---

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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, 2006
|-------------------------------------------

# OR

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

# OR

|x | SHELL
COMPANY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report .
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

|For
the transition period from _______________ to ____________
|--------------------------------------------------------------

|Commission
file number 0-28724
|------------------------------



|ORCKIT
COMMUNICATIONS LTD.
|--------------------------

|
|

|(Exact
name of Registrant as specified in its charter   
and
translation of Registrants name into English)
|-----------------------------------------------------------------------------------------------------------

|ISRAEL
|------

|
|

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

|126
Yigal Allon Street, Tel Aviv 67443, Israel
|----------------------------------------------

|
|

|(Address
of principal executive offices)
|----------------------------------------

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

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

| | 
| | 

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

|None
|----

|
|

|(Title
of Class)
|----------------

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

|None
|----

|
|

|(Title
of Class)
|----------------

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

As
of December 31, 2006, the Registrant had outstanding 15,681,535 Ordinary Shares, no par
value.

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

o Yes    x No



---

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

o Yes    x No

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

x Yes    o No

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

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

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

Item 17 o  Item 18 x

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

o Yes    x No



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# PART I

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

All
share and per share information in this Annual Report has been adjusted to give
retroactive effect to (i) a one-for-five reverse split of our ordinary shares that became
effective as of November 27, 2002 and (ii) a three-for-one split of our ordinary shares
that became effective as of April 5, 2005.

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

Not
applicable

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

Not
applicable

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

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

The
following selected consolidated financial data as of December 31, 2005 and 2006 and for
each of the years ended December 31, 2004, 2005 and 2006 are derived from our audited
consolidated financial statements incorporated by reference into this Annual Report, which
have been prepared in accordance with generally accepted accounting principles in the
United States. The selected consolidated financial data as of December 31, 2002, 2003 and
2004 and for each of the years ended December 31, 2002 and 2003 are derived from our
audited consolidated financial statements not included in the audited financial statements
incorporated by reference into this Annual Report. The selected consolidated financial
data set forth below should be read in conjunction with Item 5. Operating and
Financial Review and Prospects and the consolidated financial statements and the
notes thereto and the other financial information appearing elsewhere in or incorporated
by reference into this Annual Report.



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

4

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

---

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

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

Not
applicable

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

Not
applicable

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

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

Risks relating to our business and industry

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

During
2002, 2003 and 2004, we incurred aggregate operating losses of approximately $61.9
million. We also incurred significant operating losses in the years prior to 2002. We
incurred a significant portion of our operating losses during the period through 2003,
when our primary business was the sale of asymmetric digital subscriber line, or ADSL,
products, which we no longer sell. Since 2001, we have made significant investments in
technology projects, mainly for new telecom equipment products addressing high
transmission of data for the metropolitan area, through our subsidiary, Corrigent Systems
Inc. We began to recognize revenues from sales of these products in 2004. We were able to
generate both operating income and net income for the first time in 2005 and continued to
generate operating and net income in 2006, although at lower levels than in 2005. Due to a
decrease in revenues, we recognized both an operating and a net loss in the fourth quarter
of 2006 and in the first quarter of 2007 and it is likely that we will recognize both an
operating and a net loss for the full 2007 year. We cannot be sure that we will be able to
return to profitability.

5

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

Almost
all of our revenues in 2004 through 2006 were the result of the sales of our metro
products, the Corrigent CM-100. Approximately 81.5% of our revenues in 2004, 99.8% of our
revenues in 2005 and 97.2% of our revenues in 2006 were derived from sales of these metro
products to KDDI, a Japanese telecom carrier. We expect that a substantial majority of our
revenues in 2007 will be comprised of sales of Corrigent CM-100 products to KDDI. We do
not know for how long a period of time KDDI will continue to purchase products from us,
nor do we have any control or influence over the purchasing decisions of KDDI, including
the quantities, price and timing of the deployment of the CM-100 product line in its
network. KDDI has purchased the CM-100 for initial coverage deployment in its metropolitan
area network and, further to a significant deployment in late 2004, it is expected to
conclude its deployment of our CM-100 metro products in 2007. It is expected that once
this stage is concluded, additional demand for the CM-100 product from KDDI will be
derived from growth in the number of subscribers for new IP services offered by KDDI. We
cannot predict whether KDDI will be successful in offering new services or securing
additional subscribers. Sales to KDDI are dependent on their success in offering new
services and securing additional subscribers. Our revenues from KDDI were significantly
reduced in 2006 which adversely affected our results of operations. The loss of this
customer, or a continued significant decrease in revenues from it, would have a material
adverse effect on our results of operations. We will need to make sales to additional
customers and to develop additional products to be able to sustain profitability for any
period of time.

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

In
2006, we used $31.1 million of cash in our operating activities. We generated cash from
operating activities of $938,000 in 2004 and $72.6 million in 2005. We realized
substantially all of our positive cash flow from operations in 2005 due to the significant
increase in sales to KDDI in Japan and the payment of receivables owed to us in advance of
the recognition of the related revenue in our financial statements. We used cash in our
operating activities in 2006 as we recognized revenue in 2006 with respect to sales that
were paid for in 2005. In 2007, we expect to continue to use cash in our operating
activities as our expenses are likely to exceed cash proceeds from sales of products.

# We may need additional
financing to grow our business.

We
may need to raise additional capital to continue our longer term expansion plans. The use
of cash in our operating activities could impede our ability to fund our operations and to
invest in our business. To the extent that we cannot fund our activities through our
existing cash resources and any cash we may generate from operations, we may need to raise
equity or debt funds through additional public or private financing or through
arrangements with strategic partners in order to grow our business. In March 2007, we
issued convertible notes in the aggregate principal amount of approximately $25.8 million,
resulting in net proceeds to us of $25.0 million. These notes bear interest at the rate of
6% and are linked to the Israeli Consumer Price Index, or CPI. The notes are due in March
2017, and are subject to the right of the holders to request early repayment in March
2012. We may be unable to repay these notes when due. We may not be able to obtain
additional financing on acceptable terms or at all. 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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---

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

Our
sales of products to KDDI are made through OKI Electric Industry Co., Ltd., a distributor
located in Japan. Our relationship with OKI began in 2005 and we do not have a long
history of dealing with them. We are dependent on OKIs marketing and sales efforts
to convince KDDI and other customers or end-users in Japan to purchase our products and to
provide local support services. If OKI terminates or adversely changes its relationship
with us, we may be unsuccessful in replacing it. 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. We have experienced a
concentrated and inconsistent pattern of purchasing by KDDI in Japan. While product
selections and subsequent deliveries may last several years, the purchasing pattern during
the deployment period is highly uncertain and, accordingly, our revenues are likely to be
subject to high volatility.

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

Substantially
all of our sales are currently in Japan, a country in which prior to 2004 we had no sales
experience. Telecom equipment sales in Japan are subject to high quality and strict
delivery requirements. We have limited experience in making sales into the Japanese market
and could face business requirements for quality, delivery, service and support that we
may not meet. Since a significant majority of our sales in 2007 are expected to be in
Japan, failure to meet these requirements could have a material adverse effect on our
results of operations.

7

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---

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

Service
applications that drive the demand for our metro telecommunication products are related to
the offering of television services and other media services by telecommunication carriers
over data networks. These types of services require very high bandwidth for packet-based
transmissions and, as a result, require an upgrade of metropolitan, or metro, network
equipment and access equipment. The availability of these services has begun to emerge in
Asia and the United States, but is still limited in the breadth of services offered as
well as in the number of subscribers. The launch of these services requires significant
capital investment in equipment by telecom carriers in the access and metro networks for a
range of products, as well as for content packages to be provided by the telecommunication
carriers. Delays in the launch of these services or slow subscriber additions to these
services will have an adverse effect on the demand for our metro products. If the growth
of these services continues to be limited, we will be required to invest additional
resources and use more cash in our research and development, as well as in marketing
efforts, in an effort to attain and maintain a competitive position in these markets
before we can benefit from commercial selection and revenues from our products.

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

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

8

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

We
intend to make substantial investments in the development of telecom solutions capable of
supporting high bandwidth services in telecommunications networks located in metropolitan
areas. Almost all of our research and development and other operating expenses in 2006
were related to our CM-100 and the recently announced CM-4000 products. Our expenditures
with respect to the development of new telecommunications equipment could reduce our cash
balances and impede our ability to develop new products in addition to the Corrigent
CM-100 and CM-4000 product lines.

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

The
markets for our products are dependant on resilient packet ring, or RPR, multi protocol
label switching, or MPLS, pseudo wire emulation, or PWE, and a range of emerging
technologies that address migration of synchronous transmission protocols used at
relatively low transmission rates to a metropolitan area IP metro ring network that is not
limited to synchronous transmission protocols and operates at 10 giga bits per second and
higher transmission rates. We believe that these technologies will support the upgrade of
existing metro networks on a cost efficient basis in order to provide IP transmissions
addressing high numbers of subscribers and multiple services, at significantly higher
transmission speeds than are currently available. The markets for our products are also
dependent on the need to support legacy services and new data services over a single
unified metro network. The market for products based on RPR, MPLS and PWE technologies in
the metropolitan area may not fully develop, whether as a result of competition,
alternative technologies, such as Ethernet over fiber in the metro area that has gained
market share, changes in technology, such as fiber optic technology that has developed to
be an alternative technology for such migration, product standards or otherwise. Our
success depends on the acceptance of our products and technologies and the purchase of
high-transmission services by the customers of telecommunications companies. We have no
control over the development of these target markets. Even if our technologies are
accepted, relationships with providers of telecommunications services must be developed in
order to be successful. Furthermore, competing technologies in the targeted areas may be
utilized in the majority of these target markets. This would leave us with a small market
to address.

