**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
  **Washington,
        D.C. 20549**
 
 **FORM
        20-F**
  **(Mark
        One)**
  o
              
              **REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
                  ACT
                  OF 1934**
 **OR**
 x
              
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 **For
        the fiscal year ended December 31, 2004**
 **OR**
 o
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 **For
        the transition period from
                    
        to**
  **Commission
        file number 000-50790**
  
 **SUPERCOM
        LTD.**
 **(Exact
        name of Registrant as specified in its charter)**
 **Not
        Applicable**
 **(Translation
        of Registrant’s Name into English)**
 **Israel**
 **(Jurisdiction
        of incorporation or organization)**
 **Millennium
        Bldg.**
 **3
        Tidhar St., P.O.B. 2094**
 **Ra’anana
        43665 Israel**
 **(Address
        of principal executive offices)**
  
 **Securities
        registered or to be registered pursuant to Section 12(b) of the Act.**
 **None.**
  **Securities
        registered or to be registered pursuant to Section 12(g) of the Act.**
 **Title
                  of each class**
              
              **Name
                  of each exchange on which registered**Ordinary
                  Shares
              
              OTCBulletin
                  Board
 **Securities
        for which there is a reporting obligation pursuant to Section 15(d) of the
        Act.**
 **None.**
  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:
        17,703,199 ordinary shares as of December 31, 2004.
 
 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 periods that the registrant was
        required to file such reports), and (2) has been subject to such reporting
        requirements for the past 90 days.
 Yes x No ࿠ Not applicable
 Indicate
        by check mark which financial statement item the registrant has elected to
        follow.
 Item
        17  ࿠ Item 18 x
 (APPLICABLE
        ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
 Indicate
        by check mark whether the registrant has filed all documents and reports
        required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange
        Act
        of 1934 subsequent to the distribution of securities under a plan confirmed
        by a
        court.
 Yes  ࿠ No ࿠









**TABLE
      OF CONTENTS**











**PART
                I**NOTES
                REGARDING FORWARD-LOOKING STATEMENTS
            iITEM
                1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT & ADVISORS
            3ITEM
                2. OTHER STATISTICS AND EXPECTED TIMETABLE
            3ITEM
                3. KEY INFORMATION
            3Currency
                and Exchange Rates
            3Selected
                Financial Data
            3Capitalization
                and Indebtedness
            5Reasons
                for the Offer and Use of Proceeds
            5Risk
                Factors
            5ITEM
                4. INFORMATION ON THE CORPORATION
            17History
                and Development of the Corporation
            17Business
                Overview
            18Organizational
                Structure
            34Property,
                Plants and Equipment
            35ITEM
                5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
            35Operating
                Results
            35Liquidity
                and Capital Resources
            45Research
                and Development
            46Trend
                Information
            46Off-Balance
                Sheet Arrangements
            48Tabular
                Disclosure of Contractual Arrangements
            48ITEM
                6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
            49Directors
                and Senior Management
            49Compensation
            50Board
                Practices
            52Employees
            54Share
                Ownership
            55ITEM
                7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
            57Major
                shareholders
            58Related
                Party Transactions
            59Interests
                of Experts and CounselITEM
                8. FINANCIAL INFORMATION
            59Consolidated
                Statements and Other Financial Information (Audited)
            59Significant
                Changes
            60


ITEM
                9THE
                OFFER AND LISTING
            60Offer
                and Listing Details
            60Plan
                of Distribution
            61






i


Markets
            62Selling
                Shareholders
            62Dilution
            62Expenses
                of the Issue
            62ITEM
                10. ADDITIONAL INFORMATION
            62Share
                Capital
            62Memorandum
                and Articles of Association
            62Material
                Contracts
            62Exchange
                Controls
            62Taxation
            62Dividends
                and Paying Agent
            67Statement
                by Experts
            67Documents
                on Display
            67Subsidiary
                Information
            67ITEM
                11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                RISK
            67Quantitative
                and Qualitative Information about Market Risk
            67ITEM
                12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
            68**PART
                II**ITEM
                13. DEFAULTS, DIVIDEND ARREARAGES AND
                DELINQUENCIES
            68ITEM
                14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
              AND
                USE OF PROCEEDS
            68ITEM
                15. CONTROLS AND PROCEDURES
            68ITEM
                16A. AUDIT COMMITTEE FINANCIAL EXPERT
            69ITEM
                16B. CODE OF ETHICS
            69ITEM
                16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
            69ITEM
                16 D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT
                COMMITTEES
            69ITEM
                16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                PURCHASERS
            69**PART
                III**ITEM
                17. FINANCIAL STATEMENTS
            69ITEM
                18. FINANCIAL STATEMENTS
            69ITEM
                19. EXHIBITS
            110SIGNATURE
            111





ii


**NOTE
      REGARDING FORWARD-LOOKING STATEMENTS**




This
      Annual Report on Form 20-5 (“Annual
      Report”) contains “forward-looking statements” with the meaning of the United
      States Private Securities Litigation Reform Act of 1995 that are not historical
      facts but rather reflect our present expectation concerning future results
      and
      events. Words such as
“anticipate,”“estimate,”“expects,”“may,”“projects,”“intends,”“plans,”“believes,”“would,”“could”
      and words and terms of similar substance used in connection with any discussion
      of future operating or financial performance may identify forward-looking
      statements. All forward-looking statements are management’s present expectations
      of future events and are subject to a number of factors and uncertainties that
      could cause actual results to differ materially from those described in the
      forward-looking statements. These factors include, but are not limited to,
      (i)
      the factors discussed below under “Risk Factors;” (ii) our beliefs regarding our
      core strengths; (iii) our plans to achieve our strategic objectives and goals,
      including, without limitation, our plans for marketing our products and
      proprietary technologies towards achieving a specific market position, our
      beliefs about our ability to become a key technological player in the secured
      identification/document market, our intent to leverage our core technologies
      and
      know-how to develop markets, our beliefs about the contactless smart card market
      and our position in that market, our beliefs about the commercial possibilities
      for our products and our intent to leverage our public sector experience into
      the commercial sector, our intent to penetrate new markets by leveraging current
      products and systems to new applications and vertical markets, and our intent
      to
      continue to obtain and sell product through strategic alliances and supplier
      agreements ; (iv) our intent to continue to participate in the government market
      and our plans to increase our sales in the commercial market; (v) our
      expectations on the effects of competitive pricing on our margins, sales and
      market share; (vi) our expectations on the effect of our legal proceedings
      on
      our results of operations, sales and operating performance; (vii) our beliefs
      regarding the fluctuations of our operating results; (viii) our expectations
      about our future payments and revenues (or absence of payments or revenues)
      from
      the Ukraine ID Project and from the Moldovan government; (ix) our statements
      regarding the deployment of our SmartDSMS product in Columbus, Ohio; (X) our
      beliefs about our competitive position; (xi) our expectations about write offs
      of our inventory from the Ukraine ID Project; (xii) our expectations about
      the
      effects of seasonality on our revenues and operating results; (xiii) our plans
      for research and development and future products; (xiv) our beliefs about the
      markets in which we compete and our competitive position within those markets;
      (xv) our expected revenues from our customer contracts and purchase orders,
      including, without limitation, from our purchase orders with Moldova, the value
      of our biometric visa issuance system project with a European country, the
      value
      of contract for a “Magna” identification system with an African government, and
      the value of our agreement for our automated smart card production system with
      a
      European country and our expectations of increased revenues from sales of
      additional technology and raw materials to such European country. (xvi) our
      expectations regarding the effectiveness of our marketing programs and
      generation of business from those programs; (xvii) our expectations regarding
      trends affecting our revenues, including, without limitation, our statements
      regarding the concentration of revenues in a small number of customers and
      the
      mix of our sources of revenues; (xviii) our plans regarding future accounting
      pronouncements and the impact of such pronouncements, including, without
      limitation, our intention to adopt the new accounting pronouncement of the
      Emerging Issues Task Force 03-01, SFAS 151 and SFAS 153 and SFAS 123R and the
      anticipated effects the adoption of SFAS 123R may have on our earnings; and
      (xix) our beliefs about the sufficiency our capital resources and other sources
      of liquidity to fund our planned operations; (xx)our expectation that our
      relocation to our new facility in Kadima may result in a write-off of certain
      assets; (xxi) our beliefs about our compliance with the conditions and criteria
      of the Law for the Encouragement of Capital Investment, 1959 and that we have
      not be passive foreign investment company for U.S. tax purposes. Stockholders
      are cautioned not to place undue reliance on the forward-looking statements,
      which speak only of the date of this Annual Report. We are not under any
      obligation, and expressly disclaim any obligation, to update or alter any
      forward-looking statements, whether as a result of new information, future
      events or otherwise. All subsequent forward-looking statements attributable
      to
      us or any person acting on our behalf are expressly qualified in their entirety
      by the cautionary statements contained or referred to in this
      section.





In
      this Annual
      Report ,
      all
      references to "SuperCom" "we," "us" or "our" are to SuperCom Ltd., a company
      organized under the laws of the State of Israel, and its
      subsidiaries.






i


In
      this
      Annual Report, unless otherwise specified or unless the context otherwise
      requires, all references to "$" or "dollars" are to U.S. dollars and all
      references to "NIS" are to New Israeli Shekels. Except as otherwise indicated,
      the financial statements of and information regarding SuperCom are presented
      in
      U.S. dollars.






ii





**PART
      I**




**ITEM
      1.** ***Identity
      of Directors, Senior Management and Advisors.***





Not
      applicable.





**ITEM
      2.** ***Offer
      Statistics and Expected Timetables.***





Not
      applicable.





**ITEM
      3.** ***Key
      Information.*** ****





***A.    Selected
      Financial Data***




**Currency
      and Exchange Rates**




We
      incur
      expenses for our operations in Israel in New Israeli Shekels (“NIS”) and
      translate these amounts into United States dollars for purposes of reporting
      consolidated results. On May 31, 2005, the exchange rate between the NIS and
      the
      dollar was NIS 4.416= $1. The following table shows for the periods and dates
      indicated, certain information concerning the representative $ exchange rate
      for
      translating NIS as determined by the Bank of Israel for the years ended December
      31, 2000 through 2004.




Exchange
                  RateYear
              At
                  End of Period
              Average
                  Rate (1)
              High
              Low2000
              4.04
              4.068
              4.20
              3.972001
              4.416
              4.220
              4.416
              4.0412002
              4.737
              4.736
              4.991
              4.4372003
              4.379
              4.512
              4.924
              4.2832004
              4.3080
              4.483
              4.634
              4.3080


(1)
            The
                average of the exchange rates on the last day of each month during
                the
                applicable year.





The
      following table shows the high and low exchange rates for the previous six
      months:




Period
              High
              LowDecember
                  2004
              4.374
              4.3080January
                  2005
              4.414
              4.3080February
                  2005
              4.357
              4.392March
                  2005
              4.379
              4.299April
                  2005
              4.395
              4.360May
                  2005
              4.416
              4.348


The
      following selected consolidated financial data as of December 31, 2003 and
      2004
      and for the years ended December 31, 2002, 2003 and 2004 have been derived
      from
      our audited consolidated financial statements. These financial statements have
      been prepared in accordance with generally accepted accounting principles in
      the
      United States, or U.S. GAAP, and audited by Fahn Kanne & Co., a member of
      Grant Thornton International. The consolidated selected financial data as of
      December 31, 2000, 2001 and 2002 and for the years ended December 31, 2000
      and
      2001 have been derived from other consolidated financial statements not included
      in this Annual Report and have been prepared in accordance with U.S. GAAP and
      audited by Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young
      Global. The selected consolidated financial data set forth below should be
      read
      in conjunction with and are qualified by reference to "Item 5, Operating and
      Financial Review and Prospects" and the consolidated financial statements and
      notes thereto and other financial information included elsewhere in this Annual
      Report. Historical results are not necessarily indicative of future
      results.






3


SUMMARY
      OF CONSOLIDATED FINANCIAL DATA


YEAR
      ENDED DECEMBER 31,





Audited
 (IN
        THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)
  *2000
                
                *2001
                
                2002
                
                2003
                
                2004SUMMARY
                    OF STATEMENT OF OPERATIONS:Revenues
                
                
                3,062
                
                
                6,889
                
                
                8,027
                
                
                7,244
                
                
                7,344Cost
                    of Revenues
                
                
                1,756
                
                
                2,574
                
                
                1,830
                
                
                3,102
                
                
                3,730Gross
                    Profit
                
                
                1,306
                
                
                4,315
                
                
                6,197
                
                
                4,142
                
                
                3,614Operating
                    Expenses:Research
                    and Development
                
                
                2,477
                
                
                1,225
                
                
                1,334
                
                
                918
                
                
                845Selling
                    and Marketing
                
                
                4,180
                
                
                4,628
                
                
                2,828
                
                
                3,026
                
                
                2,445General
                    and Administrative
                
                
                3,385
                
                
                3,604
                
                
                1,988
                
                
                1,829
                
                
                1,955Total
                    Operating Expenses
                
                
                10,042
                
                
                9,457
                
                
                6,150
                
                
                5,773
                
                
                5,245Operating
                    Income (Loss)
                
                
                (8,736
                )
                
                (5,142
                )
                
                47
                
                
                (1,631
                )
                
                (1,631
                )Financial
                    Income (Expenses), Net
                
                
                744
                
                
                123
                
                
                (35
                )
                
                (233
                )
                
                (214
                )OTHER
                    INCOME (EXPENSES), NET
                
                
                (1,688
                )
                
                (241
                )
                
                6,203
                
                
                (83
                )
                
                (27
                )Income
                    Loss before Taxes on Income
                
                
                (9,680
                )
                
                (5,260
                )
                
                6,215
                
                
                (1,947
                )
                
                (1,872
                )Income
                    Taxes
                
                
                2
                
                
                --
                
                
                --
                
                
                --
                
                
                --Share
                    in Earnings (Loss) of an AffiliatedCompany
                    and impairment, Net of taxes
                
                
                19
                
                
                --
                
                
                (38
                )
                
                (48
                )
                
                --Net
                    Income (Loss) from continuing operations
                
                
                (9,663
                )
                
                (5,260
                )
                
                6,177
                
                
                (1,995
                )
                
                (1,872
                )Loss
                    from discontinued operations
                
                
                1,276
                
                
                1,288
                
                
                (427
                )
                
                --
                
                
                --Net
                    income (loss)
                
                $
                (10,939
                )
                $
                (6,548
                )
                $
                5,750
                
                $
                (1,995
                )
                $
                (1,872
                )PER
                    SHARE DATA:Basic
                    and Diluted loss from continuingoperations
                
                $
                (0.76
                )
                $
                (0.42
                )
                $
                0.49
                
                $
                (0.15
                )
                $
                (0.13
                )Basic
                    and Diluted earning (loss) from discontinuedoperations
                
                $
                (0.1
                )
                $
                (0.1
                )
                $
                (0.04
                )
                $
                --
                
                $
                --Basic
                    and Diluted earning (loss) per share$
                (0.86
                )
                $
                (0.52
                )
                $
                0.45
                
                $
                (0.15
                )
                $
                (0.13
                )SUMMARY
                    OF BALANCE SHEET DATA:Cash
                    and Cash Equivalents
                
                
                8,565
                
                
                274
                
                
                4,567
                
                
                1,729
                
                
                2,894Short
                    term deposit
                
                
                --
                
                
                100
                
                
                --
                
                
                697
                
                
                353Marketable
                    debt securities
                
                
                --
                
                
                --
                
                
                609
                
                
                117
                
                
                --Trade
                    receivables (net of allowancefor
                    doubtful accounts of $ 3,333and
                    $ 3,347 as of December 31, 2003and
                    2004, respectively)
                
                
                161
                
                
                573
                
                
                2,202
                
                
                1,808
                
                
                1,463Inventories
                
                
                2,832
                
                
                3,777
                
                
                3,144
                
                
                3,236
                
                
                2,165Total
                    Current Assets
                
                
                12,887
                
                
                6,006
                
                
                11,092
                
                
                9,881
                
                
                9,254TOTAL
                    ASSETS
                
                
                15,219
                
                
                8,531
                
                
                13,756
                
                
                12,685
                
                
                13,938Total
                    Current Liabilities
                
                
                4,016
                
                
                4,226
                
                
                3,468
                
                
                4,450
                
                
                4,259Accrued
                    Severance Pay
                
                
                858
                
                
                442
                
                
                362
                
                
                436
                
                
                564SHAREHOLDERS’
                    EQUITY:TOTAL
                    SHAREHOLDERS' EQUITY
                
                
                10,345
                
                
                3,863
                
                
                9,497
                
                
                7,612
                
                
                9,115






4


***B.***
            ***Capitalization
                and Indebtedness***





Not
      applicable.





***C.***
            ***Reasons
                for the Offer and Use of
                Proceeds***





Not
      applicable.





***D.***
            ***Risk
                Factors***




*You
      should consider each of the following factors as well as other information
      in
      this Annual Report in evaluating our business, financial condition and our
      prospects. The risks and uncertainties described below are not the only ones
      that we face. Additional risks and uncertainties not presently known to us
      or
      that we consider immaterial may also impair our business operations, financial
      results and prospects. If any of the following risks actually occur, our
      business, financial results and prospects could be harmed. In that case, the
      trading price of our ordinary shares could decline. You should also refer to
      the
      other information set forth in this Annual Report, including our financial
      statements and related notes and the Section captioned “Note Regarding
      Forward-Looking Statements”.*




**We
      have a history of operating losses and negative cash flows and may not be
      profitable in the future.**





We
      have
      incurred substantial losses and negative cash flows since our inception. We
      had
      an accumulated deficit of approximately $20,114,000 at December 31, 2004. We
      incurred net losses of approximately $1,872,000 and $1,995,000 for the years
      ended December 31, 2004 and 2003, respectively. We expect to have net operating
      losses and negative cash flows for the foreseeable future, and expect to spend
      significant amounts of capital to enhance our products and services, develop
      further sales and operations and fund expansion. As a result, we will need
      to
      generate significant revenue to achieve profitability. Even if we do achieve
      profitability, we may not be able to sustain or increase profitability on a
      quarterly or annual basis.





Part
      of
      our operating expense levels are based on internal forecasts for future demand
      and not on firm customer orders for products or services. Our results may be
      negatively affected by fluctuating demand for our products and services from
      one
      quarter to the next and by increases in the costs of components and raw
      materials acquired from suppliers.




**We
      will face a need for additional capital and may need to curtail our operations
      if it is not available.**





We
      have
      partially funded our operations through the issuance of equity securities to
      investors and may not be able to generate a positive cash flow in the future.
      If
      we are unable to generate sufficient cash flow from operations, we will need
      to
      seek additional funds through the issuance of additional equity or debt
      securities or other sources of financing. We may not be able to secure such
      additional financing on favorable terms, or at all. Any additional financings
      will likely cause substantial dilution to existing stockholders. If we are
      unable to obtain necessary additional financing, we may be required to reduce
      the scope of, or cease, our operations. We believe that our current cash and
      cash equivalents, in addition to our revenues generated from our business
      operations, will satisfy our operating capital needs for at least the next
      12
      months based upon our currently anticipated business activities. However, we
      may
      need additional capital even within the next 12 months if we undertake large
      projects or have a delay in one of our anticipated projects. Our need for
      additional capital to finance our operations and growth will be greater should,
      among other things, our revenue or expense estimates prove to be incorrect.





**We
      derive a substantial portion of our revenue from a small number of customers,
      and the reduction of sales to any one of those customers could adversely impact
      our operating results by causing a drop in revenues.**





We
      depend
      on a limited number of customers for a substantial portion of our revenue.
      During the years ended December 31, 2003 and 2002, we derived 66%, and 73%,
      respectively, of our consolidated net revenue for that year from four individual
      customers. In the year ended December 31, 2004, four of our customers accounted
      for 65% of our consolidated net revenues as follows: Intercomsoft (see
      additional information in item 4.B - “Recent Developments”), China Travel
      Services (CHK) Ltd., China Travel Service (Holdings) H.K. Ltd. and Aquarius
      Intertrade Ltd. accounted for, 22%, 17%, 10% and 16%, respectively, of our
      consolidated net revenues. A substantial reduction in sales to, or loss of,
      any
      of our significant customers would adversely affect our business unless we
      were
      able to replace the revenue we received from those customers, which replacement
      we may not be able to do. As a result of this concentration of revenue from
      a
      limited number of customers, our revenue has experienced wide fluctuations,
      and
      we may continue to experience wide fluctuations in the future. Part of our
      sales
      are not recurring sales, including our sales in 2004 to Aquarius Intertrade
      Ltd., and quarterly and annual sales levels could fluctuate and sales in any
      period may not be indicative of sales in future periods.






5




**Our
      reliance on third party technologies, raw materials and components for the
      development of some of our products and our reliance on third parties for
      manufacturing may delay product launch, impair our ability to develop and
      deliver products or hurt our ability to compete in the
      market** .





Most
      of
      our products integrate third-party technology that we license and/or raw
      materials and components that we purchase or otherwise obtain the right to
      use,
      including: operating systems, microchips, security and cryptography technology
      for card operating systems, which prevents unauthorized parties from tampering
      with our cards, and dual interface technology, which enables cards to operate
      in
      both contact and contactless mode. Our ability to purchase and license new
      technologies and components from third parties is and will continue to be
      critical to our ability to offer a complete line of products that meets customer
      needs and technological requirements. We may not be able to renew our existing
      licenses or be able to purchase components and raw materials on favorable terms,
      or at all. If we lose the rights to a patented technology, we may need to stop
      selling or may need to redesign our products that incorporate that technology,
      and we may lose the potential competitive advantage such technology gave us.
      In
      addition, competitors could obtain licenses for technologies for which we are
      unable to obtain licenses, and third parties may develop or enable others to
      develop a similar solution to security issues, either of which events could
      adversely affect our results of operations. Also, dependence on the patent
      protection of third parties may not afford us any control over the protection
      of
      the technologies upon which we rely. If the patent protection of any of these
      third parties were compromised, our ability to compete in the market also would
      be impaired.





We
      do not
      have minimum supply commitments from our vendors for our raw materials or
      components and generally purchase raw materials **** and
      components on a purchase order basis. Although we generally use standard raw
      materials and components for our systems, some of the key raw materials or
      components are available only from a single source or from limited sources.
      For
      example, Teslin®, which is a primary raw material used in our smart card
      products is only available from a single source. Similarly, many of our various
      chips and toners are only available from limited sources. Even where multiple
      sources are available, we typically obtain components and raw materials from
      only one vendor to ensure high quality, prompt delivery and low cost. If one
      of
      our suppliers were unable to meet our supply demands and we could not quickly
      replace the source of supply, it could have a material adverse effect on our
      business, operating results and financial condition, for reasons including
      a
      delay of receipt of revenues and damage to our business reputation.





**Delays
      in deliveries from our suppliers or defects in goods or components supplied
      by
      our vendors could cause our revenues and gross margins to
      decline.**





We
      rely
      on a limited number of vendors for certain components for the products we are
      supplying and rely on a single vendor for Teslin®. We do not have any long-term
      contracts with our suppliers. Any undetected flaws in components or other
      materials to be supplied by our vendors could lead to unanticipated costs to
      repair or replace these parts or materials. Even though there are multiple
      suppliers, we currently purchase some of our components from a single supplier
      to take advantage of volume discounts which presents a risk that the components
      may not be available in the future on commercially reasonable terms or at all.
      Although we believe that there are additional suppliers for the equipment and
      supplies that we require, we may not be able to make such alternative
      arrangement promptly. If one of our suppliers were unable to meet our supply
      demands and we could not quickly replace the source of supply, it could cause
      a
      delay of receipt of revenues and damage to our business reputation.





**Our
      inability to maintain existing and develop new strategic relationships with
      primary integrators for governmental secured ID and passport projects could
      impact our ability to obtain or sell our products, and prevent us from
      generating revenues.**





We
      obtain
      and sell many of our products through strategic alliance and supplier agreements
      in which we act as subcontractors or suppliers to the primary integrator or
      contractor, including China Travel Service (Holdings) H.K. Ltd. in Hong Kong
      for
      the Hong Kong passport project, China Travel Services (CHK) Ltd. for the China
      re-entry card project and Intercomsoft in Moldova for the Moldova national
      documentation project. The loss of any of our existing strategic relationships,
      or the inability to create new strategic relationships in the future, could
      adversely affect our ability to develop and sell our products.





We
      sometimes depend upon our strategic partners to market our products and to
      fund
      and perform their obligations as contemplated by our agreements with them.
      We do
      not control the time and resources devoted by our partners to these activities.
      These relationships may not continue or may require us to spend significant
      financial, personnel and administrative resources from time to time. We may
      not
      have the resources available to satisfy our commitments, which may adversely
      affect our strategic relationships.






6




If
      alliance or supplier agreements are cancelled, modified or delayed, if alliance
      or supplier partners decide not to purchase our products or to purchase only
      limited quantities of our products, or if we are unable to enter into additional
      alliance or supplier agreements, our ability to produce and sell our products
      and to generate revenues could be adversely affected.





**We
      have sought U.S. government contracts in the past and may seek additional U.S.
      government contracts in the future, which subjects us to certain risks
      associated with such types of contracts.**




Most
      U.S.
      government contracts are awarded through a competitive bidding process, and
      some
      of the business that we expect to seek in the future likely will be subject
      to a
      competitive bidding process. Competitive bidding presents a number of risks,
      including:




·
            the
                frequent need to compete against companies or teams of companies
                with more
                financial and marketing resources and more experience than we have
                in
                bidding on and performing major
                contracts;




·
            the
                need to compete against companies or teams of companies that may
                be
                long-term, entrenched incumbents for a particular contract we are
                competing for and which have, as a result, greater domain expertise
                and
                established customer relations;




·
            the
                need to compete on occasion to retain existing contracts that have
                in the
                past been awarded to us on a sole-source
                basis;




·
            the
                substantial cost and managerial time and effort necessary to prepare
                bids
                and proposals for contracts that may not be awarded to
                us;




·
            the
                need to accurately estimate the resources and cost structure that
                will be
                required to service any fixed-price contract that we are
                awarded;****and




·
            the
                expense and delay that may arise if our competitors protest or challenge
                new contract awards made to us pursuant to competitive bidding or
                subsequent contract modifications, and the risk that any of these
                protests
                or challenges could result in the resubmission of bids on modified
                specifications, or in termination, reduction or modification of the
                awarded contract.




We
      may
      not be afforded the opportunity in the future to bid on contracts that are
      held
      by other companies and are scheduled to expire if the U.S. government determines
      to extend the existing contract. If we are unable to win particular contracts
      that are awarded through the competitive bidding process, we may not be able
      to
      operate in the market for products and services that are provided under those
      contracts for a number of years. If we are unable to win new contract awards
      or
      retain those contracts, if any, that we are awarded over any extended period,
      our business, prospects, financial condition and results of operations will
      be
      adversely affected.





In
      addition, U.S. government contracts subjects us to risks associated with public
      budgetary restrictions and uncertainties, actual contracts that are less than
      awarded contract amounts, and cancellation at any time at the option of the
      government. Any failure to comply with the terms of any government contracts
      could result in substantial civil and criminal fines and penalties, as well
      as
      suspension from future contracts for a significant period of time, any of which
      could adversely affect our business by requiring us to pay significant fines
      and
      penalties or prevent us from earning revenues from government contracts during
      the suspension period. Cancellation of any one of our major government
      contracts, however, could have a material adverse effect on the financial
      condition of the Company.





The
      U.S.
      government may be in a position to obtain greater rights with respect to our
      intellectual property than we would grant to other entities. Government agencies
      also have the power, based on financial difficulties or investigations of their
      contractors, to deem contractors unsuitable for new contract awards. Because
      we
      will engage in the government contracting business, we will be subject to audits
      and may be subject to investigation by governmental entities. Failure to comply
      with the terms of any government contracts could result in substantial civil
      and
      criminal fines and penalties, as well as suspension from future government
      contracts for a significant period of time, any of which could adversely affect
      our business by requiring us to spend money to pay the fines and penalties
      and
      prohibiting us from earning revenues from government contracts during the
      suspension period.





Furthermore,
      government programs can experience delays or cancellation of funding, which
      can
      be unpredictable. For example, the U.S. military’s involvement in Iraq has
      caused the diversion of some Department of Defense funding away from the certain
      projects in which we participate, thereby delaying orders under certain of
      our
      governmental contracts. This makes it difficult to forecast our revenues on
      a
      quarter-by-quarter basis.





7




**Our
      dependence on third party distributors, sales agents, and value-added resellers
      could result in marketing and distribution delays which would prevent us from
      generating sales revenues.**





We
      market
      and sell some of our products using a network of distributors covering several
      major world regions, including the United States. We
      establish relationships with distributors and resellers through written
      agreements that provide prices, discounts and other material terms and
      conditions under which the reseller is eligible to purchase our systems and
      products for resale. These agreements generally do not grant exclusivity to
      the
      distributors and resellers and, as a general matter, are not long-term
      contracts, do not have commitments for minimum sales and could be terminated
      by
      the distributor. We do not have agreements with all of our
      distributors. We are
      currently engaged in discussions with other potential distributors, sales
      agents, and value-added resellers. Such arrangements may never be finalized
      and,
      if finalized, such arrangements may not increase our revenues or enable us
      to
      achieve profitability.





Our
      ability to terminate a distributor who is not performing satisfactorily may
      be
      limited. Inadequate performance by a distributor would adversely affect our
      ability to develop markets in the regions for which the distributor is
      responsible and could result in substantially greater expenditures by us in
      order to develop such markets. Our operating results will be highly dependent
      upon: (i) our ability to maintain our existing distributor arrangements; (ii)
      our ability to establish and maintain coverage of major geographic areas and
      establish access to customers and markets; and (iii) the ability of our
      distributors, sales agents, and value-added resellers to successfully market
      our
      products. A failure to achieve these objectives could result in lower
      revenues.





**Third
      parties could obtain access to our proprietary information or could
      independently develop similar technologies because of the limited protection
      for
      our intellectual property and such actions would enable third parties to compete
      more effectively with us and, accordingly, these actions would have a harmful
      effect on our operations.**





Despite
      the precautions we take, third parties may copy or obtain and use our
      proprietary technologies, ideas, know-how and other proprietary information
      without authorization or may independently develop technologies similar or
      superior to our technologies. In addition, the confidentiality and
      non-competition agreements between us and most of our employees, distributors
      and clients may not provide meaningful protection of our proprietary
      technologies or other intellectual property in the event of unauthorized use
      or
      disclosure. If we are not able to defend successfully our industrial or
      intellectual property rights, we might lose rights to technology that we need
      to
      develop our business, which may cause us to lose potential revenues, or we
      might
      be required to pay significant license fees for the use of such technology.
      To
      date, we have relied primarily on a combination of patent, trade secret and
      copyright laws, as well as nondisclosure and other contractual restrictions
      on
      copying, reverse engineering and distribution to protect our proprietary
      technology. We currently have one registered
      patent in Israel and five
      patent applications pending, one registered patent in the USA and four patents
      pending, two patents pending in Europe and other and other
      jurisdictions .
      Generally, these patents and patent applications relate to our
      lamination, printing access control and electronic passport
      technologies





We
      may
      not be issued patents based on our patent applications. Any inability to protect
      intellectual property rights in our technology could enable third parties to
      compete more effectively with us and/or could reduce our ability to compete.
      In
      addition, these efforts to protect our intellectual property rights could
      require us to incur substantial costs even when our efforts are
      successful.





In
      addition, the laws of certain foreign countries may not protect our intellectual
      property rights to the same extent as do the laws of Israel or the United
      States. Our means of protecting our intellectual property rights in Israel,
      the
      United States or any other country in which we operate may not be adequate
      to
      fully protect our intellectual property rights. For instance, the intellectual
      property rights of our Asian subsidiary, SuperCom Asia Pacific Ltd. may not
      be
      fully protected by the laws of Hong Kong and the People’s Republic of China
      (“PRC”). The PRC does not yet possess a comprehensive body of intellectual
      property laws. As a result, the enforcement, interpretation and implementation
      of existing laws, regulations or agreements may be sporadic, inconsistent and
      subject to considerable discretion. The PRC’s judiciary has not had sufficient
      opportunity to gain experience in enforcing laws that exist, leading to a higher
      than usual degree of uncertainty as to the outcome of any litigation. As the
      legal system develops, entities such as ours may be adversely affected by new
      laws, changes to existing laws (or interpretations thereof) and preemption
      of
      provincial or local laws by national laws. Even when adequate law exists in
      the
      PRC, it may not be possible to obtain speedy and equitable enforcement of the
      law.





8


**We
      may face harmful claims of infringement of proprietary rights, which could
      require us to devote substantial time and resources toward modifying our
      products or obtaining appropriate licenses.**





There
      is
      a risk that our products infringe the proprietary rights of third parties.
      On
      August 8, 2003, we received a letter stating that we may be infringing certain
      patents of third parties with respect to our hot lamination process for plastic
      cards. We reviewed the claims made in the letter and we do not believe that
      our
      products or technology infringes such parties' patents or any other third
      party's patents. Since the initial letter, we received another letter dated
      July
      13, 2004 from the same party requesting that we respond to their claim and
      stating that attractive licenses are available. On August 11, 2004 we responded
      to this letter and indicated that we
      do not infringe such parties’ patents. To date, no infringement claims have been
      filed against us. We believe that hot lamination of plastic cards is a widely
      known process that is used by most card manufacturers. Even if it were
      determined that we are infringing such third party’s patents, we feel that we
      could use another process to laminate plastic cards and our business would
      not
      be materially affected.





Regardless
      of whether our products infringe on proprietary rights of third parties,
      infringement or invalidity claims may be asserted or prosecuted against us
      and
      we could incur significant expenses in defending them. If any infringement
      claims or actions are successfully asserted against us, we may be required
      to
      discontinue the use of certain processes, cease the manufacture, use and sale
      of
      infringing products and services, expend significant resources to develop non
      infringing technology, modify our products and services or seek licenses for
      these intellectual property rights. We may not be able to modify our products
      or
      obtain licenses on commercially reasonable terms, in a timely manner or at
      all.
      Our failure to do so could adversely affect our business by preventing us from
      selling some or all of our products. Adverse or protracted litigation or the
      failure to obtain necessary licenses or other rights could increase our
      expenses, as well as delay our increasing revenues, due to the possible devotion
      of significant financial and human resources in defending such
      litigation.





