |                
|              |  |                
|              |  |                
|              |  |                
|2003          |  |                
|              |  |                
|              |  |                
|              |  |                
|              |  |                

54

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|Calendar Month |  | Price Per Share
|-------------- |  | ---------------
|
|
|
|
|               |  |                
|2005           |  |                
|               |  |                
|               |  |                
|2004           |  |                
|               |  |                
|               |  |                
|               |  |                
|               |  |                

55

---

---

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

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

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

|Calendar Month |  | Price Per Share
|-------------- |  | ---------------
|
|
|
|
|
|
|               |  |                
|2005           |  |                
|               |  |                
|               |  |                
|2004           |  |                
|               |  |                
|               |  |                
|               |  |                
|               |  |                

56

---

---

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

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

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

Not
applicable

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

Our
ordinary shares are quoted on the Nasdaq Stock Market under the symbol ORCT. Our ordinary
shares are also quoted on the Tel-Aviv Stock Exchange.

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

Not
applicable

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

Not applicable

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

Not applicable

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

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

Not
applicable

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

Objects
and Purposes

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

57

---

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# Transfer of Shares and
Notices

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

# Dividend and
Liquidation Rights

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

# Voting,
Shareholders Meetings and Resolutions

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

These
voting rights may be affected by the grant of any special voting rights to the holders of
a class of shares with preferential rights that may be authorized in the future.

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

The
quorum required for a meeting of shareholders consists of at least two shareholders
present in person or by proxy who hold or represent between them at least 25% of the
outstanding voting shares, unless otherwise required by applicable rules. Nasdaq generally
requires a quorum of 33-1/3%, but we have received an exemption from that requirement
based on the generally accepted business practice for companies in Israel to have a quorum
requirement of 25%. A meeting adjourned for lack of a quorum generally is adjourned to the
same day in the following week at the same time and place or any time and place as the
chairman may designate with the consent of a majority of the voting power represented at
the meeting and voting on the matter adjourned. At such reconvened meeting the required
quorum consists of any two members present in person or by proxy, unless otherwise
required by applicable rules. Pursuant to the requirements of Nasdaq, unless we obtain a
further exemption from Nasdaq, the quorum required for any such adjourned meetings will be
25%.

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We
have obtained an exemption from Nasdaqs requirement to send an annual report to
shareholders prior to our annual general meetings. We file annual reports on Form 20-F
electronically with the SEC and post a copy on our website.

# Duties of Shareholders

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

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

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

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

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

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

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

# Anti-Takeover
Provisions; Mergers and Acquisitions

The
Israeli Companies Law includes provisions that allow a merger transaction and requires
that each company that is a party to a merger have the transaction approved by its board
of directors and a vote of the majority of its shares, at a shareholders meeting
called on at least 21 days prior notice. For purposes of the shareholder vote,
unless a court rules otherwise, the statutory merger will not be deemed approved if a
majority of the shares present that are held by parties other than the other party to the
merger, or by any person who holds 25% or more of the shares or the right to appoint 25%
or more of the directors of the other party, vote against the merger. Upon the request of
a creditor of either party of the proposed merger, the court may delay or prevent the
merger if it concludes that there exists a reasonable concern that as a result of the
merger, the surviving company will be unable to satisfy the obligations of any of the
parties to the merger. In addition, a merger may not be completed unless at least 70 days
have passed from the time that the requisite proposal for the merger has been filed by
each party with the Israeli Registrar of Companies.

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

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

Israeli
tax law also treats stock-for-stock acquisitions between an Israeli company and a foreign
company less favorably than does U.S. tax law. For example, Israeli tax law may, under
certain circumstances, subject a shareholder who exchanges his ordinary shares for shares
of another corporation to taxation prior to the sale of the shares received in such
stock-for-stock swap.

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

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

Each
right initially will entitle shareholders to buy one-half of one of our ordinary shares
for $65.00. The rights generally will be exercisable and transferable apart from our
ordinary shares only if a person or group becomes an acquiring person by
acquiring beneficial ownership of 15% or more of our ordinary shares, subject to certain
exceptions set forth in the rights plan, or commences a tender or exchange offer upon
consummation of which such person or group would become an acquiring person.
Subject to certain conditions described in the rights plan, once the rights become
exercisable, the holders of rights, other than the acquiring person, will be entitled to
purchase ordinary shares at a discount from the market price.

60

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

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

# Modification of Class
Rights

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

# Indemnification,
Exculpation and Insurance of Office Holders

Exculpation of Office
Holders

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

Insurance of Office
Holders

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

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

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

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

We
obtained liability insurance covering our officers and directors.

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Indemnification of Office
Holders

Our
articles of association provide that we may indemnify an office holder against the
following obligations and expenses imposed on the office holder with respect to an act
performed in the capacity of an office holder:

| |  | a
 financial  obligation  imposed  on him in favor of  another  person  by a court
 judgment,               including a settlement judgment or an arbitrator's award
approved by the court; and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, incurred by the office holder or
which the office holder was ordered to pay by a court in connection with:
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | proceedings
 we  institute  against  him or that are  instituted  on our behalf or by another
                      person;
| | - | ---------------------------------------------------------------------------------------------------------------------------

| |  | a
criminal charge from which he is acquitted; or
| | - | ------------------------------------------------

| |  | a
criminal  proceeding  in which he is convicted of an offense that does not require proof
of                       criminal intent.
| | - | ------------------------------------------------------------------------------------------------------------------------------------

Our
articles of association also include provisions:

| |  | authorizing
us to undertake in advance to indemnify an office holder as described above, provided
that the undertaking is limited to those types of events which our board of directors
deems to be anticipated when the undertaking is given and to an amount determined by our
board of directors to be reasonable under the circumstances; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | authorizing
us to retroactively indemnify an officer or director.
| | - | -----------------------------------------------------------------

Limitations on
Exculpation, Insurance and Indemnification

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

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

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

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

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

In
addition, under the Companies Law, exculpation of, indemnification of, and procurement of
insurance coverage for our office holders must be approved by our audit committee and our
board of directors and, if the beneficiary is a director, by our shareholders.

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

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

For
a description of our bank loan agreements, see: Liquidity and Capital
Resources under Item 5B of this Annual Report on Form 20-F.

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

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

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

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

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

# United States

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

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

| |  | a
 corporation  or  partnership   (or  other  entity  taxable  as  a  corporation  or  a
              partnership)  created  or  organized  under  the  laws  of the  U.S.  or
 any  political               subdivision thereof;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

This
summary does not consider all aspects of U.S. federal income taxation that may be relevant
to particular U.S. Holders by reason of their particular circumstances, including
potential application of the alternative minimum tax, or any aspect of state, local or
non-U.S. federal tax laws. In addition, this summary is directed only to U.S. Holders that
hold our ordinary shares as capital assets and does not address the considerations that
may be applicable to particular classes of U.S. Holders, including financial institutions,
regulated investment companies, real estate investment trusts, pension funds, insurance
companies, broker-dealers, tax-exempt organizations, grantor trusts, or other pass-through
entities, holders whose functional currency is not the U.S. dollar, holders of our
ordinary shares as part of a straddle, hedge or conversion
transaction and holders, directly, indirectly or through attribution, of 10% or more
(by vote or value) of our outstanding ordinary shares.

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

# Sale or Exchange of
Ordinary Shares

Subject to the discussion below under
Passive Foreign Investment Company Status, a U.S. Holders sale or
exchange of ordinary shares generally will result in the recognition by such U.S. Holder
of capital gain or loss in an amount equal to the difference between the U.S. Dollar value
of the amount realized and the U.S. Holders tax basis in the ordinary shares sold.
This gain or loss will be long-term capital gain or loss if the ordinary shares sold have
been held for more than one year at the time of the sale or exchange. Individual U.S.
Holders currently are subject to a maximum tax rate of 15% on long-term capital gains for
tax years beginning on or before December 31, 2008. Short-term capital gains generally are
taxed at the same rates applicable to ordinary income. If the U.S. Holders holding
period on the date of the sale or exchange is one year or less, such gain or loss will be
a short-term capital gain or loss. See   Israel  Capital Gains Tax for
a discussion of taxation by Israel of capital gains realized on sales of our ordinary
shares. Any capital loss realized upon the sale, exchange or other disposition of ordinary
shares generally is deductible only against capital gains and not against ordinary income,
except that in the case of non-corporate U.S. Holders, a capital loss is deductible to the
extent of capital gains plus ordinary income up to $3,000. In general, any capital gain
recognized by a U.S. Holder upon the sale or exchange of ordinary shares will be treated
as U.S.-source income for U.S. foreign tax credit purposes. Under the tax treaty between
the United States and Israel, gain derived from the sale, exchange or other disposition of
ordinary shares by a U.S. Holder who is a resident of the United States for purposes of
the treaty and who sells the ordinary shares within Israel may be treated as
foreign-source income for U.S. foreign tax credit purposes.