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

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

9

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

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

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

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

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

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

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

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

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

The
market for our products is characterized by:

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

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

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

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

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

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

10

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

In
2004, 2005 and 2006, we recognized revenues from our major customer in Japan ratably over
the fourteen-month period of post-contract hardware and software support services, or PCS.
This revenue recognition policy was required by generally accepted accounting principles
since the fair value of the PCS could not be determined. We received the cash payments for
these sales over a shorter period than the revenue recognition period. As a result,
changes in our cash and investment balances were not correlated with the amount of our
quarterly revenues. If we become ableto determine, in accordance with generally
accepted accounting principles, the fair value of the PCS that we undertook to provide to
our major customer in Japan, it is likely that the remaining unrecognized revenue, which
was $5.9 million as of December 31, 2006, as well as the related amount of deferred
income, which was $3.2 million as of December 31, 2006, will be required to be recognized.
This would result in a one time recognition of revenues and income. No cash from
operations will result from this revenue recognition, if required. If we are able to make
this determination with respect to our product and services offerings and if we continue
to experience a volatile pattern of orders and related product delivery schedules similar
to what we experienced in the past, we will likely recognize revenues over a shorter
period of time than in the past and could experience additional fluctuations in our
quarterly revenues, cash flows and results of operations.

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

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

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

The
market for our products is intensely competitive, and we expect competition to increase in
the future. Many of our current and potential competitors are large and established
companies and have better name recognition and greater financial, technical,
manufacturing, marketing and personnel resources than us. Increased competition could
adversely affect our future revenues and ability to remain profitable due to pricing
pressure, loss of market share and other factors. The expansion of research and design
facilities in China and India, where engineering costs are significantly lower compared to
the U.S., Western Europe or Israel, is expected to increase competition and price pressure
for our products. In addition, it is also expected that manufacturers of telecom equipment
in China will attempt to leverage their success in supplying telecom equipment to local
carriers in Asia and will increase their marketing and sales efforts outside China.

11

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

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

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

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

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

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

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

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

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

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

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

12

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

We
are subject to telecommunications industry regulations requiring the use of
environmentally-friendly materials in telecommunications equipment. For example, pursuant
to a European Community directive, telecom equipment suppliers were required to stop using
specified materials that are not environmentally friendly by July 1, 2006. In
addition, telecom equipment suppliers are required under this directive to eliminate the
lead solders from their products by 2010. We will be dependent on our suppliers for
components and sub- system modules, such as semiconductors and printed circuit boards, to
comply with these requirements. We have not yet complied with this directive. We will
attempt to comply with this directive in 2008. This may harm our ability to sell our
products in Europe and in any other countries that may adopt this directive.

Compliance
with this directive, especially with respect to the requirement that products be lead
free, will require us to undertake significant expense with respect to the re-design of
our products. This could also result in part or all of our inventory becoming obsolete. In
addition, we may be required to pay higher prices for components that comply with this
directive. We may not be able to pass these higher component costs on to our customers. We
cannot at this point estimate the expense that will be required to redesign our products
in order to include environmentally friendly components. We cannot be sure
that we will be able to timely comply with these regulations, that we will be able to
comply on a cost effective basis or that a sufficient supply of compliant components will
be available to us. Compliance with these regulations could increase our product design
costs. Our inability or failure to comply with these regulations could have a material
adverse effect on our results of operations. Manufacturers of components that require lead
solders may decide to stop manufacturing those components prior to the 2010 compliance
date. These actions by manufacturers of components could result in a shortage of
components that could adversely affect our business and results of operations.

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

Any
significant product returns or claims under our warranty or PCS could have a material
adverse effect on our business and results of operations. We offer complex products that
have in the past and may in the future contain errors, defects or failures when introduced
or as new versions are released. If we deliver products with defects, errors or bugs or if
we undergo a product recall as a result of errors or failures, market acceptance of our
products could be lost or delayed and we could be the subject of substantial negative
publicity. This could have a material adverse effect on our business and results of
operations. We commenced commercial sales of our metro product in 2004. Because of the
relatively short deployment period of these products, we cannot accurately 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.

13

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

In
March 2007, we issued convertible notes in the aggregate principal amount of approximately
$25.8 million. The notes bear interest at the rate of 6% and are linked to the Israeli
CPI. The notes are due in March 2017, and are subject to the right of the holders to
request early repayment beginning in March 2012.

The
notes are convertible at the election of the holders into our ordinary shares at the
initial conversion price of NIS 52.50 (approximately $12.50) per share if the conversion
occurs by March 10, 2010 and at the initial conversion price of NIS 63.00 (approximately
$15.00) per share if the conversion occurs thereafter, in each case subject to adjustment
for customary events. We undertook to register the notes on the Tel Aviv Stock Exchange
within six months following issuance. If this registration is not concluded by that date,
the holders will have the right to request repayment of the principal amount.

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

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

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

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

| |  | placing
us at a competitive disadvantage as compared to our competitors who have less debt;
| | - | -------------------------------------------------------------------------------------------

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

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

# We are subject to
international business risks.

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

14

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

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

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

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

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

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

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

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

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

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

Our
growth and success largely depends on the managerial and technical skills of members of
senior management. If any of them is unable or unwilling to continue with us, our results
of operations could be materially and adversely affected. Recently, we have asked Mr.
Izhak Tamir, our President, to serve also as the Chief Executive Officer of Corrigent and
appointed Mr. Oren Maymon, who previously acted as the Purchasing Manager of Corrigent, as
the Vice President of Operations of Corrigent. As we derive all of our revenues from
Corrigent, any failure of the new management of Corrigent to properly manage its business
would have a material adverse effect on our results of operations.

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

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

15

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

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

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

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

# We face foreign exchange
currency risks.

We
operate in a number of territories and, although our prices are determined in U.S.
dollars, we typically link payments due to us from sales of products and services to local
currencies of the countries in which we operate. We hold cash deposits in the currencies
we operate with, that is, in the U.S dollar, Japanese Yen and New Israeli Shekel, or NIS.
In 2007, we expect that a significant majority of our revenues will be derived from Japan
and will be linked to the Yen and a major part of our expenses will be denominated in U.S.
dollars and in NIS. In particular, we are obligated to pay interest on, and to repay the
principal of, our convertible notes in NIS. We currently do not use hedge instruments. We
are likely to face risks from fluctuations of the Yen and the NIS compared to the U.S.
dollar, the functional currency in our financial statements. In 2005 and 2006, the value
of the U.S. dollar increased against the Yen, which caused us to recognize lower dollar
revenues and gross profit in our financial statements. A further increase of the value of
the U.S. dollar against the Yen in 2007 would cause a decrease in our revenues and gross
profit derived in Yen.

# 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, 2006, see Item 11  Quantitative and
Qualitative Disclosures About Market Risk-Interest Rate Risk Management.

16

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# We are subject to
taxation in several countries.

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

Risks relating to our operations in Israel.

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

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

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

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

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

17

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

A
significant majority of our revenues in 2007 are expected to be generated in Japanese Yen,
while the majority of our payroll expenses and a portion of our other expenses are
incurred in NIS, and a significant portion of our cost of revenues is incurred in U.S.
dollars. An increase in the value of the U.S. dollar against the Yen would adversely
affect the amount of revenues we report in our financial statements. We could be further
exposed to risk that the rate of inflation in Israel may exceed the rate of devaluation of
the New Israeli Shekel in relation to the Japanese Yen, U.S. dollar and other foreign
currencies or that the timing of such devaluation lags behind inflation in Israel. In that
event, the dollar cost of our operations in Israel would increase and our U.S.
dollar-measured results of operations would be adversely affected. For example, in 2005,
the value of the U.S. dollar increased in relation to the New Israeli Shekel by 6.8%,
while inflation increased by only 2.4%. As a result, our salary expenses, which are
primarily linked to the New Israeli Shekel, decreased in U.S. dollar terms. In 2006, the
value of the U.S. dollar decreased in relation to the New Israeli Shekel by 8.2%, while
inflation decreased by only 0.1%. As a result, our salary expenses, which are primarily
linked to the New Israeli Shekel, increased in U.S. dollar terms. Our issuance in March
2007 of approximately $25.8 million aggregate principal amount of convertible notes, which
are denominated in NIS, has made us more sensitive to increases in the value of the NIS
relative to the U.S. dollar and the Japanese Yen. Subject to such exchange rate
differences as of the end of each reporting period, we may incur higher or lower expenses.

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

Since
our inception, we have relied on Israeli government grants for the financing of a
significant portion of our product development expenditures. Due to a continuing reduction
of the budget of Israels Office of the Chief Scientist of the Ministry of Industry,
Trade and Labor, the amount of grants we receive in the future might be lower than in
prior years, if we receive any at all. In 2005, we did not receive any grants for our
research and development, which resulted in an increase in our research and development
expenses. In 2006, we recognized grants in the amount of $1.9 million.

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

18

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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.

For
more information about Approved Enterprises, see Item 5B  Liquidity and
Capital Resources  Effective Corporate Tax Rates in Israel below and Note 6a
to the financial statements incorporated by reference into this Annual Report.