**A
      security breach of our internal systems or those of our customers could harm
      our
      business by adversely affecting the market's perception of our products and
      services thereby causing our revenues to decline.**





For
      us to
      penetrate further the marketplace, the marketplace must be confident that we
      provide effective security protection for national identity and other secured
      ID
      documents and cards. Although we have not experienced any act of sabotage or
      unauthorized access by a third party of our software or technology to date,
      if
      an actual or perceived breach of security occurs in our internal systems or
      those of our customers, regardless of whether we caused the breach, it could
      adversely affect the market's perception of our products and services. This
      could cause us to lose customers, resellers, alliance partners or other business
      partners thereby causing our revenues to decline. If we or our customers were
      to
      experience a breach of our internal systems, our business could be severely
      harmed by adversely affecting the market's perception of our products and
      services.





**We
      may be exposed to significant liability for actual or perceived failure to
      provide required products or services which could damage our reputation and
      adversely affect our business by causing our revenues to decline and our costs
      to rise.**




Products
      as complex as those we offer may contain undetected errors or may fail when
      first introduced or when new versions are released. Despite our product testing
      efforts and testing by current and potential customers, it is possible that
      errors will be found in new products or enhancements after commencement of
      commercial shipments. The occurrence of product defects or errors could result
      in adverse publicity, delay in product introduction, diversion of resources
      to
      remedy defects, loss of or a delay in market acceptance, or claims by customers
      against us, or could cause us to incur additional costs or lose revenues, any
      of
      which could adversely affect our business.





Because
      our customers rely on our products for critical security applications, we may
      be
      exposed to claims for damages allegedly caused to a customer as a result of
      an
      actual or perceived failure of our products. An actual or perceived breach
      of
      security systems of one of our customers, regardless of whether the breach
      is
      attributable to our products or solutions, could adversely affect our business
      reputation. Furthermore, our failure or inability to meet a customer's
      expectations in the performance of our services, or to do so in the time frame
      required by the customer, regardless of our responsibility for the failure,
      could result in a claim for substantial damages against us by the customer,
      discourage other customers from engaging us for these services, and damage
      our
      business reputation. We carry product liability insurance, but existing coverage
      may not be adequate to cover potential claims.





We
      currently carry product liability insurance, errors and omissions for
      high-technology companies insurance and insurance to guard against losses caused
      by employees' dishonesty. We believe that this insurance coverage is comparable
      to that of other similar companies in our industry. However, that insurance
      may
      not continue to be available to us on reasonable terms or in sufficient amounts
      to cover one or more large claims, or the insurer may disclaim coverage as
      to
      any future claim. We do not maintain insurance coverage for employee errors
      or
      security breaches, nor do we maintain specific insurance coverage for any
      interruptions in our business operations. The successful assertion of one or
      more large claims against us that exceed available insurance coverage, or
      changes in our insurance policies, including premium increases or the imposition
      of large deductibles or co-insurance requirements, could adversely affect our
      business by increasing our costs.





9




**Our
      efforts to expand our international operations are subject to a number of risks,
      any of which could adversely reduce our future international
      sales.**





Most
      of
      our business to date has been in jurisdictions other than the United States
      and
      we plan to increase our international sales outside of the United States. Our
      inability to obtain or maintain federal or foreign regulatory approvals relating
      to the import or export of our products on a timely basis could adversely affect
      our ability to expand our international business. Additionally, our
      international operations could be subject to a number of risks, any of which
      could adversely affect our future international sales, including:




·  increased
      collection risks;





·  trade
      restrictions;





·  export
      duties and tariffs;





·  uncertain
      political, regulatory and economic developments;





·  inability
      to protect our intellectual property rights;





·  very
      aggressive competitors;





·  lower
      gross margins in commercial sales in Hong Kong and China;





·  business
      development in Hong Kong and China is time consuming and risky due to the
      uncertain political, regulatory and legal environment; and





·  currency
      issues.




In
      addition, in many countries the national security organizations require our
      employees to obtain clearance before such employees can work on a particular
      transaction. Failure to receive, or delays in the receipt of, relevant foreign
      qualifications also could have a material adverse effect on our ability to
      obtain sales at all or on a timely basis. Additionally, as foreign government
      regulators have become increasingly stringent, we may be subject to more
      rigorous regulation by governmental authorities in the future. If we fail to
      adequately address any of these regulations, our business will be
      harmed.





**The
      markets that we target for a substantial part of our future growth are in very
      early stages of development, and if they do not develop our business might
      not
      grow as much or as profitably as we hope.**





Many
      of
      the markets that we target for our future growth are currently small or
      non-existent and need to develop if we are to achieve our growth objectives.
      If
      some or all of these markets do not develop, or if they develop more slowly
      than
      we anticipate, then we will not grow as quickly or profitably as we hope. For
      example, we are developing smart card products and services for the national
      government ID market.





Smart
      card technology has not been widely adopted by national governments, largely
      due
      to the cost of the necessary infrastructure and the relatively limited
      capabilities of previous microchips. We are investing in identification and
      security networks products and services, but so far we have not deployed our
      systems on a widespread basis. In
      2004,
      our revenues from the government market totaled approximately $6,330,000
      compared to $1,014,000 from the commercial market. As a general matter, our
      revenues in the commercial market are derived from sales of products that we
      adapted to the commercial market from the government market. Although we believe
      the government market is critical to our success in the short term, we believe
      that both the government and commercial markets will be critical to our
      long-term future success. The
      development of these markets will depend on many factors that are beyond our
      control, including the factors that are discussed in these Risk Factors. There
      can be no assurances that we will be able to continue to apply our expertise
      and
      solutions developed for the government market into the commercial
      market.





10




**If
      smart card and highly secured document technology is not adopted in government
      and industry organizations, we may lose some of our existing customers and
      our
      business might not grow as much or as profitably as we
      hope.**





Our
      ability to grow depends significantly on whether governmental and industrial
      organizations adopt smart card technology as part of their new standards and
      whether we will be able to leverage our expertise with government products
      into
      commercial products .
      If
      these organizations do not adopt smart card and highly secured document
      technology, then we might not be able to penetrate some of the new markets
      we
      are targeting, or we might lose some of our existing customer base. There also
      can be no assurances that we will be able to continue to apply our expertise
      and
      solutions developed for the public sector into the commercial market.





In
      order
      for us to achieve our growth objectives, smart card technology must be adopted
      in a variety of areas, including:





·  bank
      credit and debit card systems, which in most countries have traditionally relied
      on magnetic stripe cards as their principal technology;





·  computer
      equipment, which must include smart card readers as standard equipment if the
      use of smart cards for Internet and other applications is to become
      common;





·  widely
      used digital signature information technology security systems;





·  national
      identity card programs, which are considering smart cards with biometric
      technology;





·  government
      issued passports and ID cards which include contactless smart card chips, which
      has been recently recommended as the new standard by International Committee
      of
      Aviation Organizations;





·  transportation
      applications using cards as method of payment; and





·  access
      control in such fields as education and health care.





Any
      or
      all of these areas may not adopt smart card technology.





We
      cannot
      accurately predict the future growth rate of this market, if any, or the
      ultimate size of the smart card technology market. The expansion of the market
      for our products and services depends on a number of factors such
      as:





·
            the
                cost, performance and reliability of our products and services compared
                to
                the products and services of our
                competitors;


·
            customers’
                perception of the benefits of smart card
                solutions;


·
            public
                perceptions of the intrusiveness of these solutions and the manner
                in
                which organizations use the information
                collected;


·
            public
                perceptions regarding the confidentiality of private
                information;


·
            customers’
                satisfaction with our products and services;
                and


·
            marketing
                efforts and publicity regarding our products and
                services.




Even
      if
      smart card solutions gain wide market acceptance, our products and services
      may
      not adequately address market requirements and may not gain wide market
      acceptance. If smart card solutions or our products and services do not gain
      wide market acceptance our business and our financial results will
      suffer.





**We
      need to develop our position as a provider of systems and services to earn
      high
      margins from our technology and, if we are unable to develop such position,
      our
      business will not be as profitable as we hope, if profitable at
      all.**





The
      increasing sophistication of smart card technology places a premium on providing
      innovative software systems and services to customers, in addition to
      manufacturing and supplying smart cards. While we have had some early success
      positioning ourselves as a provider of services and systems, we may not continue
      to be successful with this strategy and we may not be able to capture a
      significant share of the market for the sophisticated services and systems
      that
      we believe are likely to produce attractive margins in the future. A significant
      portion of the value of smart card technology lies in the development of
      operating systems and applications that will permit the use of smart cards
      in
      new markets. In contrast, the margins involved in manufacturing and selling
      smart cards can be relatively small, and might not be sufficient to permit
      us to
      earn an attractive return on our development investments.




11




**If
      we are unable to keep up with rapid changes in smart card technology, our
      existing products and services could become obsolete and our revenues will
      decline.**





The
      market for our products and services is marked by rapid technological change,
      frequent new product introductions and smart card technology enhancements,
      uncertain product life cycles, changes in customer demands and evolving industry
      standards. New products and services based on new or improved technologies
      or
      new industry standards can render existing products and services obsolete and
      unmarketable. To succeed, we will need to enhance our current products and
      service offerings and develop new products and services on a timely basis to
      keep pace with developments related to smart card technology and to satisfy
      the
      increasingly sophisticated requirements of our customers. Any delays in
      developing and releasing enhanced or new products and services or in keeping
      pace with continuous technological change may cause us to lose our existing
      customer base.





The
      process of developing our products and services is extremely complex and
      requires significant continuing development efforts. Our investments in research
      and development have been considerable and may increase in the future. In order
      to earn an adequate return on these investments, we need to expand our sales
      significantly. We may not achieve our development objectives or expand our
      sales.





Various
      technical problems and resource constraints may impede the development,
      production, distribution and marketing of our products and services. In
      addition, laws, rules, regulations or industry standards may be adopted in
      response to these technological changes, which in turn, could materially and
      adversely affect how we will do business. Our continued participation in the
      market for governmental agencies may require the investment of our resources
      in
      upgrading our products and technology for us to compete and to meet regulatory
      and statutory standards. We may not have adequate resources available to us
      or
      may not adequately keep pace with appropriate requirements to compete
      effectively in the marketplace.





**The
      time from our initial contact with a customer to a sale is long and subject
      to
      delays, which could result in the postponement of our receipt of revenues from
      one accounting period to the next, increasing the variability of our results
      of
      operations and causing significant fluctuations in our revenue from quarter
      to
      quarter.**




Our
      financial and operating results have fluctuated in the past and our financial
      and operating results could fluctuate in the future from quarter to quarter
      for
      the following reasons:





·
            long
                customer sales cycles;





·
            reduced
                demand for our products and
                services;




·
            price
                reductions, new competitors, or the introduction of enhanced products
                or
                services from new or existing
                competitors;




·
            changes
                in the mix of products and services we or our distributors
                sell;




·
            contract
                cancellations, delays or amendments by
                customers;




·
            the
                lack of government demand for our products and services or the lack
                of
                government funds appropriated to purchase our products and
                services;




·
            unforeseen
                legal expenses, including litigation
                costs;




·
            expenses
                related to acquisitions;




·
            other
                non-recurring financial charges;




·
            the
                lack of availability or increase in cost of key components and
                subassemblies; and




·
            the
                inability to successfully manufacture in volume, and reduce the price
                of,
                certain of our products that may contain complex designs and
                components.





12




The
      period between our initial contact with a potential customer and the purchase
      of
      our products and services is often long and subject to delays associated with
      the budgeting, approval and competitive evaluation processes that frequently
      accompany significant capital expenditures, particularly by governmental
      agencies. The typical sales cycle for our government customers has to date
      ranged from three to 24 months and the typical sales cycle for our commercial
      customers has ranged from one to six months. A lengthy sales cycle may have
      an
      impact on the timing of our revenue, which may cause our quarterly operating
      results to fall below investor expectations. We believe that a customer's
      decision to purchase our products and services is discretionary, involves a
      significant commitment of resources, and is influenced by customer budgetary
      cycles. To successfully sell our products and services, we generally must
      educate our potential customers regarding their use and benefits, which can
      require significant time and resources. This significant expenditure of time
      and
      resources may not result in actual sales of our products and
      services.





The
      lead-time for ordering parts and materials and building many of our products
      can
      be many months. As a result, we must order parts and materials and build our
      products based on forecasted demand. If demand for our products lags
      significantly behind our forecasts, we may produce more products than we can
      sell, which can result in cash flow problems and write-offs or write-downs
      of
      obsolete inventory.





**Our
      markets are highly competitive and competition could harm our ability to sell
      products and services and could reduce our market share.**





The
      market for smart card and secured document products and services is intensely
      competitive. We expect competition to increase as the industry grows and as
      smart card technology begins to converge with the information technology
      industry. We may not be able to compete successfully against current or future
      competitors. We face competition from technologically sophisticated companies,
      many of which have substantially greater technical, financial, and marketing
      resources than us. In some cases, we compete with entities that have
      pre-existing relationships with potential customers. As the national
      documentation production market expands, we expect additional competitors to
      enter the market.





Some
      of
      our competitors and potential competitors have larger technical staffs, larger
      customer bases, more established distribution channels, greater brand
      recognition and greater financial, marketing and other resources than we do.
      Our
      competitors may be able to develop products and services that are superior
      to
      our products and services, that achieve greater customer acceptance or that
      have
      significantly improved functionality as compared to our existing and future
      smart card products and services. In addition, our competitors may be able
      to
      negotiate strategic relationships on more favorable terms than we are able
      to
      negotiate. Many of our competitors may also have well established relationships
      with our existing and prospective customers. Increased competition may result
      in
      our experiencing reduced margins, loss of sales or decreased market
      share.





The
      average selling prices for our products may decline as a result of competitive
      pricing pressures, promotional programs and customers who negotiate price
      reductions in exchange for longer-term purchase commitments. The pricing of
      products depends on the specific features and functions of the products,
      purchase volumes and the level of sales and service support required. As we
      experience pricing pressure, the average selling prices and gross margins for
      our products may decrease over product lifecycles. These
      same competitive pressures may require us to write down the carrying value
      of
      any inventory on hand, which would adversely affect our operating results and
      adversely affect our earnings per share.





**We
      rely on the services of certain executive officers and key personnel, the loss
      of whom could adversely affect our operations by causing a disruption to our
      business.**





Our
      future success depends largely on the efforts and abilities of our executive
      officers and senior management and other key employees, including technical
      and
      sales personnel. The loss of the services of any of these persons could disrupt
      our business until replacements, if available, can be found. We do not maintain
      any key-person insurance for any of our employees.





**Our
      ability to remain competitive depends in part on attracting, hiring and
      retaining qualified technical personnel and, if we are not successful in such
      hiring and retention, our business could be disrupted.**





Our
      future success depends in part on the availability of qualified technical
      personnel, including personnel trained in software and hardware applications
      within specialized fields. As a result, we may not be able to successfully
      attract or retain skilled technical employees, which may impede our ability
      to
      develop, install implement and otherwise service our software and hardware
      systems and to efficiently conduct our operations.





13




The
      information technology and network security industries are characterized by
      a
      high level of employee mobility and the market for technical personnel remains
      extremely competitive in certain regions, including Israel. This competition
      means there are fewer highly qualified employees available to hire, the costs
      of
      hiring and retaining such personnel are high and highly qualified employees
      may
      not remain with our Company once hired. Furthermore, there may be pressure
      to
      provide technical employees with stock options and other equity interests in
      our
      Company, which may dilute our earnings (loss) per share.





Additions
      of new personnel and departures of existing personnel, particularly in key
      positions, can be disruptive, might lead to additional departures of existing
      personnel and could have a material adverse effect on our business, operating
      results and financial condition.





**Our
      planned growth will place significant strain on our financial and managerial
      resources and may negatively affect our results of operations and ability to
      grow.**





Our
      ability to manage our growth effectively will require us:





·  to
      continue to improve our operations, financial and management controls, reporting
      systems and procedures;





·  to
      train,
      motivate and manage our employees; and





·  as
      required, to install new management information systems.





Our
      existing management and any new members of management may not be able to augment
      or improve existing systems and controls or implement new systems and controls
      in response to anticipated future growth. If we are successful in achieving
      our
      growth plans, such growth is likely to place a significant burden on the
      operating and financial systems, resulting in increased responsibility for
      our
      senior management and other personnel.





**Some
      of our products are subject to government regulation of radio frequency
      technology which could cause a delay or inability to introduce such products
      in
      the United States and other markets.**





The
      rules
      and regulations of the United States Federal Communications Commission or,
      the
      "FCC" limit the radio frequency used by and level of power emitting from
      electronic equipment. Our readers, controllers and other radio frequency
      technology scanning equipment are required to comply with these FCC rules which
      may require certification, verification or registration of the equipment with
      the FCC. Certification and verification of new equipment requires testing to
      ensure the equipment's compliance with the FCC's rules. The equipment must
      be
      labeled according to the FCC's rules to show compliance with these rules.
      Testing, processing of the FCC's equipment certificate or FCC registration,
      and
      labeling may increase development and production costs and could delay
      introduction of our verification scanning device and next generation radio
      frequency technology scanning equipment into the U.S. market. Electronic
      equipment permitted or authorized to be used by the FCC through our
      certification or verification procedures must not cause harmful interference
      to
      licensed FCC users, and it is subject to radio frequency interference from
      licensed FCC users. Selling, leasing or importing non compliant equipment is
      considered a violation of FCC rules and federal law and violators may be subject
      to an enforcement action by the FCC. Any failure to comply with the applicable
      rules and regulations of the FCC could have a material adverse effect on our
      business, operating results and financial by increasing our costs due to
      compliance and/or limit our sales in the United States.





**Conditions
      in Israel affect our operations in Israel and may limit our ability to sell
      our
      products and services.**





We
      are
      incorporated under Israeli law and our manufacturing facility and research
      and
      development facility will continue to be located in Israel. Political, economic
      and military conditions in Israel will, accordingly, directly 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 and
      a
      state of hostility, varying in degree and intensity, has led to security and
      economic problems for Israel. Despite negotiations to effect peace between
      Israel and its Arab neighbors, the future of these peace efforts is uncertain.
      Since October 2000, there has been a significant increase in violence primarily
      in the West Bank and Gaza Strip, negotiations between Israel and the Palestinian
      Authority have ceased from time to time and there has been increased military
      activity characterized by some as war. More recently, violence has spread to
      Jerusalem and areas near Tel Aviv. Furthermore, several countries still restrict
      trade with Israeli companies, which may limit our ability to make sales in,
      or
      purchase components from, those countries. Any future armed conflict, political
      instability, continued violence in the region or restrictions could have a
      material adverse effect on our business, operating results and financial
      condition.





14




**Our
      operations could be disrupted as a result of the obligation of management or
      key
      personnel to perform military service in Israel.**





Generally,
      all nonexempt male adult citizens and permanent residents of Israel are
      obligated to perform annual military reserve duty and are subject to being
      called for active duty at any time under emergency circumstances. Currently,
      Israeli law requires most male Israeli citizens to perform military reserve
      duty
      annually until the age of 45. Generally, between five and ten, representing
      approximately 8% to 15%, of our officers and employees are at any one time
      obligated to perform annual reserve duty. We believe that a maximum of
      approximately 15% of our employees at any one time could be called for active
      duty under emergency circumstances. While we have operated effectively under
      these requirements since our incorporation, we cannot predict the full impact
      of
      such conditions on us in the future, particularly if emergency circumstances
      occur. If many of our employees are called for active duty, our operations
      in
      Israel and our business, results and financial condition may be adversely
      affected.





**Fluctuations
      in the exchange rate between the United States dollar and foreign currencies
      may
      affect our operating results.**





We
      incur
      expenses for our operations in Israel in New Israeli Shekels (NIS) and translate
      these amounts into United States dollars for purposes of reporting consolidated
      results. As a result, fluctuations in foreign currency exchange rates may
      adversely affect our expenses and results of operations, as well as the value
      of
      our assets and liabilities. Fluctuations may adversely affect the comparability
      of period-to-period results. In addition, we hold foreign currency balances,
      primarily NIS, that will create foreign exchange gains or losses, depending
      upon
      the relative values of the foreign currency at the beginning and end of the
      reporting period, affecting our net income and earnings per share. Although
      we
      may use hedging techniques in the future (which we currently do not use), we
      may
      not be able to eliminate the effects of currency fluctuations. Thus, exchange
      rate fluctuations could have a material adverse impact on our operating results
      and stock price. In addition, future currency exchange losses may increase
      if we
      become subject to exchange control regulations restricting our ability to
      convert local currencies into United States dollars or other
      currencies.





**We
      are exposed to special risks in foreign markets which may make it difficult
      in
      settling transactions and thereby force us to curtail our business
      operations.**





In
      conducting our business in foreign countries, we are subject to political,
      economic, legal, operational and other risks that are inherent in operating
      in
      other countries. For instance, business development in Hong Kong and China
      is
      time consuming and risky due to the uncertain political, regulatory and legal
      environment. Other risks inherent to operating in other countries include range
      from difficulties in settling transactions in emerging markets to possible
      nationalization, expropriation, price controls and other restrictive
      governmental actions. We also face the risk that exchange controls or similar
      restrictions imposed by foreign governmental authorities may restrict our
      ability to convert local currency received or held by it in their countries
      into
      United States dollars or other currencies, or to take those dollars or other
      currencies out of those countries.





**The
      terrorist attacks of September 11, 2001, and the continuing threat of global
      terrorism, have increased financial expectations that may not
      materialize.**





The
      September 11, 2001 terrorist attacks, and continuing concerns about global
      terrorism, may have created an increase in awareness for smart card security
      solutions generally. However, it is uncertain whether the actual level of demand
      for our products and services will grow as a result of such increased awareness.
      Increased demand may not result in an actual increase in our revenues. In
      addition, it is uncertain which security solutions, if any, will be adopted
      as a
      result of the terrorism and whether our products will be a part of those
      solutions. The efforts of the United States in the war against terrorism, the
      war in Iraq, and the post-war reconstruction efforts in Iraq, may actually
      delay
      funding for the implementation of security solutions generally in the United
      States. Even if our products are considered or adopted as solutions to the
      terrorism, the level and timeliness of available funding are unclear. These
      factors may adversely impact us and create unpredictability in revenues and
      operating results.





**Our
      shareholders may face difficulties in the enforcement of civil liabilities
      against SuperCom Ltd. and its officers and directors.**





Certain
      of our directors and our professional advisors are residents of Israel or
      otherwise reside outside of the United States. SuperCom Ltd. is incorporated
      under Israeli law and its principal office and facilities are located in Israel.
      All or a substantial portion of the assets of such persons are or may be located
      outside of the United States. It may be difficult to effect service of process
      within the United States upon us or upon any such directors or professional
      advisors or to realize in the United States upon judgments of United States'
      courts predicated upon civil liability of SuperCom Ltd. or such persons under
      United States federal securities laws. We have been advised by our Israeli
      counsel that there is doubt as to whether Israeli courts would (i) enforce
      judgments of United States' courts obtained against SuperCom Ltd. or such
      directors or professional advisors predicated solely upon the civil liabilities
      provisions of United States' federal securities laws, or (ii) impose liabilities
      in original actions against SuperCom Ltd. or such directors and professional
      advisors predicated solely upon such United States' laws. However, subject
      to
      certain time limitations, Israeli courts will enforce foreign (including United
      States) final executory judgments for liquidated amounts in civil matters,
      obtained after due trial before a court of competent jurisdiction which
      recognizes similar Israeli judgments, provided that (1) due process has been
      observed, (2) such judgments or the execution thereof are not contrary to
      Israeli law, public policy, security or sovereignty, (3) such judgments were
      not
      obtained by fraud and do not conflict with any other valid judgment in the
      same
      matter between the same parties and (4) an action between the same parties
      in
      the same matter is not pending in any Israeli court at the time the law suit
      is
      instituted in the foreign court.





15




**We
      are unlikely to pay dividends for the foreseeable future.**





We
      distributed a cash dividend to our shareholders on one occasion on August 26,
      1997 in the aggregate amount of NIS 1 million and prior to that dividends in
      the
      form of bonus shares were distributed on two other occasions. We do not expect
      to declare or pay cash dividends in the foreseeable future and currently intend
      to retain future earnings, if any, to finance the growth and development of
      our
      business.





**With
      our ordinary shares being traded only on the OTC Bulletin Board or on the "pink
      sheets" in the United States, the liquidity of our ordinary shares in the United
      States may be limited.**





Our
      ordinary shares trade on the OTC Bulletin Board in the United States. If we
      were
      unable to have a quotation of our ordinary shares on the OTC Bulletin Board
      System, our shares will only be traded on the "pink sheet" market. Stocks in
      the
      OTC Bulletin Board or in the "pink sheet" market ordinarily have much lower
      trading volume than in other markets, such as the Nasdaq SmallCap Market or
      the
      Nasdaq National Market. Very few market makers take interest in shares traded
      over-the-counter, and accordingly the markets for such shares are less orderly
      than is usual for Nasdaq stocks. As a result of the low trading volumes
      ordinarily obtained in OTC Bulletin Board and "pink sheet" markets, sales of
      our
      ordinary shares in any significant amount could not be absorbed without a
      dramatic reduction in price. Moreover, thinly traded shares in the OTC Bulletin
      Board and in the "pink sheet" markets are more susceptible to trading
      manipulations than is ordinarily the case for more actively traded
      shares.





**A
      significant number of our ordinary shares are or will be eligible for sale
      in
      the open market, which could reduce the market price for our ordinary shares
      and
      make it difficult for us to raise capital.**





As
      of
      June 20, 2005 18,346,140 ordinary shares were outstanding. In addition, there
      were a total of 3,634,141 ordinary shares issuable upon exercise or conversion
      of outstanding options. We have issued options to acquire ordinary shares to
      our
      employees and certain other persons at various prices, some of which have
      exercise prices below the current market price for our ordinary shares. As
      of
      June 20, 2005, our existing stock option plan had 1,000,000 ordinary shares
      available for future issuance. In December 2004, we filed a Registration
      Statement on Form S-8 with the U.S. Securities and Exchange Commission
      registering (i) 1,000,000 ordinary shares available for issuance upon exercise
      of stock options reserved for grant under the Option Plan, (ii) 3,494,315
      ordinary shares issued or issuable upon exercise of options previously granted
      under the Option Plan, and (iii) 643,595 ordinary shares issued or issuable
      upon
      exercise of options previously granted under the 1999 Option Plan. We have
      also
      issued 2,562,298 warrants to acquire ordinary shares to investors and
      consultants, at various prices, which expire between 2009 to 2010. As of June
      20, 2005 warrants to acquire only 1,144,853 ordinary shares had been exercised.
      In November, 2004, we registered up to 6,341,713 ordinary shares pursuant to
      a
      Registration Statement on Form F-1 filed with the U.S. Securities and Exchange
      Commission, which include ordinary shares issuable upon exercise of our
      outstanding warrants.





The
      issuance of a large number of additional ordinary shares upon the exercise
      or
      conversion of outstanding options or warrants would cause substantial dilution
      to existing stockholders and could decrease the market price of our ordinary
      shares due to the sale of a large number of shares in the market, or the
      perception that these sales could occur. These sales, or the perception of
      possible sales, could also impair our ability to raise capital in the
      future.





**"Penny
      stock" rules may make buying or selling our ordinary shares difficult, severely
      limiting the market price of our ordinary shares and the liquidity of our shares
      in the United States.**





Trading
      in our ordinary shares will most likely be subject to the "penny stock"
      regulations adopted by the U.S. Securities and Exchange Commission. These
      regulations generally define a "penny stock" to be any equity security that
      has
      a market price of less than $5.00 per share, subject to certain exceptions.
      These rules require that any broker-dealer who recommends our securities to
      persons other than prior customers and accredited investors, must, prior to
      the
      sale, make a special written suitability determination for the purchaser and
      receive the purchaser's written agreement to execute the transaction. Unless
      an
      exception is available, the regulations require delivery, prior to any
      transaction involving a "penny stock," of a disclosure schedule explaining
      the
      penny stock market and the risks associated with trading in the penny stock
      market. In addition, broker-dealers must disclose commissions payable to both
      the broker-dealer and registered representative and current quotations for
      the
      securities they offer. The additional burdens imposed upon broker-dealers by
      such requirements may discourage broker-dealers from effecting transactions
      in
      our stock, which could severely limit their market price and the liquidity
      of
      our stock.





16




**Our
      ordinary shares are traded on more than one market and this may result in price
      variations.**




Our
      ordinary shares are traded primarily on the OTC Bulletin Board in the United
      States and on the Euronext Brussels stock market in Belgium. Trading in our
      ordinary shares on these markets is made in different currencies (US dollars
      on
      the OTC Bulletin Board and Euros on Euronext Brussels), and at different times
      (resulting from different time zones, different trading days and different
      public holidays in the United States and Belgium). Consequently, the trading
      prices of our ordinary shares on these two markets often differ. 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.





**Being
      a foreign private issuer exempts us from certain Securities and Exchange
      Commission requirements.**





We
      are a
      foreign private issuer within the meaning of rules promulgated under the U.S.
      Securities and Exchange Act of 1934, as amended (the “Exchange Act”). As such,
      we are exempt from certain provisions applicable to United States public
      companies including:




•  the
      rules
      under the Exchange Act requiring the filing with the Commission of quarterly
      reports on Form 10-Q or current reports on Form 8-K;





•  the
      sections of the Exchange Act regulating the solicitation of proxies, consents
      or
      authorizations in respect of a security registered under the Exchange
      Act;





•  the
      provisions of Regulation FD aimed at preventing issuers from making selective
      disclosures of material information;





•  the
      sections of the Exchange Act requiring insiders to file public reports of their
      stock ownership and trading activities and establishing insider liability for
      profits realized from any “short-swing” trading transaction (i.e., a purchase
      and sale, or sale and purchase, of the issuer’s equity securities within less
      than six months);




Because
      of these exemptions, investors are not afforded the same protections or
      information generally available to investors holding shares in public companies
      organized in the United States.




**ITEM
      4.** ***Information
      on the Corporation.*** ****




***A.    History
      and Development of the Corporation***




SuperCom
      Ltd. was incorporated in Israel, as a company limited by shares, on July 4,
      1988
      pursuant to the provisions of the then-current Israeli Companies Ordinance.
      The
      legislative framework within which we now operate is the Israeli Companies
      Law,
      5759-1999 (the "Companies Law"), which became effective on February 1, 2000,
      and
      the Israeli Companies Ordinance (New Version) 1983, as amended (the "Companies
      Ordinance"). ****





SuperCom
      Ltd. became a publicly-traded company on Nasdaq Europe on April 19, 1999. On
      October 23, 2003, following the closing of the Nasdaq Europe stock market,
      we
      transferred the listing of our shares to Euronext Brussels stock market under
      the symbol “SUP”. Since November 5, 2004 our ordinary shares have also traded on
      the OTC Bulletin Board market under the symbol “SPCBF.OB”.





From
      our
      incorporation in 1988 until 1999, we were a development-stage company primarily
      engaged in research and development, establishing relationships with suppliers
      and potential customers and recruiting personnel with a focus on the
      governmental market. During the fiscal year ended December 31, 2002, we
      completed our reorganization plan that we began in 2001. According to such
      plan,
      we decided to add marketing and sales efforts on the commercial market with
      a
      new line of products, including SmartGate 2400, EduGate and DynaGate, while
      still maintaining our business in the governmental market.





17




In
      December 2002, we discontinued the operations of two subsidiaries, Genodous
      Inc.
      and Kromotek, Inc., and disposed of all assets related to such subsidiaries.
      The
      operations and cash flows of those two subsidiaries have been eliminated from
      our operations. We have no intention of continuing our activity in such
      subsidiaries. Our plan of discontinuance involved (i) termination of all
      employees related to those subsidiaries, including payment of all statutory
      and
      contractual severance sums, by the end of the fourth quarter of 2002, and (ii)
      disposal of the equipment owned by such subsidiaries.





During
      the period from January 1, 2004 to December 31, 2004, our capital expenditures
      totaled approximately $1,088,000 (compared to $87,000 during 2003 and $73,000
      during 2002), of which approximately $1,017,000 (compared to $78,000 during
      2003
      and $69,000 during 2002) was expended at or upon SuperCom's facilities in
      Israel, and approximately $71,000 (compared to $9,000 during 2003 and $4,000
      during 2002) was expended upon various facilities of SuperCom's subsidiaries
      outside Israel. Of these expenditures, approximately $41,000 during 2004
      (compared to $66,000 during 2003 and $33,000 during 2002) was for capital
      equipment and leasehold improvements and the balance of approximately $1,047,000
      (compared to $21,000 during 2003 and $40,000 during 2002) was related to
      information technology.





During
      January 1999, Trimol Group Inc., a publicly traded company in the United States
      and the parent company of Intercomsoft Ltd., issued 125,000 shares of Trimol
      Group, Inc. to us as partial consideration for the equipment supplied and the
      other undertakings under our agreement with Intercomsoft Ltd. (“Intercomsoft”).
      During the first and the second quarter of 2004 we sold all our shares in Trimol
      for the total amount of approximately $2,500.





On
      November 17, 2003, we purchased the remaining 20% of the shares that we did
      not
      own of SuperCom Asia Pacific from the minority shareholder in consideration
      of a
      payment of approximately $70,000.





All
      of
      the above expenditures were paid from cash generated from our initial public
      offering.





During
      fiscal 2002, we sold in three separate transactions with third party purchasers
      our entire equity interest in our subsidiary, InkSure Technologies, Inc.,
      (“InkSure”), for which we received aggregate proceeds of approximately
      $6,600,000 from the sale of its shares. During 2003, we did not make any
      significant capital divestitures nor are any such divestitures in progress.
      Other than further capital expenditures of the types and consistent with the
      amounts described above, there are no significant capital expenditures in
      progress by us.





We
      filed
      a Registration Statement under the Exchange Act on Form 20-F on July 29, 2004
      which became effective 60 days thereafter. At such time, we became a foreign
      private issuer reporting company under the Exchange Act. Our ordinary shares
      began trading on the OTC Bulletin Board in the United States on November 5,
      2004.





Our
      head
      office and principal place of business is located at Millennium Bldg., 3 Tidhar
      St., P.O.B. 2094, Ra’anana 43665 Israel, and our telephone number is
      +972-9-7750800. Our internet address is http://www.supercomgroup.com. The
      information contained on our corporate website is not a part of this Annual
      Report.





Our
      agent
      for SEC matters in the United States is SuperCom, Inc., whose address is: **** 2010
      Corporate Ridge, Suite 700 McLean, VA 22102-7838


For
      information concerning our results
      of operations, capital
      expenditures and methods of financing, see "Operating and Financial Review
      and
      Prospects."