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A
U.S. Holders tax basis in his, her or its ordinary shares generally will be the
purchase price paid therefore by such U.S. Holder. The holding period of each ordinary
share owned by a U.S. Holder will commence on the day following the date of the U.S.
Holders purchase of such ordinary share and will include the day on which the
ordinary share is sold by such U.S. Holder.

In
the case of a U.S. Holder who uses the cash basis method of accounting and who receives
NIS in connection with the sale or other taxable disposition of ordinary shares, the
amount realized will be based on the spot rate on the settlement date of such
sale or other taxable disposition. If such U.S. Holder subsequently converts NIS into U.S.
Dollars at a conversion rate other than the spot rate in effect on the settlement date,
he, she or it may have a foreign currency exchange gain or loss treated as ordinary income
or loss for U.S. federal income tax purposes. A U.S. Holder who uses the accrual method of
accounting may elect the same treatment required of cash method taxpayers with respect to
a sale or other taxable disposition of ordinary shares, provided that the election is
applied consistently from year to year. Such election may not be changed without the
consent of the U.S. Internal Revenue Service. If an accrual method U.S. Holder does not
elect to be treated as a cash method taxpayer (pursuant to the Treasury regulations
applicable to foreign currency transactions), such U.S. Holder may be deemed to have
realized an immediate foreign currency gain or loss for U.S. federal income tax purposes
in the event of any difference between the U.S. Dollar value of the NIS on the date of
sale or other taxable disposition and the settlement date. Any such currency gain or loss
would be treated as ordinary income or loss and would be subject to tax in addition to any
gain or loss recognized by such U.S. Holder on the sale or other taxable disposition of
ordinary shares.

# Treatment of
Distributions

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

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

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

# Passive Foreign
Investment Company Status

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

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

Because
less than 75% of our gross income in 2004 constituted passive income for purposes of the
Income Test, we do not believe that we would have been treated as a PFIC under the Income
Test. Under the Asset Test, however, it is likely, under the approach set forth in the
legislative history to the 1997 Act, that we would be deemed to have been a PFIC in 2004,
as well as in 2001, 2002 and 2003, primarily because (a) a significant portion of our
assets consisted of cash, short- and long-term deposits and marketable securities from the
remaining proceeds of our offerings, and (b) the relatively low public market valuation of
our ordinary shares. Accordingly, U.S. Holders are urged to consult their own tax advisors
for guidance as to our status as a PFIC. For those U.S. Holders who determine that we were
a PFIC in any future tax year and notify us in writing of their request for the
information required in order to effectuate the QEF Election described below, we will
promptly make such information available to them.

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

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

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

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

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

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

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

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

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

68

---

---

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

# Information Reporting
and Backup Withholding

Payments
in respect of our ordinary shares that are made in the U.S. or by certain U.S.-related
financial intermediaries may be subject to information reporting and backup withholding
tax at rates equal to 28% through 2010 and 31 % after 2010. Backup withholding will not
apply, however, to a U.S. Holder that (i) is a corporation or comes within certain exempt
categories, and demonstrates that fact when so required, or (ii) furnishes a correct
taxpayer identification number and makes any other required certifications. Backup
withholding is not an additional tax. Amounts withheld under the backup withholding rules
may be credited against a U.S. Holders U.S. tax liability, and a U.S. Holder may
obtain a refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for refund with the U.S. Internal Revenue Service.

Israel

The
following discussion, which represents a summary of certain Israeli tax laws affecting our
shareholders, including U.S. and other non-Israeli shareholders, is for general
information only and is not intended to substitute for careful or specific tax planning.
To the extent that the discussion is based on legislation yet to be judicially or
administratively interpreted, there can be no assurance that the views expressed herein
will accord with any such interpretation in the future by the tax authorities or by the
courts. This discussion is not intended, and should not be construed, as legal or
professional tax advice, and does not cover all possible tax considerations. Accordingly,
each investor should consult his or her own tax advisor as to the particular tax
consequences of an investment in the ordinary shares including the effects of applicable
Israeli or foreign or other tax laws and possible changes in the tax laws.

# Capital Gains Tax

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

69

---

---

Generally,
capital gains tax is imposed on Israeli residents at a rate of 15% on real gains derived
on or after January 1, 2003 from the sale of shares in, among others, (i) Israeli
companies publicly traded on Nasdaq or a recognized stock market in a country that has a
treaty for the prevention of double taxation with Israel; or (ii) companies traded on both
the TASE and Nasdaq or a recognized stock market outside of Israel (such as Orckit). This
tax rate is contingent upon the shareholder not claiming a deduction for financing
expenses in connection with such shares (in which case the capital gain will be taxed at a
rate of 25%), and does not apply to: (i) the sale of shares to a relative (as defined in
the Israeli Income Tax Ordinance); (ii) the sale of shares by dealers in securities
who will be taxed at corporate tax rates for corporations and at marginal tax rates of up
to 49% for individuals; (iii) the sale of shares by shareholders that report in accordance
with the Income Tax Law (Inflationary Adjustments), 5745-1985, referred to as the
Inflationary Adjustments Law, who will be taxed at corporate tax rates for corporation and
at marginal tax rates of up to 49% for individuals; or (iv) the sale of shares by
shareholders who acquired their shares prior to the issuers initial public offering
(that may be subject to a different tax arrangement). The tax basis of shares acquired
prior to January 1, 2003 will be determined in accordance with the average closing share
price in the three trading days preceding January 1, 2003. However, a request may be made
to the tax authorities to consider the actual adjusted cost of the shares as the tax basis
if it is higher than such average price.

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

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

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

# Tax on Dividends

Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel.
These sources of income include passive income such as dividends, royalties and interest,
as well as non-passive income from services rendered in Israel. On distributions of
dividends other than bonus shares, or stock dividends, we would be required to withhold
income tax at the rate of up to 25%, unless a different rate is provided in a treaty
between Israel and the shareholders country of residence. If the income out of which
the dividend is being paid is attributable to an Approved Enterprise, the rate is 15%.
Under the U.S.-Israel Tax Treaty, if the income out of which the dividend is being paid is
not attributable to an Approved Enterprise, then income tax with respect to shareholders
that are U.S. corporations holding at least 10% of our issued voting power during the part
of the tax year which precedes the date of payment of the dividend and during the whole of
its prior tax year, is required to be withheld at the rate of 12.5%. For more information
on Approved Enterprises, please refer to Item 5B of this Annual Report.

70

---

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

Not
applicable

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

Not applicable.

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

We
are subject to the informational requirements of the Securities Exchange Act of 1934, as
amended, applicable to foreign private issuers and fulfill the obligations with respect to
such requirements by filing reports with the Securities and Exchange Commission, or
SEC.  You may read and copy any document we file, including any exhibits, with the
SEC without charge at the SECs public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549.  Copies of such material may be obtained by mail from the
Public Reference Branch of the SEC at such address, at prescribed rates.  Please call
the SEC at 1-800-SEC-0330 for further information on the public reference room. 
Certain of our SEC filings are also available to the public at the SECs website at
http://www.sec.gov.

As
a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing
the furnishing and content of proxy statements, and our officers, directors and principal
shareholders are exempt from the reporting and short-swing profit recovery
provisions contained in Section 16 of the Exchange Act.  In addition, we are not
required under the Exchange Act to file periodic reports and financial statements with the
SEC as frequently or as promptly as United States companies whose securities are
registered under the Exchange Act.

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

Not
applicable

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

General

We
are exposed to market risk, including movements in interest rates and foreign currency
exchange rates. Our primary market risk exposure occurs because we generate most of our
revenues in Japanese Yen but incur a majority of our salaries and related expenses and
part of our other expenses in New Israeli Shekels.