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

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

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

19

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

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

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

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

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

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

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

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

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

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

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

20

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Risks Relating to the Ownership of our Ordinary Shares

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

Based
on the composition of our gross income and the composition and value of our gross assets
during 2005 and 2006, we do not believe that we were a passive foreign investment company,
or PFIC, for U.S. federal income tax purposes for either of such years. It is likely,
however, we would be deemed to have been a PFIC in 2002, 2003 and 2004. In addition, there
can be no assurance that we will not be deemed a PFIC for any future tax year in which,
for example, the value of our assets, as measured by the public market valuation of our
ordinary shares, declines in relation to the value of our passive assets (such as cash,
cash equivalents and marketable securities). If we are a PFIC for any tax year, U.S.
holders of our ordinary shares during such year may be subject to increased U.S. federal
income tax liabilities and reporting requirements for such year and succeeding years, even
if we are no longer a PFIC in such succeeding years.

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

# We do not intend to pay
cash dividends.

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

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

As
of March 31, 2007, Eric Paneth, our Chairman and Chief Executive Officer, and Izhak Tamir,
our President, each beneficially owned an aggregate of 1,224,063 ordinary shares
representing 7.5% of our outstanding ordinary shares, including 480,000 ordinary shares
issuable upon the exercise of options that are currently vested of which 60,000 options
have no exercise price and 420,000 options have an exercise price of $27.14. Subject to
the decision of our audit committee, each of Mr. Paneth and Mr. Tamir might also be
entitled to exchange his vested options to purchase shares of Corrigent common stock for
options to purchase up to approximately 1.9% of our outstanding ordinary shares (on a
fully diluted basis after giving effect to such exchanges) as of the dates of such
exchanges. For a further explanation of this possible exchange, see Item 6E
Share Ownership  Exchange of Corrigent Options.

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

21

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

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

In
addition, pursuant to a plan approved by our shareholders at the Annual General Meeting in
June 2005, we may offer holders of vested options to purchase Corrigent common stock at a
price of $0.01 per share that have been issued to employees and directors of Corrigent and
Orckit the opportunity to exchange those options for vested options to purchase our
ordinary shares at a price of $0.01 per share. Based on the terms of the plan, the maximum
number of options for our ordinary shares that could be issued in exchange for options to
purchase Corrigent shares is approximately 7.0% of our outstanding ordinary shares (on a
fully diluted basis after giving effect to such exchanges) as of the dates of such
exchanges. The issuance of such shares to employees and directors of Orckit and Corrigent
could also delay or prevent a change of control in our company.

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

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

The
market price for our ordinary shares, as well as the prices of shares of other technology
companies, has been volatile. Between January 1, 2005 and May 9, 2007, our share price has
fluctuated from a low of $6.75 to a high of $31.22. The following factors may cause
significant fluctuations in the market price of our ordinary shares:

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

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

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

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

22

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

Our quarterly results of
operations, including revenues, profit and loss and cash flow, have fluctuated
significantly in the past, and these fluctuations are expected to continue in 2007 and
beyond. Fluctuations in our results of operations may disappoint investors and result in a
decline in our share price.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

23

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

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

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

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

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

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

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

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

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

|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.

24

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

# Major Developments since
January 1, 2006

We
continued in 2006 to direct our resources to the development and marketing efforts related
to our technology and products that address the need for solutions capable of supporting
very high bandwidth services. We are in the process of developing and commercializing the
CM-100 and CM-4000 product lines, which consist of telecommunications equipment supporting
high bandwidth services over fiber networks in telecommunications networks located in
metropolitan, or metro, areas. In 2006, we continued, though to a lesser extent, to sell
our CM-100 product to KDDI in Japan for their national deployment of a new metropolitan
area network that carries new IP-based services, including high-definition TV, or HDTV,
cellular network transmissions, Internet access and voice over IP, or VoIP. These
services, if carried over a single network, are also known as quadruple play
services. Substantially all of our operating expenses in 2006 were related to our efforts
to develop and market the CM-100 and CM-4000 product lines. Our CM-4000 product line was
first announced in early 2007 and is expected to undergo trials and evaluations with
telecom carriers towards the end of 2007, with commercial availability expected in 2008.
The CM-4000 offers significantly higher bandwidth support, greater Ethernet user interface
capacity and a wider range of services compared with the CM-100.

# Principal Capital
Expenditures

Our
principal capital expenditures to date have been the purchase of equipment and other
software tools in Israel used in our business. These purchases totaled $3.9 million in
2004, $1.9 million in 2005 and $910,000 in 2006. We used internal resources to finance
these capital expenditures.

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

General

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

Our
currently available product line, the CM-100, was developed by our subsidiary, Corrigent
Systems. The CM-100 solution is designed to enable the provision and management of data
and voice transport services in an efficient manner that is expected to reduce the costs
of transport service providers. Supporting fiber-optic infrastructures, the CM-100
supports a wide range of interfaces for video, data, voice and storage.

25

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

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

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

The
CM-100 product line was first delivered for commercial deployment in 2004. In 2004, this
product was selected for commercial deployment by KDDI Corporation in Japan, a major
telecom carrier in Japan. A small amount of sales was also made to Vic Tokai, a regional
telecom provider in Japan targeting Ethernet-based services. Sales to our customers in
Japan are made through distributors. Sales to KDDI accounted for approximately 81.5% of
our revenues in 2004, 99.8% of our revenues in 2005 and 97.2% of our revenues in 2006. We
expect that a substantial majority of our revenues in 2007 will be derived from sales of
the CM-100 in Japan, including to KDDI. KDDI is deploying the CM-100 product line as part
of a nation-wide build up in Japan of an advanced metro network that is expected to carry
quadruple play services.

In
late 2005, the CM-100 was selected for deployment by WilTel, a U.S. wholesale
telecommunications carrier subsequently acquired by Level 3 Communications. Following that
acquisition, Level 3 Communications concluded that it had no further need for CM-100
products in its network and it decided not to purchase CM-100 products.

In
2006, we also continued our marketing efforts through offices in Korea and India. We
expect that in the next several years telecommunication carriers in Asia will invest in
the expansion of their metropolitan area networks and will evaluate solutions that
significantly enhance the delivery and support of quadruple play services.

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# Metro Transport Telecom
Markets, Technology and Products

The Metro Transport
Market

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

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

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

A
range of new solutions is being developed to address the need of carriers and service
providers to be able to support higher levels of data traffic within and between
metropolitan areas, commonly referred to as metro transport. One type of solution,
consisting of a router or switch that transports packets of data, focuses on the
characteristics of data traffic without supporting legacy voice and other circuit-based
data services. In this type of solution, data services and legacy services are transmitted
and maintained in different metro networks. Another type of solution attempts to take
advantage of the characteristics of data traffic while continuing to support traditional
voice traffic over a converged metro network. We offer this second type of solution that
offers transmission capacities of 10 Gbps and, to a lesser extent, 2.5 Gbps, and supports
transmission of both packets of data and traditional circuit-based voice and data services
over the same network. Data services supported include the transmission of a range of
video services, whether in standard or high definition mode, as well as over cellular
networks. We expect that the metro transport solution for the transmission of traditional
voice and increased data traffic will combine the efficient transport of data services
based on Ethernet protocol with high reliability voice services based on SONET/SDH
protocol.

27

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

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

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

RPR. Resilient
packet ring, or RPR, is an emerging technology that is being designed to integrate
Ethernet data protocols for the efficient transmission of data with traditional SONET
voice protocols. An industry standard for RPR, IEEE 802.17, was approved in 2004.
Corrigent has been instrumental in establishing this standard, serving actively as a
member of the industry workng 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 multiprotocol because it works
with the Internet Protocol, or IP, Asynchronous Transport Mode, or ATM, and frame relay
network protocols. In addition to moving traffic faster overall, MPLS makes it easy to
manage a network for quality of service, or QoS. For these reasons, MPLS is gradually
being adopted as networks begin to carry more and different mixtures of traffic.

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

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

CM-100 Product

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

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

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

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

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

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

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

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

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

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

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

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

In
2007, we expect to focus on the development of additional software features and hardware
capabilities of the CM-100 product line, to support customer requirements and address
emerging quadruple play service applications, that is, a bundled service
offering by telecom carriers to residential subscribers which is comprised of voice
services, Internet connection and a range of video and other media services that address
high transmission rates (typically of 10 Mbps and beyond), all over IP protocols.
Quadruple play also supports cellular services of the third generation, or 3G
and 3.5G, carried over IP networks that include video transmission over the cellular
network. In addition, we expect to invest resources with respect to the development of
hardware and software capabilities that will allow higher transmission capacity for the CM
product line as a result of specific requirements of our customers to support their
network architectures. This higher transmission capacity will allow for more types of high
bandwidth services supported by a converged metro network based on the CM-100 platform.

CM-4000 Product

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

30

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

# Sales, Marketing and
Service

Sales
and Marketing. We market our products to telecommunication companies both directly and
indirectly through original equipment manufacturers, strategic alliances and agency and
distribution arrangements. Our direct sales and marketing efforts are carried out through
our offices in India, Israel, Japan, Korea and the United States. In addition, we believe
that our participation in technology committees involved in the establishment of industry
standards is a strong marketing tool. As of December 31, 2006, overall marketing and sales
efforts were conducted by approximately 40 employees.