***B.    Business
      Overview***




**Business
      Overview**





We
      are a
      smart card technology company that designs, develops and markets advanced smart
      card technologies and products for the governmental and commercial secured
      identification markets. With an embedded microcontroller, smart cards have
      the
      unique ability to store large amounts of data, perform on-card functions, such
      as encryption, and interact intelligently with a smart card reader. Smart cards
      connect to a smart card reader through either direct physical contact or a
      remote contactless radio frequency interface. We function as a "one-stop"
      technological integration and support source for smart card system integrators,
      utilizing our know-how and technologies. We develop and market a wide range
      of
      complementary technologies and solutions for the smart card market, including
      customizable smart cards, smart card-related products, proprietary smart card
      production technologies, and advanced identification, or ID, technologies,
      complemented by brand protection and authentication technologies. We also sell
      specially designed kits containing the raw materials necessary to produce cards
      and smart cards.





18




We
      believe that our core strengths are as follows:





·
            Smart
                card technology integration
                know-how;





·
            High
                security solution integration;





·
            Proprietary
                smart card technologies and
                products;





·
            Expertise
                in multi-application smart cards;
                and




·
            Extensive
                experience with the government ID
                market.





Our
      objective is to become a leading provider of high-end smart card systems by
      marketing our extensive technological know-how, advanced technologies and
      value-added products and applications for government and commercial smart cards
      in the secured identification and access control markets, worldwide. While
      we
      intend to continue to participate in governmental ventures, we also plan to
      increase our sales efforts in the private commercial market through our U.S.
      distribution channels, including our distribution arrangements with Identiphoto
      Inc., Plasco-ID Inc., Laminex, Inc. and Eastern DataComm.




We
      will
      seek to market our products and proprietary technologies to position us
      as:





·
            A
                horizontal smart card technology provider and integrator with the
                ability
                to respond to complex security and multi-application smart card system
                challenges; and





·
            A
                provider of a combination of unique and traditional smart cards and
                complementary smart card-related products, which, as applicable,
                will be
                sold "off-the-shelf" as complete
                solutions.





There
      can
      be no assurance as to whether we shall achieve our objective, the degree of
      our
      growth, if any, in the commercial market or whether we shall achieve our desired
      market position.





**Recent
      Developments**





We
      entered into an agreement in December, 2004 with an African governmental agency
      to provide an end-to-end “Magna” national identification system valued at $2.5
      million during the term of the agreement, which is five years. The solution
      will
      be deployed in stages that began in the fourth quarter of 2004 and will continue
      through the end of the fourth quarter of 2005.





On
      March
      24, 2005, we terminated our agreement with Intercomsoft relating to the national
      documentation project in Moldova. Under the terms of the termination agreement,
      we will supply equipment, consumables and software directly to the Moldovan
      government. We have not, however, entered into a contract with the Moldovan
      government. We are being paid by the Moldavian per purchase order. We do not
      expect any significant changes in our revenues as a result of the termination
      of
      such agreement.





In
      May,
      2005 we received our first order for our SmartDSMS product from the city of
      Columbus, Ohio, which assists users in managing recovery operations. The
      solution will be deployed during the second quarter of 2005.





In
      May 5,
      2005, the U.S. Government Printing Office (“GPO”) issued a Notice of Termination
      for Convenience involving the Company’s participation in the three-phase testing
      of technology for a new electronic passport project. While an earlier
      termination notice was withdrawn after discussions with the U.S. Government,
      the
      Company’s attempts to persuade the Government to withdraw the current
      termination notice have been unsuccessful to date.  The notice terminates
      SuperCom’s contract awards for the Electronic Passport Program. While the
      termination notice does not specify the reason for its issuance, the Company
      understands from its discussions with the Government that it is based on
      unresolved security concerns and not related to the Company’s technological
      solution or its cost proposal.





19




In
      January 2005, we announced that we signed an agreement with the government
      of a
      European country to deploy a biometric visa issuance system in its embassies
      throughout the world. The project’s first stage that has an estimated value of
      approximately $500,000.





We
      have
      introduced the following new products since December 2004:





·
            ***Biometrics
                Visa****.*The
                biometric visa system is built on our proprietary platform technology
                and
                is tailored to meet the customer’s specific requirements. The integrated
                system captures the fingerprints of each visa applicant and stores
                the
                images on a chip integrated in each visa, enabling automatic and
                positive
                identification of the person each time the visa is used. This end-to-end
                solution meets all International Civil Aviation Organization (ICAO)
                standards for visas and passports.





·
            ***Smart
                Disaster Site Management System -
                SmartDSMS.***SmartDSMS is a comprehensive solution for facilitating the authentication
                and flow of on-site personnel in disaster recovery operations. 
                Built
                on our patented DynaGate technology, the wireless mobile units are
                specifically designed to monitor the movement of credentialed individuals
                throughout the disaster area.





·
            ***Vend
                -EZ***.
                The Vend-EZ enables vending machines with a smart card reader and
                a
                specialized controller to support smart transactions with Contactless
                Smart Cards.





Please
      refer to “The Market—Products and New Technology” below for more information
      about these products.





**The
      Market**





**Our
      Market Opportunity**





Many
      industries are rapidly adopting smart cards due to their enhanced security
      features. One reason for this move is the ability to use smart cards for
      multiple purposes. In today's world, mobile phones are used not only for
      communication, but also for mobile commerce. Credit cards are used as loyalty
      cards and as a means of authenticating e-commerce transactions. Transportation
      payment cards at once support multiple transportation providers and function
      as
      debit cards for select retailers. Smart cards can carry personal information
      for
      identification purposes, biometric data for physical access control, and digital
      signatures for network security.





A
      smart
      card is a card that stores information on an integrated circuit chip embedded
      within the card, rather than on a magnetic strip on the surface. While a typical
      magnetic strip card stores approximately 212 bytes of information, generally
      consisting of limited data, a smart card can store 64 kilobytes or more of
      information, which is many times more than a traditional magnetic stripe credit
      card. Additionally, the integrated circuit within a smart card serves as a
      central processing unit which, combined with its memory capacity, facilitates
      the use of encryption applications, which secure data and value exchanges within
      networks and the Internet. Smart cards also permit bi-directional
      authentication, which means that in addition to authenticating the identity
      of
      the user, the card can authenticate the validity of the intended party or device
      prior to exchanging information or value.





Due
      to
      the need for more secure identification and authentication, and the ability
      to
      incorporate multi-application features, there has been a shift towards adapting
      high-end smart card systems in both governmental and commercial market segments.
      Governments are seeking to move away from their traditional paper-based
      identification systems, and commercial entities are also shifting their secured
      systems away from basic, low memory single application cards.





The
      demand for increasingly complicated smart card systems with novel technological
      abilities, combined with increased pressure for cost-effective systems, has
      fostered the emergence of multiple entrants in the smart card market, each
      specializing in specific aspects of smart card production, software or
      technology. However, the complexity and sheer volume of these specialized
      providers have generated an outcome opposite to the market's needs. This
      specialization has required a growing number of entities to become involved
      in a
      single project, thereby causing longer timelines, higher costs, and less
      optimized solutions.





20


***Security,
      Cost Reduction and Smart Cards***





Governments
      and commercial entities control and mass-produce various types of identification
      documents and cards, such as passports, visas, drivers' licenses, and national
      or contactless smart cards. Such documents and cards generally provide their
      owners with the ability to exercise special rights, obtain benefits, effect
      commercial transactions, or cross otherwise restricted borders. As a result
      of
      their importance, identification cards and related documents are often forged
      or
      altered. The costs associated with such fraud, for both victims and law
      enforcement agents, are significant. Consequently, governments and commercial
      organizations are seeking solutions that will heighten security, reduce costs
      associated with forged or fraudulent identification documentation and enable
      cost-effective production of secure and durable documentation.





***Technological
      Developments***





As
      an
      additional means of detecting fraud, identification systems increasingly use
      biometric data, which are unique biological characteristics such as fingerprints
      and facial images, to verify personal identity and other personal information,
      such as medical and financial information. For example, in our Philippines
      passport project, our identification system includes a person's fingerprint
      as
      verification of a person's identity. The inclusion of this information in cards
      or documents for on-line or real-time verification is particularly important
      for
      identification cards as they are often used in commercial
      transactions.





***Political
      Developments***





The
      growth in the national identification documentation market has been fueled
      by
      geopolitical developments including the disintegration of several federal states
      (such as the former Soviet Union), the subsequent emergence of newly independent
      nations, and the creation of regional communities (such as the European Union).
      We believe that these political developments have created significant
      opportunities as an increasing number of governments are seeking to create
      digital population registry databases and cost-effective, secure and durable
      national identification documentation. Since the events of September 11, 2001,
      we have observed increased interest in government ID projects. Over the past
      year alone, we have submitted a number of proposals to governments, including
      the Israeli and other governments, to spearhead national identification
      documentation projects.





***Authentication
      and Security of Documents***





Today,
      with the help of advanced printing technologies, counterfeiters can produce
      most
      of the current identification documents that exist in the world. Governments
      and
      security agencies worldwide are considering the use of national ID documents
      with a high level of security as a method to control terrorism after the events
      of September 11, 2001. Our printing production and security technologies provide
      governments and their law enforcement agencies advanced and highly secure ID
      documents that help reduce and detect counterfeited ID documents. There can
      be
      no assurances, however, that governments and security agencies will adopt
      national ID documents or that if adopted that our technology will be compatible
      with the technology adopted or that such documentation could not
      counterfeited.





**Our
      Strategy**





We
      are a
      provider of high-end smart card systems and secured ID document technologies.
      We
      believe that the government and commercial sectors are moving towards the more
      functional and broader applications that a smart card solution can provide
      over
      traditional methods. We are positioning ourselves to become a key player in
      government and commercial smart card markets as a result of our ability to
      function as a one-stop shop for cost-effective high-end smart card systems.
      Our
      objective is to become a leading provider of high-end smart card systems by
      marketing our extensive technological know-how, advanced technologies and
      value-added products and applications for government and commercial smart cards
      in the secured identification and access control markets,
      worldwide.





While
      there can be no assurance that we shall achieve our goal, in whole or in part,
      we intend to achieve our goal by:





***Extending
      Technological Recognition***





We
      believe that our customized systems, proprietary printing and production
      technologies, software packages and integration capabilities will enable us
      to
      position ourselves as a key technological player in the secured identification
      document/card market. There can be no assurance, however, that we shall become
      such a key technological player.





21


***Leveraging
      Technology/Know-How Into Complementary Markets***




We
      intend
      to leverage our core technologies and know-how in order to respond to the needs
      of existing and potential customers. These technologies involve document
      authentication and registry database systems. We intend to tailor our marketing
      and sales efforts so as to integrate such technologies into the actual solutions
      offered to our governmental and commercial customers. There can be no assurance,
      however, that we shall be successful in these efforts.





***Expansion
      of the Contactless Smart Card Business***





We
      believe that the picture identification contactless smart card represents the
      next generation of national identification documentation and anticipate
      increasing demand for this technology from our existing and potential customer
      base. We have positioned ourselves to service this demand through the
      development of our smart card production line technology. We intend to become
      a
      key player in the supply of contactless smart cards to the governmental and
      commercial markets, and are consequently investing in research and development
      to enhance our contactless smart card technologies in order to satisfy end-user
      requirements. There are two aspects of the expanding commercial market: (i)
      new
      applications and (ii) replacement of low-end magnetic stripe cards with
      contactless smart cards with security features. There can be no assurance that
      we shall become a key player in the governmental and commercial smart card
      markets.





***Leveraging
      Public Sector Expertise Into Commercial Applications***





We
      believe that significant commercial possibilities exist for our secure and
      durable document/card production solutions that we developed for the public
      sector. We have completed the process of leveraging our expertise in the
      production of picture identification contactless smart cards for the public
      sector, and now provide solutions for commercial applications of such technology
      with requirements similar to those in the public sector, such as private or
      corporate identification cards, medical cards and benefits administration.
      There
      can be no assurances that we will be able to continue to apply our expertise
      and
      solutions developed for the public sector into the commercial
      market.





***Penetrating
      New Markets***





We
      intend
      to increase our penetration of existing markets by leveraging our current
      products and systems to new applications and new vertical markets, which can
      be
      used to produce various types of documents and cards. We will also seek to
      leverage our existing relationships and established reputation in new markets.
      We have initiated entry into geographic markets upon which we have not
      traditionally focused, such as the United States. There can be no assurance,
      however, that our efforts will achieve their objectives.





***Seeking
      Partnerships With Other Relevant Companies***





We
      intend
      to continue to obtain and sell many of our products through strategic alliance
      and supplier agreements in which we act as subcontractors or suppliers to the
      primary integrator or contractor. We will also seek new strategic partners
      to
      market our products in order to expand geographic markets and, possibly, to
      produce or develop our products in a more cost-effective manner. There can
      be no
      assurances that we will be able to maintain our existing strategic partnerships
      or enter into new strategic partnerships in the future.





**Research
      and Development**





Our
      past
      research and development efforts have helped us to achieve the goal of offering
      our customers a complete line of products and solutions. We spent $1.3 million,
      $0.9 million and $0.8 million on research and development in 2002, 2003 and
      2004, respectively. These amounts were spent on the development or improvement
      of our technologies and products, primarily in the areas of an automatic
      contactless smart card production line, data capture, management software,
      population registry software packages, security printing, contactless smart
      cards and document authentication. We will continue to research and develop
      new
      security and identification features through laser printing and pre-printing,
      create new personalization methods for contactless smart cards, develop a range
      of smart card applications and continue to develop our automatic contactless
      smart card production line. There can be no assurance that we can achieve any
      or
      all of our research and development goals.





**Products
      and New Technology**





Since
      our
      inception in 1988, we have been involved in the development of advanced
      technologies for the national documentation market. In view of the increasing
      demand for identification cards that are based on contactless smart card
      technologies, we have developed a fully automated production line for picture
      identification contactless smart cards. We also offer to our customers raw
      materials and maintenance and service agreements. In 2002, we decided to focus
      on the commercial market through several new applications. Today, we have two
      major groups of solutions for our customers that are organized as separate
      marketing divisions:





22


·
            Our
                ID and smart card division provides ID solutions for governments
                and
                contactless smart card production facilities for the governmental
                markets;
                and





·
            Our
                commercial marketing division focuses on our commercial applications
                such
                as SmartGate 2400, Power Reader and EduGate in the United States
                and Asia
                Pacific.





***Contactless
      Smart Cards***





Our
      contactless smart cards are customizable, machine-readable smart cards designed
      for a broad range of commercial and governmental applications. From traditional
      ID documents to modern e-commerce cards, our contactless smart cards carry
      large
      quantities of data, securely stored in a sealed microchip and are read using
      our
      Smart Card Reader. The cards come in different sizes and can incorporate
      virtually any chip on the market. For increased durability, the cards are
      constructed from Teslin®, an ultra-thin material that resists abrasion. The
      cards are suitable for many existing and future applications, such as e-identity
      verification, contactless credit cards, loyalty cards, health cards, financial
      sector cards, transportation cards and others. Currently, our customers are
      using the cards as loyalty cards as part of our EduGate and SmartGate systems
      and as financial sector cards.





We
      have
      designed and developed what we believe are unique technologies for the
      production of our proprietary contactless smart card. The smart card is a
      pre-fabricated multi-layered Teslin ® and polyester card that contains a radio
      frequency antenna and a programmable memory chip. Each smart card is
      personalized, including the initialization of its memory chip, in order to
      produce a particular contactless smart card. The design of the contactless
      smart
      card minimizes the number of steps necessary to produce smart cards because
      our
      proprietary printing technology allows customers to print directly onto multiple
      pages of the smart card. The smart card uses read/write memory chips supplied
      by
      third parties with a capacity that ranges from one to eight kilobytes and
      contains an installed "on-board" operating system. This allows customers to
      re-program the chip following initialization, thereby adding, removing or
      updating applications and data without the need to replace the
      chip.





We
      have
      also developed the contactless smart card Production Line 1000 (“SPPL 1000-A”),
      a technology designed for the mass production of secure and durable picture
      identification contactless smart cards. The SPPL 1000-A is an automated smart
      card inlet production line produces the inlet that contains the chip and an
      antenna that carries the secure, personalized data in the finished card, which
      is the core of the contactless smart card. Producing a continuous reel of
      inlets, the SPPL 1000-A increases throughput and reduces waste. Utilizing our
      universal chip packaging, it can accommodate virtually any chip on the
      market.





Our
      SPPL
      1000-B automated contactless smart card and pouch production line (“SPPL
      1000-B”) produces the highly durable casing for our inlet, including, finished
      and personalized smart card or our pouches. The SPPL 1000-B uses pre-printed
      ultra-strong Teslin® pages to produce high quality color smart cards laminated
      with additional protective layers of polyester. The SPPL 1000-B accepts
      continuous reels of our smart card inlets, thereby maximizing flexibility and
      cost efficiency.





***Contactless
      Smart Card Reader/Writer - 5600 Series***





Our
      Contactless Smart Card Readers/Writers are devices that transfer data to and
      from contactless smart cards. Our Contactless Smart Card Readers/Writers are
      easily integrated with devices such as vending machines, access gates and
      hand-held terminals. Unlike readers/writers that require direct contact between
      the card and reader, SuperCom Contactless Smart Card Readers/Writers operate
      by
      radio frequency technology, which allows the transmission of data by simply
      holding the card near the reader. The ability to read cards without physical
      contact speeds reaction time and prolongs the life of both the smart card and
      the reader/writer. In addition, given that the 5600 Series Reader/Writer has
      no
      moving parts, maintenance and cost of ownership are considerably
      reduced.





***Smart
      Card 8500 Series***





Our
      Smart
      Card 8500 Series offers more features than our other smart cards. These smart
      cards are color personalized, highly durable, and may be produced at remote
      issuing stations by customers using our equipment. In addition, the 8500 Series'
      smart cards are designed to meet our customer’s specified **** size
      and
      thickness standards regardless of the size of the chip the customer chooses.
      The
      8500 Series' smart cards may incorporate a variety of security features such
      as
      ID pictures and holograms, hidden features detectable by ultraviolet lamps
      or
      two-dimensional bar-code readers, and proprietary features that require special
      forensic equipment for authentication. Customers can select the security level
      required for each card, creating customized security solutions for different
      ID
      types.





23




***Security
      Printing***





We
      have
      developed fully automated production lines that allow for rapid mass production
      of generic pouches and personalized cards. Our ability to produce generic
      pouches is important because such pouches may be personalized through our
      proprietary transfer printing technology at a later stage. This provides
      customers with the option to decentralize the mass production of cards by
      manufacturing pouches in a centralized location and distributing them to sites
      (such as regional documentation issuing sites or embassies) where the pouch
      is
      personalized and the final card is produced.





***Transfer
      Process Printing***





Our
      proprietary transfer printing technology, which is patented in five
      jurisdictions, including the United States, Europe and Hong Kong, allows us
      to
      print captured data on booklets and pouches regardless of the size, design,
      type, thickness or lamination method used. This technology offers the customer
      the option of combining the security of personalized pouches and pre-sewn
      laminated booklets with the durability of laser printing in a cost-effective
      manner. The ability to affix data on any size pouch or booklet provides us
      with
      a competitive advantage as governments often purchase quantities of different
      types of blank passport booklets and pouches in bulk and desire the ability
      to
      produce durable passports and similar documents in various formats while
      utilizing their entire existing stock of booklets and cards. Our technology
      allows the printing of personalized data on multiple passport pages in the
      same
      step. This allows additional security data to be included in a passport without
      incurring a substantial increase in the cost of producing each
      booklet.





***Teslin
      Printing***





A
      growing
      segment of the national identification documentation market uses Teslin® as its
      primary printing substrate. Teslin® is a polymer that was developed and patented
      in the United States. We purchase all of the Teslin® used in our business from
      the sole manufacturer of this product. Teslin® has been identified by the
      identification documentation production industry as a potential substrate
      because of its high absorption level, attractive print stability, and
      plastic-like flexibility and durability. Teslin®, however, is extremely
      sensitive to high temperatures. This renders useless any conventional printing
      technique based on extreme heat, such as laser printing. In addition, Teslin® is
      not receptive to ink jet printing. The practice adopted by the national
      identification production industry is to use thick pieces of Teslin® coated with
      various chemicals in order to increase its resistance to heat. This process,
      however, makes the cards more vulnerable to damage, thus vitiating the very
      attractiveness of Teslin®. We offer our customers the ability to print on
      Teslin® using high quality color laser printers. Our use of laser printing
      provides us with an important competitive advantage given that laser printing
      can retain functional stability for up to 10 years, as opposed to ink jet or
      thermal transfer technology printing, which are generally stable for only two
      to
      five years.





Our
      solution features a production process in which laser printing is controlled
      by
      proprietary software than the typical heat and pressure process. This solution
      makes laser printing possible on extremely thin layers of uncoated Teslin®,
      which maximizes durability while minimizing the possibility of forgery or
      tampering. We also utilize our Teslin® printing capability for the production of
      picture identification contactless smart cards in order to make such cards
      significantly more durable.





***Software
      Packages***





Our
      software packages are designed for data collection and management, and capturing
      and encoding various types of data in a personal digitized file. This
      facilitates control over the data printing process and storage of digitized
      files at either a remote site or central registry. The packages can handle
      all
      types of data ranging from images captured through live video, photo or color
      scanning to biometric information, including palm geometry, fingerprints and
      facial recognition. The packages are configurable with all types of database
      software, can be used with all commercially available platforms, including
      mainframe computers and UNIX servers, can support multiple document types and
      printers and can operate in Windows 98, Windows 2000, Windows XP and Windows
      NT
      environments.





Our
      proprietary software integrates these data capture technologies with a PC-based
      workstation in a modular configuration, allowing for the easy establishment
      and
      operation of multiple data collection stations and provision of
      customer-specific solutions. In addition, our software enables data capture
      workstation operators to control the image capture process exclusively through
      the keyboard and to calibrate multiple units of image capture equipment through
      one centralized workstation.





24




***Raw
      Materials***





We
      sell
      specially designed kits containing the raw materials necessary to produce some
      of our products, including silicon sheets, polyethylene terephthalate (PET)
      and
      Teslin®. Among the raw materials we sell are plastics, various printing
      substrates, toners and printing drums. Although not all of these materials
      incorporate our technologies, they include components necessary for the
      operation of certain of our systems. In some cases, our customer agreements
      require that customers purchase raw materials from us for the production of
      documents and cards exclusively for the term of the agreement.





***Electronic
      Passport Technology***




Our
      electronic passport solution provides a smart inlay, which can be included
      in
      the front or back cover of the passport, in the middle page or adjoining the
      personalization page.




Our
      ePassport solution is based upon the following areas of products and
      expertise:




·
            **Smart
                Inlay for ePassport**






Our
      smart
      inlay is flexible, highly durable and uses an operating system fully compatible
      with the International Civil Aviation Organization (“ICAO”) and International
      Organization for Standardization (“ISO”) standards. Our inlay passed several
      extensive tests that exceed the normal use of a passport with embedded
      technology. Our ePassport inlay can be included in the front or back cover,
      in
      the middle page or adjoining the personalization page.




·
            **Manufacturing**






Our
      innovative high-volume “ePASS PRO” manufacturing systems are designed to provide
      an automatic and flexible solution for producing smart inlays for electronic
      passports. The system can incorporate changes of chip, design and material.
      The
      universal chip module system allows us to utilize almost any chip on the market
      today. As part of the production system, we employ a variety of testing methods
      to assure high quality and reliability for our products.




·
            **Chip
                and Operating System
                Technology**




We
      supply
      a chip with a proven operating system, which conforms to ISO and ICAO standards.
      We offer features such as memory capacity of up to 72KB and fast write/read
      time.




***Biometrics
      Visa***





The
      biometric visa system is built on our proprietary platform technology and is
      tailored to meet the customer’s specific requirements. The system features an
      advanced and decentralized design. The ID system is cost-effective to install
      while increasing its flexibility. To combat counterfeiting and fraud, the
      integrated system captures the fingerprints of each visa applicant and stores
      the images on a chip integrated in each visa, enabling automatic and positive
      identification of the person each time the visa is used. The end-to-end solution
      meets all International Civil Aviation Organization (“ICAO”) standards for visas
      and passports.




** ***EduGate***





EduGate
      is an access control and attendance system designed to combat school truancy.
      The system allows school personnel to record and automatically report students'
      entry or exit by using a system of smart cards and smart card readers while
      a
      remote central computer compiles data about students' attendance. An optional
      feature is PhoneGate, an automated system that contacts parents by email or
      text
      messaging if their child is absent from school.





** ***DynaGate***





DynaGate
      is a portable smart card reader and data collection device that can also be
      integrated into our EduGate system. It utilizes the Dynamic Access Control
      (“DAC”) concept (patent pending in the United States and Israel) to enable
      school personnel to check, record and automatically report a student's entry
      or
      exit using a specially designed mobile reader. The school's main management
      system records activity and automatically notifies parents of their child's
      absence from school.





25




** ***SmartGate
      2400***





Security
      and identification authorization are important concerns for businesses and
      individuals alike. SmartGate 2400 is an integrated solution for these concerns,
      providing secured access control to targeted environments using contactless
      smart cards, controllers and readers. These units are programmed according
      to
      client specifications and carry an array of personalization and security
      features. The multi-application system can be integrated into a variety of
      environments, including office buildings, residential buildings, nursing homes,
      hospitals, universities and schools.





***Smart
      Disaster Site Management System - SmartDSMS***




SmartDSMS
      is a comprehensive solution for facilitating the authentication and flow of
      on-site personnel in disaster recovery operations.  Built on our patented
      DynaGate technology, the wireless mobile units are specifically designed to
      monitor the movement of credentialed individuals throughout the disaster
      area.  The wireless solution provides the capability of transmission
      of
      data over distances exceeding ten miles in and around debris and buildings.




As
      a
      modular solution, it is intended for mobility and can easily be moved from
      one
      disaster site to the next. Once deployed, these self-contained units monitor
      access to sensitive areas, log personnel traffic into and out of the site and
      facilitate real-time reporting. The system records all access requests and
      assists in the personnel management of disaster recovery efforts by ensuring
      controlled access and reliable real-time reports that account for all personnel
      at the disaster site, and grants or denies access into restricted zones based
      on
      the security profile.




By
      utilizing DynaGate, a mobile wireless access control system, every entrance
      is
      managed and documented at the disaster site.  The local first responders
      to
      the disaster area are pre-badged prior to any emergency.  Other personnel
      are provided with badges at the on-site enrollment station. Advantages of this
      “smart” solution include the ability to store personal data on the card such as
      fingerprint, blood type, allergies and emergency contact information and an
      authorization level to each DynaGate access zone station.  Access data
      is
      maintained in real-time on a central server.


***Vend
      -EZ***





The
      Vend-EZ is a natural addition to all smart card networks. Vending machines
      are
      enabled with a smart card reader and a specialized controller to support the
      smart transaction with Contactless Smart Cards. SuperCom's Smart Cards are
      cost
      effective, machine-readable and personalized.





**New
      Technologies**





Through
      our involvement in the national identification documentation market, we have
      identified features that require new technologies that are complementary to
      our
      core technologies, primarily for document authentication and population registry
      systems. Magna is our comprehensive, web-based population registration and
      document issuance system that we market to businesses and government offices.
      An
      off-the-shelf software solution, Magna features generic core technology,
      intuitive modular structure and easy-to-use tools. Magna enables customization
      without dependency on technical experts as well as allowing controlled, seamless
      integration with existing legacy systems.





**Customers
      and Projects**





***Passports
      and ID Card—Africa***





In
      April
      2003, we entered into an agreement with the Security, Immigration and Refugees
      Affaires Authority of an African country in connection with passports and other
      travel documentation project in such African country. The agreement has a term
      of five years. Pursuant to the agreement, we will supply the customer with
      equipment and raw materials necessary for the production of passports and other
      travel documents as required from time to time under the agreement. Pursuant
      to
      the agreement, the customer is required to pay us for the equipment and the
      raw
      materials that we supply in the aggregate amount of $1.6 million. In 2003,
      we
      generated $ 536,000 in revenues. During 2004, we generated $261,000 in revenues
      pursuant to this agreement.





26


***Passports
      and Id Smart Cards—Ukraine***




In
      September 1999, a consortium led by us was awarded a contract from the Ukrainian
      government for a national passport and ID smart card project. Over the course
      of
      the project, we were engaged to supply technology, production equipment and
      raw
      materials for the issuance of passports and ID smart cards. In April 2001,
      we
      signed the first phase of this agreement, which provided the Ukrainian
      government with a central production system for issuing Ukrainian passports
      and
      finished the initial implementation phase. During 2002, we began the delivery
      of
      the first phase of the Ukraine ID Project (the “Ukraine ID Project”) and
      generated revenues of $2.1 million. During 2003, we generated an aggregate
      of
      $1.97 million in revenues from the Ukraine ID Project.





In
      April
      2004, we were informed by the International Commercial Arbitration Court at
      the
      Ukrainian Chamber of Commerce and Industry (“Arbitration Court”) that the
      Department for Resources Supply of the Ministry had filed with the Arbitration
      Court a statement of claim to declare the Contract as void due to defaults
      in
      the tender proceedings under which the Contract had been awarded to SuperCom.
      On
      July 22, 2004 we were informed by the law firm representing us in the
      arbitration proceedings that on July 19, 2004, the Arbitration Court issued
      a
      negative award declaring the Contract as void. We strongly believe that the
      award is wrong due to many defaults that occurred in the arbitration
      proceedings. On April 27, 2005 we challenged the validity of the award in the
      High Commercial Court of Ukraine. In May 2005 we were informed by the
      Arbitration Court that the Department for Resources Supply of the Ministry
      had
      filed with the Arbitration Court a new statement of claim for restitution of
      $1,047,740 paid to us by the Department for Resources Supply of the Ministry.
      We
      strongly believe, that the new claim has no merit and we intend to take all
      necessary actions in order not to pay this amount. We did not have any revenues
      from this project in 2004.





Negative
      developments in the Ukraine ID Project litigation may cause us to write off
      the
      inventory in the amount of approximately $860,000 with respect to the Ukraine
      ID
      Project pursuant to our contract with the Ministry of Internal Affairs of
      Ukraine and that any such write off could have a material adverse effect on
      our
      net worth and income and the trading price for our ordinary shares.
      Additionally, during the year 2003, we increased the allowance for doubtful
      accounts in aggregate amount of $ 2,133,000 for the debt the Ukrainian
      government owes to us.





***National
      Documentation—Moldova***





In
      August
      1995, we entered into an agreement with Intercomsoft, which was subsequently
      amended on May 5, 1998 and July 22, 1998, in connection with a national
      documentation project in Moldova. The agreement had a term of ten years.
      Pursuant to the agreement, we supplied Intercomsoft with equipment and raw
      materials necessary for the production of passports, drivers' licenses, vehicle
      registrations, identification cards and other documents, as required from time
      to time under an agreement between Intercomsoft and the Ministry of Internal
      Affairs of Moldova (“MIAM”). Pursuant to the agreement, Intercomsoft was
      required to pay us for the equipment and raw materials that we supplied to
      Intercomsoft. In addition, we were entitled to 25% of Intercomsoft's gross
      profits from the sale of ID documentation to the MIAM. In addition, Trimol
      Group
      Inc., a publicly traded company in the United States and the parent company
      of
      Intercomsoft, issued 125,000 shares of Trimol Group, Inc. to us as partial
      consideration for the equipment supplied and the other undertakings. During
      the
      first and the second quarter of 2004 we sold all of our shares in Trimol Group,
      Inc. for the total amount of $2,500. In 2002 and 2003, we generated revenues
      of
      $1,554,000 and $1,184,000, respectively, pursuant to this agreement. During
      2004, we generated $1,610,000 in revenues pursuant to this agreement.




On
      March
      24, 2005, we terminated our agreement with Intercomsoft. Under the terms of
      the
      termination agreement, we will supply equipment, consumables and software
      directly to the Moldovan government which we expect will be paid for by the
      Moldovan government. We have not entered a contract with the Moldovan
      government. We are being paid by the Moldavian per purchase order. We do not
      expect any significant changes in our revenues as a result of the termination
      of
      such agreement. In the absence of a long-term agreement, there can be no
      assurances that the Moldovan government will purchase products from us to the
      same extent or for the same period of time as Intercomsoft would have under
      its
      agreement with us.





***Passports—Hong
      Kong***





In
      September 1996, SuperCom Asia Pacific Ltd. (“SuperCom Asia Pacific”), our
      100%-owned subsidiary as of December 31, 2003, entered into an agreement with
      China Travel Service (Holdings) H.K. Ltd. (“CTSH”), which supplies passports to
      the Hong Kong government. Pursuant to the agreement, SuperCom Asia Pacific,
      as
      subcontractor, is obligated to provide CTSH with all the equipment and raw
      materials required for the production of passports in Hong Kong. The agreement
      provides for payments for equipment and raw materials purchased plus annual
      fees
      for maintenance after the first 12 months. In September 1999, the parties signed
      a supplementary agreement whereby they agreed to extend the agreement for an
      additional term of three years through December 31, 2003. In September 2003,
      the
      parties signed a supplementary agreement whereby they agreed to extend the
      agreement for an additional term of one year through December 31, 2004. We
      renewed this agreement in March, 2005 for an additional term of three years
      through June 30, 2007. In 2002 and 2003, we generated revenues of $615,000
      and
      $811,000, respectively, pursuant to this agreement. During 2004, we generated
      $758,000 in revenues pursuant to this agreement.





27




***Hong
      Kong - China Re-Entry Cards***





In
      1996,
      SuperCom Asia Pacific entered into an agreement with China
      Travel Services (CHK) Ltd. (“CTS”),
      which is responsible for the supply of Hong Kong-China re-entry cards to the
      Hong Kong government. According to the agreement, SuperCom Asia Pacific, as
      subcontractor, will provide CTS with all the equipment and raw material
      necessary for the production of the Hong Kong-China re-entry cards. The
      agreement provides for payment of equipment and raw materials plus annual
      maintenance fees after the first 12 months. The term of the agreement is five
      years with a five-year renewal option and can be terminated for cause. In June
      2001, the agreement has been renewed through June 29, 2006. In 2002 and 2003,
      we
      generated revenues of $931,000 and $879,000, respectively, pursuant to this
      agreement. During 2004, we generated $1,271,000 in revenues pursuant to this
      agreement.





***Passports—United
      Kingdom***





In
      December 1997, we entered into an agreement with the Stationary Office Limited,
      an English company (“TSO”), which was awarded a ten-year agreement in June 1997
      to supply passports to the United Kingdom Passport Agency. Pursuant to the
      agreement, we, as subcontractor, will supply TSO with equipment and training
      for
      the production of passports at TSO's central facility in Manchester, England
      and
      at six regional offices of the United Kingdom Passport Agency. In addition,
      TSO
      has the option to purchase raw materials from us at prices specified in the
      agreement. The TSO agreement may be terminated for cause and upon termination
      of
      TSO's agreement with the Passport Agency. In 2002 and 2003, we generated
      revenues of $285,000 and 140,000, respectively, pursuant to this agreement.
      During 2004, we generated revenues of $129,000 pursuant to this agreement.