From
time to time, in managements discretion, we engage in hedging or other transactions
intended to manage risks relating to foreign currency exchange rates. As of February 28,
2005, we were not involved in any hedging transactions. We may in the future undertake
hedging or other similar transactions or invest in market risk sensitive instruments when
our management determines that it is necessary to offset these risks.

71

---

---

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

# Exchange Rate Risk
Management

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

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

The
table below presents our balance sheet exposure as of December 31, 2004 at fair value
related to market risk sensitive instruments, mainly short term receivables and payables
in currencies other than U.S. dollars. Substantially all of such balance is in the
currencies set forth in the table below. The information is presented in U.S. dollars (in
millions), which is our reporting currency.

Please
see also the explanatory notes below the table.

|         | New Israeli
Shekels | Japanese Yen
(3) | Total
|-------- | ------------------- | ---------------- | -----
|
|
|
|
|Israel   |                     |                  |      
|Far East |                     |                  |      
|Total    |                     |                  |      

Explanatory
notes:

1)       
          Total balance sheet exposure relating to market risk sensitive instruments is
          the sum of the absolute figures (excess of assets over liabilities in the amount
          of 52.5 million). A devaluation of 5% of the U.S. dollar compared to the NIS
          would cause an increase in expenses of approximately $75,000. A devaluation of
          5% of the U.S. dollar compared to the Japanese Yen would cause a decrease in
          expenses of approximately $2.7 million.

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

3)       
          As of February 28, 2005, the balance sheet exposure in Japanese Yen was reduced
          to approximately $8.5 million.

# Interest Rate Risk
Management

As
of December 31, 2004, we had $26.6 million of cash and cash equivalents, $6.8 million of
short-term bank deposits, $9.6 million of trading securities, $15.8 million of short-term
marketable securities and $18.4 million of long-term marketable securities. Our trading
and marketable securities mature as follows: $25.2 million in 2005, and $18.6 million over
a period from 2005 to 2007. Due to the relatively short-term maturities of the
Companys cash, deposits and securities portfolio, an immediate 10% change in the
current interest rates (for example, from 5.0% to 5.5%) is not expected to have a material
effect on its near-term financial condition or results of operations.

72

---

---

|ITEM 12. | DESCRIPTION
OF SECURITIES OTHER THAN EQUITY SECURITIES
|-------- | ------------------------------------------------------

Not
applicable

# PART II

|ITEM 13. | DEFAULTS,
DIVIDEND ARREARAGES AND DELINQUENCIES
|-------- | -----------------------------------------------

Not
applicable

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

Not
applicable

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

We
performed an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of December 31, 2004. The evaluation was performed with the
participation of our senior management and under the supervision and with the
participation of our chief executive officer and chief financial officer. Based on this
evaluation, our principal executive officer and principal financial officer have concluded
that our disclosure controls and procedures are effective to alert them on a timely basis
to material information required to be included in our periodic reports with the
Securities and Exchange Commission.

In
addition, there were no changes in our internal control over financial reporting that
occurred during 2004 that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.

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

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

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

On
March 30, 2004, our board of directors adopted our Code of Ethics, a code that applies to
all of our officers, directors and employees. We will provide our Code of Ethics free of
charge to any person who requests a copy of it. Such requests may be sent to our offices
in 126 Yigal Alon Street, Tel Aviv, Israel, attention: Controller.

73

---

---

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

In
the annual meeting held in May 2004, our shareholders re-appointed Kesselman &
Kesselman, a member of PricewaterhouseCoopers International Limited, to serve as our
independent auditors. These accountants billed the following fees to us for professional
services in each of the last two fiscal years:

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

Audit
Fees are the aggregate fees billed for the audit of our annual financial statements.
This category also includes services that generally the independent accountant provides,
such as statutory audits including audits required by the Office of the Chief Scientist
and other Israeli government institutes, consents and assistance with and review of
documents filed with the SEC. Audit-Related Fees are the aggregate fees billed
for assurance and related services that are reasonably related to the performance of the
audit and are not reported under Audit Fees. These fees include mainly accounting
consultations regarding the accounting treatment of matters that occur in the regular
course of business, implications of new accounting pronouncements and other accounting
issues that occur from time to time. Tax Fees are the aggregate fees billed
for professional services rendered for tax compliance, tax advice, other than in
connection with the audit. Tax compliance involves preparation of original and amended tax
returns, tax planning and tax advice.

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

None
of the fees paid by us to our independent auditors during 2004 were for services approved
pursuant to 2-01(c)(7)(i)(C) of Regulation S-K.

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

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

74

---

---

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

Not
applicable.

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

Not
applicable.

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

See
Item 18.

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

Attached.
          See Item 19(a).

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

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

|                                                           
|-----------------------------------------------------------
|
|
|
|
|Table of Contents to 2004 Consolidated Financial Statements
|Report of Independent Registered Public Accounting Firm    
|                                                           
|Consolidated Financial Statements:                         
|Balance Sheets at December 31, 2003 and 2004               
|Statements of Operations for the Years Ended               
|December 31, 2002, 2003 and 2004                           
|Statements of Changes in Shareholders' Equity for the      
|Years Ended December 31, 2002, 2003 and 2004               
|Statements of Cash Flows for the Years Ended               
|December 31, 2002, 2003 and 2004                           
|Notes to Financial Statements                              

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

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

75

---

---

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

|1.17 |  | Memorandum of Association, as amended.
|----- |  | --------------------------------------

|1.27 |  | Fourth
Amended and Restated Articles of Association.
|---- |  | ----------------------------------------------------

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

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

|4.12 |  | Orckit
Israeli Share Incentive Plan, as amended (2000).
|---- |  | -------------------------------------------------------

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

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

|4.76 |  | Spediant
Stock Option Plan
|---- |  | --------------------------

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

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

|4.11* |  | Letter
of undertaking dated December 5, 2005 of Orckit Communications Ltd to Bank Hapoalim B.M
|----- |  | ----------------------------------------------------------------------------------------------

|4.12* |  | Undertaking dated
December 5, 2005 of Orckit Communications Ltd to Bank Hapoalim B.M
|----- |  | ------------------------------------------------------------------------------------

|4.13* |  | Debenture
dated December 5, 2005 of Orckit Communications Ltd to Bank Hapoalim B.M
|----- |  | ----------------------------------------------------------------------------------

|4.14* |  | Debenture
dated December 5, 2005 of Corrigent Systems Ltd to Bank Hapoalim B.M
|----- |  | ------------------------------------------------------------------------------

|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
                to § 302 of the Sarbanes-Oxley Act
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------

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

76

---

---

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

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

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

---

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

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

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

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

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

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

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

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

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

77

---

---

# SIGNATURES

The
Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F
and has duly caused and authorized the undersigned to sign this annual report on its
behalf.

| |  | ORCKIT COMMUNICATIONS LTD.BY: /S/ Izhak Tamir
Izhak TamirPresident
Date: March 21, 2005
| |  | -----------------------------------------------------------------------------------------------------

78

---

---

# ORCKIT COMMUNICATIONS
LTD.

(An Israeli Corporation)

2004 CONSOLIDATED
FINANCIAL STATEMENTS



---

---

# ORCKIT COMMUNICATIONS
LTD.

(An Israeli Corporation)

2004 CONSOLIDATED
FINANCIAL STATEMENTS

TABLE OF CONTENTS

|                                                                        | Page      
|----------------------------------------------------------------------- | ----------
|
|
|
|
|REPORT OF INDEPENDENT REGISTERED PUBLIC
                ACCOUNTING FIRM | F-2       
|                                                                       
|CONSOLIDATED FINANCIAL STATEMENTS:                                     
|Balance sheets                                                          | F-3       
|Statements of operations                                                | F-4       
|Statements of changes in shareholders' equity                           | F-5       
|Statements of cash flows                                                | F-6       
|Notes to financial statements                                           | F-7 - F-27

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



---

---

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders of ORCKIT COMMUNICATIONS LTD.