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

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

Substantially
all of our revenues in 2004 through 2006 were generated from our CM-100 metro product
line, with sales to KDDI accounting for 81.5% of our revenues in 2004, 99.8% of our
revenues in 2005 and 97.2% of our revenues in 2006. We expect to depend on purchases by a
very limited number of telecommunication carriers for our product revenues.

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

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

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

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

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

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

Customers
and End-users.

The
CM-100 product line was first delivered for commercial deployment in 2004. To date, our
product has been commercially deployed by KDDI Corporation in Japan, and, in limited
amounts, by Vic Tokai, a regional telecom provider in Japan targeting Ethernet-based
services. WilTel, a U.S. wholesale telecommunications carrier selected the CM-100 for
limited deployment in 2005. WilTel was subsequently acquired by Level 3 Communications,
which ceased purchasing our products.

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

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# Manufacturing

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

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

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

# Industry Standards and
Government Regulations

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

We
are subject to telecom industry regulations and requirements set by telecommunication
carriers that address a wide range of areas including quality, final testing, packaging
and use of environmentally friendly components. We are making efforts to comply with the
European Unions Restriction of Hazardous Substances Directive that required telecom
equipment suppliers to stop the usage of some materials that are not environmentally
friendly by July 1, 2006. However, we believe that we will not be able to comply with this
directive until 2008. These materials include cadmium, hexavalent chromium, lead, mercury,
polybrominated biphenyls and polybrominatel diphenyl ethers. Under the directive, an
extension for compliance through 2010 was granted with respect to the usage of lead in
solders in telecommunication equipment. We expect that other countries, including
countries we operate in, will adopt similar directives or other additional regulations.

# Competition

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

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

# Intellectual Property
Rights

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

# Legal Proceedings

On
May 24, 2006, Bezeq  The Israeli Telecommunications Corporation Ltd. filed a lawsuit
against us in the District Court of Tel Aviv. The complaint alleges that we breached
supply undertakings regarding DSL products and services we supplied Bezeq and claims
approximately $9.5 million in damages. We do not supply any more DSL products or services.
We filed an answer denying the allegations in the complaint. We believe that this lawsuit
is without merit and intend to vigorously defend against it.

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

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

List
of Significant Subsidiaries

Corrigent
 Systems  Inc.,  a  subsidiary,  is a Delaware  corporation.  As of March 31,  2007,
 Orckit  owned approximately 93% of the shares of Corrigent Systems on a fully-diluted
basis.

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

Our
principal offices in Tel Aviv occupy approximately 50,000 square feet of rental space
rented through a series of leases. Our major lease in Tel Aviv expires in December 2007
and we expect to be able to extend this lease. We have an option to terminate these lease
agreements with six months prior written notice. We also maintain offices in San
Jose, California, Tokyo, Japan, Mumbai, India and Seoul, South Korea. We believe that our
offices and facilities are adequate for our current needs and that suitable additional or
substitute space will be available when needed.

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

None.

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

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

A.
          OPERATING RESULTS

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

# Overview

Orckit
was founded in 1990. We are an Israeli corporation engaged in the design, development,
manufacture and marketing of telecom equipment that enables transmission of broadband
services. Substantially all of our revenues in 2004, 2005 and 2006 were derived from the
sale of our metro products, the CM-100 product line, to KDDI. Our historical revenues
through December 31, 2003 were generated primarily from the sale of systems and customer
premises modems based on digital subscriber line, or DSL, technology. We have terminated
the sale of these DSL products. We expect to generate substantially all of our revenues in
2007 from the sale of our CM-100 metro products.

The
end-user base for our products is comprised primarily of large telecommunications
companies, and has historically been concentrated in each year among a small number of
companies. Sales to KDDI accounted for approximately 81.5% of our revenues in 2004, 99.8%
of our revenues in 2005 and 97.2% of our revenues in 2006. We expect that in 2007 and for
the foreseeable future we will continue to experience high customer concentration.

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

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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 2006 related to research and development expenses,
selling, general and administrative expenses and capital expenditures for the operations
and support related to our CM-100 and CM-4000 product lines and related technologies.

Prior
to 2005, we generated operating losses in each of the previous five years. Our revenues
were insignificant in 2003 and the first half of 2004. We began for the first time to
generate revenues from sales of our metro products in the second half of 2004. In 2005 and
2006, we recognized revenues solely from sales of our metro products, while controlling
our operating expenses, and were able to generate operating and net income in these years,
although the amount of operating and net income was significantly lower in 2006. Our sales
declined in the second half of 2006 and we recognized an operating loss and a net loss in
the fourth quarter of 2006. Our sales continued to decline in the first quarter of 2007.
We recognized both an operating loss and a net loss in the first quarter of 2007, and it
is likely that we will recognize an operating loss and a net loss for the full 2007 year.

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

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

# Critical Accounting
Policies and Estimates

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

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

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

Revenue Recognition

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

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

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In
2004, 2005 and 2006, we granted post-contract hardware and software support services, or
PCS, in our sales to KDDI. The VSOE of the fair value of the PCS relating to these sales
could not be determined. Accordingly, revenues for substantially all sales in 2004 through
2006 are being recognized ratably over the fourteen-month term of the PCS. Deferred income
of $28.7 million as of December 31, 2005, represented $54.8 million of deferred revenues
less the $26.1 million deferred cost of goods associated with these revenues. Deferred
income of $3.2 million as of December 31, 2006 represented $5.9 million of deferred
revenues, less the $2.7 million deferred cost of goods associated with these revenues. The
deferred revenues and costs will be included in our statements of operations over the term
of the PCS. Applicable costs that were deferred consist of a) cost of components used in
manufacture and assembly, b) subcontractors fees for component procurement, manufacture,
assembly, testing, shipment and final testing, c) expenses related directly to operational
activities: salaries of manufacturing planning, support, procurement personnel, premises
lease and related expenses of those departments, travel expenses of those employees,
related expenses of subcontractors and depreciation of equipment used in the testing
process, d) expenses addressing Post Contract Services of level 3 and
maintenance services including provisions for salary and travel expenses, e) warranty
provisions for hardware repair, and f) OCS royalties on products sold.

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

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

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

Provision for servicing
products under warranty

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

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

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Stock-based compensation
expense

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

Prior to July 1, 2005, we accounted for stock-based compensation costs in accordance with
Accounting Principle Board Opinion number 25 (Accounting for Stock Issued to Employees),
known as APB25, and related interpretations. Under this treatment, compensation cost for
employee stock option plans was measured using the intrinsic value based method of
accounting. We expensed $616,000 in 2005 and $855,000 in 2006 for stock-based
compensation, of which $263,000 was recorded in 2005 for the period January 1 through June
30, 2005 and was calculated based on APB 25 and the balance of $353,000 was recorded for
the period July 1 through December 31, 2005 and was calculated based on SFAS 123R. If we
had used SFAS 123R from January 1, 2005 through December 31, 2005, our stock-based
compensation expense for 2005 would have been $5.5 million. As of December 31, 2006, there
was approximately $3.2 million of total unrecognized stock-based compensation expense
related to non-vested stock-based compensation arrangements granted by us (including
options whose vesting is subject to our meeting specified performance goals). That expense
is expected to be recognized by us over a weighted-average period of 1.5 years.

# Results of Operations

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

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

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Revenues.
          The substantial majority of our revenues of $11.3 million in 2004 and all of our
          revenues of $101.2 million in 2005 and $63.6 million in 2006 were generated from
          sales of our CM-100 product line. Almost all of these revenues were generated
          from sales to KDDI. We expect that substantially all of our revenues in 2007
          will result from sales of the CM-100 product line.

Gross
Profit. Cost of revenues consists primarily of raw materials, subcontracting costs,
costs for integration, assembly and testing of finished products, expenses related
directly to operational activities, cost related to PCS and maintenance services and the
payment of royalties to the Office of the Chief Scientist. Gross profit was $33.4 million
(52.5% of revenues) in 2006 compared to $49.4 million (48.8% of revenues) in 2005 and $5.4
million (47.7% of revenues) in 2004. The substantial majority of our gross profit in 2006,
2005 and 2004 was a result of sales of our CM-100 products. The increase in our gross
profit percentage was primarily attributable to revenues from software license fees.

Operating
Expenses

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

Research
and Development Expenses, net. Research and development expenditures consist primarily
of materials, depreciation and salaries and related costs for engineering and technical
personnel and subcontracting costs associated with developing new products and features.
Our costs for research and development are expensed as incurred. Grants from the
government of Israel for research and development are offset against our gross research
and development expenditures. Research grants were $2.7 million in 2004, $173,000 in 2005
and $1.9 million in 2006. Research grants in 2006 were higher than in 2005 because a
portion of the grants recognized in 2006 covered our research and development working plan
for 2005. Our net research and development expenses were slightly lower in 2006 compared
to 2005, mainly due to larger grants received from the Israeli Office of the Chief
Scientist, partly offset by an increase in the cost of salaries of research and
development employees. We anticipate that we will incur a higher level of research and
development expenditures in 2007 compared with 2006 in connection with accelerated design
efforts relating to the CM-4000 product line, as well as continued enhancements of the
CM-100 product line.