***United
      States Government Printing Office (GPO)***





On
      May 5,
      2005, we announced that the U.S. Government Printing Office (“GPO”) has issued a
      Notice of Termination for Convenience involving the Company’s participation in
      the three-phase testing of technology for a new electronic passport project.
      While an earlier termination notice was withdrawn after discussions with the
      U.S. Government, the Company’s attempts to persuade the Government to withdraw
      the current termination notice have been unsuccessful to date.  The
      notice
      terminates SuperCom’s contract awards for the Electronic Passport Program. While
      the termination notice does not specify the reason for its issuance, the Company
      understands from its discussions with the Government that it is based on
      unresolved security concerns and not related to the Company’s technological
      solution or its cost proposal.





***Biometric
      Visa*** ****** ***system
      to European Government***




In
      January 2005, we announced that we have signed an agreement with the government
      of an European country to deploy a biometric visa issuance system in its
      embassies throughout the world. The project’s first stage has an estimated value
      of approximately $500,000.




The
      system will be built on our proprietary platform technology, and will be
      tailored to meet the customer’s specific requirements. To combat counterfeiting
      and fraud, the integrated system will capture the fingerprints of each visa
      applicant and store the images on a chip integrated in each visa, enabling
      automatic and positive identification of the person each time the visa is used.
      The system features an advanced and decentralized design that makes it fast
      and
      cost-effective to install while increasing its flexibility. The end-to-end
      solution meets all ICAO standards for visas and passports.




***National
      ID card deal with African Governmental Agency***




In
      December 2004, we announced that we have entered into an agreement with an
      African governmental agency to provide an end-to-end “Magna” national
      identification system valued at $2.5 million during the term of the agreement,
      which is five years. The solution will be deployed in stages that began in
      the
      fourth quarter of 2004 and will continue through the end of the fourth quarter
      of 2005. Revenues will be recognized during the forth quarter 2004 through the year
      2005.






28




The
      comprehensive hardware and software-based solution will consist of a national
      population ID registry together with a document issuance system. The
      identification card itself will utilize visible and invisible security features,
      including the encoded fingerprints of the cardholder.





***Automated
      Smart Card Production System to a European Government***




During
      the fourth quarter of 2004, we sold an automated smart card production system
      to
      the government of an European country. We recognized revenues from the sale
      in
      the amount of approximately $1.25 million during the forth quarter
      2004.




The
      system is for the production of secured documents and credentials issued by
      the
      government.  We expect increased revenues through the sale of additional
      technology and raw materials in 2005.  The automated production line
      is
      based on high-end technology and manufactures contactless smart cards and inlays
      with an antenna and chip.




***Contracts
      for Commercial Applications-Generally***




From
      time
      to time we are party to agreements for the sale of our commercial applications,
      including EduGate, DynaGate, SmartGate 2400, SmartDSMS and Vend-EZ. Most, if
      not
      all, of our sales from these products are not recurring sales.





**Sales
      and Marketing**





We
      sell
      our systems and products worldwide through distribution channels that include
      direct sales and traditional distributor or reseller sales. We have
      approximately 27 employees directly engaged in the sale, distribution and
      support of our products through centralized marketing offices in distinct world
      regions including, our employees of SuperCom Asia Pacific, which market our
      products in Asia, and SuperCom, Inc., which markets our products in the United
      States. We are also represented by seven independent distributors and resellers
      with which we have distribution agreements.




Our
      distributors and resellers sell our systems and products to business
      enterprises, healthcare and educational institutions and government agencies
      and
      act as the initial customer service contact for the systems and products they
      sell. We establish relationships with distributors and resellers through written
      agreements that provide prices, discounts and other material terms and
      conditions under which the reseller is eligible to purchase our systems and
      products for resale. These agreements generally do not grant exclusivity to
      the
      distributors and resellers and, as a general matter, are not long-term
      contracts, do not have commitments for minimum sales and could be terminated
      by
      the distributor. We do not have agreements with all of our
      distributors.





During
      2004 **** we
      signed
      distribution agreements with two U.S. distributors: Plasco-ID Inc., PSA Security
      Network and Eastern DataComm. During 2003, we signed distribution agreements
      with three U.S. distributors: TransTech Systems, Inc., Laminex Inc. and Clinton
      Electronics Corporation;




None
      of
      our distributions agreements with our distributors or resellers include any
      minimum sales or supply requirements.





**Sales
      Analysis**





***Sales
      By Geographic Destination:***





The
      following table provides a breakdown of total revenue by geographic market
      (all
      amounts in thousands of dollars):


**Year
                ended December 31,****2002**
            
            **2003**
            
            **2004****Total**
            
            **Total**
            
            **Total****revenues**
            
            **revenues**
            
            **revenues**Europe
            
            $
            5,237
            
            $
            3,308
            
            $
            3,218Asia
                Pacific
            
            
            1,942
            
            
            2,067
            
            
            2,433Africa
            
            
            -
            
            
            536
            
            
            899United
                States
            
            
            581
            
            
            828
            
            
            386Israel
            
            
            229
            
            
            460
            
            
            320Other
            
            
            38
            
            
            45
            
            
            88$
            8,027
            
            $
            7,244
            
            $
            7,344





29


The
      following table provides a breakdown of total revenue by product category (all
      amounts in thousands of dollars):





**Year
                  ended December 31,****2002**
              
              **2003**
              
              **2004**Raw
                  materials and equipment
              
              $
              4,879
              
              $
              4,196
              
              $
              5,552SPPL
                  1000
              
              
              2,080
              
              
              2,471
              
              
              1,210License
                  fee
              
              
              446
              
              
              -
              
              
              -Maintenance
              
              
              622
              
              
              577
              
              
              582$
              8,027
              
              $
              7,244
              
              $
              7,344
  **Customer
      Service**





We
      believe that customer support plays a significant role in our sales and
      marketing efforts and in our ability to maintain customer satisfaction, which
      is
      critical to our efforts to build our reputation and permit us to grow in both
      new and existing markets. In addition, we believe that the customer interaction
      and feedback involved in our ongoing support functions provide us with
      information on customer needs that contributes to our product development
      efforts. We generally provide maintenance services under our agreements pursuant
      to terms that are according to each particular agreement. We provide service
      either through customer training, local third-party service organizations,
      our
      subsidiaries, or our personnel, including appropriate personnel sent from our
      headquarters in Israel. We generally provide our customers with a warranty
      for
      our products varying in length from 12 to 36 months. Costs incurred annually
      by
      SuperCom for product warranties have to date been insignificant; however, there
      can be no assurance that these costs will not increase significantly in the
      future.





**Manufacturing
      and Availability of Raw Materials**





Our
      manufacturing operations consist primarily of materials planning and
      procurement, quality control of components, kit assembly and integration, final
      assembly, and testing of fully-configured systems. A significant portion of
      our
      manufacturing operations consists of the integration and testing of
      off-the-shelf components. All of our products and systems, whether or not
      manufactured by us, undergo several levels of testing, including configuration
      to customer orders and testing with current release software, prior to
      delivery.





Certain
      components, such as printers and digital cameras, are purchased and then
      integrated by us into a data capture workstation. We perform a significant
      amount of primary assembly of our printers. We contract with manufacturers
      to
      produce less technologically sensitive and complex features of our printers
      to
      our specifications.





In
      addition, we purchase raw materials such as Teslin®, silicon, toners and certain
      security features, used by our customers in the production of ID documents
      from
      third parties. While third parties process many of the materials according
      to
      our specifications, we carry out the finishing and packaging of the consumable
      materials.





We
      do not
      have minimum supply commitments from our vendors and generally purchase
      components on a purchase order basis. Although we generally use standard raw
      materials and components for our systems, some of the key raw materials or
      components are available only from a single source or from limited sources.
      For
      example, Teslin®, which is a primary raw material used in our smart card
      products is only available from a single source. Similarly, many of our various
      chips and toners are only available from limited sources. Even where multiple
      sources are available, we typically obtain components and raw materials from
      only one vendor to ensure high quality, prompt delivery and low cost. If one
      of
      our suppliers were unable to meet our supply demands and we could not quickly
      replace the source of supply, it could have a material adverse effect on our
      business, operating results and financial condition, for reasons including
      a
      delay of receipt of revenues and damage to our business reputation. We have,
      however, identified alternate sources of supply for most of our components
      and
      raw materials. We believe that our open systems architecture facilitates the
      substitution of components when this becomes necessary or
      desirable.





**Competition**





The
      market for our products and services is extremely competitive. We
      asses
      our competitive position from our experience and market intelligence and
      reviewing third party competitive research materials. Our
      management expects this competition to intensify as the markets in which our
      products and services compete continue to develop. We face competition from
      technologically sophisticated companies, many of which have substantially
      greater technical, financial, and marketing resources. In some cases, we compete
      with entities that have pre-existing relationships with potential customers.
      As
      the national documentation production market expands, we expect additional
      competitors to enter the market. However, to date , we believe that we have
      been
      able to compete because our products combine technologies and features that
      provide customers with a complete and comprehensive solution. There can be
      no
      assurance, however, that other companies will not offer similar products in
      the
      future or develop products and services that are superior to our products and
      services, that achieve greater customer acceptance or that have significantly
      improved functionality as compared to our existing and future smart card
      products and services. Increased competition may result in our experiencing
      reduced margins, loss of sales or decreased market shares.






30




We
      experience intense competitive pricing pressures, promotional programs and
      customers who negotiate price reductions in exchange for longer-term purchase
      commitments, which might cause the average selling prices for our products
      to
      decline. The pricing of products depends on the specific features and functions
      of the products, purchase volumes and the level of sales and service support
      required. These same competitive pressures may require us to write down the
      carrying value of any inventory on hand, which would adversely affect our
      operating results and adversely affect our earnings per share.





In
      the
      passport production and national identification card markets, we compete with
      local governments and government-owned or private sector security printing
      companies. These companies have either adapted new printing technologies to
      the
      passport production market or use the same technologies as we do. These
      companies include Canadian Bank Notes; Thomas De la Rue, a publicly held English
      company; Giesecke & Devrient GmbH, a German company; 3M Inc., a
      publicly-held U.S. company; Setec Oy, a Finnish company that produces passports
      using laser engraving technology; Toppan, a Japanese company that manufactures
      laser printers; and American Banknote Corporation. We are able to compete to
      date on the basis of, among other things, our ability to produce national
      identification cards of any size that feature high-speed laser printing on
      Teslin ® and polyester, which provides enhanced security and significant
      durability. There can be no assurance, however, that other companies will not
      offer similar products in the future.





We
      also
      compete with system integrators such as EDS, Unisys, Siemens, TRW,
      Lockheed-Martin and IBM, which act as prime integrators in connection with
      government agreements. These system integrators, however, sometimes act as
      our
      partners when we participate in consortiums led by, or including, one or more
      of
      these system integrators.





In
      projects where customers require biometric data collection technology, we
      compete with automatic fingerprint identification system, or AFIS providers
      such
      as Lockheed-Martin, Printrak International (Motorola), TRW, Cogent Technology,
      Sagem Morpho of France and NEC of Japan. AFIS suppliers tend to position
      themselves as prime integrators on turnkey projects. We have developed
      integration capabilities with AFIS systems and can print encrypted AFIS data
      onto our national identification cards and passports.





In
      the
      emerging market for contactless smart cards for use in national documentation
      systems, we compete with companies such as Schlumberger, Gempluss and Orga
      Cards, which supply smart cards for commercial applications using
      polyvinylchloride, or PVC, and other material platforms; Giesecke & Devrient
      Oberthur, which supplies smart cards; ODS Landis & Gyr and Maurer, a German
      company, which produces laser engraved polycarbonate cards; Nova Card and
      Amatech, German companies, and Austrian Cards, an Austrian company, which also
      sell antenna winding technology, PET cards and sell contactless production
      equipment; Muhlbauer and Meltzer, German companies which are competitors in
      manufacturing contactless equipment; and Bull and De La Rue, which is engaged
      in
      the business of printing money, passport and other secured
      documents.





Our
      commercial applications for EduGate, DynaGate, SmartDSMS and Vend-EZ compete
      in
      an undeveloped market that is primarily served by niche competitors, which
      change frequently.





**Intellectual
      Property**





Our
      ability to compete is dependent on our ability to develop and maintain the
      proprietary aspects of our technology. We rely on a combination of trademark,
      copyright, trade secret and other intellectual property laws, employee and
      third-party nondisclosure agreements, licensing and other contractual
      arrangements and have also applied for patent protection to protect our
      proprietary technology and intellectual property. These legal protections afford
      only limited protection for our proprietary technology and intellectual
      property. If we enter into U.S. government contracts, the U.S. government may
      be
      in a position to obtain greater rights with respect to our intellectual property
      than we would grant to other entities.





In
      addition, the laws of certain foreign countries may not protect our intellectual
      property rights to the same extent as do the laws of Israel or the United
      States. Our means of protecting our intellectual property rights in Israel,
      the
      United States or any other country in which we operate may not be adequate
      to
      fully protect our intellectual property rights. For instance, the intellectual
      property rights of our Asian subsidiary, SuperCom Asia Pacific Ltd. may not
      be
      fully protected by the laws of Hong Kong and the People’s Republic of China.





31




***Patents***





We
      currently have one registered
      patent in Israel and five
      patent applications pending, one registered patent in the USA and four patents
      pending, two patents pending in Europe and other and other
      jurisdictions .
      Generally, these patents and patent applications relate to our
      lamination, printing access control and electronic passport
      technologies




We
      intend
      to file additional patent applications when and if appropriate. There is no
      guarantee that patents will arise from our applications or, if patents do arise,
      that we will be afforded proprietary protection should claims
      arise.





In
      addition, we recognize that our existing patents provide us only limited
      protection. Moreover, not all countries provide legal protection of proprietary
      technology to the same extent. There can be no assurance that the measures
      taken
      by us to protect our proprietary technologies are or will be sufficient to
      prevent misappropriation of our technologies or portions thereof by unauthorized
      third parties or independent development by others of similar technologies
      or
      products. In addition, regardless of whether our products infringe on
      proprietary rights of third parties, infringement or invalidity claims may
      be
      asserted or prosecuted against us and we could incur significant expenses in
      defending them. Our costs could also increase if we have to pay license fees
      as
      a result of these claims.





***Licenses***





We
      license technology and software, such as operating systems and database software
      from third parties for incorporation into our smart card systems and products
      and we expect to continue to enter into these types of agreements for future
      products. Our licenses are either perpetual or for specific terms.





**Government
      Regulation**





Some
      of
      our contracts relate to projects that have elements that are classified for
      national security reasons. Although most of our contracts are not themselves
      classified, persons with high security clearances are often required to perform
      portions of the contracts. We believe that our employment of personnel with
      high
      security clearances is helpful in obtaining such contracts. Doing business
      with
      governments is complex and requires the ability to comply with intricate
      regulations and satisfy periodic audits.





Our
      smart
      card readers must comply in the United States with the regulations of the
      Federal Communications Commission, or the FCC, which may require certification,
      verification or registration of the equipment with the FCC. Certification and
      verification of new equipment requires testing to ensure the equipment's
      compliance with the FCC's rules. In addition, the equipment must be labeled
      according to the FCC's rules to show compliance with these rules. Electronic
      equipment permitted or authorized to be used by the FCC through our
      certification or verification procedures must not cause harmful interference
      to
      licensed FCC users, and it is subject to radio frequency interference from
      licensed FCC users. To date, our smart card readers have complied with the
      regulations of the FCC; however, there can be no assurance that they will
      continue to do so in the future.





We
      are
      subject to certain labor statutes and to certain provisions of collective
      bargaining agreements between the Histadrut, the General Federation of Labor
      in
      Israel, and the Coordinating Bureau of Economic Organizations, including the
      Industrialists’ Association, with respect to our Israeli employees. In addition,
      our Israeli employees are also subject to minimum mandatory military service
      requirements. Please refer to the discussion of “Employees” appearing under
      Section D of Item 5 for more information.





Generally,
      we are subject to the laws, regulations and standards of the countries in which
      we operate and/or sell our products, which vary substantially from country
      to
      country. The difficulty of complying with these laws regulations and standards
      may be more or less difficult than complying with applicable U.S. or Israeli
      regulations, and the requirements may differ.





**Legal
      Proceedings**





We
      are
      party to legal proceedings in the normal course of our business. Other than
      as
      described below, there are no material pending legal proceedings in which we
      are
      a party or of which our property is subject. Although the outcome of claims
      and
      lawsuits against us can not be accurately predicted, we do not believe that
      any
      of the claims and lawsuits described in this paragraph, individually or in
      the
      aggregate, will have a material adverse effect on our business, financial
      condition, results of operations and cash flows for any quarterly or annual
      period.





32




In
      April
      2004, we were informed by the International Commercial Arbitration Court at
      the
      Ukrainian Chamber of Commerce and Industry (“Arbitration Court”) that the
      Department for Resources Supply of the Ministry had filed with the Arbitration
      Court a statement of claim to declare the Contract No. 10/82, dated April 9,
      2002 between SuperCom and the Ministry of Internal Affairs of Ukraine as void
      due to defaults in the tender proceedings under which the Contract had been
      awarded to SuperCom. On July 22, 2004 we were informed by the law firm
      representing us in the arbitration proceedings that on July 19, 2004, the
      Arbitration Court issued a negative award declaring the Contract as void. We
      strongly believe that the award is wrong due to many defaults that occurred
      in
      the arbitration proceedings. On April 27, 2005 we challenged the validity of
      the
      award in the High Commercial court of Ukraine. In May 2005 we were informed
      by
      the Arbitration Court that the Department for Resources Supply of the Ministry
      had filed with the Arbitration Court a new statement of claim to a restitution
      of $1,047,740, paid to us by the Department for Resources Supply of the
      Ministry. We strongly believe, that the new claim has no merit and we intend
      to
      take all necessary actions in order not to pay this amount.





Negative
      developments in the Ukraine ID Project litigation may cause us to write off
      the
      inventory in the amount of approximately $860,000 with respect to the Ukraine
      ID
      Project pursuant to our contract with the Ministry of Internal Affairs of
      Ukraine and any such write off could have a material adverse effect on our
      net
      worth and income and the trading price for our ordinary shares.





On
      October30, 2003 , SuperCom Slovakia, a subsidiary (66%) of SuperCom Ltd.,
      received an award by the International Arbitral Centre of the Austrian Federal
      Economic Chamber ("IAC"), in the case against the Ministry of Interior of the
      Slovak Republic which refers to the agreement on delivery of Technology,
      Cooperation and Services signed on March 17, 1998. Upon the Arbitral Award,
      the
      Ministry of Interior of the Slovak Republic has been ordered to pay SuperCom
      Slovakia the amount of SKK 80,000,000 (approximately $2,800,000 million as
      of
      December 31, 2004) plus interest accruing from March, 1999. In addition, the
      Ministry of Interior of the Slovak Republic has been ordered to pay the costs
      of
      arbitration in the amount of EUR 42,716 (approximately $58,000 as of December
      31, 2004) and SuperCom Slovakia's legal fees in the amount of EUR 63,611
      (approximately $87,000 as of December 31, 2004). The Ministry of Interior of
      the
      Slovak Republic has the right to appeal in the Austrian Courts within 3 months
      from the date of this award on only legal procedures. We have begun the
      enforcement procedure of the arbitral award. The Ministry of the Interior of
      the
      Slovak Republic filed a claim with the Commercial Court Court in Vienna, Austria
      on February 10, 2004, whereby it challenged and requested to set aside the
      arbitral award.





On
      July
      14, 2003, Mr. Yaacov Pedhatzur, an Israeli citizen filed a lawsuit against
      us,
      with the Magistrate Court in Tel Aviv, Israel. The plaintiff claims that we
      owe
      him commission on transactions between SuperCom and certain third parties and
      he
      asks the court to order us to furnish the plaintiff with a report on
      transactions made with such third parties. Subject to such report, the plaintiff
      has set the amount of the lawsuit against us at NIS 250,000 (approximately
      $
      58,000 as of December 31, 2004) in commissions allegedly due for his part in
      establishing business connections for us in Eastern Asia during the years
      1993-1998. We are contesting this claim.





On
      December 16, 1999, Secu-Systems filed a lawsuit with the District Court in
      Tel-Aviv-Jaffa jointly and severally against us and InkSure Ltd. (a former
      subsidiary, which is currently a subsidiary of InkSure Technologies, Inc.)
      seeking a permanent injunction and damages. The plaintiff asserted in its suit
      that the printing method applied to certain products that have been developed
      by
      InkSure Ltd. constitutes inter alia: (a) the breach of a confidentiality
      agreement between the plaintiff and us; (b) unjust enrichment of us and InkSure
      Ltd; (c) breach of fiduciary duties owed to the plaintiff by us and InkSure
      Ltd., and (d) a tort of misappropriation of trade secrets and damage to
      plaintiff's property. Based on such allegations, Secu-Systems asked the court
      to
      order the Company and InkSure Ltd. to: (i) cease any activity which involves
      the
      plaintiff's confidential information; (ii) furnish the plaintiff with a
      certified report detailing all profits derived by us and InkSure Ltd. from
      such
      activity; (iii) pay the plaintiff an amount equal to all such profits, and
      (iv)
      pay the plaintiff additional damages in the amount of NIS 100,000 (approximately
      $23,000 as of December 31, 2004). Alternatively, the plaintiff asked the court
      to declare that the above-mentioned products are jointly owned, in equal shares,
      by the plaintiff and InkSure Ltd. and that the plaintiff is entitled to 50%
      of
      all profits derived therefrom.





**Employees**





As
      of
      December 31, 2004 and December 31, 2003, we had 67 and 59 full-time employees,
      respectively. Please refer to the section captioned “Employees” appearing under
      Section D, Item 6 for more information about our employees.





Our
      ability to succeed depends, among other things, upon our continuing ability
      to
      attract and retain highly qualified managerial, technical, accounting, sales
      and
      marketing personnel.





33




**Seasonality**




Our
      financial and operating results have fluctuated in the past and our financial
      and operating results could fluctuate in the future. It is our experience that,
      as a general matter, a majority of our sales are made during the latter half
      of
      the calendar year consistent with the budgetary, approval and order processes
      of
      our governmental customers. Additionally, the period
      between our initial contact with a potential customer and the purchase of our
      products and services is often long and subject to delays associated with the
      budgeting, approval and competitive evaluation processes that frequently
      accompany significant capital expenditures, particularly by governmental
      agencies. The typical sales cycle for our government customers has to date
      ranged from three to 24 months and the typical sales cycle for our commercial
      customers has ranged from one to six months. A lengthy sales cycle may have
      an
      impact on the timing of our revenue, which may cause our quarterly operating
      results to fall below investor expectations. We believe that a customer's
      decision to purchase our products and services is discretionary, involves a
      significant commitment of resources, and is influenced by customer budgetary
      cycles. To successfully sell our products and services, we generally must
      educate our potential customers regarding their use and benefits, which can
      require significant time and resources. This significant expenditure of time
      and
      resources may not result in actual sales of our products and services.





The
      lead-time for ordering parts and materials and building many of our products
      can
      be many months. As a result, we must order parts and materials and build our
      products based on forecasted demand. If demand for our products lags
      significantly behind our forecasts, we may produce more products than we can
      sell, which can result in cash flow problems and write-offs or write-downs
      of
      obsolete inventory.







***C.    Organizational
      Structure***





The
      diagram below shows SuperCom Ltd.'s holdings in its subsidiaries and affiliates
      as of December 31, 2004:










As
      part
      of our reorganization plan, we have made a strategic decision to focus on our
      core business and shut down all operations that are not a part thereof. As
      a
      result, we liquidated Genodus Inc. (and its subsidiary) and Kromotech Inc.
      and
      its subsidiary, both of which developed technology used in our business, which
      we now own, and sold all of our equity in InkSure Technologies, Inc. and its
      subsidiaries.





**SuperCom
      Asia Pacific Limited (''SuperCom Asia Pacific'')**


SuperCom
      Asia Pacific, incorporated in Hong Kong, is responsible for our sales and
      marketing efforts in the Far East. SuperCom Asia Pacific was 80% owned by us
      and
      20% by Chandler Technology Limited, a company owned by SuperCom Asia Pacific
      's
      former managing director, Thomas Chan. On November 17, 2003 we entered into
      an
      agreement with Chandler Technology Limited for purchasing Chandler Technology’s
      shares in SuperCom Asia Pacific. SuperCom Asia Pacific is currently 100% owned
      by us.








**SuperCom
      Slovakia a.s. (''SuperCom Slovakia'')**


SuperCom
      Slovakia, incorporated in Slovakia, was established to implement a national
      documentation project in the Republic of Slovakia. SuperCom Slovakia is 66%
      owned by us and 34% owned by EIB Group a.s., a privately held Czech company.
      Despite our ownership of almost two-thirds or the economic interests of SuperCom
      Slovakia, our voting power in SuperCom Slovakia is 50%.





34




**SuperCom,
      Inc.**


SuperCom,
      Inc., incorporated in Delaware, is responsible for our sales and marketing
      efforts in the United States. SuperCom, Inc. is 100% owned by us.





***D.    Property,
      Plants and Equipment***




We
      do not
      own any real property.





We
      currently lease approximately 1,844 square meters of facilities in Ra'anana,
      Israel. Our principal management, administration and marketing activities occupy
      approximately 600 square meters on the site. Our principal engineering, research
      and development and manufacturing activities occupy approximately 1,244 square
      meters on the site. Such manufacturing activities consist of the production
      of
      smart cards and assembly lines for our smart card products and secured documents
      solutions. The lease for substantially all of this space expires in August
      2005. On
      April
      18, 2005 the Company singed a contract to lease new offices in Kadima. Those
      offices will replace the current offices. According to the agreement the lease
      is for a period of five years commencing on August 1, 2005. The Company has
      an
      option to renew the lease for a period of an additional five years. According
      to
      the agreement, the monthly fee is $16,000.





SuperCom
      Asia Pacific leases approximately 200 square meters of office space in Hong
      Kong, and SuperCom, Inc. leases approximately 200 and 30 square meters of office
      space in New York and Washington, D.C., respectively. All of such leased
      properties in Hong Kong and the United States consist of office space for
      management, administrative and marketing activities.





The
      total
      annual rental fees for 2002, 2003 and 2004 were $ 414,121, $ 311,804 and
      $386,821, respectively, and were linked to the Consumer Price Index in the
      United States. The total annual lease commitments for 2005 are
      $270,385





All
      assets are held in the name of SuperCom Ltd. and its subsidiaries.





The
      following table details our fixed assets as of December 31, 2004 and
      2003:





**December
                31,****2003**
            
            **2004****Cost:**
            
            **(In
                thousands of US Dollars)**Computers
                and peripheral equipment
            
            $
            2,281
            
            $
            4,380Office
                furniture and equipment
            
            
            408
            
            
            471Leasehold
                improvements
            
            
            1,107
            
            
            1,1473,796
            
            
            5,998**Accumulated
                depreciation:**Computers
                and peripheral equipment
            
            
            1,412
            
            
            1,547Office
                furniture and equipment
            
            
            192
            
            
            218Leasehold
                improvements
            
            
            516
            
            
            5922,120
            
            
            2,357Depreciated
                cost
            
            $
            1,676
            
            $
            3,641





Depreciation
      expenses for the years ended December 31, 2002, 2003 and 2004 were $442,000,
      $284,000 and $238,000, respectively.





**ITEM
      5.** ***Operating
      and Financial Review and Prospects.*** ****




The
      following section should be read in conjunction with the audited financial
      statements and notes thereto for the years ended December 31, 2004, December
      31,
      2003 and December 31, 2002, which have been prepared in accordance with U.S.
      GAAP and which are included in Item 18. Some of the statements contained in
      this
      section constitute “forward-looking statements.” These statements relate to
      future events or to our future financial performance and involve known and
      unknown risks, uncertainties and other factors that may cause our actual
      results, levels of activity, performance or achievements to be materially
      different from any future results, levels of activity, performance or
      achievements express or implied by such forward-looking statements. See “Note
      Regarding Forward Looking Statements” and “Risk Factors.”





35




**Overview**





We
      were
      incorporated under the laws of the State of Israel in 1988. From our
      incorporation until 1999, we were a development-stage company primarily engaged
      in research and development, establishing relationships with suppliers and
      potential customers and recruiting personnel with a focus on the governmental
      market. During the fiscal year ended December 31, 2002, we completed our
      reorganization plan which began in 2001. According to such plan, we decided
      to
      add marketing and sales efforts on the commercial market with a new line of
      products, including SmartGate 2400, EduGate and DynaGate, while still
      maintaining our business in the governmental market. In 2004, our revenue from
      the government market totaled approximately $6,330,000 compared to $1,014,000
      from the commercial market. In 2003, our revenue from the government market
      was
      approximately $5,621,000 compared to $1,623,000 from the commercial market.
      Although we believe that the government is critical to our success in the
      short-term, we believe that both the government and commercial markets will
      be
      critical to our long-term future success.





During
      2002, we began the delivery of the first phase of the Ukraine ID Project
      pursuant to Contract No. 10/82, dated April 9, 2002 (the “Ukraine Contract”)
      between SuperCom and the Ministry of Internal Affairs of Ukraine (the
“Ministry”) and generated revenues of $2.1 million. During 2003, we generated an
      aggregate of $1.97 million in revenues from this project. In April 2004, we
      were
      informed by the Arbitration Court that the Department for Resources Supply
      of
      the Ministry had filed with the Arbitration Court a statement of claim to
      declare the Ukraine Contract as void due to defaults in the tender proceedings
      under which the Ukraine Contract had been awarded to SuperCom. On July 22,
      2004
      we were informed by the law firm representing us in the arbitration proceedings
      that on July 19, 2004, the Arbitration Court issued a negative award declaring
      the Ukraine Contract as void. We strongly believe that the award is wrong due
      to
      many defaults that occurred in the arbitration proceedings. On April 27, 2005,
      we challenged the validity of the award in the High Commercial Court of Ukraine.
      In May 2005 we were informed by the Arbitration Court that the Department for
      Resources Supply of the Ministry had filed with the Arbitration Court a new
      statement of claim for restitution of $1,047,740 paid to us by the Department
      for Resources Supply of the Ministry. We strongly believe, that the new claim
      has no merit and we intend to take all necessary actions in order not to pay
      this amount. We did not have any revenues from this project in 2004.





In
      addition, negative developments in the Ukraine ID Project litigation may cause
      us to write off the inventory in the amount of approximately $860,000 with
      respect to the Ukraine ID Project pursuant to our Ukraine Contract with the
      Ministry and any such write off could have a material adverse effect on our
      net
      worth and income and the trading price for our ordinary shares.





During
      fiscal 2002, we sold our equity interest in our subsidiary, InkSure
      Technologies, Inc. (“InkSure”), for which we received aggregate proceeds of
      approximately $6,600,000 from the sale of shares.




In
      October 2004, the United States Government Printing Office (“GPO”) awarded
      contracts to four companies (which was subsequently increased to eight companies
      in January 2005), including SuperCom, to provide technology for testing a new
      electronic U.S. passport. Once the testing results are completed, the GPO plans
      to select a final vendor for the project. On January 18, 2005 the Company
      announced that the US Government Printing Office (GPO) had added four vendors,
      whose proposals were the next higher ranked in the Solicitation for Offers
      (SFO)
      EP-2004 for the Electronic Passport, to the list of companies whose computer
      chips will be tested for usage in the GPO’s massive electronic passport project.
      The total list now includes 8 companies, including both SuperCom and SuperCom’s
      partner BearingPoint, who has proposed a SuperCom-based solution.




On
      May 5,
      2005, the U.S. Government Printing Office (“GPO”) issued a Notice of Termination
      for Convenience involving the Company’s participation in the three-phase testing
      of technology for a new electronic passport project. While an earlier
      termination notice was withdrawn after discussions with the U.S. Government,
      the
      Company’s attempts to persuade the Government to withdraw the current
      termination notice have been unsuccessful to date.  The notice terminates
      SuperCom’s contract awards for the Electronic Passport Program. While the
      termination notice does not specify the reason for its issuance, the Company
      understands from its discussions with the Government that it is based on
      unresolved security concerns and not related to the Company’s technological
      solution or its cost proposal.





In
      December 2004, we announced that we entered into an agreement with an African
      governmental agency to provide an end-to-end “Magna” national identification
      system valued at $2.5 million during the term of the agreement, which is five
      years. The solution will be deployed in stages that began in the fourth quarter
      of 2004 and will continue through the end of the fourth quarter of
      2005.





36




In
      January 2005, we announced that we signed an agreement with the government
      of an
      European country to deploy a biometric visa issuance system in its embassies
      throughout the world. The project’s first stage, valued at approximately
      $500,000.




**** ***Revenues***





The
      primary products that we sell are smart card systems, smart card production
      machines and raw materials used for the production of smart cards and secure
      ID
      cards. We derive the majority of our revenues during the first two years of
      an
      agreement with a customer. This revenue is generated by the delivery of the
      data
      collection and document production systems. Following delivery of such systems,
      the majority of revenues generated from the agreement results from ongoing
      deliveries of raw materials for use with the installed systems. We also
      typically generate additional revenues from maintenance fees and support,
      training and installation.





Our
      systems are tailored to meet the specific needs of our customers. In order
      to
      satisfy these needs, the terms of each agreement, including the duration of
      the
      agreement and prices for our products and services differ from agreement to
      agreement.





Additional
      revenue is generated through licensing technology, mostly with commercial
      customers.





***Operating
      Expenses***





Our
      costs
      associated with a particular project may vary significantly depending on the
      specific requirements of the customer and the terms of the agreement, as well
      as
      on the extent of the technology licensing. As a result, our gross profits from
      each project may vary significantly.





Our
      research and development expenses consist of salaries, raw material and
      equipment costs, as well as financing research and development operations in
      subsidiaries.





***Net
      Income***





Our
      operating results are significantly affected by, among other things, the timing
      of contract awards and performance of agreements. As a result, our revenues
      and
      income may fluctuate substantially from quarter to quarter, and comparisons
      over
      longer periods of time may be more meaningful. The nature of our expenses
      (including cost of revenues) are mainly fixed or semi-fixed and any fluctuation
      in revenues will generate a significant variation in gross profit and net
      income.





**Critical
      Accounting Policies and Estimates**





The
      preparation of financial statements requires us to make estimates and
      assumptions that affect the reported amounts of assets and liabilities and
      the
      disclosure of contingent liabilities at the date of the financial statements
      and
      the reported amounts of revenues and expenses during the reporting period.
      On an
      ongoing basis, we evaluate our estimates and judgments, including those related
      to revenue recognition, allowance for bad debts, and valuation of inventories
      and impairment of long-lived assets.