We have audited the consolidated balance
sheets of Orckit Communications Ltd. (the Company) and its subsidiaries as of
December 31, 2003 and 2004, 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, 2004. 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 the standards of the Public
Company Accounting Oversight Board (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,
2003 and 2004 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, 2004, in conformity with accounting principles generally accepted in
the United States.

|                 |                                     | 
|---------------- | ----------------------------------- | 
|
|
|
|
|Tel Aviv, Israel | /s/ Kesselman & Kesselman          
|March 9, 2005    | Certified Public Accountants (Isr.)

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

F - 2

---

---

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

|                                                                             | December 31
|---------------------------------------------------------------------------- | -----------
|
|
|
|
|A s s e t s                                                                  |            
|CURRENT ASSETS:                                                              |            
|Cash and cash equivalents                                                    |            
|Marketable securities  (note 9a)                                             |            
|Bank deposits (note 9d)                                                      |            
|Trade receivables (note 9b)                                                  |            
|Other receivables (note 9c)                                                  |            
|Inventories                                                                  |            
|                                                                             |            
|T o t a l    current assets                                                  |            
|                                                                             |            
|LONG-TERM INVESTMENTS:                                                       |            
|Marketable securities (note 9a)                                              |            
|Other (notes 1c, 3a, 9d)                                                     |            
|                                                                             |            
|                                                                             |            
|                                                                             |            
|PROPERTY AND EQUIPMENT- net (note 2):                                        |            
|                                                                             |            
|DEFERRED ISSUANCE COSTS,net of accumulated amortization (note 1g)            |            
|                                                                             |            
|T o t a l    assets                                                          |            
|                                                                             |            
|Liabilities and shareholders' equity                                         |            
|CURRENT LIABILITIES:                                                         |            
|Bank loans (note 9e)                                                         |            
|Trade payables                                                               |            
|Accrued expenses and other payables (note 9f)                                |            
|Deferred income (note 9g)                                                    |            
|                                                                             |            
|T o t a l   current liabilities                                              |            
|                                                                             |            
|LONG-TERM LIABILITIES:                                                       |            
|Accrued severance pay (note 3)                                               |            
|Convertible subordinated notes (note 4)                                      |            
|                                                                             |            
|T o t a l   long-term liabilities                                            |            
|                                                                             |            
|COMMITMENTS(note 5)                                                          |            
|                                                                             |            
|T o t a l   liabilities                                                      |            
|                                                                             |            
|SHAREHOLDERS' EQUITY(note 6):                                                |            
|Share capital - ordinary shares of no par value and paid-in capital          |            
|(authorized 10,000,000 shares; issued: December 31, 2003 - 5,216,593 shares; |            
|December 31, 2004 - 5,275,995 shares; outstanding: December 31, 2003 -       |            
|4,334,980 shares; December 31, 2004 - 4,394,382 shares)                      |            
|Deferred compensation                                                        |            
|Accumulated deficit                                                          |            
|Treasury shares, at cost  (881,613 ordinary shares)                          |            
|                                                                             |            
|T o t a l    shareholders' equity                                            |            
|                                                                             |            
|T o t a l   liabilities and shareholders' equity                             |            
|                                                                             |            

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

F - 3

---

---

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

|                                                     | Year ended December 31
|---------------------------------------------------- | ----------------------
|
|
|
|
|REVENUES(note 9h)                                    |                       
|COST OF REVENUES(note 9i)                            |                       
|                                                     |                       
|GROSS PROFIT                                         |                       
|RESEARCH AND DEVELOPMENT EXPENSES- net     (note 9j) |                       
|SELLING, GENERAL AND ADMINISTRATIVE                  |                       
|EXPENSES                                             |                       
|                                                     |                       
|OPERATING LOSS                                       |                       
|FINANCIAL INCOME- net (note 9k)                      |                       
|                                                     |                       
|NET INCOME (LOSS) FOR THE YEAR                       |                       
|                                                     |                       
|                                                     |                       
|                                                     |                       
|EARNINGS (LOSS) PER SHARE ("EPS")(note 9m):          |                       
|                                                     |                       
|Basic                                                |                       
|                                                     |                       
|Diluted                                              |                       
|                                                     |                       
|                                                     |                       
|WEIGHTED AVERAGE NUMBER OF SHARES                    |                       
|USED IN COMPUTATION OF EPS:                          |                       
|                                                     |                       
|Basic                                                |                       
|                                                     |                       
|Diluted                                              |                       
|                                                     |                       

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

F - 4

---

---

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

|                                                                              | Share capital |  |  |       |   |  
|----------------------------------------------------------------------------- | ------------- |  |  | ----- | - | -
|
|
|
|
|BALANCE AT JANUARY 1, 2002                                                    |               |  |  | 4,875 |   | $
|CHANGES DURING 2002:                                                          |               | 
|Net income                                                                    |               |  |  |       |   |  
|Exercise of options granted to employees                                      |               |  |  | 105   |   |  
|Amortization of deferred compensation related to employee                     |               | 
|stock option grants                                                           |               |  |  |       |   |  
|Cancellation of ordinary shares par value                                     |               |  |  |       |   |  
|                                                                              |               |  |  |       |   |  
|BALANCE AT DECEMBER 31, 2002                                                  |               |  |  | 4,980 |   |  
|CHANGES DURING 2003:                                                          |               | 
|Net loss                                                                      |               |  |  |       |   |  
|Issuance of shares to employees, exchangeable to options, 
    see note 6a(5) |               |  |  | 600   |   |  
|Exercise of options granted to employees                                      |               |  |  | 237   |   |  
|Acquisition of treasury stock                                                 |               |  |  | (882  | ) |  
|Exchange of shares into options, see note 6a(5)                               |               |  |  | (600  | ) |  
|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                     |               |  |  |       |   |  
|                                                                              |               |  |  |       |   |  
|BALANCE AT DECEMBER 31, 2003                                                  |               |  |  | 4,335 |   |  
|CHANGES DURING 2004:                                                          |               | 
|Net loss                                                                      |               |  |  |       |   |  
|Exercise of options granted to employees                                      |               |  |  | 59    |   |  
|Amortization of deferred compensation related to employee                     |               | 
|stock option grants                                                           |               |  |  |       |   |  
|                                                                              |               |  |  |       |   |  
|BALANCE AT DECEMBER 31, 2004                                                  |               |  |  | 4,394 |   | $
|                                                                              |               |  |  |       |   |  

|*
The figures as of January 1, 2002 are after giving retroactive effect to the one-for-five
reverse share split, see note 6a(2).
|--------------------------------------------------------------------------------------------------------------------------------

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

F - 5

---

---

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

|                                                                   | Year ended December 31
|------------------------------------------------------------------ | ----------------------
|
|
|
|
|CASH FLOWS FROM OPERATING ACTIVITIES:                              |                       
|Net income (loss) for the year                                     |                       
|Adjustments to reconcile net income (loss) to net cash provided by |                       
|(used in) operating activities:                                    |                       
|Depreciation and amortization:                                     |                       
|Property and equipment                                             |                       
|Deferred charges                                                   |                       
|Impairment of property and equipment                               |                       
|Trading marketable securities, net                                 |                       
|Gain from early extinguishment of convertible subordinated notes   |                       
|Interest and premium amortization on long-term investments         |                       
|Increase in accrued severance pay                                  |                       
|Amortization of deferred compensation related to employee          |                       
|stock option grants, net                                           |                       
|Changes in operating assets and liabilities:                       |                       
|Decrease (increase) in trade receivables and other receivables     |                       
|Increase (decrease)  in trade payables, accrued expenses           |                       
|and other payables                                                 |                       
|Increase in deferred income                                        |                       
|Decrease (increase) in inventories                                 |                       
|                                                                   |                       
|Net cash provided by (used in) operating activities                |                       
|                                                                   |                       
|CASH FLOWS FROM INVESTING ACTIVITIES:                              |                       
|Purchase of property and equipment                                 |                       
|Bank deposits, net                                                 |                       
|Funds in respect of accrued severance pay                          |                       
|Long term investments                                              |                       
|Collection of long-term loan granted                               |                       
|Maturities of marketable securities held to maturity               |                       
|Purchase of marketable securities held to maturity                 |                       
|                                                                   |                       
|Net cash provided by (used in) investing activities                |                       
|                                                                   |                       
|CASH FLOWS FROM FINANCING ACTIVITIES:                              |                       
|Short-term bank loan, net                                          |                       
|Long-term bank loan received                                       |                       
|Cost of acquisition of treasury shares                             |                       
|Exercise of options granted to employees                           |                       
|Early extinguishment of convertible subordinated notes             |                       
|                                                                   |                       
|Net cash provided by (used in) financing activities                |                       
|                                                                   |                       
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS               |                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT                            |                       
|BEGINNING OF YEAR                                                  |                       
|                                                                   |                       
|BALANCE OF CASH AND CASH EQUIVALENTS AT                            |                       
|END OF YEAR                                                        |                       
|                                                                   |                       
|                                                                   |                       
|SUPPLEMENTARY DISCLOSURE OF CASH FLOW                              |                       
|INFORMATION - CASH PAID DURING THE YEAR FOR:                       |                       
|Interest paid                                                      |                       
|                                                                   |                       
|Advances paid to income tax authorities                            |                       
|                                                                   |                       