Selling,
General and Administrative Expenses. Selling, general and administrative expenses
consist primarily of costs relating to promotion, trade shows, compensation costs for
marketing and sales personnel, and other general corporate expenses. Selling, general and
administrative expenses in 2006 were similar to these expenses in 2005. Selling, general
and administrative expenses increased in 2005 compared to 2004 due to an increase in
marketing, promotion and sales activities with respect to the increased efforts of
distribution of our metro products. We expect that marketing and sales expenses will
moderately increase in 2007 as we increase our marketing activities and sales efforts as
we attempt to expand the distribution of our metro products.

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Financial
Income, net. Financial income consists primarily of interest on short term and long
term investments and on bank deposits. In 2004, financial expense consisted primarily of
interest payments with respect to our convertible subordinated notes, bank loans and
amortization of the issuance costs of our convertible subordinated notes. It also included
exchange rate differentials. In 2005, financial expense consisted primarily of interest
payments with respect to bank loans and exchange rate differentials. In 2006, financial
expense consisted primarily of losses from the sale of marketable securities.

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

Financial
income, net was $1.5 million in 2004, $2.6 million in 2005 and $3.3 million in 2006. The
fluctuations in our financial income were primarily driven by the amount of financial
income derived from our investment in marketable securities. In 2005, exchange rate
currency losses also impacted our financial income, net mainly due to fluctuations of the
Japanese Yen versus the U.S. dollar which resulted in expenses of approximately $972,000,
offset in part by income of approximately $410,000 from fluctuations of other currencies
(mainly NIS) versus the U.S dollar. In 2006 we had net exchange rate currency income of
approximately $397,000.

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

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

As
of December 31, 2006, the majority of our assets in non-dollar currencies are in Japanese
Yen (Yen) and in New Israeli Shekels (NIS). A devaluation of the Yen or NIS in relation to
the U.S. dollar would have the effect of decreasing the dollar value of assets in Yen or
NIS of Orckit, to the extent the underlying value is Yen or NIS based. Such a devaluation
would also have the effect of reducing the U.S. dollar amount of any of our liabilities
that are payable in NIS (unless such payables are linked to the U.S. dollar).

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

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.

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The
following table presents information about the rate of inflation in Israel, the rate of
devaluation of the NIS, the rate of inflation in Israel adjusted for the devaluation and,
for 2004 through 2006, the devaluation rate of the Yen against the U.S. dollar:

|Years Ended
December 31, | Israeli Inflation
Rate | NIS Devaluation Rate | Israel Inflation Adjusted for
Devaluation | Yen Devaluation Rate
|------------------------ | ---------------------- | -------------------- | ----------------------------------------- | --------------------
|
|
|
|
|2002                     |                        |                      |                                           | 6.5                 
|2003                     |                        |                      |                                           | (1.9                
|2004                     |                        |                      |                                           | 1.2                 
|2005                     |                        |                      |                                           | 2.4                 
|2006                     |                        |                      |                                           | (0.1                

B.
          LIQUIDITY AND CAPITAL RESOURCES

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

We
had working capital (total current assets net of total current liabilities) of $16.5
million as of December 31, 2004, a working capital deficit of $(6.3) million as of
December 31, 2005 and working capital of $34.9 million as of December 31, 2006. The
decrease in our working capital in 2005 occurred mainly as a result of collecting most of
our accounts receivable and our decision to invest funds in long-term marketable
securities, which are not included in working capital, partly offset by the repayment of
our short-term bank loans, and a decrease in trade payables and deferred income. The
increase in our working capital in 2006 occurred mainly as a result of a decrease in the
balance of trade payables, accrued expenses and other payables and deferred income.

We
had cash, cash equivalents, long-term marketable securities and bank deposits of $85.6
million as of December 31, 2006 compared to $117.8 million as of December 31, 2005, and
$77.2 million as of December 31, 2004. Since all of our revenues in 2005 and substantially
all of our revenues in 2006 were recognized ratably over a 14-month period from product
delivery, the increase of cash, cash equivalents and marketable securities did not result
in a corresponding increase in revenues recognized in 2005. We expect that the balance of
our cash, cash equivalents and marketable securities will decline in 2007.

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

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

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Net Cash Provided by/Used
in Operating Activities

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

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

In
2004, we generated $938,000 of cash from operating activities primarily as a result of an
increase in trade payables, and deferred income and trading of marketable securities,
offset in part by our net loss and an increase in trade receivables.

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 $3.9 million in 2004,
$1.9 million in 2005 and $910,000 in 2006. Our capital expenditures in 2004, 2005 and 2006
were primarily for the procurement of telecommunications equipment and related software
tools.

Our
investing activities also included primarily the receipt of $58.3 million in 2006, $15.1
million in 2005 and $10.0 million in 2004 from marketable securities that came to
maturity, offset by $48.3 million in 2006, $63.8 million in 2005 and $3.0 million in 2004
of investments in marketable securities.

Net Cash Provided by/Used
in Financing Activities

In
2006, $1.7 million of cash was provided by financing activities as a result of the
exercise of stock options. In 2005, we used $25.0 million in financing activities as we
repaid $31.0 million of bank borrowings, offset in part by the receipt of $6.0 million
from the exercise of stock options. In 2004, $14.9 million was provided by financing
activities as bank borrowings of $31.0 million were offset in part by the payment of $16.2
million in cash to redeem the remaining outstanding principal amount of our convertible
subordinated notes.

Convertible Notes

In
March 2007, we issued convertible notes in the aggregate principal amount of approximately
$25.8 million, resulting in net proceeds to us of approximately $25.0 million. The notes
bear interest at the rate of 6% and are linked to the Israeli CPI. The notes are due in
March 2017, and are subject to the right of the holders to request early repayment in
March 2012. We have a right to force conversion of the notes if the market price of our
ordinary shares exceeds $30 per share, subject to certain dilution adjustments, in any 20
trading days within a period of 30 consecutive trading days. If the forced conversion is
effected on or prior to March 10, 2010, the notes will be converted based on a price of
NIS 52.50 (approximately $12.50) per share. Thereafter, the notes would be converted based
on a price of NIS 63.00 (approximately $15.00) per share. In each case, the conversion
price is subject to adjustment for customary events.

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The
notes are convertible at the election of the holders into our ordinary shares at the
initial conversion price of NIS 52.50 (approximately $12.50) per share if the conversion
occurs by March 10, 2010 and at the initial conversion price of NIS 63.00 (approximately
$15.00) per share if the conversion occurs thereafter, in each case subject to adjustment
for customary events.

We
undertook to register the notes on the Tel Aviv Stock Exchange within six months following
issuance. If the registration is not concluded by that date, the holders will have the
right to request repayment of the principal amount.

Convertible Subordinated
Notes

In
March 2000, we sold $125 million aggregate principal amount of 5.75% convertible
subordinated notes due on April 1, 2005. From 2000 to 2004, we repurchased and redeemed
the outstanding balance of the principal amount of our convertible subordinated notes for
an aggregate amount of $70.4 million. As a result, as of December 31, 2004, none of the
convertible subordinated notes issued in 2000 remained outstanding. The repurchase and
redemption of convertible subordinated notes constituted our primary use of cash in
financing activities in 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 bore interest at a rate
between 2.08% and 2.17% per year until maturity in May and July 2005. We have paid this
loan on its maturity dates from the proceeds of our long-term marketable securities.

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

Working Capitial

We
believe that we have sufficient working capital, including the net proceeds from our
recent sale of convertible notes, to meet our anticipated operating and capital
expenditure requirements for 2007 and 2008. If we do not have available sufficient cash to
finance our operations, we may be required to obtain equity or debt financing. We cannot
be certain that we will be able to obtain additional financing on acceptable terms or at
all.

# Government and Other
Grants

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

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

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In
prior years, we relied on grants from the Office of the Chief Scientist to finance a
portion of our product development expenditures. During the three years ended December 31,
2006, we recognized research and development grants in an aggregate amount of
approximately $4.7 million. As of December 31, 2006, total contingent liabilities to the
Office of the Chief Scientist were approximately $6.5 million.

Under
the terms of the grants we received from the Office of Chief Scientist, we are obligated
to pay royalties of 3% during the first three years following commencement of royalty
payments, and 4% to 5% thereafter. Pursuant to a proposed amendment to the R&D Law
described below, we expect our royalty rate to be 3%  5% per annum. Royalties are
payable up to 100% of the amount of such grants, or up to 300% as detailed below, linked
to the U.S. Dollar, plus annual interest at LIBOR. The payment of royalties is on all
revenues derived from the sale of the products developed pursuant to the funded plans,
including revenues from licensed ancillary services.

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

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

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

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

# Effective Corporate Tax
Rates in Israel

Generally,
Israeli companies are subject to corporate tax on their taxable income at the rate of 31%
for the 2006 tax year. Following an amendment to the Israeli Income Tax Ordinance [New
Version], 1961 (the Tax Ordinance), which came into effect on January 1, 2006,
the corporate tax rate is scheduled to decrease as follows: 29% for the 2007 tax year, 27%
for the 2008 tax year, 26% for the 2009 tax year and 25% for the 2010 tax year and
thereafter. Israeli companies are generally subject to capital gains tax at a rate of 25%
for capital gains (other than gains deriving from the sale of listed securities) derived
from assets purchased after January 1, 2003. However, the effective tax rate payable by a
company that derives income from an Approved Enterprise program may be considerably less.
For more information, please see Item 10E. TaxationIsraeli Tax
ConsiderationsTax Benefits Under the Law for the Encouragement of Capital
Investments, 1959.