We
      base
      our estimates and judgments on historical experience and on various other
      factors that we believe to be reasonable under the circumstances, the results
      of
      which form the basis for making judgments about the carrying values of assets
      and liabilities that are not readily apparent from other sources. Under
      different assumptions or conditions, actual results may differ from these
      estimates.





Our
      discussion and analysis of our financial condition and results of operations
      are
      based on our consolidated financial statements, which have been prepared in
      accordance with generally accepted accounting principles in the United States
      ("US GAAP"). Our significant accounting principles are presented within Note
      2
      to our Consolidated Financial Statements. While all the accounting policies
      impact the financial statements, certain policies may be viewed to be critical.
      These policies are those that are most important to the portrayal of our
      financial condition and results of operations. Actual results could differ
      from
      those estimates. Management believes that the significant accounting policies
      which affect its more significant judgments and estimates used in the
      preparation of the consolidated financial statements and are the most critical
      to aid in fully understanding and evaluating our reported results include the
      following:





37




A.  Revenue
      recognition


B.  Allowance
      for doubtful accounts


C.  Inventory
      valuation


D.  Impairment
      of long-lived assets


E.  Contingencies


F.  Stock
      Based Compensation





***Revenue
      Recognition and Allowance for Doubtful Accounts***





We
      generate revenues primarily from governmental projects sales and commercial
      products sales. Some
      of
      our transactions include maintenance services, installation and integration
      consulting services.





Revenues
      are recognize when delivery has occurred and, where applicable, after
      installation has been completed, there is persuasive evidence of an agreement,
      the fee is fixed or determinable and collection of the related receivable is
      reasonably assured and no further obligations exist. In cases where delivery
      has
      occurred but the required installation has not been performed, the Company
      does
      not recognize the revenues until the installation is completed. The Company
      does
      not grant a right of return. Following are the main factors of our revenue
      recognition policies:




·
            We
                recognize revenue from products generally upon shipment, unless contract
                terms call for a later date, net of an allowance for estimated returns,
                provided persuasive evidence of an arrangement exists, collection
                is
                probable, the fee is fixed or determinable, vendor-specific objective
                evidence exists to allocate the total fee to elements of the arrangement
                and assuming only inconsequential or perfunctory performance obligations
                remain. Revenue from some data security hardware products contains
                embedded software. However, the embedded software is considered incidental
                to the hardware product sale. We also act as a reseller of third-party
                hardware and software applications. Generally, we recognize such
                revenue
                upon shipment of the hardware or software application, unless contract
                terms call for a later date, provided that all other conditions above
                have
                been met.




·
            Service
                revenue includes payments under support and upgrade contracts and
                consulting fees. We recognize support and upgrade revenue ratably
                over the
                term of the contract, which typically is twelve months. Consulting
                revenue
                primarily relates to installation, integration and training services
                performed on a time-and-materials or fixed-fee basis under separate
                service arrangements. Fees from consulting are recognized as services
                are
                performed.




·
            Revenues
                from arrangements that involve the delivery of multiple deliverables
                such
                as products, services or rights to use asset, are recognized in accordance
                with EITF Issue No. 00-21 “Revenue Arrangements with Multiple
                Deliverables”. For such arrangements, each element of the contract is
                accounted as a separate unit if the delivered items has value to
                the
                customer on a standalone basis and there is objective and reliable
                evidence of the fair value of the undelivered
                items.




·
            Revenues
                from long-term contracts are recognized pursuant to the percentage
                of
                completion method. We measure the percentage of completion based
                on output
                criteria, such as the number of units delivered or based on contract
                milestones as applicable to each contract. Provisions for estimated
                losses
                on incomplete contracts are made during the period in which such
                losses
                are first identified, in the amount of the estimated loss on the
                entire
                contract.Cost estimates on percentage-of-completion contracts are reviewed
                periodically with adjustments recorded in the period in which the
                revisions are made. The complexity of the estimation process and
                factors
                relating to the assumptions, risks and uncertainties inherent with
                the
                application of the percentage-of-completion method of accounting
                affect
                the amounts of revenue and related expenses reported in our consolidated
                financial statements. A number of internal and external factors can
                affect
                our estimates, including labor rates, availability of qualified personnel
                and project requirement and/or scope changes. Billings on uncompleted
                contracts may be less than or greater than the revenues recognized
                and are
                recorded as either unbilled receivable (an asset) or deferred revenue
                (a
                liability) in the consolidated financial statements.




·
            The
                allowance for doubtful accounts is determined with respect to specific
                debts that the Company has determined to be doubtful of
                collection.




Our
      revenue results are difficult to predict, and any shortfall in revenue or delay
      in recognizing revenue could cause our operating results to vary significantly
      from quarter to quarter and could result in future operating
      losses.





We
      perform ongoing credit evaluations of our customers' financial condition and
      we
      require collateral as deemed necessary. An allowance for doubtful accounts
      is
      determined with respect to those accounts that we have determined to be doubtful
      of collection. If the financial condition of our customers were to deteriorate,
      resulting in an impairment of their ability to make payments, additional
      allowances would be required. The
      allowance for doubtful accounts was $3,333,000 and $3,347,000 at December 31,
      2003 and 2004, respectively.





38




*Inventories
      Valuation*





At
      each
      balance sheet date, we evaluate our inventory balance for excess quantities
      and
      obsolescence. This evaluation includes analyses of sales levels by product
      line
      and projection of future demand. In addition, we write off inventories that
      we
      considered obsolete. Remaining inventory balances are adjusted to the lower
      of
      the cost or market value. If future demand or market conditions are less
      favorable than our projections, additional inventory write-downs may be required
      and would be reflected in cost of sales in the period the revision is
      made.





***Impairment
      of Long-Lived Assets***





Long-lived
      assets are reviewed for impairment in accordance with Statement of Financial
      Accounting Standard No. 144 "Accounting for the Impairment or Disposal of
      Long-Lived Assets" whenever events or changes in circumstances indicate that
      the
      carrying amount of an asset may not be recoverable. Recoverability of the
      carrying amount of assets to be held and used is measured by a comparison of
      the
      carrying amount of an asset to the future undiscounted cash flows expected
      to be
      generated by the assets. If such assets are considered to be impaired, the
      impairment to be recognized is measured by the amount by which the carrying
      amount of the assets exceeds the fair value of the assets. Assets to be disposed
      of are reported at the lower of the carrying amount or fair value less selling
      costs.





The
      determination of the value of such long-lived and intangible assets requires
      management to make assumptions regarding estimated future cash flows and other
      factors to determine the fair value of the respective assets. If these estimates
      or the related assumptions change in the future, we could be required to record
      impairment charges. Any material change in our valuation of assets in the future
      and any consequent adjustment for impairment could have a material adverse
      impact on our future reported financial results.





***Contingencies***





From
      time
      to time, we are the defendant or plaintiff in various legal actions, which
      arise
      in the normal course of business. We are required to assess the likelihood
      of
      any adverse judgments or outcomes to these matters as well as potential ranges
      of probable losses. A determination of the amount of reserves required for
      these
      contingencies, if any, which would be charged to earnings, is made after careful
      and considered analysis of each individual action together with our legal
      advisors. The required reserves may change in the future due to new developments
      in each matter or changes in circumstances, such as a change in settlement
      strategy. A change in the required reserves would affect our earnings in the
      period the change is made. Other than as described under the heading “Legal
      Proceedings” under Item 4, B, there are no material pending legal proceedings in
      which we are a party or of which our property is subject.





***Stock-Based
      Compensation***




We
      applied the intrinsic-value-based method of accounting prescribed by Accounting
      Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
      Employees,” and related interpretations including Financial Accounting Standards
      Board (FASB) Interpretation No. 44, “Accounting for Certain Transactions
      involving Stock Compensation,” an interpretation of APB Opinion No. 25, issued
      in March 2000, to account for our employee stock options. Under this method,
      compensation expense is recognized only if the current market price of the
      underlying stock exceeded the exercise price on the date of grant. SFAS No.
      123,
“Accounting for Stock-Based Compensation,” and FASB Statement No. 148,
“Accounting for Stock-Based Compensation—Transition and Disclosure,” an
      amendment to FASB Statement No. 123, established accounting and disclosure
      requirements using a fair-value-based method of accounting for stock-based
      employee compensation plans. As permitted by existing accounting standards,
      we
      elected to continue to apply the intrinsic-value-based method of accounting
      described above, and have adopted only the disclosure requirements of SFAS
      No.
      123, as amended.




We
      accounted for non-employee stock-based compensation in accordance with SFAS
      No.
      123 and Emerging Issues Task Force (EITF) Issue No. 96-18, “Accounting for
      Equity Instruments that Are Issued to Other than Employees for Acquiring, or
      in
      Conjunction with Selling, Goods or Services.”








***Warranties***





Based
      on
      past experience, the Company does not provide for warranty costs when revenue
      is
      recognized.





39




**Results
      of Operations**





The
      following table sets forth selected consolidated income statement data for
      SuperCom for each of the three years ended December 31, 2002, 2003 and 2004
      expressed as a percentage of total revenues.




2002
              
              2003
              
              2004Revenues
              
              
              100
              %
              
              100
              %
              
              100
              %Cost
                  of revenues
              
              
              22.8
              
              
              42.8
              
              
              50.8Gross
                  profit
              
              
              77.2
              
              
              57.2
              
              
              49.2Operating
                  expenses:Research
                  and development
              
              
              16.6
              
              
              12.7
              
              
              11.5Selling
                  and marketing, net
              
              
              35.2
              
              
              41.8
              
              
              33.3General
                  and administrative
              
              
              24.8
              
              
              25.2
              
              
              26.6Total
                  operating expenses
              
              
              76.6
              
              
              79.7
              
              
              71.4Operating
                  income (loss)
              
              
              (0.6
              )
              
              (22.5
              )
              
              (22.2
              )Financial
                  income (expenses), net
              
              
              (0.4
              )
              
              (3.2
              )
              
              (2.9
              )Other
                  income (expenses), net
              
              
              77.3
              
              
              (1.1
              )
              
              (0.3
              )Income
                  (loss) before income taxes
              
              
              77.5
              
              
              (26.8
              )
              
              (25.5
              )Equity
                  in losses of affiliates and
              
              
              (0.5
              )
              
              (0.7
              )
              
              --impairment,
                  net of taxesNet
                  income (loss) from
              
              
              77.0
              
              
              (27.5
              )
              
              (25.5
              )continuing
                  operationsLoss
                  from discontinued operations
              
              
              5.3
              
              
              --
              
              
              --Net
                  income (loss)
              
              
              71.7
              
              
              (27.5
              )
              
              (25.5
              )




**Operating
        Results**
 
 **Year
        Ended December 31, 2004 Compared to Year Ended December 31, 2003**
 
 ***Revenues***
 
 Our
        revenues in 2004 were $7,344,000 compared to $7,244,000 in 2003, an increase
        of
        2%. Our revenues for the twelve months ended December 31, 2003 included
        $1,970,000 in revenues attributable to our agreement with the Ukraine Ministry
        of Internal Affairs for a national passport and ID smart card project (the
        “Ukraine ID Project”). Due to the arbitration proceeding with the Ukraine
        Chamber of Commerce relating to the Ukraine ID Project we did not recognize
        any
        revenues from this project for the twelve months ended December 31, 2004.
        During
        2004, we classified the cost of goods that were sold to the Ukraine Ministry
        of
        Internal Affairs from trade receivables to inventory. In connection with
        the
        arbitration relating to the Ukraine ID Project, we might write off the inventory
        relating to the Ukraine ID Project in the amount of approximately $860,000,
        which could result in a material and adverse effect on our income and net
        worth.
        Additionally, we increased the allowance for doubtful accounts in an aggregate
        amount of $2,133,000 for the debt the Ukrainian government owes to us in
        connection with the Ukraine ID Project. Our revenues in the fourth quarter
        of
        2003 included $536,000 of revenue related to the sale of a production line
        to a
        customer in the United States, which is to be paid to us over a period of
        four
        years. Our
        revenues in the fourth quarter of 2004 included $1,208,000 of revenue related
        to
        the sale of a production line to a customer in Europe. Our
        revenues from the government market for 2004 and 2003 totaled $6,330,000
        and
        $5,621,000, respectively. In comparison our revenues from the commercial
        market
        for 2004 and 2003 totaled $1,014,000 and $1,623,000, respectively. We anticipate
        that our mix of revenues from the government and commercial markets for the
        twelve months ended December 31, 2005 will be consistent with our mix of
        revenues in 2004. Although we believe that the government market is critical
        to
        our success in the short-term, we believe that both the government and
        commercial markets will be critical to our long-term future
        success.
 
 40
  ***Gross
        Profit***
 
 Our
        gross
        profits in 2004 were $3,614,000 compared to gross profits of $4,142,000 in
        2003,
        a decrease of 12.7%. The gross profit margin for the year 2004 decreased
        by 8%
        as compared to a 57% in 2003. The decrease in our 2004 gross profit was
        primarily due to different mix of product, which carry lower margins. We
        increased the volume of sales of our commercial applications, which carry
        lower
        margins as compared to sales of our ID solutions and contactless smart cards
        for
        governmental markets.
 
 ***Expenses***
 
 Our
        operating expenses in 2004 were $5,245,000 compared to $5,773,000 in 2003,
        a
        decrease of 9%. The decrease in operating expenses was primarily due to the
        reduction in sales and marketing expenses.
 
 Selling
        and marketing expenses consist primarily of salaries and commission earned
        by
        sales and marketing personnel, trade show and promotional expenses, allocated
        rent and supplies and travel and entertainment costs. Our selling and marketing
        expenses in 2004 were $2,445,000 compared to $3,026,000 in 2003, a decrease
        of
        19%. The decrease in the sales and marketing expenses was due to a reduction
        in
        sales and marketing expenses related to our Ukraine ID Project.
 
 General
        and administrative expenses consist primarily of salaries, benefits, allocated
        rent and supplies, and related costs for our executive, finance, legal, human
        resource, information technology and administrative personnel, and professional
        service fees, including legal counsel insurance and audit fees. Our general
        and
        administrative expenses in 2004 were $1,955,000 compared to $1,829,000 in
        2003,
        an increase of 7%. The increase in the general and administrative expenses
        was
        primarily due to expenses related to the registration of our ordinary shares
        under the Exchange Act, and the commencement of trading of our shares in
        the
        United States on the OTC Bulletin Board.
 
 Research
        and development expenses consist primarily of salaries, benefits, allocated
        rent
        expense, supplies and equipment for software developers and architects, hardware
        engineers and program managers, as well as legal fees associated with our
        intellectual property. Our research and development expenses in 2004 were
        $845,000 compared to $918,000 in 2003, a decrease of 8%. We expect, however,
        that our research and development expenses will increase in 2005 due to research
        and development expenses associated with our SmartSMDS, E-Passport and Vend-EZ
        applications. .
 
 ***Financial
        Interest Expense, net***
  Financial
        interest expense for the twelve months ended December 31, 2003, and 2004,
        was
        $135,000 and $166,000, respectively. Interest expense during 2004 and 2003
        consisted of interest accrued from bank loans net of bank deposit.
  ***Other
        Income (Expenses), Net***
  Other
        income (expenses), net for the twelve months ended December 31, 2003, and
        2004,
        was $ 83,000 and $27,000, respectively. Other expenses primarily consisted
        of a
        decline in market value of held-to-maturity securities for the twelve months
        ended December 31, 2003, and 2004, $ 52,000 and $ 7,000,
        respectively.
 
 ***Net
        Income (Loss)***
 
 As
        a
        result of the factors described above, our net loss in 2004 was $1,872,000
        compared to a net loss of $1,995,000 in 2003, a decrease of 6%.
 
 41
  **Year
        Ended December 31, 2003 Compared to Year Ended December 31,
        2002**
 
 ***Revenues***
 
 Our
        revenues in 2003 were $7,244,000 compared to $8,027,000 in 2002, a decrease
        of
        9%. The decrease was primarily due to the inclusion of $1,884,000 of InkSure's
        revenues in the 2002 results of operations. Excluding InkSure's results of
        operations for 2002, our revenues would have increased to $7,244,000 from
        $6,143,000, representing an increase of 18%. This increase was primarily
        due to
        the implementation of a new five-year governmental project in Africa by 2008,
        plus the expansion in the commercial markets systems and their implementation
        during 2003. The primary increase in commercial revenues has come from the
        United States, Asia Pacific and the Israeli commercial markets by the sale
        of
        our automatic production line, SmartGate, EduGate and DynaGate systems. Our
        revenues in the fourth quarter of 2003 included $536,000 of revenue related
        to
        the sale of a production line to a customer, who is also a distributor of
        our
        products in the United States, which is to be paid to us over a period of
        four
        years.
 
 ***Gross
        Profit***
 
 Our
        gross
        profits in 2003 were $4,142,000 compared to gross profits of $6,197,000 in
        2002,
        a decrease of 33%. The gross profit margin for the twelve months ended December
        31, 2003 decreased by 20% to 57% as compared to a gross profit margin of
        77% for
        the twelve months ended December 31, 2002. The decrease in our 2003 gross
        profit
        was primarily due to the inclusion of $1,613,000 of InkSure's gross profit
        in
        the 2002 results of operations. Excluding InkSure's results of operations
        from
        our results of operations for 2002, gross profit would have decreased to
        $4,142,000 from $4,584,000, representing a decrease of 9%. This decrease
        was
        primarily due to an increase in the volume of commercial systems, which carries
        lower margins.
 
 ***Expenses***
 
 Our
        operating expenses in 2003 were $5,773,000 compared to $6,150,000 in 2002,
        a
        decrease of 6%. The decrease in operating expenses was primarily due to
        decreases in operating expenses in connection with the divesting of InkSure’s
        shares during 2002. Excluding InkSure's results of operations in our results
        of
        operations for 2002, operating expenses would have otherwise increase to
        $5,773,000 from $4,843,000, representing an increase of 19%. This increase
        was
        primarily due to the increase in selling and marketing expenses discussed
        below.
 
 Our
        selling and marketing expenses in 2003 were $3,026,000 compared to $2,828,000
        in
        2002, an increase of 7%. The increase in the selling and marketing expenses
        was
        due to increases in selling and marketing expenses attributable to Inksure’s
        operations. Excluding InkSure's results of operations for 2002, selling and
        marketing expenses would have increased to $3,026,000 from $2,040,000,
        representing an increase of 48%. The increase was primarily due to net selling
        and marketing expenses of $700,000 for the implementation of the Ukraine
        ID
        Project resulting from the aggregate amount of $2,133,000 owed to us by the
        Ukraine government net of $1,433,000 representing the commissions that we
        would
        have paid to the consultants that mediated the Ukraine ID Project had it
        not
        been void. The increase was also attributable to our expansion of marketing
        activities for our commercial applications in the US and the Israeli markets.
 
 Our
        general and administrative expenses in 2003 were $1,829,000 compared to
        $1,988,000 in 2002, a decrease of 8%. The decrease in the general and
        administrative expenses was primarily due to decreases in general and
        administrative expenses in connection with the divesting of InkSure’s shares
        during 2002. Excluding InkSure's results of operations for 2002, general
        and
        administrative expenses would have increased to $1,829,000 from $1,799,000,
        representing an increase of 2%.
 
 Our
        research and development expenses in 2003 were $918,000 compared to $1,334,000
        in 2002, a decrease of 31%. The decrease in the research and development
        expenses was primarily due to the elimination of InkSure's research and
        development expenses, which accounted for $330,000 of research and development
        expense in 2002. Excluding InkSure's, research and development expenses,
        would
        have resulted in a decrease to $918,000 in research and development expenses
        for
        2003 from $1,004,000 in 2002, representing a decrease of 9%.
 
 ***Net
        Income***
 
 Our
        net
        loss in 2003 was $1,995,000 compared to net income of $5,750,000 in 2002
        resulting from $6,203,000 booked as other income in 2002 from the divestment
        of
        the InkSure shares and net income in 2002 of InkSure's activities in the
        amount
        of $294,000. Our net loss in 2003 was primarily due to a decrease in gross
        profit margins and an increase in our sales and marketing expenses in the
        United
        States and Israeli markets, as well as in the international governmental
        project
        market. Excluding Inksure’s net income of $294,000 in 2002 and $6,203,000 booked
        as other income in 2002 from the divestment of the InkSure shares, our net
        loss
        in 2003 would have increased to $1,995,000 from $747,000, representing an
        increase of 167%. This increase in our net loss was primarily due to a decrease
        in gross profit margins and an increase in our sales and marketing expenses
        in
        the United States and Israeli markets as well as our management's decision
        to
        increase our doubtful accounts by $700,000. Such net provision of $700,000
        for
        doubtful accounts results from the aggregate amount of $2,133,000 owed by
        the
        Ukraine government net of $1,433,000 in commissions that we would have had
        to
        pay to the consultants that mediated the Ukraine ID Project had it not been
        void.
   42
  **Impact
        of Inflation and Currency Fluctuations**
 
 Because
        the majority of our revenue is paid in or linked to the dollar, we believe
        that
        inflation and fluctuation in the NIS/dollar exchange rate has no material
        effect
        on our results of operations. However, a portion of the cost of our Israeli
        operations, mainly personnel, is incurred in NIS. Because some of our costs
        are
        in NIS, inflation in Israel/dollar exchange rate fluctuations do have some
        impact on expenses and, as a result, on net income. Our NIS costs, as expressed
        in dollars, are influenced by the extent to which any increase in the rate
        of
        inflation in Israel is not offset, or is offset on a delayed basis, by a
        devaluation of the NIS in relation to the dollar.
 
 In
        2004,
        the rate of evaluation of the NIS against the U.S. dollar was 1.6% and the
        rate
        of inflation was 1.2%. It is unclear what the devaluation/evaluation rate
        will
        be in the future, and we may be materially adversely affected if inflation
        in
        Israel exceeds the devaluation of the NIS against the U.S. dollar, or if
        the
        timing of the devaluation lags behind increases in inflation in
        Israel.
 
 We
        do not
        engage in any hedging or other transactions intended to manage risks relating
        to
        foreign currency exchange rate or interest rate fluctuations. At December
        31,
        2004, we did not own any market risk sensitive instruments except for our
        revolving line of credit. However, we may in the future undertake hedging
        or
        other similar transactions or invest in market risk sensitive instruments
        if
        management determines that it is necessary or advisable to offset these
        risks.
 
 **Seasonality**
 
 Our
        quarterly operations are subject to fluctuations due to several factors,
        including the factors discused under the section captioned “Risk Factors—The
        time from our initial contact with a customer to a sale is long and subject
        to
        delays . . .” appearing under Item 3, D and the section captioned “Seasonality”
        appearing under Item 4, B. It is our experience that, as a general matter,
        a
        majority of our sales are made during the latter half of the calendar year
        consistent with the budgetary, approval and order processes of our governmental
        customers. Additionally, the period
        between our initial contact with a potential customer and the purchase of
        our
        products and services is often long and subject to delays associated with
        the
        budgeting, approval and competitive evaluation processes that frequently
        accompany significant capital expenditures, particularly for government
        organizations. A lengthy sales cycle may have an impact on the timing of
        our
        revenue, which may cause our quarterly operating results to fall below investor
        expectations. We believe that a customer's decision to purchase our products
        and
        services is discretionary, involves a significant commitment of resources,
        and
        is influenced by customer budgetary cycles. To successfully sell our products
        and services, we generally must educate our potential customers regarding
        their
        use and benefits, which can require significant time and resources. This
        significant expenditure of time and resources may not result in actual sales
        of
        our products and services, which could have an adverse effect on our results
        of
        operations. .
 
 **New
        Accounting Pronouncements**
 
 In
        March
        2004, the EITF reached a consensus on recognition and measurement guidance
        previously discussed under EITF 03-01. The consensus clarifies the meaning
        of
        other-than-temporary impairment and its application to investments classified
        as
        either available-for-sale or held-to-maturity under SFAS No. 115, “Accounting
        for Certain Investments in Debt and Equity Securities,” and investments
        accounted for under the cost method or the equity method.
 
 In
        September 2004, the FASB delayed the accounting provisions of EITF 03-01,
        but
        the disclosure requirements remained effective. During the period of the
        delay,
        the current authoritative literature should be applied regarding “other than
        temporary” impairments.
  We
        do not
        expect the adoption of recognition and measurement guidance of EITF 03-01
        in
        future periods to have material impact on its results of operations or financial
        condition.
 
 In
        November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
        of
        ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 clarifies the accounting for
        abnormal amounts of idle facility expenses, freight, handling costs, and
        wasted
        material (spoilage). SFAS 151 requires that those items be recognized as
        current-period charges regardless of whether they meet the criterion of "so
        abnormal". In addition, it requires that allocation of fixed production overhead
        to the costs of conversion be based on the normal capacity of the production
        facilities. SFAS 151 is effective for inventory costs incurred during fiscal
        years beginning after June 15, 2005. Earlier application is permitted. We
        believe that SFAS 151, when adopted, will not have a significant impact on
        its
        financial position or results of operations.
  43
  In
        December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”
        (SFAS 123R), a revision of SFAS No. 123, “Accounting for Stock Based
        Compensation (SFAS 123). Among other items, SFAS 123R eliminates the use
        of APB
        25 and the intrinsic value method of accounting, and requires companies to
        recognize in their financial statements, the cost of employee services received
        in exchange for awards of equity instruments, based on the fair value of
        those
        awards at the grant date. The effective date of SFAS 123R is the first reporting
        fiscal year period beginning after June 15, 2005, which is the first
        quarter 2006 for calendar year companies. Early adoption of SFAS 123R is
        encouraged. SFAS 123R permits companies to adopt its requirements using either
        a
“modified prospective” method, or a “modified retrospective” method. Under the
“modified prospective” method, compensation cost is recognized in the financial
        statements beginning with the effective date, based on the requirements of
        SFAS
        123R for all share-based payments granted after that date, and based on the
        requirements of SFAS 123 for all unvested awards granted prior to the effective
        date of SFAS 123R. Under the “modified retrospective” method, the requirements
        are the same as under the “modified prospective” method, but it also permits
        entities to restate financial statements of previous periods based on pro
        forma
        disclosures made in accordance with SFAS 123.
  We
        currently expect to adopt SFAS 123R effective January 1, 2006;
  However,
        the adoption of SFAS 123R could have a material impact on the amount of earnings
        the Company reports in fiscal 2006. We have not yet determined the specific
        impact that adoption of this standard will have on our financial position
        or
        results of operations.
  In
        December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets - An
        Amendment of APB Opinion No. 29”. SFAS 153 amends APB opinion No. 29, “Acounting
        for nonmonetary Transactions”. SFAS 153 eliminates the APB 29 exception for
        nonmonetary exchanges of similar productive assets and replaces it with a
        general exception for exchanges of nonmonetary assets that do not have
        commercial substance. The provisions in SFAS 153 are effective for nonmonetary
        asset exchanges accruing in fiscal periods beginning after June 15, 2005
        (which
        is third quarter of 2005 for the Company), and the provisions of this statement
        shall be applied prospectively. Earlier application is permitted. We do not
        expect the adoption of SFAS 153 to have a material effect on the Company’s
        financial statements or its results of operations.
 
 In
        June
        2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with
        Exit
        or Disposal Activities," which addresses significant issue regarding the
        recognition, measurement, and reporting of costs associated with exit and
        disposal activities, including restructuring activities. SFAS No. 146 requires
        that costs associated with exit or disposal activities be recognized when
        they
        are incurred rather than at the date of a commitment to an exit or disposal
        plan. SFAS No. 146 is effective for all exit or disposal activities initiated
        after December 31, 2002. We do not expect the adoption of SFAS No. 146 to
        have a
        material impact on our results of operations or financial position.
 
 In
        November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
        Accounting and Disclosure Requirements for Guarantees, Including Indirect
        Guarantees of Indebtedness of Others, an interpretation of FASB Statements
        No.
        5, 57, and 107 and Rescission of FASB Interpretation No. 34" ("FIN No. 45").
        FIN
        No. 45 elaborates on the disclosures to be made by a guarantor in its interim
        and annual financial statements about its obligations under certain guarantees
        that it has issued.
 
 FIN
        No.
        45 also clarifies that a guarantor is required to recognize, at the inception
        of
        a guarantee, a liability for the fair value of the obligation undertaken
        in
        issuing the guarantee. FIN No. 45 does not prescribe a specific approach
        for
        subsequently measuring the guarantor's recognized liability over the term
        of the
        related guarantee. It also incorporates, without change, the guidance in
        FASB
        Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness
        of
        Others," which is being superseded. The disclosure provisions of FIN No.
        45 are
        effective for financial statements of interim or annual periods that end
        after
        December 15, 2002 and the provisions for initial recognition and measurement
        are
        effective on a prospective basis for guarantees that are issued or modified
        after December 31, 2002, irrespective of a guarantor's year-end. We do not
        expect the adoption of FIN No. 45 to have a material impact on our results
        of
        operations or financial position.
 
 In
        November 2002, the Emerging Issues Task Force (“EITF”) of the FASB reached a
        consensus on EITF issue No. 00-21, "Accounting for Revenue Arrangements with
        Multiple Element Deliverables." The issue addresses how to account for
        arrangements that may involve multiple revenue-generating activities, i.e.,
        the
        delivery or performance of multiple products, services, and/or rights to
        use
        assets. In applying this guidance, separate contracts with the same party,
        entered into at or near the same time, will be presumed to be a package,
        and the
        consideration will be measured and allocated to the separate units based
        on
        their relative fair values. This consensus guidance will be applicable to
        agreements entered into in quarters beginning after June 15, 2003.
 
 44
  The
        adoption of EITF issue No. 00-21 did not have a material impact on our result
        of
        operations or financial position.
 
 In
        December 2003, the FASB issued additional guidance clarifying the provisions
        of
        FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
        an
        Interpretation of ARB No. 51 ("FIN 46-R"). FIN 46-R provides a deferral of
        FIN
        46 for certain entities until after March 15, 2004. FIN 46 requires certain
        variable interest entities to be consolidated by the primary beneficiary
        of the
        entity if the equity investors in the entity do not have the characteristics
        of
        a controlling financial interest or do not have sufficient equity at risk
        for
        the entity to finance its activities without additional subordinated financial
        support from other parties. We do not expect the adoption of FIN 46 to have
        a
        material impact on our consolidated financial statements.
 
 ***B.    Liquidity
        and Capital Resources***
 
 Net
        cash
        used in operating activities from continuing operations for the twelve months
        ended December 31, 2004 was $609,000 compared to $2,107,000 during the period
        ended December 31, 2003, a decrease of $1,498,000 or 71%. This decrease was
        primarily a result of an increase in accrued expenses and other liabilities
        especially due to an increase of $996,000 in advance payments from customers.
        In
        addition, our inventory in 2004 decreased by $814,000 compared to an increase
        of
        $92,000 in 2003, primarily due to a sale of an automatic production line
        to a
        customer. On the other hand, our accounts receivable and prepaid expenses
        increased in 2004 by $403,000 compared to an increase in 2003 of $239,000
        due to
        deferred expenses relating to projects from which we had not yet recognized
        revenues.
 
 Net
        cash
        used in investing activities during the period ended December 31, 2004 was
        $531,000 compared to $1,501,000 during the period ended December 31, 2003,
        a
        decrease of $970,000. This decrease was primarily due to proceeds of $578,000
        in
        short term bank deposits during the period ended December 31, 2004 compared
        to
        an investment of $1,741,000 during the period ended December 31, 2003, and
        to
        purchase in the amount of $1,088,000 of property and equipment compared to
        $87,000 during the year 2003.
 
 Net
        cash
        provided by financing activities during the period ended December 31, 2004
        was
        $2,305,000 compared to $1,036,000 during the period ended December 31, 2003,
        an
        increase of $1,269,000. This increase was primarily due to gross proceeds
        from a
        private placement in the amount of $3,517,00 during the year ended December
        31,
        2004 and to a decrease in short term bank credit of $1,122,000 in 2004 compared
        to an increase of $1,196,000 in short term bank credit during 2003.
  As
        of
        December 31, 2004, our cash and cash equivalents and short-term deposits
        totaled
        $3,247,000, compared to $2,426,000 as of December 31, 2003. All marketable
        debt
        securities were matured by January 15, 2004. Restricted cash totaled $1,129,000
        as of December 31, 2004 compared to $1,363,000 as of December 31, 2003.
        Restricted cash is invested in certificates of deposits, which mature within
        one
        year, and is used to secure agreements with a customer or a bank.
 
 We
        have
        accumulated net losses of approximately $20,114,000 from our inception through
        December 31, 2004, and we have continued to accumulate net losses since December
        31, 2004. Since May 1999, we have funded operations primarily through cash
        generated from our initial public offering on Nasdaq Europe in April 1999,
        which
        resulted in total net proceeds of approximately $23,600,000 (before offering
        expenses), our sale of shares of our former subsidiary, InkSure, and, to a lesser extent, borrowings from financial
        institutions and, in 2004, private placements of our ordinary shares and
        warrants to purchase our ordinary shares. As of
        December 31, 2004, our principal source of liquidity was $3,247,000 of cash,
        cash equivalents and marketable securities. As of December 31, 2004, we had
        $1,022,000 of debt outstanding relating to obligations under our credit facility
        and an obligation for severance pay to Israeli employees of $564,000 of which
        $428,000 is provided by monthly deposits with severance pay funds, insurance
        policies and by an accrual.
 
 In
        April
        1999, we entered into an underwriting agreement to sell 2,526,316 ordinary
        shares plus an additional 631,579 ordinary shares offered by selling
        shareholders at an offering price of $10.00 per share for gross proceeds
        to us
        of approximately $25,300,000. The gross proceeds were offset by underwriting
        fees of $1,700,000 and offering expenses of $1,250,000 so that we received
        net
        proceeds of $22,350,000 from this public offering.
 
 During
        June and July, 2004, we received aggregate gross proceeds of $1,225,000 from
        a
        private placement of 1,558,826 ordinary shares and five-year warrants to
        purchase 623,535 ordinary shares at an exercise price of $1.10 per share.
        In
        connection with the private placement, our placement advisors received warrants
        to purchase 77,941 ordinary shares at an exercise price of $1.10 per share.
 