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

F - 6

---

---

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
2004, substantially all of the Companys revenues were derived from the sale of the
CM-100 product line, which is a transport telecommunication equipment targeting high
capacity packetized metropolitan networks. In 2002 and 2003, substantially all of the
Companys revenues were derived from the sale of ADSL (Asymmetric Digital Subscriber
Line) broadband equipment for access networks. The Company does not expect to have
additional revenues from the ADSL broadband equipment product line.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
CM-100 product line, which in 2004 generated substantially all of the Companys
revenues was initiated and funded by Orckit as a technology project through its
subsidiary, Corrigent Systems (Corrigent).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2004, the Company reached an agreement for deployment in Japan of its CM-100
products. Under the agreement and related terms, the Company is also obligated to supply warranty and
related services. The substantial majority of the Companys revenues in 2004 were
derived from this agreement, see note 9h. Through December 31, 2004, the Company has
delivered a significant portion of units. A portion of the consideration for the Companys
sales was collected and the remainder was recorded as trade receivables. However, these
revenues will be recognized ratably over a period of 14 months since vendor-specific
objective evidence (VSOE) for the fair value of post contract hardware and
software support services included in the agreement is not avalaible, see note 1i. below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 7

---

---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

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

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

| | Intercompany
balances and transactions have been eliminated.
| | ------------------------------------------------------------

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

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

| | Marketable
securities classified as trading securities are recorded at fair market value, with
unrealized gains and losses included in financial income or expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Debt
securities that the Company plans to 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Other
investments
| | -- | -----------------

| | These
investments include an investment in another company in a venture stage in the amount of
$1.9 million. This investment is included within other long-term investments on the
balance sheet, is stated at cost, net of write-down for decrease in value which is not of
a temporary nature.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Inventories,
which as of December 31, 2004 consist of finished products, are valued at the lower of
cost or market. Cost is determined based on the specific cost of each product.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

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

|                                  | Years
|--------------------------------- | -----
|Computers, software and equipment | 2-5  
|Office furniture and equipment    | 6-10 

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

F - 8

---

---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

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

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

| | Issuance
costs of convertible subordinated notes, in the original amount of $ 4,531,000, were
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 was adjusted proportionately. In April 2004, the
convertible subordinated notes were fully retired and all remaining issuance costs were
amortized. Accordingly, there are no deferred issuance costs as of December 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Companys
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 an arrangement exists, the fee is fixed or
determinable and collectibility is reasonably assured.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company granted customer post-contract hardware and software support services (PCS)
in connection with sales in 2004. Accordingly, where VSOE of the fair value of PCS could
not be determined, the Company recognizes revenue for the entire arrangement ratably over
the term of the PCS.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
deferred income balance as of December 31, 2004 equals the amount of revenues that were
invoiced and due on delivery, but deferred, less applicable product, PCS and warranty
costs.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

| | The
Company grants warranty servicing for products sold. The Company 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.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | m. | Cash
equivalents
| | -- | ----------------

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

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

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

| | In
computing diluted earning per share, the potential dilutive effect of outstanding stock
options was taken into account using the treasury stock method. See also note 9m.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 6a(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

---

---

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:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                | Year ended December 31
|------------------------------- | ----------------------
|
|
|
|
|Net income (loss), as reported  |                       
|Add: stock based employee       |                       
|compensation expense,           |                       
|included in reported net income |                       
|(loss)                          |                       
|Deduct: stock based employee    |                       
|compensation expense            |                       
|determined under the fair value |                       
|method for all awards           |                       
|                                |                       
|Pro forma net income (loss)     |                       
|                                |                       
|                                |                       
|Earnings (loss) per share:      |                       
|Basic - as reported             |                       
|Basic - pro forma               |                       
|Diluted - as reported           |                       
|Diluted - pro forma             |                       

| | q. | Deferred
income taxes
| | -- | ---------------------

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

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

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

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

F - 11

---

---

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

NOTE 1  SIGNIFICANT
ACCOUNTING POLICIES(continued):

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

| | FAS
123 (Revised 2004) Share-based Payment
| | ------------------------------------------

| | In
December 2004, the FASB issued the revised FAS No. 123, Share-Based Payment (FAS 123R),
which addresses the accounting for share-based payment transactions in which the Company
obtains employee services in exchange for (a) equity instruments of the Company or (b)
liabilities that are based on the fair value of the Companys equity instruments or
that may be settled by the issuance of such equity instruments. This Statement eliminates
the ability to account for employee share-based payment transactions using APB 25, and
requires instead that such transactions be accounted for using the grant-date fair value
based method. This Statement will be effective as of the beginning of the first interim
or annual reporting period that begins after June 15, 2005 (July 1, 2005 for the
Company). This Statement applies to all awards granted or modified after the Statements
effective date. In addition, compensation cost for the unvested portion of previously
granted awards that remain outstanding on the Statements effective date shall be
recognized on or after the effective date, as the related services are rendered, based on
the awards grant-date fair value as previously calculated for the pro-forma
disclosure under FAS 123.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company expects that upon the adoption of FAS 123R, it will apply the modified
prospective application transition method, as permitted by the Statement. Under such
transition method, upon the adoption of FAS 123R, the Companys financial statements
for periods prior to the effective date of the Statement will not be restated.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company expects that adoption of FAS 123R will have a material effect on its results of
operations.
| | -------------------------------------------------------------------------------------------------------

| | FAS
151  Inventory Costs  an amendment of ARB 43, Chapter 4
| | -------------------------------------------------------------

| | In
November 2004, the FASB issued FAS No. 151, Inventory Costs  an amendment of
ARB 43, Chapter 4 (FAS 151). This Statement amends the guidance in ARB No. 43,
Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts
of idle facility expense, freight, handling costs, and wasted material. This Statement
requires that those items be recognized as current-period charges. In addition, this
Statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This Statement
will be effective for inventory costs incurred during fiscal years beginning after June
15, 2005 (January 1, 2006 for the Company). The provisions of this Statement shall be
applied prospectively. The Company does not expect this Statement to have a material
effect on the Companys financial statements or its results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | EITF Issue 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
| | -----------------------------------------------------------------------------------------------------------

| | In
March 2004, the FASB issued EITF Issue No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain Investments which
provides new guidance for assessing impairment losses on debt and equity investments.
Additionally, EITF Issue No. 03-1 includes new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the FASB
delayed the provisions of EITF Issue No. 03-1; however, the disclosure requirements
remain effective and have been adopted by the Company in these financial statements. The
Company will evaluate the effect, if any, of EITF Issue No. 03-1 when final guidance
is released.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

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

# NOTE 2  PROPERTY
AND EQUIPMENT

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

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

| | Depreciation
expenses totaled $ 3,568,000, $ 3,039,000 and $ 1,781,000 in the years ended December 31,
2002, 2003 and 2004 respectively.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, in 2003, the Company recorded an impairment of property and equipment in the
amount of approximately $1.8 million, representing write-off of property and equipment
relating to the ADSL product line (see also note 1a).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 3  SEVERANCE
PAY:

| | a. | Israeli
labor laws and agreements require payment of severance pay upon           dismissal of an
employee or upon termination of employment in certain other           circumstances. The
Companys severance pay liability to its employees,           mainly based upon
length of service and the latest monthly salary (one           months salary for
each year worked) is reflected by a balance sheet           accrual under accrued
severance pay. The Company records the           liability as if it were payable at
each balance sheet date on an undiscounted           basis.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
liability is partly funded by purchase of insurance policies or pension funds and by
deposit of funds in dedicated deposits. The amounts funded are included in the balance
sheet under long term investments  other. The policies are the Companys
assets and under labor agreements, subject to certain limitations, they may be
transferred to the ownership of the beneficiary employees. The amounts funded as of
December 31, 2003 and 2004 are approximately $ 2,707,000 and $3,348,000, 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