Under
Israeli tax law, at December 31, 2006, we had accumulated losses for tax purposes
amounting to approximately $138 million. These losses are available indefinitely to offset
future taxable business income. As of December 31, 2006, our carry forward of capital
losses for tax purposes were $39 million. Orckit and each of our subsidiaries are assessed
on a stand-alone basis. Therefore, accumulated tax losses in each of the entities can
offset future taxable business income only in the entity in which the losses were
generated.

# Dividend Policy

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

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If
we declare cash dividends, we will pay those dividends in 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 2005 and 2006 consisted primarily of finished products and raw materials and in 2004
primarily of finished products. Our inventory was $3.5 million as of December 31, 2006,
$3.3 million as of December 31, 2005 and $5.5 million as of December 31, 2004. In 2006,
our inventory level was similar to that of 2005. In 2006, we wrote off approximately $1.0
million of obsolete inventory due to the release of certain new sub-system line cards for
our CM-100 product line. The decrease in inventory levels in 2005 resulted from a decrease
in the volume of finished products due to a lower volume of shipments expected in the
first quarter of 2006 in comparison to the first quarter of 2005.

C.
          RESEARCH AND DEVELOPMENT

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

Our
research and development staff consisted of 104 employees as of December 31, 2004, 133
employees as of December 31, 2005 and 144 employees as of December 31, 2006, most of whom
are located in Israel and hold engineering or other advanced technical degrees. The number
of research and development employees increased in 2006 and in 2005 because we increased
our research and development efforts related to our CM-100 and CM-4000 product lines. Our
gross research and development expenses were approximately $17.7 million in 2004, $16.3
million in 2005 and $17.4 million in 2006. 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 $2.7 million in 2004, $173,000 in 2005 and $1.9
million in 2006.

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

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D.
          TREND INFORMATION

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

E.
          OFF-BALANCE SHEET ARRANGEMENTS

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

F.
          TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

The
following table of our material contractual obligations as of December 31, 2006 summarizes
the aggregate effect that these obligations are expected to have on our cash flows in the
periods indicated.

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

---

|1 | Our major  premises  leases  allow for early
    termination upon advance notice.  Accordingly,  this amount reflects lease payments for the applicable
    notice  period..  The amount is  presented  in the 1-3 years  column  since this is the  average  life
    period of our lease obligations.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

|3 | This amount reflects our accrued severance pay liability. The time of its
               payment, in whole or in part, cannot be predicted and, as a result, this amount
               is presented in the more than 5 years column. Out of this amount, $3.2 million
               has been previously funded by our contributions to employee plans.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In
addition, as of December 31, 2006, our contingent liability to the Office of the
Chief Scientist in respect of grants received was approximately $6.5 million. This
liability is required to be repaid only by royalties based on revenues derived from
products (and related services) whose development was funded with these grants. The
foregoing table does not include approximately $25.8 million aggregate principal amount of
convertible notes since these notes were issued after December 31, 2006. See above under
Liquidity and Capital ResourcesConvertible Notes.

|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   | 57  | Chairman of the Board and Chief Executive Officer                                                          
|Izhak Tamir   | 54  | President and Director of Orckit and Chairman of the Board and Chief Executive Officer of Corrigent Systems
|Aviv Boim     | 40  | Chief Financial Officer                                                                                    
|Leon Bruckman | 49  | Vice President, Chief Technology Officer of Corrigent Systems                                              
|Zvi Menahemi  | 39  | Vice President, R&D of Corrigent Systems                                                                   
|Akio Ogiso    | 52  | Vice President, Asia Pacific of Corrigent Systems                                                          
|Oren Maymon   | 35  | Vice President, Operations of Corrigent Systems                                                            
|Miri Gelbman  | 55  | Outside Director                                                                                           
|Moshe Nir     | 57  | Outside Director                                                                                           
|Jed M. Arkin  | 43  | Director                                                                                                   
|Moti Motil    | 54  | Director                                                                                                   

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

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

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Mr.
          Tamir has  been  President  and  a  Director  of  Orckit
since its founding in 1990 and Chairman of the Board of Corrigent  Systems since 2001 and Chief  Executive
Officer of  Corrigent  Systems  since May 2007.  Mr.  Tamir has served as a  Director  of Gilat  Satellite
Networks Ltd. and of Scopus Video  Networks  since 2005.  From 1987 until 1989,  Mr. Tamir was employed by
Comstream  Inc.,  in San  Diego,  California.  From  1985  until  1987,  he was  vice  president  of  A.T.
Communication  Channels  Ltd.,  a subsidiary  of Bezeq - the Israel  Telecommunications  Corporation  Ltd.
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.
          Boim joined Orckit as Chief Financial Officer in February 1998. From August
          1996 until February 1998, he was a banker with BT Alex. Brown Incorporated, an
          investment banking firm. From August 1993 until August 1996, Mr. Boim was a vice
          president of Giza Ltd., Tel Aviv, an investment banking firm. Mr. Boim holds a
          B.A. and an M.A. in economics and management from Tel Aviv University and an
          L.L.B. from Tel Aviv University Law School.

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

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

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

Mr.
          Maymon has   served  as  Vice  President,  Operations  of
Corrigent  Systems  since  March  2007.  From  2000 to 2007,  he  served as a  Purchasing  Manager  and as
Planning and Supply  Chain  Director of  Corrigent  Systems.  From 1995 to 2000,  Mr.  Maymon  served as a
Purchasing Manager of Mobilecomm  Communications  Ltd. Mr. Maymon holds a practical  engineering degree in
Industry and Management from the Israeli Government Institute for Technology.

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

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

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

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

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

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

The
aggregate direct remuneration paid by us to all persons as a group (12 persons,) who
served in the capacity of director or executive officer in 2006, including the
remuneration of Eric Paneth and Izhak Tamir detailed below, was approximately $3.0
million, which includes approximately $410,000 of pension, retirement or similar benefits,
expenses reimbursed (including professional and other business association dues and
expenses) and other fringe benefits. In 2006, we granted to this group (excluding Messrs.
Paneth and Tamir) options to purchase an aggregate of 85,000 ordinary shares under the
Orckit Israeli Share Incentive Plan. All of these options are contingent upon meeting
various performance goals in addition to their vesting period. The options have an
exercise price of $8.90 per share, which represented the market price of our ordinary
shares on the date of grant. These options will expire in September 2013. In addition,
160,000 options which were granted in 2005 contingent upon meeting various performance
goals had their goals modified in 2006.

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Employment Agreements
with Eric Paneth and Izhak Tamir

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

Pursuant
to the amended employment of each of Mr. Paneth and Mr. Tamir, each is entitled to an
annual bonus based on our results of operations for 2006 and each subsequent fiscal year
equal to the sum of: (i) 1.0% of the first $5.0 million of pre-tax income; (ii) 2.0% of
pre-tax income between $5.0 million and $15.0 million; (iii) 3.0% of pre-tax income in
excess of $15.0 million; and (iv) 0.25% of revenues. However, for 2005, the bonus with
respect to pre-tax income was payable only to the extent that the amount of our pre-tax
income exceeded $15.0 million and then only to the extent of 3% of the excess. The rate of
the bonus based on revenues, equal to 0.25% of our revenues in each year, was not modified
from the original agreement. As a result of these provisions, each of Mr. Paneth and Mr.
Tamir received a bonus of approximately $214,000 with respect to 2006.

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

The
amended employment agreements reduced the base salary and employee benefits for 2005 of
each of them, effective January 1, 2005, to the amount of NIS equal to $570,000 (based on
the exchange rate on March 31, 2005 of NIS 4.361 to one U.S. dollar) and reduced the
annual percentage used to adjust base salary from 15% to 5%, but subject to adjustments
pursuant to the Israeli CPI beginning in 2006. The dollar equivalent of the salary will
fluctuate in accordance with fluctuations of the exchange rate of the NIS to the U.S.
dollar. There also may be adjustments as a result of changes in tax, national insurance
and other applicable laws from time to time. Accordingly, the base salary and employee
benefits of each of Mr. Paneth and Mr. Tamir for 2006 were approximately $605,000 (based
on the average exchange rate in 2006 of NIS 4.452 to one U.S. dollar).

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

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

# Corporate Governance
Practices

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

# Nasdaq Requirements

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

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

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The
Nasdaq rules require that director nominees be selected or recommended for the
boards selection either by a committee composed solely of independent directors or
by a majority of independent directors. The compensation of a companys chief
executive officer and other executive officers is required to be approved either by a
majority of the independent directors on the board or a committee comprised solely of
independent directors. Our audit committee, which is composed solely of independent
directors, is authorized to also act as the nominating committee and compensation
committee. Under the Nasdaq rules, the approval of the audit committee is also required to
effect related-party transactions that would be required to be disclosed in our annual
report.

# Israeli Companies Law

Board of Directors

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

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

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

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

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Outside Directors

Qualifications
of Outside Directors

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

| |  | 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:

55

---

---

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

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

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

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

Committees

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

Audit
Committee

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

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

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

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

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

56

---

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Option
Committee

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

57

---

---

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

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

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

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

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

Disclosure of Personal
Interest of an Office Holder

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

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

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

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

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

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

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

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

58

---

---

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.