 45
  In
        August
        and September 2004, we received gross proceeds of $2,200,000 from a private
        placement to accredited investors of 2,470,589 ordinary shares and five-year
        warrants to purchase 988,234 ordinary shares at an exercise price of $1.10
        per
        share. In connection with the private placement, our placement agent received
        warrants to purchase 177,882 ordinary shares at an exercise price of $1.10
        per
        share and 444,706 ordinary shares at an exercise price of $0.85 per share.
        All
        of such warrants issued in this private placement, except 444,706 warrants
        with
        an exercise price of $0.85, were called by us at a redemption price of $.01
        per
        warrant pursuant to our right to do so if the closing price (or closing bid
        price) of our ordinary shares on an U.S. stock exchange, Nasdaq or the OTC
        Bulletin Board was equal to or greater than $2.50 per share for 10 out of
        any 15
        consecutive trading days. The investors exercised warrants to purchase an
        aggregate of 1,144,853 ordinary shares. During the fourth quarter of 2004,
        706,912 warrants were exercised for an aggregate amount of approximately
        $778,000, and approximately $130,000 was received in respect of shares to
        be
        allotted in 2005.
 
 Our
        budget relies on our existing projects and estimated revenues from sales
        of our
        ID and smart card applications and commercial applications.
 
 As
        of
        December 31, 2004, we had credit lines from several banks in the aggregate
        amount of $1,238,000 (including current maturities of long-term loans credit
        lines in the amount of $454,000 of which $454,000 was used), of which $751,000
        is denominated in NIS and bears interest at the rate of Prime, the monthly
        prime
        rate of interest of the Bank of Israel in the range of +1% to +2.5%, and
        $
        487,000 is denominated in dollars and bears interest at the rate of LIBOR
        in the
        range of +2.5% to +3.2%. The weighted average interest rate on the credit
        lines
        as of December 31, 2003 and 2004 was approximately 6.8% and 5.7%, respectively.
 
 We
        had an
        unused credit facility in the amount of approximately $16,000 as of December
        31,
        2004. There is no fee for the unused portion of the credit facility.
 
 During
        the period from January 1, 2004 to December 31, 2004, our capital expenditures
        totaled approximately $1,088,000 (compared to $87,000 during 2003 and $73,000
        during 2002), of which approximately $1,017,000 (compared to $78,000 during
        2003
        and $69,000 during 2002) was expended at or upon SuperCom's facilities in
        Israel, and approximately $71,000 (compared to $9,000 during 2003 and $4,000
        during 2002) was expended upon various facilities of SuperCom's subsidiaries
        outside Israel. Of these expenditures, approximately $41,000 during 2004
        (compared to $66,000 during 2003 and $33,000 during 2002) was for capital
        equipment and leasehold improvements and the balance of approximately $1,047,000
        (compared to $21,000 during 2003 and $40,000 during 2002) was related to
        information technology.
 
 We
        believe that our existing capital resources together with revenue from
        operations and amounts available under our credit facility will be sufficient
        to
        fund our planned operations through at least the next twelve months. We will
        be
        required to raise additional funds to meet our long-term planned goals. We
        intend to consider other alternatives for financing, which may include public
        or
        private equity financings. There can be no assurance that such additional
        financing, if at all available, can be obtained on terms acceptable to us.
        If we
        are unable to obtain such additional financing, future operations will need
        to
        be scaled back further or discontinued.
 
 ***C.    Research
        and Development***
  Our
        past
        research and development efforts have helped us to achieve our goal of offering
        our customers a complete line of products and solutions. As a result of our
        past
        efforts, we reduced the number of employees in our research and development
        activities to 28 people as of December 31, 2004. We spent $1.3 million, $0.9
        million and $0.8 on research and development in 2002, 2003 and 2004,
        respectively. These amounts were spent on the development or improvement
        of our
        technologies and products, primarily in the areas of an automatic contactless
        smart card production line, data capture, management software, population
        registry software packages, security printing, contactless smart cards and
        document authentication. We will continue to research and develop new security
        and identification features through laser printing and pre-printing, create
        new
        personalization methods for contactless smart cards, develop a range o f
        smart
        card applications and continue to develop our automatic contactless smart
        card
        production line. There can be no assurance that we can achieve any or all
        of our
        research and development goals.
 
 ***D.***
              ***Trend
                  Information***
 
 ***Industry
        Trends***
 
 The
        increased demand for better security systems and services has positively
        affected trends within the industry. Access and asset control are now leading
        security concerns in commercial and governmental enterprises. This has created
        an increasing demand, both for physical security access to buildings and
        logical
        security access to corporate networks. Our contactless smart cards provide
        an
        optimal solution to these problems as they deliver stronger authentication
        of
        network users and they store personal data for highly secure physical access
        control.
   46
  Another
        major trend is the widespread deployment of smart credentials and travel
        documents. From among the three main credentials (e-passport, ID card, drivers’
        license) currently in use on a governmental level, the electronic smart passport
        is posed to be the frontrunner and leads the way for the others. As a global
        credential, it is the only one based on international standards and will
        therefore most likely serve as the base from which the standards of other
        credentials on national, local and commercial levels will be derived.
 
 ***Market
        and Operational Trends***
 
 Our
        quarterly operations results may be subject to significant fluctuations due
        to
        several factors. Some of these factors are based primarily on the timing
        of
        large orders, which represent a significant percentage of our revenues, customer
        budget cycles and impact on the timing for buying decisions, competitive
        pressures, the ability of our partners, distributors and system integrators
        to
        become effective in selling and marketing our products, as well as other
        factors.
 
 During
        the **** twelve
        months ended December 31 ,
        2004,
        we observed a slight increase in our production. We have also observed a
        considerable increase in marketing leads from our growing partnerships,
        distributions and systems integration network, and a particular interest
        by
        government customers in electronic passports (e-passports). We expect to
        continue to benefit from marketing programs and leads generated by this network,
        as well as sales opportunities identified by them. We intend to expand our
        marketing and implementation capacity through these third parties, including
        vendors of complementary products and providers of service applications.
        By
        employing third parties in the marketing and implementation process, we expect
        to enhance sales by taking advantage of their market presence.
 
 A
        significant portion of our 2004 revenues have been derived from our governmental
        projects and the remainder have been derived from commercial products.
        Historically, our revenues have been concentrated in a few large orders and
        in a
        relatively small number of customers, a trend that has been increasing over
        time
        and a trend that we expect to continue to influence our revenues.
 
 Due
        to
        the arbitration proceeding with the Ukraine Chamber of Commerce relating
        to our
        agreement with the Ukraine Ministry of Internal Affairs, we are not anticipating
        any revenues from this project during the year 2004 or beyond. During 2003,
        we
        generated an aggregate of $1,970,000 in revenues from this project. If we
        are
        not able to replace this revenue with revenue from other projects, we expect
        our
        overall revenues to decrease and our net loss to increase in 2005. See Item
        3,
“Risk Factors-- We derive a substantial portion of our revenue from a small
        number of customers...” above.
 
 We
        have
        observed an increase in orders for access control networks in 2004 compared
        with
        2003. Since the end of 2003, the selling prices of our commercial products
        have
        been slightly increased. Commercial product inventory has been reduced without
        replenishing the stock, while other inventory levels have remained the
        same.
 
 Our
        revenues from the government market for 2004 and 2003 totaled $6,330,000
        and
        $5,621,000, respectively. In comparison our revenues from the commercial
        market
        for 2004 and 2003 totaled $1,014,000 and $1,623,000, respectively. We anticipate
        that our mix of revenues from government and commercial markets for 2005
        will be
        consistent with our mix of revenues in 2004.
 
 For
        more
        information about our expectations regarding future cost of revenues, future
        operating expenses and liquidity and capital resources, please refer to the section
        captioned “Risk
        Factors, ” under Section D of Item 3 and the sections
        captioned “Results of Operations” and “Liquidity
        and Capital Resources” under
        Sections A and B, respectively, of Item 5 “Operating and Financial Review and
        Prospects ”.
 
 Our
        development and marketing efforts for the solution and product platforms
        are
        aimed at addressing several systems and service trends that we see developing
        in
        the industry:
 
 In
        2003,
        the ICAO (“International Civil Aviation Organization”) mandated the inclusion of
        biometric authentication technology in passports. We believe that the e-passport
        trend, from our point of view, should have an apparent impact on our income
        from
        operations during the next few years. As we have developed a flexible end-to-end
        solution for electronic passports, we believe that this trend will significantly
        affect our business forecast, as well as influence vertical markets in the
        smart
        card industry. Our combined experience in passport application projects
        worldwide and our position as a leading smart card inlay manufacturer provides
        us with what we believe is an advantage. We are currently aggressively bidding
        on a number of large projects and expect to achieve fair results.
 
 47
  As
        a
        result of these trends and combined with our core strengths, we are focusing
        on
        products and solutions that we believe will be significantly influential
        in the
        present and future markets. We expect that our 2005 revenues will be primarily
        derived from:
 
 ·
              Smart
                  passport technologies;
 ·
                High
                    security solution integration;
 ·
                Expertise in multi-application smart cards,
                  integration
                  know-how; and
 ·
                Extensive experience with the government ID
                  market.
 
 ***Recent
        Developments and Outlook***
 
 We
        expect
        revenues to continue to be derived from one-time sales and recurring fees,
        sales
        of high-end solutions, sales of products, consumables and technology. Sales
        are
        expected to continue through OEM partnerships and continual upgrades,
        maintenance and support will continue to be provided to customers.
 
 Due
        to
        the Ukraine ID Project litigation, we did not recognize any revenues from
        this
        project during the year 2004. During 2003, we generated an aggregate of
        $1,970,000 in revenues from this project. If we are not able to replace this
        revenue with revenue from other projects, we expect our revenues to decrease
        and
        our net loss to increase in 2005. See
        Item
        3, “Risk Factors-- We derive a substantial portion of our revenue from a small
        number of customers...” above. During
        2004, we classified the cost of goods that were sold to the Ukraine Ministry
        of
        Internal Affairs from trade receivables to inventory. Negative developments
        in
        the Ukraine ID project litigation may cause us to write off the inventory
        in the
        amount of approximately $860,000 with respect to the Ukraine ID Project pursuant
        to our contract with the Ministry of Internal Affairs of Ukraine and that
        any
        such write off could have a material adverse effect on our net worth and
        income
        and the trading price for our ordinary shares. Moreover, even if we do not
        take
        such a write off or reserve, there is no assurance that we will ultimately
        collect the amounts due under our contract with the Ministry of Internal
        Affairs
        of Ukraine.
  In
        January 2005, we announced that we have signed an agreement with the government
        of an European country to deploy a biometric visa issuance system in its
        embassies throughout the world. The project’s first stage has an estimated value
        of approximately $500,000.
  In
        December 2004, we announced that we have entered into an agreement with an
        African governmental agency to provide an end-to-end “Magna” national
        identification system valued at $2.5 million during the term of the agreement,
        which is five years. The solution will be deployed in stages that began in
        the
        fourth quarter of 2004 and will continue through the end of the fourth quarter
        of 2005.  Revenues will be recognized during the forth quarter 2004
        through
        the year 2005.
  During
        the fourth quarter of 2004, we sold an automated smart card production system
        to
        the government of an European country. We recognized revenues from the sale
        in
        the amount of approximately $1.25 million during the forth quarter
        2004.
  We
        recently entered into a lease agreement for a new office in Kadima, Israel,
        which will replace our current office in Ra’anna, Israel. As a result of this
        relocation, we might be required to write off certain assets.
 
 ***E.***
              ***Off
                  Balance Sheet
                  Arrangements***
 
 We
        do not
        have any off-balance sheet transactions that have or are reasonably likely
        to
        have a material effect on our current or future financial condition, changes
        in
        financial condition, revenues or expenses, results of operations, liquidity,
        capital expenditures or capital resources.
 
 ***F.***
              ***Tabular
                  Disclosure of Contractual
                  Obligations***
 
 **Contractual
        Obligations**
 
 The
        following table summarizes our contractual obligations and commitments as
        of
        December 31, 2004 that will require significant cash outlays in the
        future:
  48
  
 **Contractual
                  Obligations**
              
              **Total**
              
              **2005**
              
              **2006**
              
              **2007**
              
              **2008**
              
              **2009
                  and Beyond**Long-term
                  debt obligations
              
              $
              187,000
              
              $
              187,000
              
              
              --
              
              
              --
              
              
              --
              
              
              --Capital
                  (finance) lease obligations
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Operating
                  lease obligations
              
              $
              337,000
              
              $
              270,000
              
              $
              67,000
              
              
              --
              
              
              --
              
              
              --Unconditional
                  purchase obligations
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --
              
              
              --Total
                  contractual cash obligations
              
              $
              524,000
              
              $
              457,000
              
              $
              67,000
              
              
              --
              
              
              --
              
              
              --
 
 Long-term
        debt consists of amounts due to loans from banks, which is described in Item
        18,
        note 8 to the financial statements included in this Annual report. Operating
        lease obligations represent commitments under several lease agreements for
        our
        facilities and the facilities of certain subsidiaries. Total contractual
        cash
        obligations represent outstanding commitments for loans from banks and lease
        agreement for facilities. We are not a party to any capital leases.
  **ITEM
        6.** ***Directors,
        Senior Management and Employees.***
  ***A.    Directors
        and Senior Management.***
  **Board
        of Directors**
  We
        are
        managed by our Board of Directors that, pursuant to our Articles of Association,
        must be comprised of between two and eight members. Members are elected for
        a
        one year term ending at our next annual general meeting of shareholders,
        except
        for our external directors, who are elected for three year terms in accordance
        with the Companies Law. The Board of Directors elects one of its members
        to
        serve as the Chairman.
 
 The
        Board
        of Directors is composed as follows (as of the date of this Annual Report):
 
 ********Name**
              **Age**
              **Position**Eli
                  Rozen
              51
              Director,
                  Chairman of the BoardAvi
                  Landman
              51
              DirectorMenachem
                  Meron
              76
              Director
                  retired on June 19, 2005Avi
                  Elkind
              51
              External
                  DirectorMichal
                  Brikman
              35
              External
                  Director
  ***Eli
        Rozen*** is one
        of our co-founders and serves as a director and our Chairman of the Board
        of
        Directors. Mr. Rozen has served as the Chairman since 2000. In 1988, Mr.
        Rozen
        joined Electrocard Ltd., our predecessor, and served as the General Manager
        and
        a director until our establishment in 1988. From 1988 until 2000, he served
        as
        our Chief Executive Officer and President. Mr. Rozen has a B.S. in Industrial
        Engineering and Management from the Israel Institute of Technology.
 
 ***Avi
        Landman*** is one
        of our co-founders and serves as a member of the Board of Directors and as
        the
        Research Manager. Prior to joining us in 1988, Mr. Landman worked as a computer
        engineer at Gal Bakara Ltd. and prior to that as an electrical engineer at
        Eltam
        Ltd. Mr. Landman has a Bachelor of Science degree in Computer Engineering
        from
        the Israel Institute of Technology - the ''Technion''.
 
 ***Avi
        Elkind*** **,** an
        external Director, became a member of the Board of Directors on July 25,
        2000
        and is a member of the remuneration committee as well as the audit committee.
        Since 1999, Mr. Elkind has been Chairman and Chief Executive Officer of E.A.
        Elkind Ltd. Prior to that, from 1997 to 1999, he was the Chief Financial
        Officer
        of Pelephone Communication Ltd. Mr. Elkind graduated from Hebrew University
        of
        Jerusalem where he received degrees in Social Studies in Economics, Business
        Administration and International Affairs.
 
 ***Menachem
        Meron*** became a
        member of the Board of Directors on July 25, 2000 and retired on June 19,
        2005.
        Since 1968, Mr. Meron has been managing director of IFTIC Ltd., a consulting
        firm. Mr. Meron also serves as a director with the Polar Investment Company
        Ltd., Magal Securities Systems Ltd. and Paz Lubricants & Chemicals Ltd.
 
 ***Michal
        Brikman*** **,** an
        external Director, became a member of the Board of Directors on October 28,
        2004. Ms. Brikman is a Certified Public Accountant with extensive management
        and
        accounting experience. Since 2000, Ms. Brikman has been a business consultant
        at
        Daniel Doron Business Consulting. In addition to her appointment to SuperCom’s
        Board of Director, she also serves on the Board of another public company
        in
        Israel.  Ms. Brikman received her Masters in Finance from Baruch College
        in
        New York City and later relocated to Israel.
 
 49
  **Executive
        Officers and Key Employees** ****
 
 Our
        executive officers and certain key employees who are not also directors are:




**Name**
              **Age**
              **Position**Avi
                  Schechter
              40
              President,
                  Chief Executive OfficerEli
                  Basson
              44
              Vice
                  President IPS (Int'l Project Solutions) DivisionEyal
                  Tuchman
              37
              Vice
                  President, Chief Financial OfficerMoshe
                  Wolfson
              53
              Vice
                  President, Sales




***Avi
        Schechter*** ,
        President and Chief Executive Officer, is SuperCom's Chief Executive Officer
        and
        President. Mr. Schechter has been our Chief Executive Officer and President
        since 2001. Mr. Schechter has many years of commercial and managerial
        experience. From March 2001 to November 2001, he served as the Chief Executive
        Officer of Genodus Inc., one of SuperCom's subsidiaries. Mr. Schechter was
        in
        charge of developing a generic platform that pioneered a simplified and complete
        implementation of a multitude of enterprise application integration projects.
        Prior to joining Genodus, from November 1998 to February 2001, he was the
        Chief
        Executive Officer of E-com Global Electronic Commerce, a subsidiary of the
        Aurec
        group. Prior to that, Mr. Schechter was the Chief Executive Officer of Tikal
        Ltd., a service company, which provides medical information for insurance
        companies. He holds a B.A. in Economics and Sociology from Bar-Ilan University
        and an M.S. in Information Systems from Recanati School of Business, Tel-Aviv
        University.
 
 ***Eli
        Basson*** **,** Vice
        President IPS (Int'l Project Solutions) Division. Mr. Basson entered his
        position after serving as the Chief Executive Officer of Genodus, Inc. from
        December 1999 to March 2001. Before joining Genodus, Basson served as our
        Vice
        President of Research & Development and Operations. From July 1994 to July
        1997, he was Vice President of Customer Support for Eldor Computers, and
        from
        December 1992 to July 1994, he was Deputy Vice President of Customer Support
        and
        Response Center Manager at Orbotech (USA). Basson holds a Masters of Science
        in
        Management from Lesley College and a B.S. in Electrical Engineering from
        the
        Technion Israel Institute of Technology.
 
 ***Eyal
        Tuchman*** ,
        CPA,
        Vice President, Corporate Finance and Chief Financial Officer, Mr. Tuchman
        has
        years of experience in accounting and finance in publicly traded companies.
        Prior to joining us in 2002, he served as Chief Financial Officer of Magam
        Group, a company traded on the Tel-Aviv Stock Exchange, from 1996 to 2002,
        and
        before that, was a Senior Auditor at Kessleman & Kessleman (today,
        PriceWaterhouseCoopers). Mr. Tuchman holds a B.A. in Economics & Accounting
        from Ben Gurion University, as well as a C.P.A.
 
 ***Moshe
        Wolfson,*** is Vice
        President of Sales for the Public Sector - Federal, State and Local in the
        United States. Mr. Wolfson is responsible for SuperCom's business partnerships
        with system integrators and solution providers. Prior to joining SuperCom
        in
        2003, Mr. Wolfson was Vice President of Sales and Marketing at dsIT
        Technologies, a solution technology provider for Real Time military solutions.
        Prior to this, Mr. Wolfson was Executive Vice-President of Malam Systems,
        one of
        Israel’s major systems integration and software development companies and
        managed the IT Division. Mr. Wolfson has a M.B.A. from Tel Aviv University
        and a
        B.Sc. in Mathematics and Computer Science. He has been a lecturer in Information
        Technology since 1987. Mr. Wolfson served in the Israeli Army Computer
        Centre.
 
 ***B.    Compensation***
 
 The
        aggregate amount of compensation paid by us to our board members and our
        President and Chief Executive Officer, Vice President, IPS Division, an Vice
        President, Corporate Finance and Chief Financial Officer, and Vice President,
        Sales (collectively, the "Named Executive Officers") as a group for the twelve
        months ended December 31, 2004 was approximately $778,000 This sum includes
        amounts paid for salary and social benefit.. In addition, we have provided
        automobiles to our executive officers at our expense.
 
 In
        accordance with the requirements of Israeli law, we determine our directors’
        compensation in the following manner. First, our audit committee reviews
        the
        proposal for compensation; second, provided that the audit committee approves
        the proposed compensation, the proposal is then submitted to our board of
        directors for review, except that a director who is the beneficiary of the
        proposed compensation does not participate in any discussion or voting with
        respect to such proposal; and finally, if our board of directors approves
        the
        proposal, it must then submit its recommendation to our shareholders, which
        is
        done in the forum of our shareholders’ general meeting. The approval of a
        majority of our shareholders is required for any such compensation
        proposal.
   50
 
  On
          January 26, 2003, at a special general meeting, our shareholders approved
          the
          grant to each of our directors who is not an external director, commencing
          on
          October 1, 2002, a monthly $1,000 fee participation remuneration per meeting
          of
          the Board of Directors, provided however, that each of the directors who
          is not
          an external director shall be entitled to an aggregate sum of monthly
          remuneration and participation remuneration of not more than $18,000 per
          year.
 
 As
        of
        December 31, 2004, we had set aside approximately $ 79,000 to provide pension,
        retirement or similar benefits for our board of directors and Named Executive
        Officers.
 
 ***Option/SAR
        Grants during the Year Ended December 31, 2004***
 
 During
        the twelve months ended December 31, 2004, we granted the following options
        to
        purchase ordinary shares under our 2003 Employee Stock Option Plan to the
        following directors Named Executive Officers.
 
 **Name**
              **Options
                  to Purchase Ordinary Shares Awarded during FY Ended Dec. 31,
                  2004**
              **Exercise
                  Price**
              **Expiration
                  Date**Avi
                  Schechter
              150,000
                310,000
                300,000
              $
                  0.42
                $
                  0.85
                $
                  2.52
              27,
                  March 2014
                3,
                  October 2014
                6,
                  November 2014Eyal
                  Tuchman
              75,000
                125,000
                150,000
              $
                  0.42
                $
                  0.85
                $
                  2.52
              27,
                  March2014
                3,
                  October 2014
                6,
                  November 2014Eli
                  Basson
              75,000
                120,000
                100,000
              $
                  0.52
                $
                  0.85
                $
                  2.52
              27,
                  March 2014
                3,
                  October 2014
                6,
                  November 2014Moshe
                  Wolfson
              50,000
                75,000
                75,000
              $
                  0.42
                $
                  0.85
                $
                  2.52
              27,
                  March 2014
                3,
                  October 2014
                6,
                  November 2014
 
 ***Aggregated
        Option/SAR Exercises during the Year Ended December 31, 2003 and Financial
        Year-end Option/SAR Values***
 
 The
        following table sets out (i) the number of ordinary shares issued to the
        Named
        Executive Officers upon the exercise of options during the year ended December
        31, 2004 and the aggregate value realized upon such exercises; and (ii) the
        number and value of unexercised options held by the Named Executive Officers
        as
        at December 31, 2004:
 
 **Name
                  and Position**
              **Securities
                  Acquired on Exercise**
                **(#)**
              **Aggregate
                  Value Realized**
                **($)**
              **Unexercised
                  Options/SARs**
                **at
                  FY-End (#)**
                **Exercisable/**
                **Unexercisable**
              **Value
                  of Unexercised in-the-money Options/SARs at**
                **FY-End
                  ($)**
                **Exercisable/**
                **Unexercisable****(1)**Avi
                  Schechter - President, Chief Executive Officer
              -
              -
              900,000
              $922,700Eyal
                  Tuchman - Vice President, Chief Financial Officer
              -
              -
              400,000
              $386,250Eli
                  Basson - Vice President, Research and Development and Chief Operating
                  Officer
              -
              -
              300,922
              $294,523Moshe
                  Wolfson
                Vice
                  President Sales
              -
              -
              200,000
              $187,750
 **** (1)
        Based
        on the closing price of our ordinary shares on the OTC Bulletin Board of
        $2.18
        on December 31, 2004 minus the exercise price multiplied by the number of
        option.
  Please
        refer to the Section captioned “Stock Option Plan” under Item 6, Section E below
        for a description of our Option Plans.
  51
  ***C.    Board
        Practices***
  Our
        Board
        of Directors and senior management consider good corporate governance to
        be
        central to our effective and efficient operations. The following table lists
        our
        directors, the positions they hold with us and the dates the directors were
        first elected or appointed:
 
 **Name**
              **Position**
              **Period
                  Served in Office**Eli
                  Rozen
              Director
                Chairman
                  of the Board
              1988-present
                July
                  25, 2000-presentAvi
                  Landman
              Director
              1988-presentMenachem
                  Meron
              Director
              July
                  25, 2000- June 19, 2005Avi
                  Elkind
              External
                  Director
              July
                  25, 2000-presentMichal
                  Brikman
              External
                  Director
              October
                  28, 2004-present
 
 Our
        Articles of Association provide that the minimum number of members of the
        Board
        of Directors is two and the maximum number is eight. The Board of Directors
        is
        presently comprised of four members, two of whom were elected as external
        directors under the provisions of the Companies Law (discussed below) by
        the
        shareholders at our 2004 Annual General Meeting of Shareholders. All directors
        hold office until their successors are elected at the next annual general
        meeting of shareholders, except for our external directors, Avi Elkind and
        Michal Brikman, who shall hold office until June 30, 2006 and October 2007,
        respectively.
 
 Under
        the
        Companies Law and the regulations promulgated pursuant thereto, Israeli public
        companies, namely companies whose shares have been offered to the public,
        or
        that are publicly traded are required to appoint at least two natural persons
        as
“external directors”. A person may not be appointed as an external director if
        the person, or a relative, partner or employer of the person, or any entity
        under the person’s control, has or had, on or within the two years preceding the
        date of the person’s appointment to serve as an external director, any
        affiliation with the company to whose board the external director is proposed
        to
        be appointed, with the controlling shareholder of such company or with any
        entity controlling or controlled by such company or by the controlling
        shareholder of such company. The term “affiliation” includes an employment
        relationship, a business or professional relationship maintained on a regular
        basis, control and service as an office holder (which term includes a director).
 
 In
        addition, no person may serve as an external director if the person’s position
        or other business activities create, or may create, a conflict of interest
        with
        the person’s responsibilities as an external director or interfere with the
        person’s ability to serve as an external director or if the person is an
        employee of the Israel Securities Authority or of an Israeli stock exchange.
        If,
        at the time of election of an external director, all other directors are
        of the
        same gender, the external director to be elected must be of the other gender.
 
 Pursuant
        to recent amendment to the Companies Law, in the future at least one of the
        external directors (as well as a number of the non-external directors to
        be
        determined by the board of directors) will be required to have "financial
        and
        accounting skills" and the other external directors will be required to have
        "professional skills", as such terms will be defined in regulations to be
        promulgated under the Companies Law.
 
 Each
        committee of a company’s board of directors that has the authority to exercise
        powers of the board of directors is required to include at least one external
        director and its audit committee must include all external directors.
 
 External
        directors are elected at the general meeting of shareholders by a simple
        majority, provided that the majority includes at least one-third of the
        shareholders who are not controlling shareholders, who are present and voting,
        or that the non-controlling shareholders who vote against the election hold
        one
        percent or less of the voting power of the company. Notwithstanding the above,
        regulations under the Companies Law provide that with respect to companies
        such
        as us, whose shares are traded on a stock exchange outside of Israel, the
        board
        of directors may determine that a director appointed prior to February 1,
        2000
        (the effective date of the Companies Law), who meets the above qualifications,
        be deemed an external director even if the person served as a director when
        the
        Companies Law became effective. In such case shareholder approval is not
        required.
 
 52
  At
        our
        2003 Annual General Meeting held on June 30, 2003, Esther Koren and Avi Elkind
        were each re-elected to serve as external directors for an additional term
        of
        three years ending on June 30, 2006. However, Esther Koren resigned as a
        member
        of our Board of Directors due to personal reasons effective July 14, 2004.
        Ms.
        Michal Brikman was subsequently appointed to our Board of Directors as an
        External Director which was approved by our shareholders at a special general
        shareholder meeting on October 28, 2004. In addition, Ms. Brikman was appointed
        to the audit committee.
 
 Under
        the
        Companies Law, an external director cannot be dismissed from office unless:
        (i)
        the board of directors determines that the external director no longer meets
        the
        statutory requirements for holding the office, or that the external director
        has
        breached the external director's fiduciary duties and the shareholders vote,
        by
        the same majority required for the appointment, to remove the external director
        after the external director has been given the opportunity to present his
        or her
        position; (ii) a court determines, upon a request of a director or a
        shareholder, that the external director no longer meets the statutory
        requirements of an external director or that the external director has breached
        his or her fiduciary duties to the company; or (iii) a court determines,
        upon a
        request of the company or a director, shareholder or creditor of the company,
        that the external director is unable to fulfill his or her duty or has been
        convicted of specified crimes.
 
 **Board
        Committees**
 
 We
        currently have the following committees:
 
 **Audit
        Committee**
 
 The
        Companies Law requires public companies to appoint an audit committee (the
        "Audit Committee") comprised of at least three directors, including all of
        the
        external directors, and further stipulates that the chairman of the board
        of
        directors of a public company, any director employed by or providing other
        services on a regular basis to the company and the controlling shareholder
        or
        any relative of the controlling shareholder of such company may not be members
        of the audit committee of the company. We have an audit committee (the "Audit
        Committee"), a majority of whose members, including the Chairman, satisfy
        the
        criteria of independence as required by Euronext Rules. The functions of
        the
        Audit Committee include, among others, reviewing and evaluating the results
        and
        scope of the audit and other services provided by our independent accountants.
        In addition, tasks include reviewing our accounting principles and system
        of
        internal auditing controls and approving actions or transactions requiring
        Audit
        Committee approval under the Companies Law, the Articles of Association and
        the
        Euronext Rules. Until June 19, 2005 we have had an Audit Committee comprising
        three members, Mr. Menachem Meron, Mr. Avi Elkind (external director) and
        Ms.
        Michal Brikman (external director), a majority of whose members including
        the
        Chairman, satisfied the criteria of independence as required by Euronext
        Rules.
        Due to the recent retirement of Mr. Meron from our board of directors, Our
        Audit
        Committee is currently comprised of only two directors (less than the minimum
        legal requirement).
 
 **Remuneration
        Committee**
 
 We
        have a
        remuneration committee (the "Remuneration Committee"), a majority of whose
        members, including the Chairman, satisfy the criteria of independence required
        by Euronext Rules. The Remuneration Committee is responsible for making
        recommendations on remuneration of Named Executive Officers and the
        implementation of the Employee Share Option Plan. The Named Executive Officers
        and our senior officers are paid fairly and commensurably with their
        contributions to furthering our strategic direction and objectives. We also
        grant stock options to our officers, directors and employees from time to
        time
        in accordance with our stock option plan. The Remuneration Committee is
        comprised of Avi Elkind, and Ms. Michal Brikman.
 
 **Employment
        Agreements, Termination Of Employment And Change-In-Control
        Arrangements**
 
 We
        have
        employment agreements with the following executive officers and
        directors:
 
 Avi
        Schechter's consulting/services agreement, dated July 1, 2002, provides for
        his
        services as our President and Chief Executive Officer until terminated by
        either
        party as described below. The agreement provides for an annual salary of
        $179,822. In addition, we provide Mr. Schechter with the use of an automobile,
        mobile telephone and regular telephone. Either party may terminate the
        employment agreement without cause upon 90 days' prior notice or we may
        terminate it upon 30 days' notice for cause. In the event of Mr. Schechter's
        termination in connection with a change of control, he is entitled to receive
        his salary for 180 days. During 2004, we granted Mr. Schechter options to
        purchase an aggregate of 150,000, 310,000 and 300,000 ordinary shares at
        an
        exercise price of $0.42, $0.85 and $2.52 per share, respectively.
 
 53
  Eyal
        Tuchman's employment agreement, dated July 1, 2002, provides for his employment
        as our Vice President, Corporate Finance and Chief Financial Officer until
        terminated by either party as described below. The agreement provides for
        an
        annual salary of $97,780, plus a bonus as determined by the board of directors.
        In addition, we provide Mr. Tuchman with the use of an automobile and mobile
        telephone. Either party may terminate the employment agreement without cause
        upon 90 days' prior notice or we may terminate it immediately for cause.
        During
        2004, we granted Mr. Tuchman an option to purchase 75,000, 125,000 and 150,000
        ordinary shares at an exercise price of $0.42, $0.85 and $2.52 per share,
        respectively.
 
 Eli
        Basson's employment agreement, dated July 28, 1997, provides for his employment
        as our Vice President and Chief Operating Officer until terminated by either
        party as described below. The agreement provides for an annual salary of
        $113,668. Either party may terminate the employment agreement without cause
        upon
        90 days' prior notice or we may terminate it upon two weeks' prior notice
        for
        cause. During 2004, we granted Mr. Basson an option to purchase 75,000, 120,000
        and 100,000 ordinary shares at an exercise price of $0.52, $0.85 and $2.52
        per
        share, respectively.
 
 Moshe
        Wolfson's employment agreement, dated October 27, 2003, provides for his
        employment as our Vice President US Gov Sales until terminated by either
        party
        as described below. The agreement provides for an annual salary of $114,000.
        Either party may terminate the employment agreement without cause upon 60
        days'
        prior notice or we may terminate it immediately for cause. During 2004, we
        granted Mr. Wolfson options to purchase 50,000, 75,000 and 75,000 ordinary
        shares at an exercise price of $0.42, $0.85 and $2.52 per share,
        respectively.
 
 Eli
        Rozen's consulting/services agreement, dated October 1, 2001, provides for
        his
        employment as our Chairman of the Board of Directors until terminated by
        either
        party as described below. The agreement provides for an annual salary of
        $110,400. In addition, we provide Mr. Rozen with the use of an automobile
        and
        mobile telephone and regular telephone. Either party may terminate the
        employment agreement without cause upon 60 days' prior notice or we may
        terminate it upon 30 days' notice for cause.
 
 Avi
        Landman's consulting/services agreement, dated October 1, 2001, provides
        for his
        employment as our Research Manager until terminated by either party as described
        below. The agreement provides for an annual salary of $55,200. Either party
        may
        terminate the employment agreement without cause upon 60 days' prior notice
        or
        we may terminate it upon 30 days' notice for cause.
  ***D.    Employees***
  As
        of
        December 31, 2004 and December 31, 2003, we had 67 and 59 full-time employees,
        respectively. The following table describes our employees and the employees
        of
        our subsidiaries by department.
 