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

NOTE 3  SEVERANCE PAY(continued):

| | b. | The
amounts of pension and severance pay expense were $ 844,000, $ 776,000           and
$905,000 for the years ended December 31, 2002, 2003 and 2004 respectively,           of
which $ 15,000 and $300,000 in 2003 and 2004 respectively, were in           respect
of the insurance policies that were expensed but not reflected in the           balance
sheet as described above.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | The
Company expects to contribute approximately $ 1.0 million in 2005 to the
insurance companies and pension funds, in respect of its severance pay
liabilities expected for 2005 operations.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | The
Company does not expect to pay any future benefits to its employees upon their
normal retirement age in the years 2005 through 2014 since there are no current
employees who reach retirement age until year 2014.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
statement in item d above does not include amounts that might be paid to employees who
will cease working with the Company before their normal retirement age.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 4 
CONVERTIBLE SUBORDINATED NOTES:

| | a. | In
March, 2000, the Company issued $ 125,000,000 principal amount of
convertible subordinated notes (the Notes) due on April 1, 2005.
The Notes bore interest at an annual rate of 5.75% payable April 1 and October
1 of each year. Unless previously redeemed, the Notes were convertible by the
holder at any time through maturity into ordinary shares of the Company and
Tikcro Technologies Ltd. (Tikcro, previously known as Tioga
Technologies Ltd.), a related party. The conversion rate was equal to 2.34962
ordinary shares of Orckit plus 11.7481 ordinary shares of Tikcro for each $ 1,000
principal amount of Notes.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Early
extinguishment of the Notes
| | -- | ---------------------------------

| | During
2002, 2003 and 2004, the Company retired $ 28.2 million, $ 22.0 million and $16.2 million
principal amount of the Notes, respectively. Through December 31, 2001, the Company had
retired an aggregate of $ 58.6 million principal amount of the Notes. As of December 31,
2004, there are no Notes outstanding.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company recorded financial income of $ 13.2 million in 2002 and $ 3.1 million in
2003 from gains on early extinguishments of Notes. The redemption of notes in 2004 did
not result in any financial income.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

F - 14

---

---

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

# NOTE 5 
COMMITMENTS:

| | a. | Royalty
commitment
| | -- | ------------------

| | The
Company is committed to pay royalties to the Government of Israel on proceeds from sales
of products whose research and development was funded, in part, by Government grants. At
the time the grants were received, successful development of the related projects was not
assured.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In the case of failure of a project that was partly financed by royalty-bearing Government
participations, the Company is not obligated to pay any royalties to the Government.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
royalty rate, based on the sales of products resulting from funded research and
development projects, was fixed at 3% during the first three years and 4-5% thereafter.
Royalties are payable up to 100% of the amount of such grants, with the addition of
annual interest based on LIBOR. 
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. The
total aggregate contingent liability of the Company and its subsidiaries in respect of
royalties to the Government of Israel at December 31, 2004 was approximately $ 10.0
million.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | b. | Lease
commitments
| | -- | -----------------

| | The
Company has entered into operating lease agreements with respect to its offices. The main
agreement is for the premises it uses in Israel. The Company has an option to terminate
this lease agreement with a six month notice in advance. The projected annual rental
payments for 2005, at rates in effect at December 31, 2004, are approximately $ 750,000. 
Lease
expenses totaled $ 1,414,000, $ 803,000 and $ 785,000 in the years ended December 31,
2002, 2003 and 2004, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 6 
SHAREHOLDERS EQUITY:

| | a. | Share
capital:
| | -- | --------------

| | 1) | The
Companys ordinary shares are traded in the United States on the           Nasdaq
National Market, under the symbol ORCT. Beginning in April           2002,
the Companys ordinary shares were also traded on the Tel-Aviv Stock
          Exchange in Israel.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | 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 number
of options and their exercise prices were also adjusted as a result of the reverse share
split.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

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

NOTE 6  SHAREHOLDERS
EQUITY(continued):

| | 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 4c).
| | ---------------------------------------------------------------------------------------------------------------------

| | 4) | Exercise
of options
| | -- | -------------------

| | Under
the Employee Share Option Plan (see note 6b. below), options to purchase 105,466; 237,368
and 59,402 ordinary shares were exercised in the years ended December 31, 2002, 2003 and
2004, 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, and of which approximately $1.3 million and
$2.3 million were amortized in 2003 and 2004, respectively. Upon the exchange, the plan
became a fixed plan and the compensation was fixed according to the share price of Orckit
on that date. At the date of exchange, the intrinsic value of options to purchase shares
of subsidiaries granted to employees was zero.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6) | On
February 27, 2005 the Board of Directors has approved a three-for-one stock
          split of the Ordinary Shares to be effected in the form of a 200% stock
          dividend, pursuant to which the Company will distribute to each holder of an
          Ordinary Share two additional Ordinary Shares for no consideration. In order to
          enable such stock dividend, shareholders approval to increase the
          Companys authorized share capital from 10,000,000 to 50,000,000 is
          required. Subject to such approval, the distribution date of the stock dividend
          is expected to occur in the beginning of April 2005.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

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

NOTE 6  SHAREHOLDERS
EQUITY (continued):

| | b. | Employee
Share Option Plan:
| | -- | ---------------------------

| | 1) | In
February, 1994, the Companys Board of Directors approved an Employee
          Share Option Plan (the Plan). The total aggregate number of shares
          authorized for which options could be granted under the Plan (as amended in
          2004) was 2,682,047 at December 31, 2004, of which options to purchase 457,723
          shares and 220,844 shares, at December 31, 2003 and 2004, respectively, were
          available for future grant. With respect to options outstanding at December 31,
          2004, see (2) below. Each option can be exercised to purchase one ordinary
share           having the same rights as the other ordinary shares. The resale of the
shares           underlying these options was 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, 2002, 2003 and 2004, and
          changes during the years ended on those dates is presented below.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|                                    | Year ended December 31
|----------------------------------- | ----------------------
|
|
|
|
|Options outstanding at beginning    |                       
|of year                             |                       
|Changes in options during the year: |                       
|Granted, (1)                        |                       
|Exercised                           |                       
|Forfeited                           |                       
|                                    |                       
|Options outstanding at year-end     |                       
|                                    |                       
|Options exercisable at year-end     |                       
|                                    |                       
|Weighted average fair value of      |                       
|options granted during the year (2) |                       
|                                    |                       

| | (1) | Composed
as follows:
| | --- | --------------------

|                       | Y e a r s  e n d e d  D e c e m b e r  3 1,
|---------------------- | -------------------------------------------
|
|
|
|
|Options granted during |                                            
|the year at the        |                                            
|following exercise     |                                            
|prices:                |                                            
|Above market value     |                                            
|                       |                                            
|At market value        |                                            
|                       |                                            