Approval of Private
Placements

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

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

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

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

59

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

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

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

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

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

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

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

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

60

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

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

As
of March 31, 2007, Messrs. Eric Paneth and Izhak Tamir, each beneficially owned 1,224,063
ordinary shares, or 7.5% of our ordinary shares. This includes options to purchase (i)
60,000 of our ordinary shares at nominal value, which expire in August 2010, and (ii)
420,000 of our ordinary shares at $27.14 per share, which expire in June 2012. In
addition, each of Messrs. Eric Paneth and Izhak Tamir hold stock options of Corrigent.
Pursuant to the exchange program described below under Exchange of Corrigent
Options, on or after June 23, 2007, such options might be exchanged for options to
acquire up to approximately 1.9% of our outstanding ordinary shares on a fully diluted
basis after giving effect to such exchange as of the dates of such exchanges.

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

At   March  31,  2007,   outstanding   options  to
purchase a total of 5,250,860  ordinary shares (including  options whose vesting is subject to our meeting
specified  performance  goals)  were  outstanding  under our share  incentive  plan,  of which  options to
purchase a total of 1,497,862  ordinary  shares were held by our  directors and officers (11 persons) as a
group.  Our share incentive plan is administered by an option  committee of our board of directors,  which
is empowered,  subject to  applicable  law, to determine  the  optionees,  dates of grant and the exercise
price of options.  Unless  otherwise  decided by our board of directors or the option  committee,  options
granted under the share incentive plan are non-assignable  except by the laws of descent.  The outstanding
options are  exercisable  at  purchase  prices  which range from $0 to $27.14 per share,  vest mainly over
periods of up to five years, and have expiration dates which range from 2007 to 2016.

61

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Exchange of Corrigent
Options

At
our annual meeting of shareholders held in June 2005, our shareholders approved the
potential exchanges, from time to time, of all of the vested stock options of Corrigent,
which constituted at that time approximately 10% of the outstanding share capital of
Corrigent (on a fully diluted basis), for vested options for up to 10% of our outstanding
ordinary shares (on a fully diluted basis after giving effect to such issuances). The goal
of this program is to simplify our capital structure by increasing our fully diluted
ownership percentage of Corrigent to up to 100%. Generally, our option committee, along
with the board of directors of Corrigent, will determine the persons who will be offered
to exchange and the amount and terms of such exchange. Our audit committee and board of
directors will determine the amount and terms with respect to exchanges of Corrigent stock
options held by Messrs. Paneth and Tamir, which will be on substantially the same terms as
those of other option holders and will not occur prior to June 23, 2007. Corrigent options
are exercisable for the par value of Corrigent shares, $0.01 per share, and the Orckit
options granted in the exchanges would be exercisable at the same price. The issuance of
our ordinary shares upon the exercise of our options received in any exchange will be
covered by a Registration Statement on Form S-8 filed with the SEC under the Securities
Act of 1933, as amended.

Corrigent
does not intend to grant any additional options. Since the outstanding Corrigent options
vest through the end of 2008, it is expected that the series of exchanges will not be
completed earlier than the end of 2008. During 2005, our option committee approved certain
exchanges, effective as of January 1, 2006, of approximately 3% of Corrigent capital stock
on a fully diluted basis for options to purchase approximately 497,000 of Orckits
ordinary shares. Following these exchanges, Orckits holding in Corrigent was
increased from 90% to approximately 93% of Corrigents capital stock on a fully
diluted basis. After giving effect to these exchanges, options to purchase up to
approximately 7.0% of the ordinary shares of Orckit outstanding (on a fully diluted basis
after giving effect to such exchanges) as of the dates of exchange could be issued in
exchange for Corrigent options. The number of Orckit options issuable in exchange for
Corrigent options may change as a result of a change in the value of Corrigent relative to
the value of Orckit at the time of the exchange.

We
will not be required to record an expense in our financial statements under U.S. generally
accepted accounting principles in connection with these exchanges to the extent that the
fair value of the Orckit options that we grant in exchange for Corrigent options does not
exceed the fair value of the Corrigent options being exchanged. When the exchange program
was initially approved in 2005, our audit committee and board of directors determined,
based on an independent valuation, that the fair market value of 10% of the outstanding
capital stock of Corrigent (on a fully diluted basis) at the time the exchange program was
approved was equal to the value of 10% of the outstanding ordinary shares of Orckit (on a
fully diluted basis).

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

62

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

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

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

The
following table sets forth, as of March 31, 2007, the number of our ordinary shares, which
constitute our only voting securities, beneficially owned by (i) all shareholders known to
us to own more than 5% of our outstanding ordinary shares, and (ii) all of our directors
and executive officers as a group. The voting rights of all shareholders are the same. As
of March 31, 2007, 15,766,512 of our ordinary shares were outstanding.

|Identity of Person or Group                                  | Amount Owned | Percent of Class
|------------------------------------------------------------ | ------------ | ----------------
|
|
|
|
|Eric Paneth (1)                                              |              |                 
|Izhak Tamir (2)                                              |              |                 
|David J. Greene and Company, LLC (3)                         |              |                 
|FMR Corp. (4)                                                |              |                 
|All directors and executive officers as a group
(11 persons) |              |                 

---

| | (1)(2) | Includes,
in the case of each of Messrs. Tamir and Paneth, 480,000 ordinary           shares
issuable upon the exercise of options that are currently vested or vest           within
60 days following March 31, 2007 but excludes ordinary shares issuable           upon the
exercise of options that may be issued in the future in exchange for           stock
options of Corrigent held by each of them (see Item 6.E above). This           figure
also includes, in the case of each of Messrs. Tamir and Paneth, 420,000
          ordinary shares subject to a six-year variable forward sale contract entered
          into with Credit Suisse Capital LLC on March 1, 2006. Under each such contract,
          420,000 ordinary shares were pledged to Credit Suisse as collateral.
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (4) | Based
on an initial Schedule 13G of FMR Corp. and Edward C. Johnson 3d filed on
          February 14, 2007 with the Securities and Exchange Commission.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | Includes
1,214,176 ordinary shares which may be purchased pursuant to options
          exercisable within sixty days following March 31, 2007. As discussed in Item
6.E           above, stock options of Corrigent held by directors and executive officers
of           Orckit may be exchanged for options of Orckit.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

63

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As
of March 31, 2004, each of Mr. Paneth and Mr. Tamir beneficially owned 2,255,313 ordinary
shares, or 16.7% of our outstanding ordinary shares. The reduction in each of their
holdings was caused principally by (i) the waiver on February 14, 2005 of an option to
purchase 420,000 ordinary shares at a 10% premium over the market price on the date of
exercise, (ii) the sale of 300,000 ordinary shares on Nasdaq between February 1, 2005 and
April 26, 2005, (iii) the sale of 520,000 ordinary shares on Nasdaq between July 1, 2005
and April 25, 2006 pursuant to a trading plan under Rule 10b5-1(c) entered into in May
2005 with respect to 600,000 ordinary shares and (iv) the transfer of 215,000 ordinary
shares on December 8, 2005 to a blind trust for a period of two years, offset by increases
in beneficial ownership attributable to (v) the vesting of 3,750 options which were not
vested within 60 days from March 31, 2004 and (vi) the grant on June 23, 2005 of an option
to purchase 420,000 ordinary shares at the market price on the date of grant with a seven
year term. The objective of the blind trust referenced in clause (v) above is to extract
value from the volatility of the shares while enabling Messrs. Paneth and Tamir to
maintain their holdings in the shares, subject to market conditions. Commencing March
2006, the trust runs a yield enhancement program with respect to the shares. The program
is run by actively managing the selling and buying back of options with respect to the
shares. Shares of the trust might be assigned and delivered pursuant to transactions
effected under the program. After two years, if the trust is not extended, the shares
owned by the trust at that time will be distributed from the trust back to Messrs. Paneth
and Tamir. The foregoing information is based mainly on reports on Schedule 13D filed with
the SEC by Messrs. Paneth and Tamir.

As
of March 31, 2007, there were 48 holders of record of our ordinary shares in the United
States who collectively held approximately 96% of our outstanding ordinary shares. The
number of record holders in the United States is not representative of the number of
beneficial holders nor is it representative of where such beneficial holders are resident
since many of these ordinary shares were held of record by brokers or other nominees.

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

Tikcro Management
Agreement

Following
the sale of Tikcros business to STMicroelectronics in April 2003, we agreed to
provide Tikcro administrative services. For the services rendered in 2004, Tikcro paid us
$100,000. Fees paid by Tickro in 2005 were $72,000. In 2006, the fees paid by Tikcro were
$48,000.

Siliquent Technologies

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

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

64

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

Not
applicable

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

# Consolidated Statements
and Other Financial Information

See
Item 18.

# Legal Proceedings

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

# Dividend Policy

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

# Significant Changes

No
significant change has occurred since December 31, 2006, except as otherwise disclosed in
this Annual Report.