 **Dec.
                  31, 2002**
              
              **Dec.
                  31, 2003**
              
              **Dec.
                  31, 2004**Research,
                  Development & Manufacturing
              
              
              25
              
              
              21
              
              
              28Marketing
                  and Sales
              
              
              15
              
              
              27
              
              
              27Administration
              
              
              11
              
              
              11
              
              
              12**Total**
              
              
              **51**
              
              
              **59**
              
              
              **67**
 
 From
        time
        to time, we have engaged temporary employees to fill open positions. These
        temporary employees, however, historically have not comprised a material
        number
        of our employees.
  As
        of
        December 31, 2004 all but 18 of our employees are located at our Ra’anna, Israel
        location.
 
 SuperCom’s
        Israeli employees are not part of a collective bargaining agreement. However,
        in
        Israel we are subject to certain labor statutes, and to certain provisions
        of
        collective bargaining agreements between the Histadrut, the General Federation
        of Labor in Israel, and the Coordinating Bureau of Economic Organizations,
        including the Industrialists' Association. These are applicable to our employees
        by virtue of expansion orders of the Israeli Ministry of Labor and Welfare.
        These statutes and provisions principally concern the length of the workday,
        minimum daily wages for professional workers, procedures for dismissing
        employees, determination of severance pay, annual and other vacations, sick
        pay
        and other conditions for employment. In addition, by virtue of such expansion
        order all employees in Israel  are
        entitled to automatic adjustment of wages relative to increases in the Consumer
        Price Index in Israel. The amount and frequency of these adjustments are
        modified from time to time. We provide our employees with benefits and working
        conditions that comply with the required minimum.
 
 54
  Generally,
        all male adult citizens and permanent residents of Israel under the age of
        45
        are, unless exempt, obligated to perform up to 30 days of military reserve
        duty
        annually. Additionally, all such residents are subject to being called to
        active
        duty at any time under emergency circumstances. Some of our officers and
        employees are currently obligated to perform annual reserve duty. While we
        have
        operated effectively under these requirements since we began operations,
        no
        assessment can be made as to the full impact of such requirements on our
        workforce or business if conditions should change, and no prediction can
        be made
        as to the effect on us of any expansion of such obligations.
 
 All
        of
        our employees have entered into confidentiality agreements. We have also
        granted
        certain employees options to purchase shares of our ordinary shares under
        our
        option plan. We consider our relationship with our employees to be good and
        have
        never experienced a strike or work stoppage.
 
 ***E.    Share
        Ownership***
 
 The
        following table shows the number of ordinary shares and options to purchase
        ordinary shares beneficially owned by each director and Named Executive Officer
        as of May 30, 2005.
 
 **Name**
              **Ordinary
                  Shares held directly and beneficially**
              **%
                  of Outstanding Ordinary Shares as of May 30, 2005**
              **Options
                  outstanding**
                **as
                  of May 30, 2005**
              **Exercise
                  Price**
              **Expiration
                  date**Eli
                  Rozen
              3,171,340(1)
              16.1%
              945,981(10)
              $
                  0.42
              27,
                  January, 2013Avi
                  Landman
              2,395,764(2)
              12.16%
              100,000
              $
                  0.42
              27,
                  January, 2013Menachem
                  Meron
              45,000(3)
              *
              95,000
              $
                  0.42
              7,
                  October 2012Avi
                  Elkind
              50,000(4)
              *
              50,000
              $
                  0.42
              30,
                  June 2013Avi
                  Schechter
              255,000(5)
              *
              70,000
                150,000
                310,000
                300,000
              $
                  0.42
                $
                  0.42
                $
                  0.85
                $
                  2.52
              17,
                  March 2012
                25,
                  April 2014
                3,
                  October 2014
                6,
                  November 2014Eyal
                  Tuchman
              117,500(6)
              *
              30,000
                75,000
                125,000
                150,000
              $
                  0.42
                $
                  0.42
                $
                  0.85
                $
                  2.52
              20,
                  June 2012
                25,
                  April 2014
                3,
                  October 2014
                6,
                  November 2014Eli
                  Basson
              80,922(7)
              *
              5,922
                75,000
                120,000
                100,000
              $
                  0.42
                $
                  0.52
                $
                  0.85
                $
                  2.52
              17,
                  March 2012
                25,
                  April 2014
                3,
                  October 2014
                6,
                  November 2014Moshe
                  Wolfson
              18,333(8)
              *
              35,000
                75,000
                75,000
              $
                  0.42
                $
                  0.85
                $
                  2.52
              27,
                  March 2014
                3,
                  October 2014
                6,
                  November 2014Michal
                  Brikman
              -
              -
              -
              -
              -Directors
                  and Named Executive Officers as a Group
              6,133,859(9)
              31.14%
 
 **** As
        of May
        30, 2005 the outstanding shares are 18,346,140.
 *
        Indicates less than 1%.
 
 (1)
        Includes (a) 2,425,359 shares held directly by Eli Rozen, and (b) options
        to
        purchase 745,981 ordinary shares which are currently exercisable or exercisable
        within 60 days of May 30, 2005, of which 662,647 ordinary shares are held
        by
        Finel Architecture and Engineering Ltd. ,
        a
        company owned solely by Mr. Rozen (“Finel”) .
 (2)  Includes
        (a) 2,345,764 ordinary shares held by Avi Landman, of which 500,000 shares
        are
        held by Ashland Investments LLC, a limited liability company solely owned
        by Mr.
        Landman (“Ashland”), and (b) options to purchase 50,000 ordinary shares which
        are currently exercisable or exercisable within 60 days of May 30,
        2005.
 (3)
        Includes options to purchase 45,000 ordinary shares which are currently
        exercisable or exercisable within 60 days of May 30, 2005. Mr. Meron was
        one of
        our directors and retired on June 19, 2005.
 (4)
        Includes options to purchase 50,000 ordinary shares which are currently
        exercisable or exercisable within 60 days of May 30, 2005.
  55
  (5)
        Includes options to purchase 245,000 ordinary shares which are currently
        exercisable or exercisable within 60 days of May 30, 2005.
 (6)  Includes
        options to purchase 117,500 ordinary shares which are currently exercisable
        or
        exercisable within 60 days of May 30, 2005.
 (7)  Includes
        options to purchase 80,922 ordinary shares which are currently exercisable
        or
        exercisable within 60 days of May 30, 2005.
 (8)  Includes
        options to purchase 18,333 ordinary shares which are currently exercisable
        or
        exercisable within 60 days of May 30, 2005.
 (9)
        Includes options to purchase 1,352,736 ordinary shares which are currently
        exercisable or exercisable within 60 days of May 30, 2005.
 (10)
        Includes options to purchase 695,981 ordinary shares held by Finel.
 
 All
        of
        our ordinary shares have identical voting rights.
 
 **Share
        Option Plans**
 
 On
        February 14, 1999, the Board of Directors adopted, and our shareholders
        subsequently approved, the 1999 Employee Stock Option Plan Option Plan, which
        was amended and restated in March 2002(the "1999 Option Plan"). We no longer
        use
        the 1999 Option Plan to issue stock options. In 2003, we adopted a new stock
        option plan under which we now issue stock options (the “Option Plan”). In
        December 2004, we filed a Registration Statement on Form S-8 with the U.S.
        Securities and Exchange Commission registering (i) 1,000,000 ordinary shares
        available for issuance upon exercise of stock options reserved for grant
        under
        the Option Plan, (ii) 3,494,315 ordinary shares issued or issuable upon exercise
        of options previously granted under the Option Plan, and (iii) 643,595 ordinary
        shares issued or issuable upon exercise of options previously granted under
        the
        1999 Option Plan.The Option Plan is intended to provide incentives to our
        employees, officers, directors and/or consultants by providing them with
        the
        opportunity to purchase our ordinary shares. Under the Option Plan, options
        to
        purchase an aggregate of up to the number of our authorized ordinary shares
        (26,500,000) may, from time to time, be awarded to any employee, officer,
        director and/or consultant. The Option Plan is, subject to the provisions
        of the
        Companies Law, administered by the Remuneration Committee, and is designed:
        (i)
        to comply with Section 102 of the Tax Ordinance or any provision which may
        amend
        or replace it and rules promulgated thereunder and to enable us and grantees
        thereunder to benefit from Section 102 of the Tax Ordinance and the
        Commissioner’s Rules; and (ii) to enable us to grant options and issue shares
        outside the context of Section 102 of the Tax Ordinance. Options become
        exercisable ratably over a period of three to five years, commencing with
        the
        date of grant. The options generally expire no later than 10 years from the
        date
        of grant. Any options, which are forfeited or canceled before expiration,
        become
        available for future grants.
  During
        2004, options to purchase a total of 2,030,000, 212,137, and 0 ordinary shares
        (having respective weighted exercise prices of $1.23, $5.03 and $0 per share)
        were awarded, cancelled and exercised, respectively, under this Plan. As
        of
        December 31, 2004, under this Plan, options to purchase a total of 3,352,377
        ordinary shares and having a weighted average exercise price of $0.97 per
        share,
        were outstanding.
  As
        a
        result of an amendment to Section 102 of the Tax Ordinance as part of the
        2003
        Israeli tax reform, and pursuant to an election made by us thereunder, capital
        gains derived by optionees arising from the sale of shares pursuant to the
        exercise of options granted to them under Section 102 after January 1, 2003,
        will generally be subject to a flat capital gains tax rate of 25%. Previously,
        such gains were taxed as salary income at the employee’s marginal tax rate
        (which could be up to 50%). However, as a result of this election, we will
        no
        longer be allowed to claim as an expense for tax purposes the amounts credited
        to such employees as a benefit when the related capital gains tax is payable
        by
        them, as we had previously been entitled to do under Section 102. For certain
        information as to the Israeli tax reform, see “Taxation.”
 A
        summary
        of our stock option activity, and related information is as follows:
  56
  
 **Year
                  ended December 31****2002**
              
              **2003**
              
              **2004****Number
                  of**
                **options**
              
              **Weighted
                  average exercise price**
              
              **Number
                  of**
                **options**
              
              **Weighted
                  average exercise price**
              
              **Number
                  of**
                **options**
              
              **Weighted
                  average exercise price**Outstanding
                  at beginning of year
              
              
              543,495
              
              $
              5.19
              
              
              880,712
              
              $
              2.88
              
              
              1,534,514
              
              $
              1.17Granted
              
              
              443,081
              
              $
              0.42
              
              
              1,005,981
              
              $
              0.42
              
              
              2,030,000
              
              $
              1.23Exercised
              
              
              -
              
              $
              -
              
              
              (200,533
              )
              $
              0.42
              
              
              -
              
              $
              -Canceled
                  and forfeited
              
              
              (105,864
              )
              $
              4.41
              
              
              (151,646
              )
              $
              0.72
              
              
              (212,137
              )
              $
              5.03Outstanding
                  at end of year
              
              
              880,712
              
              $
              2.88
              
              
              1,534,514
              
              $
              1.17
              
              
              3,352,377
              
              $
              0.97Exercisable
                  at end of year
              
              
              462,655
              
              $
              4.32
              
              
              1,113,580
              
              $
              1.44
              
              
              1,681,360
              
              $
              0.58
  The
        options outstanding as of December 31, 2004, have been separated into ranges
        of
        exercise price as follows:
  **Exercise**
                **price**
              
              **Options
                  outstanding as of**
                **December
                  31, 2004**
              
              **Weighted
                  average**
                **remaining**
                **contractual
                  life (years)**
              
              **Weighted
                  average**
                **exercise
                  price**
              
              **Options
                  exercisable**
                **as
                  of**
                **December
                  31, 2004**
              
              **Weighted
                  average**
                **exercise
                  price**$
                  0.42 - $ 1
              
              
              2,692,115
              
              
              8.75
              
              $
              0.55
              
              
              1,650,343
              
              $
              0.50$
                  2
                  - $ 2.52
              
              
              640,000
              
              
              9.02
              
              $
              2.50
              
              
              12,000
              
              $
              2$
                  4.00 - $ 5.62
              
              
              13,690
              
              
              3.45
              
              $
              4.89
              
              
              12,445
              
              $
              4.98$
                  9.64
              
              
              6,572
              
              
              1.14
              
              $
              9.64
              
              
              6,572
              
              $
              9.643,352,377
              
              
              8.76
              
              $
              0.97
              
              
              1,681,360
              
              $
              0.58
  **ITEM
        7.** ***Major
        Shareholders And Related Party Transactions.*** ****
  ***A.    Major
        shareholders***
  The
        following table lists the beneficial ownership of our securities as of May
        30,
        2005 by each person known by us to be the beneficial owner of more than 5%
        of
        the outstanding shares of any class of our securities.
 
 Beneficial
        ownership is determined in accordance with the rules of the U.S. Securities
        and
        Exchange Commission and generally includes voting or investment power with
        respect to securities. The principal address of our directors and executive
        officers listed below (all but Jacob Hassan) is c/o SuperCom Ltd., Millennium
        Bldg., 3 Tidhar St., P.O.B. 2094, Raanana, Israel. We believe that all persons
        named in the table have sole voting and sole investment power with respect
        to
        all shares beneficially owned by them. All figures include ordinary shares
        issuable upon the exercise of options or warrants exercisable within 60 days
        of
        May 30, 2005 and deemed to be outstanding and beneficially owned by the person
        holding those options or warrants for the purpose of computing the percentage
        ownership of that person, but are not deemed to be outstanding for the purpose
        of computing the percentage ownership of any other person. None of the following
        major shareholders have different voting rights from the other holders of
        our
        ordinary shares.
 
  57
  
 **Name
                  of Beneficial Owner**
              
              **Number
                  of Shares****Beneficially Owned**
              
              **Percentage
                  of Shares****Outstanding**Jacob
                  Hassan (1)
              
              
              2,346,358
              
              
              11.91
              %Avi
                  Landman (2)
              
              
              2,395,764
              
              
              12.16
              %Eli
                  Rozen (3)
              
              
              3,171,340
              
              
              16.1
              %
 __________
 
 (1)
              Mr.
                  Hassan’s address is 21 Shnat Hayovel, Hod Hasharon ,
                  Israel.
 (2)
              Includes
                  (a) 2,345,764 ordinary shares held by Avi Landman, of which 500,000
                  shares
                  are held by Ashland, and (b) options to purchase 50,000 ordinary
                  shares
                  which are currently exercisable or exercisable within 60 days of
                  May 30,
                  2005.****
 (3)
              Includes
                  (a) 2,425,359 shares held directly by Eli Rozen, and (b) options
                  to
                  purchase 745,981 ordinary shares which are currently exercisable
                  or
                  exercisable within 60 days of May 30, 2005, of which 662,647 ordinary
                  shares are held by Finel.
 
 To
        the
        best of our knowledge based on the information known to us, there have not
        been
        anysignificant change in the percentage ownership of the Company’s major
        shareholders during the last three years other than chamges resulting from
        our
        private placements in 2004 and the exercise of warrants issued in those
        offerings, and the grant of options to Messrs. Rozen and Landman.
 
 As
        of
        December 31, 2004, to the best of our knowledge based on the information
        available to us, we had approximately 51 total registered holders of our
        ordinary shares. As of December 31, 2004 to the best of our knowledge based
        on
        the information available to us, approximately 26.75% of our total outstanding
        ordinary shares were held by U.S. residents.
 
 To
        the
        best of our knowledge based on the information available to us, there are
        no
        existing arrangements that may at a future date result in a change of control
        of
        SuperCom.
 
 ***B.***
              ***Related
                  Party Transactions*******
 
 It
        is our
        policy to enter into transactions with related parties on terms that, on
        the
        whole, are no less favorable than those that would be available from
        unaffiliated parties. Based on our experience in the business segments in
        which
        we operate and the terms of our transactions with unaffiliated third parties,
        we
        believe that all of the transactions described below met our policy standards
        at
        the time they occurred.
 
 On
        October 1, 2001, the Company entered into a consulting agreement with a company
        owned by the Chairman of the Board of Directors who is one of the co-founders
        of
        the Company. In consideration of these services, the Company has undertaken
        to
        pay $ 10,500 per month plus motor vehicle expenses. In addition the Company
        pays
        $ 1,500 per month as a directors fee. During 2002, 2003 and 2004 the Company
        paid $ 148,000, $ 147,000 and $ 144,000 pursuant to this
        agreement.
 
 On
        October 1, 2001, the Company entered into a consulting agreement with a company
        owned by a member of the Company's Board of Directors, one of the Company's
        co-founders and a principal shareholder. In consideration of these services,
        the
        Company has undertaken to pay $ 4,600 per month plus motor vehicle expenses.
        In
        addition the Company pays $ 1,500 per month as a directors fee. During 2002,
        2003 and 2004, the Company paid $ 65,000, $ 76,000 and $ 73,000, pursuant
        to this agreement.
 
 On
        October 1, 2001, the Company entered into a consulting agreement with a company
        owned by one of the co-founders of the Company. In consideration for these
        services, the Company has undertaken to pay $ 4,600 per month plus motor
        vehicle
        expenses. During 2002, 2003 and 2004, the Company paid $ 78,000, $ 68,000
        and $ 69,000, pursuant to this agreement.
 
 On
        September 1, 2001, the Company entered into an agreement with its 40% owned
        affiliated company, pursuant to which the Company agreed to sub-lease office
        space in the Ra’anana, Israel facility to CT Card Tech and to provide CT Card
        Tech with certain additional services in consideration of a monthly payment
        of
        $ 1,000. In November 2003, CT Card Tech surrendered a portion of its
        office
        space, which reduced the monthly payment to $ 500 and in March 2004 to $
        0, when
        CT Card Tech surrendered all its office space.
 
 58
  During
          2002, Avi Landman, one of the Company's co-founders, received $152,000
          as past
          compensation in connection with salary and social benefits for the period
          he
          served as an employee in connection with the termination of his employment
          agreement.
  During
        2004, our Board of Directors approved the granting of stock options to certain
        of our Named Executive Officers. Please see the section captioned “Option/SAR
        Grants during the Year Ended December 31, 2004” under Section B of Item 6 above
        for a description of these stock option grants.
  During
        January 2005, our shareholders approved at our general meeting the grant
        of
        50,000 options to each of Mr. Menahem Meron and Mr. Avi Landman, directors
        of
        the Company and 300,000 options to Mr. Eli Rozen, the Chairman of
        the board
        of directors. The exercise price of such options is $0.85 per share (the
        market
        price on the date of the Board’s grant) and the vesting period and the other
        exercise terms and conditions of said options are in accordance with the
        Company's 2003 Israeli Share Option Plan. Those options were granted as a
        compensation for their efforts in the private placement during the year
        2004.
  In
        addition, during January 2005, our shareholders approved at our general meeting the
        following amendments to the service agreement between us and Mr. Avi Landman,
        dated October 1, 2001:
  (i) As
        of the date of the general meeting, increase the compensation to a sum of
        NIS
        30,000 per month.
 (ii) Upon
        the termination of the current car leasing period, upgrade the car provided
        to
        Mr. Landman to any car that has a leasing price of up to NIS 4,200 (excluding
        tax) per month.
 (iii) Grant
        Mr. Landman a one-time bonus of NIS 130,000 including VAT.
  ***C.***  ***Interests
        of Experts and Counsel***
  Not
        applicable.
  **ITEM
        8.** ***Financial
        Information.*** ****
  ***A.    Consolidated
        Statements and Other Financial Information (Audited)***
  Refer
        to
        Item 18, which contains the following financial statements:
  •
              
              Consolidated
                  Balance Sheets
  •
              
              Consolidated
                  Statements of Operations
  •
              
              Statements
                  of Changes in Shareholders’ Equity
 
 •
              
              Consolidated
                  Statements of Cash Flows
  •
              
              Notes
                  to Consolidated Financial Statements
  ***Dividend
        Policy***
 
 We
        have not distributed a dividend since August 27, 1997 and we do not anticipate
        any dividend distribution in the foreseeable future. Dividends may only be
        paid
        out of our profits legally available for distribution under the Companies
        Law
        (the "Profits Criteria"), and provided that there is no reasonable concern
        that
        such payment will prevent us from satisfying our existing and foreseeable
        obligations as they become due. In addition, a competent court may approve,
        as
        per a motion to be filed by a company in accordance with the Companies Law
        requirements, a payment which does not meet the Profit Criteria, provided
        that
        the court was convinced that there is no reasonable concern that such payment
        will prevent the company from satisfying its existing and foreseeable
        obligations as they become due.
 
 In
        accordance with our articles of association, a dividend shall be proposed
        by the
        board of directors and shall be payable only after the same has been approved
        by
        ordinary resolution of the shareholders meeting, but no such resolution shall
        provide for the payment of an amount exceeding the amount proposed by the
        board
        of directors.
 
 Subject
        to the rights of the holders of shares as to dividends, any dividend paid
        by us
        shall be allocated among the members entitled thereto in proportion to the
        sum
        paid up or credited as paid up on account of the nominal value of their
        respective holding of the shares in respect of which such dividend is being
        paid, without taking into account the premium paid up for the shares.
   59
  ***Legal
        Proceedings***
 
 We
        are
        party to legal proceedings in the normal course of our business. Other than
        as
        described under the heading “Legal Proceedings” under Section B of Item 4, there
        are no material pending legal proceedings in which we are a party or to which
        our property is subject. Although the outcome of claims and lawsuits against
        us
        can not be accurately predicted, we do not believe that any of the claims
        and
        lawsuits described in this paragraph, individually or in the aggregate, will
        have a material adverse effect on our business, financial condition, results
        of
        operations and cash flows for any quarterly or annual period, other than
        as
        described under the heading “Legal Proceedings” under Section B of Item
        4.
 
 ***Export
        Sales***
 
 Sales
        in
        Israel during the year 2002, 2003 and 2004 was $229,000, $ 460,000 and $
        320,000, respectively. Export sales during the year 2002, 2003 and 2004 was
        $7,798,000 (97%), $ 6,784,000 (94%) and $ 7,024,000 (96%)
        respectively.
  ***B.    Significant
        Changes***
  There
        have not been any significant changes since the date of the annual financial
        statements included under Item 18 of this Annual Report.
  **ITEM
        9.** ***The
        Offer And Listing.***
  ***A.***
              ***Offer
                  and Listing Details***
 
 The
          tables included below set forth information regarding the price history
          of the
          ordinary shares on the Euronext Brussels stock market and the OTC Bulletin
          Board for the periods indicated.
  1.  The
        following table set forth the annual high and low market prices of our
        ordinary shares on the Euronext Brussels stock market
        and the OTC Bulletin Board for our
        five most recent full financial years:
 
 **NasdaqEurope/Euronext**
              **OTC-BB****Fiscal
                  year ended:**
              High
                $
              Low
                $
              High
                ($)
              Low
                ($)Dec-04
              $2.62
              $1.94
              $2.65
              $2.14Dec-03
              $0.75
              $0.28
              -
              -Dec-02
              $0.565
              $0.1
              -
              -Dec-01
              $1.6
              $0.25
              -
              -Dec-00
              $6.95
              $1.8
              -
              -
 
 2.     The
        following table set forth the high and low market prices of our
        ordinary shares on the Euronext Brussels stock market
        and the OTC Bulletin Board for each
        full financial quarter for our two most recent full financial years and
        any
        subsequent period:
   60
  
 **NasdaqEurope/
                  Euronext**
              **OTC-BB****Quarter
                  ended:**
              High
                ($)
              Low
                ($)
              High
                ($)
              Low
                ($)Q1/05
                Jan-Mar
              $2.79
              $1.92
              $2.56
              $2.20Q4/04
                Oct-Dec
              $2.66
              $0.82
              $2.65
              $2.14Q3/04
                July-Sept
              $1.04
              $0.79
              -
              -Q2/04
                Apr-Jun
              $1.205
              $0.616
              -
              -Q1/04
                Jan-Mar
              $0.73
              $0.546
              -
              -Q4/03
                Oct-Dec
              $0.75
              $0.28
              -
              -Q3/03
                July-Sept
              $0.665
              $0.29
              -
              -Q2/03
                Apr-Jun
              0.525
              $0.3088
              -
              -Q1/03
                Jan-Mar
              $0.675
              $0.38
              -
              -
  3.     The
        following table set forth the high and low market prices of our
        ordinary shares on the Euronext Brussels stock market and the OTC Bulletin
        Board for each
        month for our most recent six months :
 
 **NasdaqEurope
                / Euronext**
              **OTC-BB**High
                ($)
              Low
                ($)
              High
                ($)
              Low
                ($)May-05
              $1.98
              $0.75
              $2.17
              $0.73April-05
              $2.22
              $1.96
              $2.38
              $2.05March-05
              $2.43
              $2.23
              $2.51
              $2.25Feb-05
              $2.41
              $2.21
              $2.49
              $2.27Jan-05
              $2.79
              $1.92
              $2.56
              $2.20Dec-04
              $2.62
              $1.94
              $2.65
              $2.14
 
 5.     The
        Company has not issued any securities in connection with a pre-emptive
        issue.
 
 ***B.***  ***Plan
        of Distribution***
 
 Not
        applicable.
  61
  ***C.    Markets***
  Our
        ordinary shares are traded on the Euronext Brussels stock market under the
        symbol “SUP” and on the OTC Bulletin Board under the symbol “SPCBF.OB”.
 
 ***D.    Selling
        Shareholders***
 
 Not
        applicable.
 
 ***E.***
              ***Dilution***
 
 Not
        applicable.
 
 ***F.***
              ***Expenses
                  of the Issue***
 
 Not
        applicable.
  **ITEM
        10.** ***Additional
        Information.*** ****
  ***A.    Share
        Capital***
 
 Not
        applicable.
 
 ***B.    Memorandum
        and Articles of Association***
  Please
        refer to Item 10.B. of our Registration Statement on Form 20-F (File No.
        000-50790) filed with the U.S. Securities and Exchange Commission, as amended
        November 14, 2004, for a
        description of our memorandum of association and articles of association,
        the
        rights, preference and restrictions attaching to each class of our shares,
        and
        certain related matters, which we hereby incorporate into this Annual Report
        by
        reference.
  ***C.    Material
        Contracts***
  Except
        for the material contracts described under the sections captioned “Employment
        Agreements, Termination of Employment and Change-In-Control Arrangements” and
“Share Option Plans” under Sections B and E, respectively, under Item 6, we are
        not a party to any other material contracts outside of the ordinary course
        of
        business.
  ***D.    Exchange
        Controls***
  Pursuant
        to a general permit issued in 1998 by the Israeli Controller of Foreign Exchange
        under the Currency Control Law, 1978 (the "Currency Control Law"), there
        are
        virtually no restrictions on foreign exchange in the State of Israel, except
        for
        certain reporting obligations.
 
 ***E.    Taxation***
  To
        the
        extent that the following discussion is based on new or existing tax or other
        legislation that has not been subject to judicial or administrative
        interpretation, there can be no assurance that the views expressed herein
        will
        be accepted by the tax or other authorities in question. This discussion
        is not
        intended, nor should it be construed, as legal or professional tax advice
        and it
        is not exhaustive of all possible tax considerations.
 
 **Israeli
        Taxation**
 
 The
        following discussion describes the material Israeli tax consequences regarding
        ownership and disposition of SuperCom’s ordinary shares applicable to Israeli
        and non-Israeli shareholders, including U.S. shareholders.
 
 *Taxation
        of Capital Gains Applicable to Israeli and Non-Israeli
        Shareholders*
   62
  Israeli
        law generally imposes a capital gains tax on the sale of any capital assets
        by
        residents of Israel, as defined for Israeli tax purposes, and on the sale
        of
        assets located in Israel, including shares in Israeli companies, by both
        residents and non-residents of Israel, unless a specific exemption is available
        or unless a tax treaty between Israel and the shareholder's country of residence
        provides otherwise. The law distinguishes between real gain and inflationary
        surplus. The inflationary surplus is a portion of the total capital gain
        which
        is equivalent to the increase of the relevant asset's purchase price which
        is
        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.
 
 Pursuant
        to the Tax Reform, generally, capital gains tax is imposed on Israeli residents
        at a rate of 15% on real gains derived on or after January 1, 2003, from
        the
        sale of shares in Israeli companies publicly traded on Nasdaq or on a recognized
        stock exchange (Euronext Brussels New Market) or regulated market in a country
        that has a treaty for the prevention of double taxation with Israel. This
        tax
        rate is contingent upon the shareholder not claiming a deduction for financing
        expenses in connection with such shares, and does not apply to: (i) the sale
        of
        shares to a relative (as defined in the Tax Reform); (ii) the sale of shares
        by
        dealers in securities; (iii) the sale of shares by shareholders that report
        in
        accordance with the Inflationary Adjustments Law; or (iv) the sale of shares
        by
        shareholders who acquired their shares prior to an initial public offering
        (that
        are subject to a different tax arrangement). The tax basis of shares acquired
        prior to January 1, 2003 will be determined in accordance with the average
        closing share price in the three trading days preceding January 1, 2003.
        However, a request may be made to the tax authorities to consider the actual
        adjusted cost of the shares as the tax basis if it is higher than such average
        price.
 
 In
        December 2003, regulations promulgated pursuant to the Tax Reform were amended
        so that, in certain circumstances, capital gains derived from the sale and
        subsequent (same day) repurchase of shares traded on the TASE or from shares
        of
        Israeli companies publicly traded on a recognized stock exchange or regulated
        market in a country that has a treaty for the prevention of double taxation
        with
        Israel, may be taxed at a rate equal to the withholding tax rate applicable
        to
        revenues derived from such sale. In accordance with an announcement published
        by
        the Israeli Income Tax Commission, the withholding tax rate applicable to
        the
        sale of such shares until the end of 2003 tax year, which was equal at such
        time
        to 1% of the revenues generated in their sale, was determined as the final
        tax
        rate applicable to such sale. The amended regulations also determined that
        the
        day of such sale and repurchase shall be considered the new date of purchase
        of
        such shares. The foregoing was not applicable to: (i) dealers in securities;
        (ii) shareholders that report in accordance with the Inflationary Adjustments
        Law; (iii) shareholders who acquired their shares prior to an initial public
        offering; (iv) in some cases, shareholders that received their shares within
        the
        framework of an employer-employee relationship; or (v) shareholders claiming
        a
        deduction for financing expenses in connection with such shares. The regulations
        further provided that with respect to shares of Israeli companies traded
        on a
        stock exchange outside of Israel, the market price determined at the close
        of
        the trading day preceding the day of the sale and repurchase of such shares,
        shall constitute the new tax basis for any future sale of such
        shares.
 
 Non-Israeli
        residents are exempt from Israeli capital gains tax on any gains derived
        from
        the sale of shares publicly traded on a the TASE, provided such gains did
        not
        derive from a permanent establishment of such shareholders in Israel, and
        are
        exempt from Israeli capital gains tax on any gains derived from the sale
        of
        shares of Israeli companies publicly traded on a recognized stock exchange
        (Euronext Brussels New Market) or regulated market outside of Israel, provided
        however that such capital gains are not derived from a permanent establishment
        in Israel and provided that such shareholders did not acquire their shares
        prior
        to an 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
        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 SuperCom shareholders may be liable to Israeli tax on the
        sale
        of their ordinary shares, the payment of the consideration may be subject
        to the
        withholding of Israeli tax at the source. Pursuant to the Convention Between
        the
        government of the United States of America and the government of Israel with
        Respect to Taxes on Income, as amended (the "U.S.-Israel Tax Treaty") the
        sale,
        exchange or disposition of ordinary shares by a person who (i) holds the
        ordinary shares as a capital asset, (ii) qualifies as a resident of the United
        States within the meaning of the U.S.-Israel Tax Treaty and (iii) is entitled
        to
        claim the benefits afforded to such person by the U.S.-Israel Tax Treaty,
        generally, will not be subject to the Israeli capital gains tax unless such
        Treaty U.S. resident holds, directly or indirectly, shares representing 10%
        or
        more of our voting power during any part of the 12-month period preceding
        such
        sale, exchange or disposition, subject to certain conditions, or the capital
        gains from such sale, exchange or disposition can be allocated to a permanent
        establishment in Israel. In this case, the sale, exchange or disposition
        of
        ordinary shares would be subject to Israeli tax, to the extent applicable;
        however, under the U.S.-Israel Tax Treaty, such Treaty U.S. Resident would
        be
        permitted to claim a credit for such taxes against the U.S. federal income
        tax
        imposed with respect to such sale, exchange or disposition, subject to the
        limitations in U.S. laws applicable to foreign tax credits. The U.S.-Israel
        Tax
        Treaty does not relate to U.S. state or local taxes.
  63
  *Income
        Taxes on Dividend Distribution to Non-Israeli Shareholders*
 
 Individuals
        who are non-residents of Israel are subject to a graduated income tax on
        income
        derived from sources in Israel. These sources of income include passive income,
        including dividends, royalties and interest, as well as non-passive income
        from
        services provided in Israel. Upon a distribution of a dividend, other than
        bonus
        shares (stock dividends), income tax is generally withheld at the rate of
        25%
        (or 15% in the case of dividends distributed from taxable income derived
        from an
        Approved Enterprise), unless a different rate is provided in a treaty between
        Israel and the shareholder's country of residence. The withheld tax is the
        final
        tax in Israel on dividends paid to non-residents who do not conduct a business
        in Israel. See "U.S.-Israel Tax Treaty".
 
 A
        non-resident of Israel who has dividend income derived from or accrued in
        Israel, from which tax was withheld at source, is generally exempt from the
        duty
        to file tax returns in Israel in respect of such income, provided such income
        was not derived from a business conducted in Israel by the taxpayer and the
        non-resident has no other sources of income in Israel.
 
 Residents
        of the United States generally will have withholding tax in Israel deducted
        at
        source. As discussed below, they may be entitled to a credit or deduction
        for
        United States federal income tax purposes in the amount of the taxes withheld,
        subject to detailed rules contained in United States tax
        legislation.
 
 *U.S.-Israel
        Tax Treaty*
 
 The
        Treaty is generally effective as of January 1, 1995. Under the Treaty, the
        maximum Israeli tax and withholding tax on dividends paid to a holder of
        ordinary shares who is a Treaty U.S. Resident (as defined below) is generally
        25%. However, pursuant to the Approved Enterprise Law, dividends distributed
        by
        an Israeli company and derived from the income of an Approved Enterprise
        during
        the applicable benefits period will generally be subject to a reduced 15%
        dividend withholding tax rate. The Treaty further provides that a 12.5% Israeli
        dividend withholding tax will apply to dividends paid to a United States
        corporation owning 10% or more of an Israeli company's voting shares during,
        in
        general, the current and preceding tax year of the Israeli company. The lower
        12.5% rate applies only on dividends distributed from income not derived
        from an
        Approved Enterprise in the applicable period and does not apply if we have
        certain amounts of passive income.
 