F - 17

---

---

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

NOTE 6  SHAREHOLDERS
EQUITY (continued):

| | (2) | The
fair value of each option grant is estimated on the date of grant, inter           alia,
using the Black-Scholes option-pricing model taking into account the           expected
term of the option (contractual term and the effects of employees          expected
exercise and employment termination behavior) with the following           assumptions:
Dividend yield is 0% for all years, expected volatility: 2002            81%; 2003
 59%; 2004  40%. Risk-free interest rate: 2002            4.00%; 2003
 1.5%; 2004  2% and average expected life of           approximately 3 years.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3) | The
following table summarizes information about options outstanding at December
          31, 2004:
| | -- | ----------------------------------------------------------------------------------------------------

|Options outstanding | Options exercisable
|------------------- | -------------------
|
|
|
|
|0                   |                    
|3-7                 |                    
|7-15                |                    
|15-20               |                    
|20-30               |                    
|30-60               |                    
|                    |                    
|                    |                    
|                    |                    

| | c. | Grant
of stock and option plans of subsidiaries
| | -- | -----------------------------------------------

| | In
2001, the Board of Directors of the Companys major subsidiary, Corrigent, approved
an employee share option plan (the Corrigent Subsidiary Plan). Corrigent has
granted, and reserved for grant, shares and options under its Plan, as applicable, to its
employees, officers and directors and to personnel of Orckit, including employees,
officers and directors of Orckit. As determined by the respective stock option committee,
the exercise price of options granted is zero, which represents the value of the shares
on grant day. The vesting period of options granted is up to four years from the date of
grant.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2004, on a fully diluted basis, Orckits holding in Corrigent was
approximately 90%, (December 31, 2003  70%. The increase in holding is due to the
issuance of Corrigents capital stock to Orckit as consideration for additional
funding).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the grant date, the intrinsic value and the weighted fair value of options granted by
Corrigent was $ 0. Accordingly, no compensation expense in respect of the options granted
was recorded other than $ 1.3 million and $2.3 million amortization of compensation
measured upon exchange of Orckit shares, in 2003 and 2004 respectively, see note 6a(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

---

---

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

NOTE 6  SHAREHOLDERS
EQUITY (continued):

| | e. | Shareholder
Bonus Rights Plan
| | -- | -----------------------------

| | On
November 21, 2001, the Companys Board of Directors adopted a Shareholder Bonus
Rights Plan (the Rights Plan) pursuant to which share purchase bonus rights
(the Rights) were distributed on December 6, 2001 at the rate of one
Right for each of the Companys ordinary shares held by shareholders of record as of
the close of business on that date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Rights Plan is intended to help ensure that all of the Companys shareholders are
able to realize the long-term value of their investment in the Company in the event of a
potential takeover which does not reflect the full value of the Company and is otherwise
not in the best interests of the Company and its shareholders. The Rights Plan is also
intended to deter unfair or coercive takeover tactics.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Rights will be exercisable and transferable apart from the Companys ordinary shares
only if a person or group becomes an Acquiring Person by acquiring beneficial
ownership of 15% or more of the Companys ordinary shares, subject to certain
exceptions set forth in the Rights Plan, or commences a tender or exchange offer upon
consummation of which such person or group would become an Acquiring Person. Subject to
certain conditions described in the Rights Plan, once the Rights become exercisable, the
holders of Rights, other than the Acquiring Person, will be entitled to purchase ordinary
shares at a discount from the market price.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 7  TAXES ON
INCOME:

| | a. | Tax
benefits under the Law for the Encouragement of Capital Investments, 1959 (the
law)
| | -- | -----------------------------------------------------------------------------------------

| | Under
the law, by virtue of the approved enterprise status granted to its
enterprises (including the enterprises of Corrigent), 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

---

---

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

NOTE 7  TAXES ON INCOME(continued):

| | b. | Tax
rates applicable to income from other sources:
| | -- | --------------------------------------------------

| | 1) | Income
from other sources in Israel
| | -- | -----------------------------------

| | Income
not eligible for approved enterprise benefits mentioned in note 7a. above is taxed at the
regular rate. Through December 31, 2003, the corporate tax rate was 36%. In July
2004, an amendment to the Israeli Income Tax Ordinance was enacted. One of the provisions
of this amendment is that the corporate tax rate is to be gradually reduced from 36% to
30%, in the following manner: the rate for 2004 will be 35%, in 2005  34%, in 2006
 32%, and in 2007 and thereafter  30%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Income
of non-Israeli subsidiaries
| | -- | ----------------------------------

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

| | c. | Measurement
of the results for tax purposes under the Income Tax (Inflationary Adjustments)
Law, 1985
| | -- | -----------------------------------------------------------------------------------------------------

| | Results
for tax purposes are measured on a real basis - adjusted for the increase in the
Israeli CPI. As explained in note 1a(2), the financial statements are presented in
dollars. The difference between the change in the Israeli CPI and the NIS-dollar exchange
rate  both on annual and cumulative bases  causes a difference between
taxable income and income reflected in these financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Paragraph
9 (f) of FAS 109, Accounting for Income Taxes, prohibits the recognition of
deferred tax liabilities or assets that arise from differences between the financial
reporting and tax bases of assets and liabilities that are measured from the local
currency into dollars using historical exchange rates, and that result from changes in
exchange rates or indexing for tax purposes. Consequently, the abovementioned differences
were not reflected in the computation of deferred tax assets and liabilities.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | Deferred
income taxes
| | -- | ---------------------

| | At
December 31, 2004, the Company and its subsidiaries had accumulated tax losses amounting
to approximately $ 134 million (December 31, 2003  approximately $130 million) and
carry forward capital losses for tax purposes of approximately $ 39 million (December 31,
2003  $ 40 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, 2004, the Company and its subsidiaries had net deferred tax asset (mostly in
respect of carry forward losses and capital losses), in the amount of approximately $ 37
million (December 31, 2003  approximately $44 million; December 31, 2002 approximately
$40 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

---

---

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

NOTE 7  TAXES ON INCOME(continued):

| | e. | Tax
rate reconciliation
| | -- | -----------------------

| | In
2004, the main reconciling item from the statutory tax rate of the Company (35%,
representing a theoretical tax benefit of approximately $ 7 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 2003 and 2002, the main reconciling item from the statutory tax rate of
the Company (36%, representing theoretical tax expenses of approximately $ 8.0 million
and $1.5 million respectively) to the effective tax rate (0%) is the release of valuation
allowance provided against the deferred taxes created in respect of carry forward tax
losses (see note 1q).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Tax
assessments
| | -- | ---------------

| | The
Company has received final assessments through the year ended December 31, 2000. The
Companys subsidiaries have not been assessed since incorporation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 8  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT:

| | a. | Balances
in non-dollar currencies:
| | -- | ----------------------------------

| | 1) | As
follows:
| | -- | -----------

|            | December 31,
2004
|----------- | -----------------
|
|
|
|
|Assets      |                  
|            |                  
|Liabilities |                  
|            |                  

| | The
above mainly represent balances in Japanese Yen (Yen) and in lower portion
 in Israeli currency.
| | -------------------------------------------------------------------------------------------------------

| | 2) | Data
regarding the rate of exchange and the Israeli CPI:
| | -- | --------------------------------------------------------

|                                                | Year ended December 31
|----------------------------------------------- | ----------------------
|
|
|
|
|Rate of devaluation (evaluation) of the Israeli |                       
|Currency against the dollar                     | 7.3%                  
|Rate of evaluation of the Yen                  
|against the dollar                              |                       
|Rate of increase (decrease) in the Israeli CPI  | 6.5%                  
|Exchange rate at end of year - $ 1=             | NIS 4.737             

| | 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
9a(2).
| | -------------------------------------------------------------------------------------------

F - 21

---

---

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

NOTE 8  FINANCIAL
INSTRUMENTS AND RISK MANAGEMENT(continued):

| | c. | Concentrations
of credit risks
| | -- | ------------------------------

| | At
December 31, 2003 and 2004, 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 US and Israeli
corporations and agencies.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company evaluates on a current basis its financial exposure with any financial
institution or commercial issuer.
| | --------------------------------------------------------------------------------------------------------------------

| | Substantially
all of the trade receivable balance at December 31, 2004 derived from one customer. The
Company is of the opinion that the exposure to credit risk relating to these trade
receivables is limited. An appropriate allowance for doubtful accounts is included in the
accounts.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# NOTE 9 
SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION:

| | Balance
sheets:
| | ---------------

| | a. | Marketable
securities:
| | -- | ----------------------

| | 1) | Trading
securities
| | -- | ------------------

| | At
December 31, 2004, the Company held trading securities in the amount of $ 9.5 million
(December 31, 2003  $ 20.5 million). These securities are classified as short-term
investments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Held-to-maturity
marketable securities
| | -- | --------------------------------------

| | The
securities mature over the following years:
| | -----------------------------------------------

|                                                                  | December 31
|----------------------------------------------------------------- | -----------
|
|
|
|
|Mature within 12 months - Classified as    short-term investments |            
|Mature after 1 year up to 3 years                                 |            
|                                                                  |            
|                                                                  |            
|                                                                  |            