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

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

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

The
following table sets forth, for the periods indicated, the high and low sales prices of
our ordinary shares as reported on the Nasdaq Stock Market. The price per share of our
ordinary shares and share count has been retroactively adjusted to reflect the (i)
three-for-one stock split of our ordinary shares as of April 5, 2005 and (ii) one-for-five
reverse share split effective as of November 27, 2002.

|Calendar Year | Price Per Share
|------------- | ---------------
|
|
|
|
|2006          |                
|2005          |                
|2004          |                
|2003          |                
|2002          |                

65

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|Calendar Period                       | Price Per Share
|------------------------------------- | ---------------
|
|
|
|
|2007                                  |                
|Second  Quarter (through May 9, 2007) |                
|First  Quarter                        |                
|2006                                  |                
|First  Quarter                        |                
|Second Quarter                        |                
|Third Quarter                         |                
|Fourth Quarter                        |                
|2005                                  |                
|First Quarter                         |                
|Second Quarter                        |                
|Third Quarter                         |                
|Fourth Quarter                        |                

|Calendar Month | Price Per Share
|-------------- | ---------------
|
|
|
|
|2007           |                
|April          |                
|March          |                
|February       |                
|January        |                
|2006           |                
|December       |                
|November       |                

66

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

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

|Calendar Period                       | Price Per Share
|------------------------------------- | ---------------
|
|
|
|
|2007                                  |                
|Second  Quarter (through May 9, 2007) |                
|First  Quarter                        |                
|2006                                  |                
|First Quarter                         |                
|Second Quarter                        |                
|Third Quarter                         |                
|Fourth Quarter                        |                
|2005                                  |                
|First Quarter                         |                
|Second Quarter                        |                
|Third Quarter                         |                
|Fourth Quarter                        |                
|2004                                  |                
|First Quarter                         |                
|Second Quarter                        |                
|Third Quarter                         |                
|Fourth Quarter                        |                

67

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|Calendar Month | Price Per Share
|-------------- | ---------------
|
|
|
|
|2007           |                
|April          |                
|March          |                
|February       |                
|January        |                
|2006           |                
|December       |                
|November       |                

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

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

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

Not
applicable

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

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

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

Not
applicable

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

Not
applicable

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

Not
applicable

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

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

Not
applicable

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

Objects
and Purposes

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

# Borrowing Powers

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

# Transfer of Shares and
Notices

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

# Dividend and
Liquidation Rights

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

# Voting,
Shareholders Meetings and Resolutions

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

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

69

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

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

# Duties of Shareholders

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

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

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

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

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

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

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

# Anti-Takeover
Provisions; Mergers and Acquisitions

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

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

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

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

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

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

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

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

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

# Modification of Class
Rights

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

# Indemnification,
Exculpation and Insurance of Office Holders

Exculpation of Office
Holders

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

Insurance of Office
Holders

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

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

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

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

We
obtained liability insurance covering our officers and directors.

Indemnification of Office
Holders

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

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

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

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

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

Limitations on
Exculpation, Insurance and Indemnification

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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United States Federal Income Tax Considerations

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

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

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

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

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

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

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

# Sale, Exchange or
Other Taxable Disposition of Ordinary Shares

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

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

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

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# Treatment of
Distributions

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

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

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

# Passive Foreign
Investment Company Status

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

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

Based
on the composition of our gross income and the composition and value of our gross assets
during 2005 and 2006, we do not believe that we were a PFIC in 2005 or 2006. However, it
is likely, under the approach set forth in the legislative history to the 1997 Act, that
we would have been classified as a PFIC in 2002, 2003 and 2004, primarily because (a) a
significant portion of our assets consisted of cash, short- and long-term deposits and
marketable securities from the remaining proceeds of our offerings, and (b) the relatively
low public market valuation of our ordinary shares. In addition, there can be no assurance
that we will not be deemed a PFIC in any future tax year.

78

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

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

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

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

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

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

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

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

79

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

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

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

# Information Reporting
and Backup Withholding

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

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Israeli Tax Considerations

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

# Corporate Tax Structure

Generally,
Israeli companies are subject to corporate tax on their taxable income at the rate of 31%
for the 2006 tax year. Following an amendment to the Israeli Income Tax Ordinance, or the
Tax Ordinance, which came into effect on January 1, 2006, the corporate tax rate is
scheduled to decrease as follows: 29% for the 2007 tax year, 27% for the 2008 tax year,
26% for the 2009 tax year and 25% for the 2010 tax year and thereafter. Israeli companies
are generally subject to capital gains tax at a rate of 25% for capital gains (other than
gains deriving from the sale of listed securities) derived from assets purchased after
January 1, 2003. However, the effective tax rate payable by a company that derives income
from an Approved Enterprise program may be considerably less, as further discussed below.

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

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

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

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

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

# Capital Gains Tax

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

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

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

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

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

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

83

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# Tax on Dividends

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

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

Not
applicable

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

Not
applicable.

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

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

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

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

Not
applicable

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|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 may engage in hedging or other
transactions intended to manage risks relating to foreign currency exchange rates. As of
March 15, 2007, we were not involved in any hedging transactions. We may in the future
undertake hedging or other similar transactions or invest in market risk sensitive
instruments when our management determines that it is necessary to offset these risks.

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

# Exchange Rate Risk
Management

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

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

The
table below presents our balance sheet exposure as of December 31, 2006 at fair value
related to market risk sensitive instruments, mainly short term receivables cash, cash
equivalents and payables in currencies other than U.S. dollars. Substantially all of such
balance is in the currencies set forth in the table below. The information is presented in
U.S. dollars (in millions), which is our reporting currency.

Please
see also the explanatory notes below the table.

| | New Israeli Shekels | Japanese Yen | 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 $800,000). A devaluation of 5% of the U.S. dollar compared to the NIS would
          cause an increase in expenses of approximately $180,000. A devaluation of 5% of
          the U.S. dollar compared to the Japanese Yen would cause a decrease in expenses
          of approximately $220,000.

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

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# Interest Rate Risk
Management

As
of December 31, 2006, we had $12.2 million of cash and cash equivalents, $33.8 million of
short-term marketable securities, $38.1 million of long-term marketable securities and
$1.5 million of long-term bank deposits. Our trading securities mature as follows: $33.8
million in 2007, and $38.1 million over a period from 2008 to 2009. Due to the relatively
short-term maturities of the Companys cash, deposits and securities portfolio, an
immediate 10% change in the current interest rates (for example, from 5.0% to 5.5%) is not
expected to have a material effect on its near-term financial condition or results of
operations.

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

Not
applicable

# PART II

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

None

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

None

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

See
Item 15T below.

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

Disclosure Controls and
Procedures

We
performed an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of December 31, 2006. The evaluation was performed with the
participation of our senior management and under the supervision and with the
participation of our chief executive officer and chief financial officer. Based on this
evaluation, our chief executive officer and chief financial officer have concluded that
our disclosure controls and procedures are effective to alert them on a timely basis to
material information required to be included in our periodic reports with the Securities
and Exchange Commission.

Managements Annual
Report on Internal Control Over Financial Reporting

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

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Our
management (with the participation of our chief executive officer and chief financial
officer) conducted an evaluation, pursuant to Rule 13a-15(c) under the Exchange Act, of
the effectiveness, as of the end of the period covered by this Annual Report, of our
internal control over financial reporting based on the criteria set forth in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission. Based on the results of this evaluation, management assessed the
effectiveness of our internal control over financial reporting as at December 31,
2006 and concluded that our internal control over financial reporting was effective as of
December 31, 2006.

This
Annual Report does not include an attestation report of our registered public accounting
firm regarding internal control over financial reporting. Managements report was not
subject to attestation by our registered public accounting firm pursuant to temporary
rules of the SEC that permit us to provide only managements report in this Annual
Report.

Changes in Financial
Control Over Financial Reporting

In
addition, there were no changes in our internal control over financial reporting that
occurred during 2006 that have materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.

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

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

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

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

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

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

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|                   | 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.

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

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

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

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

Requests
or applications to provide services that require specific approval by the Audit Committee
are submitted to the Audit Committee by an executive officer 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.

88

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

Not
applicable.

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

None.

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

See
Item 18.

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

Our
consolidated financial statements and related auditors report for the year ended
December 31, 2006 are hereby incorporated by reference to our Report on Form 6-K, filed
with the SEC on March 30, 2007.

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

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

89

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

|1.110 |  | Memorandum
of Association, as amended.
|------ |  | --------------------------------------

|1.29 |  | Sixth
Amended and Restated Articles of Association.
|---- |  | ---------------------------------------------------

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

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

|4.19 |  | Orckit
Israeli Share Incentive Plan, as amended.
|---- |  | ------------------------------------------------

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

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

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

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

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

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

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

|4.1510 |  | Amended
and Restated Employment Agreement, dated as of June 23, 2005, between           Orckit
Communications Ltd. and Eric Paneth.
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------

|4.1610 |  | Amended
and Restated Employment Agreement, dated as of June 23, 2005, between           Orckit
Communications Ltd. and Izhak Tamir.
|------ |  | -----------------------------------------------------------------------------------------------------------------------------------

|4.17* |  | English
summary of the terms and conditions of Convertible Notes issued in March 2007.
|----- |  | --------------------------------------------------------------------------------------

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

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

90

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---

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

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

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

---

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

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

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

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

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

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

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

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

|8 | Incorporated by reference to Orckit Communications Ltd.s Annual Report on
          Form 20-F for the fiscal year ended December 31, 2004.
|- | -------------------------------------------------------------------------------------------------------------------------------------------

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

|10 | Incorporated by reference to Orckit Communications Ltd.s Annual Report on
          Form 20-F for the fiscal year ended December 31, 2005.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------

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

91

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# SIGNATURES

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

| |  | ORCKIT COMMUNICATIONS LTD.By: /s/ Izhak Tamir
Izhak TamirPresident
Date:    May 9, 2007
| |  | -----------------------------------------------------------------------------------------------------

92

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