| | At
December 31, 2004, the fair value of the Companys held-to-maturity tradable
securities is $ 31.6 million (December 31, 2003  $ 42.2 million). The difference
between the carrying amounts and the fair value results from a decrease in market value
in comparison to the amortization of the premium paid for the securities in the amount of
approximately $2.5 million (December 31, 2003  increase in market value of
approximately $1 million). It is expected that the debt securities would not be settled
at a price less than the amortized cost of the investment.  Because the Company has
the ability and intent to hold this investment until a recovery of fair value, which may
be maturity, it does not consider the investment in these debentures to be
other-than-temporarily impaired at December 31, 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | b. | Trade
receivables:
| | -- | ------------------

|                                       | December 31
|-------------------------------------- | -----------
|
|
|
|
|Open accounts                          |            
|Less - allowance for doubtful accounts |            
|                                       |            
|                                       |            
|                                       |            

|                                 | Year ended December 31
|-------------------------------- | ----------------------
|
|
|
|
|Allowance for doubtful accounts: |                       
|Balance at beginning of year     |                       
|Increase  during the year        |                       
|Bad debt written off             |                       
|                                 |                       
|Balance at end of year           |                       
|                                 |                       

| | c. | Other
receivables
| | -- | -----------------

|                                    | December 31
|----------------------------------- | -----------
|
|
|
|
|Employees and employee institutions |            
|Government of Israel                |            
|Prepaid expenses                    |            
|Sundry                              |            
|                                    |            
|                                    |            
|                                    |            

| | d. | Bank
deposits
| | -- | -------------

| | At
December 31, 2004, the Company had bank deposits classified among current assets, which
are denominated in dollars and bear annual interest at a rate of 4.29%, in the amount of
$ 6.8 million. As of December 31, 2003, this deposit was classified as other long-term
investments in the balance sheet, since this deposit matures in 2005. In addition, at
December 31, 2003, the Company had short-term bank deposits denominated in dollars in the
amount of $ 273,000.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | e. | Bank
loans
| | -- | ----------

| | The
balance at December 31, 2004 consisted of a short-term bank loan of $15 million and
current maturities of long-term bank loans of $16 million. The loans, received in
dollars, bear annual interest at a weighted rate of 2.94%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

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

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | In
addition, in 2004, the Company entered into an agreement for a bank credit facility,
pursuant to which the Company may, subject to certain conditions, from time to time,
borrow an aggregate principal amount of up to $20 million. Under the terms of the
agreement, the amounts will be denominated in dollars and will bear interest at Libor
plus a fixed rate.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
loans received by the Company in 2004 are secured by a fixed charge on the Companys
bank deposits and rights deriving from the letter of agreement with its major customer
(see notes 1a and 9h).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | f. | Accrued
expenses and other payables:
| | -- | ------------------------------------

|                                                             | December 31
|------------------------------------------------------------ | -----------
|
|
|
|
|Accrued expenses in respect of deferred income, see g. below |            
|Employees and employee institutions                          |            
|Provision for vacation pay                                   |            
|Provision for warranty *                                     |            
|Accrued royalties                                            |            
|Accrued interest                                             |            
|Sundry                                                       |            
|                                                             |            
|                                                             |            
|                                                             |            
|                                                             |            

|                                                         | December 31
|-------------------------------------------------------- | -----------
|
|
|
|
|* The changes in the balance during the year:            |            
|Balance at beginning of year                             |            
|Payments made under the warranty                         |            
|Product warranties issued for new sales                  |            
|Changes in accrual in respect of pre-existing warranties |            
|                                                         |            
|Balance at end of year                                   |            
|                                                         |            

| | g. | Deferred
income:
| | -- | ----------------

|                                            | December 31, 2004
|------------------------------------------- | -----------------
|
|
|
|
|Revenues to be recognized in future periods |                  
|Applicable product costs                    |                  
|Applicable PCS, warranty and other costs    |                  
|                                            |                  
|                                            |                  
|                                            |                  

F - 24

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

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

| | Statements
of operations:
| | -------------------------

| | h. | Segment
information and revenues from principal customers
| | -- | ---------------------------------------------------------

| | The
Company operates in one operating segment.
| | ----------------------------------------------

| | Disaggregated
financial data is provided below as follows: (1) revenues by geographic area; and (2)
revenues from principal customers:
| | --------------------------------------------------------------------------------------------------------------------------------------

| | 1) | Geographic
information
| | -- | ----------------------

| | Following
is a summary of revenues by geographic area. The Company sells its products mainly to
telecommunications carriers. Revenues are attributed to geographic areas based on the
location of the end users as follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 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:
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------

|           | Year ended December 31
|---------- | ----------------------
|
|
|
|
|Customer A |                       
|           |                       
|Customer B |                       
|           |                       
|Customer C |                       
|           |                       

F - 25

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

NOTE 9  SUPPLEMENTARY
FINANCIAL STATEMENT INFORMATION(continued):

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

|                                      | Year ended December 31
|------------------------------------- | ----------------------
|
|
|
|
|Materials consumed, subcontractors    |                       
|and other production expenses         |                       
|Payroll and related expenses          |                       
|Depreciation                          |                       
|Decrease (increase) in inventories of |                       
|finished products                     |                       
|Other                                 |                       
|                                      |                       
|                                      |                       
|                                      |                       

| | The
Company currently procures a number of major  components of its
                    products from   single source suppliers.
| | --------------------------------------------------------------------------------------------------------------------------------

| | j. | Research
and development expenses - net:
| | -- | ----------------------------------------

|                                     |  |  |  
|------------------------------------ |  |  | -
|
|
|
|
|                                     |  |  |  
|Total expenses                       |  |  | $
|L e s s - grants and participations, |  | 
|see note 5                           |  |  |  
|                                     |  |  |  
|                                     |  |  | $
|                                     |  |  |  

| | k. | Financial
income - net:
| | -- | -----------------------

|                                           | Year ended December 31
|------------------------------------------ | ----------------------
|
|
|
|
|Income:                                    |                       
|Interest on bank deposits                  |                       
|Gain and interest on marketable securities |                       
|Gain from early extinguishments of notes   |                       
|Interest on long-term loan                 |                       
|Other (including currency transactions)    |                       
|                                           |                       
|                                           |                       
|                                           |                       

F - 26

---

---

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

NOTE
9  SUPPLEMENTARY FINANCIAL STATEMENT INFORMATION(continued):

|                                                | Year ended December 31
|----------------------------------------------- | ----------------------
|
|
|
|
|Expenses:                                       |                       
|Interest in respect of convertible subordinated |                       
|notes and bank loans                            |                       
|Amortization of convertible subordinated        |                       
|notes issuance costs                            |                       
|Other (2002 and 2003 - mainly currency          |                       
|transaction gains and losses)                   |                       
|                                                |                       
|                                                |                       
|                                                |                       
|                                                |                       
|                                                |                       

| | l. | Transactions
with related parties:
| | -- | ----------------------------------

| | 1) | In
2002, cost of revenues included purchases from Tikcro, a related party, which amounted to
                              $ 200,000.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------

| | 2) | Commencing
July 1, 2003, the Company provides Tickro with certain administrative
                       services,    for an annual consideration of $100,000.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | m. | Net
income (loss) per share
| | -- | ---------------------------

|                                             | Year ended December 31
|-------------------------------------------- | ----------------------
|
|
|
|
|Numerator - Basic                            |                       
|Net income (loss)                            |                       
|                                             |                       
|Denominator - Basic                          |                       
|Weighted average ordinary shares outstanding |                       
|(net of treasury shares)                     |                       
|                                             |                       
|                                             |                       
|Basic net income (loss) per share            |                       
|                                             |                       
|Numerator - Diluted                          |                       
|                                             |                       
|Denominator - Diluted                        |                       
|Weighted average ordinary shares outstanding |                       
|Dilutive potential of ordinary shares        |                       
|equivalents - options                        |                       
|                                             |                       
|                                             |                       
|                                             |                       
|Diluted net income (loss) per share          |                       
|                                             |                       

| | In
2002 and 2003 the potential effect of the convertible subordinated notes was not taken
into account, since its effect was anti-dilutive. In 2003 and 2004, the potential effect
of 674,639 and 1,336,116 options, respectively, was not taken into account, because of
their anti-dilutive effect, since the Company had net loss applicable to ordinary shares.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

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