 Pursuant
        to the Treaty, the sale, exchange or disposition of ordinary shares by a
        person
        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 such residents
        under the Treaty (a "Treaty U.S. Resident") generally will not be subject
        to the
        Israeli capital gains tax unless such Treaty U.S. Resident holds, directly
        or
        indirectly, shares representing 10% or more of the voting power of SuperCom
        during any part of the 12-month period preceding such sale, exchange or
        disposition subject to certain conditions. A sale, exchange or disposition
        of
        ordinary shares by a Treaty U.S. Resident who holds, directly or indirectly,
        shares representing 10% or more of the voting power of SuperCom at any time
        during such preceding 12-month period would not be exempt under the Treaty
        from
        such Israeli tax; however, under the Treaty, such Treaty U.S. Resident would
        be
        permitted to claim a credit for such taxes against United States federal
        income
        tax imposed on any gain from such sale, exchange or disposition, under the
        circumstances and subject to the limitations specified in the
        Treaty.
 
 Israel
        presently has no estate or gift tax.
 
 *General
        Corporate Tax Structure*
 
 The
        general corporate tax rate in Israel is according to the amendment made on
        June
        29, 2004, the Israeli Parliament passed Amendment to the Income Tax Ordinance
        (No. 140 and Temporary Order) - 2004, gradually reducing the tax rate applicable
        to us, commencing on January 1, 2004, from 35% in 2004 to 30% in 2007.
  The
        effective tax rate payable by a company that derives income from an "Approved
        Enterprise," however, may be considerably less. See "Law for the Encouragement
        of Capital Investments, 1959" below.
 
 *Law
        for the Encouragement of Industry (Taxes), 1969*
 
 Under
        the
        Law for the Encouragement of Industry (Taxes), 1969 (the "Industry Encouragement
        Law"), a company qualifies as an "Industrial Company" if it is a resident
        in
        Israel and at least 90% of its income in a given tax year (exclusive of certain
        income) is derived from Industrial Enterprises which was defined as an
        enterprise whose major activity in a particular tax year is industrial
        manufacturing. We currently qualify as such.
 
 64
  A
        qualifying Industrial Company is entitled to deduct the purchase price of
        know-how and patents and is also entitled to deduct expenses of issuing publicly
        traded shares.
 
 Additionally,
        under certain income tax regulations, Industrial Companies qualify for special
        accelerated depreciation rates. An Industrial Company owning an Approved
        Enterprise (see "Law for the Encouragement of Capital Investments, 1959"
        below)
        may choose between the above depreciation rates and the depreciation rules
        available to Approved Enterprises.
 
 Qualification
        as an Industrial Company is not conditional upon the receipt of prior approval
        from any Israeli Government authority. No assurance can be given that we
        will
        continue to qualify as an Industrial Company or will in the future be able
        to
        avail itself of any benefits available to companies so qualifying.
 
 *Law
        for the Encouragement of Capital Investment, 1959*
 
 The
        Law
        for the Encouragement of Capital Investment, 1959 (the "Investment Law")
        provides that capital investment in a production facility (or other eligible
        assets) may, upon application to the Israeli Investment Center, be designated
        as
        an "Approved Enterprise". Each certificate of approval for an Approved
        Enterprise relates to a specific investment program, delineated both by the
        financial scope of the investment and by the physical characteristics of
        the
        facility or the asset. A company having an Approved Enterprise is entitled
        to
        certain benefits, including Israeli Government cash grants and tax benefits.
        Each application for an investment program is evaluated by the Investment
        Center
        and there can be no assurance that any such application will be approved.
        SuperCom currently has three Alternative Benefits Programs under the Investment
        Law, which entitle us to certain tax benefits. The benefits available to
        a
        company having an Approved Enterprise are conditional upon the fulfillment
        of
        certain conditions stipulated in the Investment Law and its regulations and
        the
        criteria set forth in the specific certificate of approval. The Company believes
        its Approved Enterprises operate in substantial compliance with all such
        conditions and criteria as of December 31, 2004.
 
 **United
        States Federal Income Tax**
 
 The
        following general discussion sets forth the material United States federal
        income tax consequences that are applicable to the following persons who
        invest
        in ordinary shares and hold such ordinary shares as capital assets ("U.S.
        Shareholders"): (a) individuals who are citizens or residents (as specifically
        defined for U.S. federal income tax purposes) of the United States; (b)
        corporations (or entities treated as corporations for U.S. tax purposes)
        created
        or organized in the United States or under the laws of the United States
        or of
        any state thereof; (c) estates the income of which is subject to United States
        federal income taxation regardless of its source . ;
        and (d)
        a trust if such trust validly has elected to be treated as a United States
        person for United States federal income tax purposes or if a United States
        court
        can exercise primary supervision over its administration and one or more
        United
        States persons have the authority to control all of its substantial
        decisions .
        This
        discussion does not deal with: (i) all aspects of U.S. federal income taxation
        that may be relevant to particular U.S. Shareholders based on their particular
        circumstances (including potential application of the alternative minimum
        tax);
        (ii) certain U.S. Shareholders subject to special treatment under the U.S.
        federal income tax laws such as dealers or traders in securities or currencies,
        banks, financial institutions or insurance companies, tax-exempt organizations,  real
        estate investment trusts, regulated investment companies or grantor trusts
        taxpayers whose functional currency is not the Dollar, taxpayers
        who received ordinary shares as compensation for the performance of services,
        holders who hold ordinary shares as part of a position in a straddle or as
        part
        of a hedging or conversion transaction for United States federal income tax
        purposes or
        foreign individuals or entities; (iii) U.S. Shareholders owning directly
        or by
        attribution 10% or more ,
        by
        voting power or value, of the
        ordinary shares; or (iv) any aspect of state, local or non-United States
        tax
        laws. Additionally, the following discussion does not consider the tax treatment
        of persons who hold ordinary shares through a partnership or other pass-through
        entity.
 
 The
        summary of United States income tax laws set out below is based on the Internal
        Revenue Code of 1986, as amended, Treasury regulations, judicial decisions
        and
        published positions of the Internal Revenue Service (the "IRS") as of the
        date
        hereof and is subject to any changes occurring in the United States law after
        that date, which changes could be retroactive.
  *Dividends
        Paid on Shares*
 
 Distributions
        on ordinary shares paid (before reduction for Israeli withholding taxes)
        out of
        our current or accumulated earnings and profits, as determined for U.S. federal
        income tax purposes, will be dividends and will be includible in a U.S.
        Shareholder's ordinary income when received. Under recently enacted legislation,
        dividends received by an individual taxpayer during taxable years before
        2009
        will be taxed at a maximum rate of 15%, provided the taxpayer has held the
        stock
        for more than 60 days during the 120-day period beginning 60 days before
        the
        ex-dividend date and certain other conditions are satisfied. Dividends received
        by an individual taxpayer for taxable years after 2008 will be subject to
        tax at
        ordinary income rates. The dividend will not be eligible for the
        dividends-received deduction generally allowed to U.S.
        corporations.
 
 65
  The
        amount of any dividend paid in Israeli currency will equal the Dollar value
        of
        the Israeli currency received calculated by reference to the exchange rate
        in
        effect on the date the dividend is received by the U.S.
 Shareholder,
        regardless of whether the Israeli currency is converted into Dollars. If
        the
        Israeli currency received as a dividend is not converted into Dollars on
        the
        date of receipt, the U.S. Shareholder will have a basis in the Israeli currency
        equal to the Dollar value on the date of receipt. Any gain or loss realized
        on a
        subsequent conversion or other disposition of the Israeli currency will be
        treated as ordinary income or loss, and generally will be income or loss
        from
        sources within the United States for U.S. foreign tax credit
        purposes.
  To
        the
        extent that the amount of any distribution exceeds our current and accumulated
        earnings and profits for a taxable year, the distribution will first be treated
        as a tax-free return of capital to the extent of the U.S. Shareholder's basis,
        and any excess will be treated as capital gain. Such distributions would
        not
        give rise to income from sources outside the United States.
 
 *Credit
        For Israeli Taxes Withheld*
 
 U.S.
        Shareholders may be entitled to deduct, or claim a U.S. foreign tax credit
        for,
        Israeli taxes that are withheld on dividends received, subject to applicable
        limitations in the Code. Dividends will be income from sources outside the
        United States and generally will be "passive income" or "financial services
        income" for purposes of computing the U.S. foreign tax credit allowable to
        a
        U.S. Shareholder. The rules governing the U.S. foreign tax credit are complex,
        and additional limitations on the credit apply to individuals receiving
        dividends eligible for the 15% maximum tax rate on dividends described
        above.
 
 *Disposition
        Of Ordinary Shares*
 
 A
        U.S.
        Shareholder will generally recognize capital gain or loss upon the sale or
        exchange of ordinary shares in an amount equal to the difference between
        the
        amount realized and the U.S. Shareholder's tax basis in the ordinary shares.
        Such gain or loss will be long-term capital gain or loss if the U.S.
        Shareholder's holding period exceeds one year, and otherwise will be short-term
        capital gain or loss. Certain limitations apply to the deductibility of capital
        losses by both corporate and non-corporate taxpayers. Gain or loss from the
        sale, exchange or other disposition of ordinary shares will generally be
        treated
        as from U.S. sources for U.S. foreign tax credit purposes. However, pursuant
        to
        the Treaty, such gain or loss may be foreign source in certain circumstances.
        See "U.S.-Israel Tax Treaty". U.S. Shareholders should consult their own
        tax
        advisors regarding the treatment of any foreign currency gain or loss on
        any
        Israeli currency received in respect of the sale, exchange or other disposition
        of ordinary shares.
 
 *Passive
        Foreign Investment Company*
 
 A
        "passive foreign investment company" ("PFIC") is defined as any foreign
        corporation at least 75% of whose consolidated gross income for the taxable
        year
        is passive income, or at least 50% of the value of whose consolidated assets
        is
        attributable to assets that produce or are held for the production of passive
        income. For this purpose, passive income generally includes dividends, interest,
        royalties, rents, annuities and the excess of gains over losses from the
        disposition of assets which produce passive income. We believe that it is
        not
        and has not been a PFIC for United States federal income tax purposes, and
        we
        expect that it will not become a PFIC. If we were to become a PFIC, then
        all
        U.S. Shareholders would be required either: (i) to include in their taxable
        income certain undistributed amounts of our income if a qualified electing
        fund
        election has been made; or (ii) to pay an interest charge together with tax
        calculated at maximum ordinary income rates on certain "excess distributions"
        (defined to include gain on the sale of ordinary shares). In addition, if
        we are
        a PFIC, individual U.S. Shareholders will not be eligible for the 15% maximum
        tax rate on dividends described above.
 
 *Backup
        Withholding and Information Reporting*
 
 A
        non-corporate U.S. Shareholder may, under certain circumstances, be subject
        to
        information reporting requirements and "backup withholding" at a rate currently
        equal to 28% on cash payments in the United States of dividends on, and the
        proceeds of disposition of, ordinary shares. Backup withholding will apply
        only
        if a U.S. Shareholder: (a) fails to furnish its social security or other
        taxpayer identification number ("TIN") within a reasonable time after the
        request therefor; (b) furnishes an incorrect TIN; (c) is notified by the
        IRS
        that it has failed properly to report payments of interest and dividends;
        or (d)
        under certain circumstances, fails to certify, under penalty of perjury,
        that it
        has furnished a correct TIN and has not been notified by the IRS that it
        is
        subject to backup withholding for failure to report interest and dividend
        payments. U.S. Shareholders should consult their tax advisors regarding their
        qualification for exemption, if applicable. The amount of backup withholding
        from a payment to a U.S. Shareholder generally will be allowed as a credit
        against such U.S. Shareholder's federal income tax liability and may entitle
        such U.S. Shareholder to a refund, provided that the required information
        is
        furnished to the IRS.
  66
  ***F.    Dividends
        and Paying Agent***
 
 Not
        applicable.
 
 ***G.    Statement
        by Experts***
 
 Not
        applicable.
 
 ***H.    Documents
        on Display***
  We
        are subject to the informational requirements of the Exchange Act, applicable
        to
        foreign private issuers. We, as a “foreign private issuer,” are exempt from the
        rules under the Exchange Act prescribing certain disclosure and procedural
        requirements for proxy solicitations, 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, with respect to their
        purchases and sales of shares. In addition, we are not required to file annual,
        quarterly and current reports and financial statements with the SEC as
        frequently or as promptly as United States companies whose securities are
        registered under the Exchange Act. However, we will file with the SEC, within
        180 days after the end of each fiscal year, an annual report on Form 20-F
        containing financial statements audited by an independent accounting firm.
        We
        will also furnish quarterly reports on Form 6-K containing unaudited interim
        financial information for the first three quarters of each fiscal year, within
        60 days after the end of such quarter.
 
 You
        may read and copy any document we file or furnish with the SEC at reference
        facilities at 450 Fifth Street, NW, Washington, DC 20549. You may also obtain
        copies of the documents at prescribed rates by writing to the Public Reference
        Section of the SEC at 450 Fifth Street, NW, Washington, DC 20549. Please
        call
        the SEC at 1-800-SEC-0330 for further information on the operation of the
        public
        reference facilities. You can review our SEC filings and the registration
        statement by accessing the SEC’s internet site at
        http://www.sec.gov.
  ***I.  Subsidiary
        Information***
 
 Not
        applicable.
 
 **ITEM
        11.** ***Quantitative
        and Qualitative Disclosures About Market Risk.*** ****
 
 *Quantitative
        and Qualitative Information about Market Risk*
  The
        primary objective of our investment activities is to preserve principal while
        at
        the same time maximizing the income we receive from investments without
        significantly increasing risk. Some of the securities in which we may invest
        may
        be subject to market risk. This means that a change in prevailing interest
        rates
        and foreign currency rates against the NIS may cause the value of the investment
        to fluctuate. For example, if we purchase a security that was issued with
        a
        fixed interest rate and the prevailing interest rate later rises, the value
        of
        our investment will probably decline. To minimize this risk, we intend to
        maintain our portfolio of cash equivalents and short-term investments in
        a
        variety of securities, including U.S. dollars, NIS bank deposits, money market
        funds and government and non-government debt securities. In general, money
        market funds are not subject to market risk because the interest paid on
        such
        funds fluctuates with the prevailing interest rate.
 
 Our
        financial market risk includes risks related to international operations
        and
        related foreign currencies. We anticipate that sales outside of North America
        will continue to account for a significant portion of our consolidated revenue
        in 2005. To date, most of our sales have been valued in dollars. In future
        periods, we expect our sales to be principally valued in dollars, eliminating
        foreign currency exchange risk.
 
 67
  We
        value
        expenses of some of our international operations, such as Israel and Hong
        Kong,
        in each country's local currency and therefore are subject to foreign currency
        exchange risk. However, through December 31, 2004, we have not experienced
        any
        significant negative impact on our operations as a result of fluctuations
        in
        foreign currency exchange rates, although we have incurred a loss of $98,000
        in
        the year ended December 31, 2004 due to fluctuations in foreign exchange
        rates.
        We do not use financial instruments to hedge operating expenses in Israel
        or
        Hong Kong that are valued in local currency. We intend to continue to assess
        the
        need to utilize financial instruments to hedge currency exposures on an ongoing
        basis.
 
 We
        do not
        use derivative financial instruments for speculative trading purposes, nor
        do we
        hedge our foreign currency exposure to offset the effects of changes in foreign
        exchange rates.
 
 Our
        exposure to market risks for changes in interest rates relates primarily
        to our
        credit facility. At December 31, 2004, our financial market risk related
        to this
        debt was immaterial. Our general policy is to limit the risk of principal
        loss
        and ensure the safety of invested funds by limiting market and credit
        risk.
 
 **ITEM
        12** . ***Description
        of Securities Other than Equity Securities..***
 
 Not
        applicable.
 **PART
        II**
 
 **ITEM
        13** . ***Defaults,
        Dividend Arrearages and Delinquencies.***
 
 A.
              None.
 
 B.
              None.
 
 **ITEM
        14.** ***Material
        Modifications to the Rights of Security Holders and Use of
        Proceeds*** .
 
 A.
              None.
 
 B.
              None.
 
 C.
              Not
                  applicable.
 
 D.
              No
                  changes.
 
 E.
              None.
 
 **ITEM
        15. Controls and Procedures.**
 
 **Disclosure
        Controls and Procedures**
 
 Within
        90
        days prior to the date of this Annual Report, we performed an evaluation
        of the
        effectiveness of our disclosure controls and procedures that are designed
        to
        ensure that the material financial and non-financial information required
        to be
        disclosed on Form 20-F and filed with the Securities and Exchange Commission
        is
        recorded, processed, summarized and reported timely. Based on our evaluation,
        which was performed under the supervision and with the participation of our
        management including the Chief Executive Officer (“CEO”) and Chief Financial
        Officer (“CFO”), the CEO and CFO have concluded that the Corporation’s
        disclosure controls and procedures (as defined in Exchange Act Rules 13(a)-15(e)
        and 15(d)-15(e) of the Exchange Act of 1934, as amended) as of the end of
        the
        period covered by this Annual Report are adequate and effective. The CEO
        and CFO
        have indicated that there have been no significant changes in the internal
        controls or other factors that could significantly affect internal controls
        subsequent to the above-mentioned evaluation, nor were there any significant
        deficiencies or material weaknesses in our internal controls. Accordingly,
        no
        corrective actions were required or undertaken. Pursuant
        to Section 404 of the Sarbanes-Oxley Act of 2002, we expect that beginning
        with our annual report on Form 20-F for the fiscal year ended
        December 31, 2006, we will be required to furnish a report by management
        on
        our internal control over financial reporting, which report must also contain
        a
        statement that our auditors have issued an attestation reporton our
        management's assessment of such internal controls.
 
  68
  **ITEM
        16A.**  ***Audit
        Committee Financial Expert***
 
 Our
        board
        of directors has determined that Ms. Michal Brikman, who chairs our audit
        committee, is an “audit committee financial expert.” Ms. Brikman is an
        independent director under Nasdaq Market Place Rule 4200(a)(15).
 
 **ITEM
        16B.**  ***Code
        of Ethics***
 
 Our
        board
        of directors adopted a code of ethics that applies to our chief executive
        officer, chief financial officer, director of finance, controller, and other
        persons performing similar functions a copy
        of which is filed as Exhibit 11.1 to this Annual Report .
        A copy
        of our code of ethics will be provided, without charge, upon written request
        of
        any person delivered as follows: 3 Tidhar St. Ra’anana P.O.B. 2094, Israel
        43665.
 
 **ITEM
        16C.**  ***Principal
        Accountant Fees and Services***
 
 The
        following table presents the fees paid to our external auditors for professional
        services rendered in the years ended December 31, 2004 and 2003:
  **2004**
              **2003**Audit
                  Fees
              45,000
              50,000Audit-Related
                  Fees
              5,000
              -Tax
                  Fees
              20,000
              13,000All
                  Other Fees
              134,000
              41,000**Total**
              204,000
              104,000
  *Pre-Approval
        Policies for Non-Audit Services*
  The
        Audit
        Committee has adopted policies and procedures relating to the approval of
        all
        audit and non-audit services that are to be performed by our independent
        auditors. These policies generally provide that we will not engage our
        independent auditors to render audit or non-audit services unless the service
        is
        specifically approved in advance by the Audit Committee or the engagement
        is
        entered into pursuant to the pre-approval procedure described
        below.
  From
        time
        to time, the Audit Committee may pre-approve specified types of services
        that
        are expected to be provided to us by our independent auditors during the
        next 12
        months. Any such pre-approval is detailed as to the particular service or
        type
        of services to be provided and is also generally subject to a maximum dollar
        amount.
 
 **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.
 
 **PART
        III**
 
 **ITEM
        17.** ***Financial
        Statements.***
 
 Not
        applicable.
 
 **ITEM
        18.** ***Financial
        Statements.***
 
 69
  
 **REPORT
        OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**
  **TO
        THE SHAREHOLDERS OF**
  **SUPERCOM
        LTD.**
  We
        have
        audited the accompanying consolidated balance sheets of Supercom Ltd. (the
        "Company") and it's subsidiaries as of December 31, 2003 and 2004,
        and the
        related consolidated statements of operations, changes in shareholders’ equity
        and cash flows for each of the three years in the period ended December 31,
        2004. These financial statements are the responsibility of the Board of
        Directors and management of the Company. Our responsibility is to express
        an
        opinion on these financial statements based on our audits.
  We
        did
        not audit the financial statements of "Supercom Asia Pacific Limited" a
        subsidiary, whose assets included in the consolidation constituted approximately
        5% and 5.3% of total consolidated assets as of December 31, 2003 and 2004,
        respectively, and whose revenues included in the consolidation constituted
        approximately 33%, 28.5%, and 24% of total consolidated revenues for the
        years
        ended December 31, 2002, 2003 and 2004, respectively. The financial
        statements of this subsidiary were audited by other independent auditors,
        whose
        report has been furnished to us. Our opinion, insofar as it relates to the
        amounts included in respect of this company, is based solely on the report
        of
        the other independent auditors.
  We
        conducted our audits in accordance with auditing standards of the Public
        Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audits to obtain reasonable assurance as to whether the
        financial statements are free of material misstatements. An audit includes
        examining, on a test basis, evidence supporting the amounts and disclosures
        in
        the financial statements, assessing the accounting principles used and
        significant estimates made by management, as well as evaluating the overall
        financial statement presentation. We believe that our audits and the report
        of
        the other independent auditors provide a reasonable basis for our
        opinion.
  In
        our
        opinion, based on our audit and the report of the other independent auditors,
        the consolidated financial statements referred to above present fairly, in
        all
        material respects, the consolidated financial position of the Company and
        its
        subsidiaries as of December 31, 2003 and 2004, and the consolidated
        results
        of operations, changes in shareholders’ equity and cash flows for each of the
        three years in the period ended December 31, 2004, in conformity with accounting
        principles generally accepted in the United States.
 
 
 
 Fahn
                  Kanne & Co.
                Certified
                  Public Accountants (Isr.)
  Tel-Aviv,
        ISRAEL
 June
        30,
        2005
 
 70
 
 
 Report
        of
        Independent Auditors
 
  
 **To
        the Board of Directors of**
 **SuperCom
        Asia Pacific Limited**
 
 We
        have
        audited the accompanying balance sheets of SuperCom
        Asia Pacific Limited (the
“Company”) as of December
        31, 2004 and
        2003, and the related statements of operations, stockholders’ deficit and cash
        flows for the years ended December 31, 2004 and 2003. These financial statements
        are the responsibility of the Company’s management. Our responsibility is to
        express an opinion on these financial statements based on our
        audit.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States of America). Those standards require
        that we plan and perform the audit to obtain reasonable assurance about whether
        the financial statements are free of material misstatement. An audit includes
        examining, on a test  basis,
        evidence supporting the amounts and disclosures in the financial statements.
        An
        audit also includes assessing the accounting principles used and significant
        estimates made by management, as well as evaluating the overall financial
        statement presentation. We believe that our audits provide a reasonable basis
        for our opinion.
 
 In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the financial positions of the Company as of December
        31,
        2004 and 2003 and the results of its operations and cash flows for the years
        ended December 31, 2004 and 2003 in conformity with accounting principles
        generally accepted in the United States of America.
  
 BDO
        McCabe Lo & Company
 
 **Hong
        Kong, February 4, 2005**
  
 71
 
   **SUPERCOM
        LTD. AND ITS SUBSIDIARIES**
 **CONSOLIDATED
        FINANCIAL STATEMENTS**
 **AS
        OF DECEMBER 31, 2004**
 
 **IN
        U.S. DOLLARS**
 
 
 
 
 **INDEX**
 
 
 
 
 **Page****Consolidated
                  Balance Sheets**
              **73
                  - 74****Consolidated
                  Statements of Operations**
              **75****Statements
                  of Changes in Shareholders' Equity**
              **76****Consolidated
                  Statements of Cash Flows**
              **77
                  - 78****Notes
                  to Consolidated Financial Statements**
              **79
                  - 109**
  -
        - **-** **-
        - - - - - - - - - - - - - - - - -**
 
 72
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 
 
 
 **December
                  31,****2003**
              
              **2004**ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              1,729
              
              $
              2,894Restricted
                  cash deposits
              
              
              1,363
              
              
              1,129Short-term
                  deposit
              
              
              697
              
              
              353Marketable
                  debt securities
              
              
              117
              
              
              -Trade
                  receivables (net of allowance for doubtful accounts of $ 3,333
                  and$ 3,347
                  as of December 31, 2003 and 2004, respectively)
              
              
              1,808
              
              
              1,463Other
                  accounts receivable and prepaid expenses
              
              
              931
              
              
              1,250Inventories
              
              
              3,236
              
              
              2,165Totalcurrent assets
              
              
              9,881
              
              
              9,254INVESTMENTS
                  AND LONG-TERM RECEIVABLES:Long-term
                  trade receivables
              
              
              364
              
              
              247Investment
                  in an affiliated company
              
              
              275
              
              
              275Severance
                  pay fund
              
              
              333
              
              
              428Totallong-term investments
              
              
              972
              
              
              950PROPERTY
                  AND EQUIPMENT, NET
              
              
              1,676
              
              
              3,641INTANGIBLE
                  ASSETS
              
              
              156
              
              
              93Totalassets
              
              $
              12,685
              
              $
              13,938
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 73
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 **CONSOLIDATED
        BALANCE SHEETS**
 
 
 
 **December
                  31,****2003**
              
              **2004**LIABILITIES
                  AND SHAREHOLDERS' EQUITYCURRENT
                  LIABILITIES:Short-term
                  bank credit and current maturities of long-term loan
              
              $
              2,131
              
              $
              1,022Trade
                  payables
              
              
              1,166
              
              
              1,135Employees
                  and payroll accruals
              
              
              331
              
              
              357Accrued
                  expenses and other liabilities
              
              
              822
              
              
              1,745Totalcurrent liabilities
              
              
              4,450
              
              
              4,259LONG-TERM
                  LIABILITIES:Long-term
                  loan, net of current maturities
              
              
              187
              
              
              -Accrued
                  severance pay
              
              
              436
              
              
              564Totallong-term liabilities
              
              
              623
              
              
              564COMMITMENTS
                  AND CONTINGENT LIABILITIESSHAREHOLDERS'
                  EQUITY:Share
                  capital:
                Ordinary
                  shares of NIS 0.01 par value -Authorized:
                  26,500,000 shares as of December 31, 2003 and 2004;Issued
                  and outstanding: 12,906, 872 and 17,703,199 shares as of December 31,
                  2003 and 2004, respectively
              
              
              40
              
              
              51Additional
                  paid-in capital
              
              
              25,814
              
              
              29,094Deferred
                  stock compensation
              
              
              -
              
              
              (59
              )Receipt
                  on account of shares
              
              
              -
              
              
              143Accumulated
                  deficit
              
              
              (18,242
              )
              
              (20,114
              )Totalshareholders' equity
              
              
              7,612
              
              
              9,115Totalliabilities and shareholders' equity
              
              $
              12,685
              
              $
              13,938
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 74
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 
 **CONSOLIDATED
        STATEMENTS OF OPERATIONS**
 
 
 
 **Year
                  ended**
                **December
                  31,****2002**
              
              **2003**
              
              **2004**Revenues
              
              $
              8,027
              
              $
              7,244
              
              $
              7,344Cost
                  of revenues
              
              
              1,830
              
              
              3,102
              
              
              3,730Gross
                  profit
              
              
              6,197
              
              
              4,142
              
              
              3,614Operating
                  expenses:Research
                  and development
              
              
              1,334
              
              
              918
              
              
              845Selling
                  and marketing
              
              
              2,828
              
              
              3,026
              
              
              2,445General
                  and administrative
              
              
              1,988
              
              
              1,829
              
              
              1,955Totaloperating expenses
              
              
              6,150
              
              
              5,773
              
              
              5,245Operating
                  income (loss)
              
              
              47
              
              
              (1,631
              )
              
              (1,631
              )Financial
                  expenses, net
              
              
              (35
              )
              
              (233
              )
              
              (214
              )Other
                  income (expenses), net
              
              
              6,203
              
              
              (83
              )
              
              (27
              )Income
                  (loss) before income taxes
              
              
              6,215
              
              
              (1,947
              )
              
              (1,872
              )Share
                  in losses of affiliates and impairment of investment in an affiliated
                  company, net of taxes
              
              
              (38
              )
              
              (48
              )
              
              -Net
                  income (loss) from continuing operations
              
              
              6,177
              
              
              (1,995
              )
              
              (1,872
              )Loss
                  from discontinued operations, net
              
              
              (427
              )
              
              -
              
              
              -Net
                  income (loss)
              
              $
              5,750
              
              $
              (1,995
              )
              $
              (1,872
              )Net
                  earnings (loss) per share:Basic
                  and diluted earnings (loss) from continuing operations
              
              $
              0.49
              
              $
              (0.15
              )
              $
              (0.13
              )Basic
                  and diluted loss from discontinued operations
              
              $
              (0.04
              )
              $
              -
              
              $
              -Basic
                  and diluted net earnings (loss) per share
              
              $
              0.45
              
              $
              (0.15
              )
              $
              (0.13
              )Weighted
                  average number of Ordinary shares outstanding
              
              
              12,706,339
              
              
              12,718,426
              
              
              14,590,346
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 75
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 **STATEMENTS
        OF CHANGES IN SHAREHOLDERS' EQUITY**
 **U.S.
        dollars in thousands, except share amount**
 **Ordinary
                      shares****Number
                        of****Shares**
                  
                  **Share****capital**
                  
                  **Additional****paid-in****capital**
                  
                  **Deferred****stock****compensation**
                  
                  **Accumulated****other
                        comprehensive****income (loss)**
                  
                  **Accumulated****Deficit**
                  
                  **Receipt
                      on account of shares**
                  
                  **Total****comprehensive****income
                      (loss)**
                  
                  **Total****shareholders'****equity**Balance
                      as of January 1, 2002
                  
                  
                  12,706,339
                  
                  
                  40
                  
                  
                  25,949
                  
                  
                  (245
                  )
                  
                  116
                  
                  
                  (21,997
                  )
                  $
                  -
                  
                  
                  
                  
                  
                  3,863Forfeiture
                      of stock options held by
                    Inksure's
                      employees
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (219
                  )
                  
                  219
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  -Other
                      comprehensive income:Functional
                      currency adjustment due
                    to
                      sale of Inksure
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (116
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  (116
                  )
                  
                  (116
                  )Net
                      income
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  5,750
                  
                  
                  -
                  
                  
                  5,750
                  
                  
                  5,750Total
                      comprehensive income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  5,634Balance
                      as of December 31, 2002
                  
                  
                  12,706,339
                  
                  
                  40
                  
                  
                  25,730
                  
                  
                  (26
                  )
                  
                  -
                  
                  
                  (16,247
                  )
                  
                  -
                  
                  
                  
                  
                  
                  9,497Exercise
                      of stock options
                  
                  
                  200,533
                  
                  
                  *)
                      -
                  
                  
                  84
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  84Amortization
                      of stock compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  26
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  26Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,995
                  )
                  
                  -
                  
                  
                  (1,995
                  )
                  
                  (1,995
                  )Total
                      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,995
                  )Balance
                      as of December 31, 2003
                  
                  
                  12,906,872
                  
                  
                  40
                  
                  
                  25,814
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (18,242
                  )
                  
                  -
                  
                  
                  
                  
                  
                  7,612Deferred
                      stock compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  68
                  
                  
                  (68
                  )
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  -Conversion
                      of loan to ordinary shares,
                    net
                  
                  
                  60,000
                  
                  
                  1
                  
                  
                  24
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  25Issuance
                      of shares in a private
                    placement,
                      net
                  
                  
                  4,029,415
                  
                  
                  9
                  
                  
                  2,451
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  2,460Exercise
                      of warrant
                  
                  
                  706,912
                  
                  
                  1
                  
                  
                  737
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  738Receipt
                      on account of share to be allotted
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  143
                  
                  
                  
                  
                  
                  143Amortization
                      of stock compensation
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  9
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  
                  
                  
                  9Net
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (1,872
                  )
                  
                  -
                  
                  
                  (1,872
                  )
                  
                  (1,872
                  )Total
                      comprehensive loss
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  (1,872
                  )Balance
                      as of December 31, 2004
                  
                  
                  17,703,199
                  
                  
                  51
                  
                  
                  29,094
                  
                  
                  (59
                  )
                  $
                  -
                  
                  
                  (20,114
                  )
                  
                  143
                  
                  
                  
                  
                  
                  9,115
  *)
              Less
                  than $ 1.
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 
 76
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 U.S.
        dollars in thousands
 **Year
                  ended December 31,****2002**
              
              **2003**
              
              **2004**Cash
                  flows from operating activities:Net
                  income (loss)
              
              $
              5,750
              
              $
              (1,995
              )
              $
              (1,872
              )Loss
                  from discontinued operations
              
              
              427
              
              
              -
              
              
              -Net
                  income (loss) from continuing operations
              
              
              6,177
              
              
              (1,995
              )
              
              (1,872
              )Adjustments
                  to reconcile net income / loss to net cash used in operating
                  activities:Depreciation
                  and amortization
              
              
              442
              
              
              371
              
              
              338Share
                  in losses of affiliates
              
              
              38
              
              
              -
              
              
              -Accrued
                  severance pay
              
              
              (6
              )
              
              74
              
              
              128Amortization
                  of deferred stock compensation
              
              
              -
              
              
              26
              
              
              9Decline
                  in market value below cost of marketable debt securities
              
              
              -
              
              
              52
              
              
              7Decrease
                  (increase) in trade receivables
              
              
              (2,061
              )
              
              30
              
              
              (398
              )Increase
                  in other accounts receivable and prepaid expenses
              
              
              (244
              )
              
              (239
              )
              
              (403
              )Decrease
                  (Increase) in inventories
              
              
              (217
              )
              
              (92
              )
              
              814Increase
                  (decrease) in trade payables
              
              
              (330
              )
              
              450
              
              
              (31
              )Decrease
                  in employees and payroll accruals
              
              
              (275
              )
              
              73
              
              
              51Increase
                  (decrease) in accrued expenses and other liabilities
              
              
              881
              
              
              (912
              )
              
              747Loss
                  on sale of property and equipment
              
              
              209
              
              
              5
              
              
              1Accumulated
                  interest on marketable debt securities
              
              
              (1
              )
              
              -
              
              
              -Gain
                  on issuance of subsidiary’s shares and sale of subsidiary's
                  shares
              
              
              (6,423
              )
              
              -
              
              
              -Accumulated
                  interest on long-term loan
              
              
              -
              
              
              2
              
              
              -Write-off
                  of investment in an affiliate
              
              
              -
              
              
              48
              
              
              -Net
                  cash used in operating activities
              
              
              (1,810
              )
              
              (2,107
              )
              
              (609
              )Adjustments
                  to reconcile net loss to net cash used in operating
                  activities
                from
                  discontinued operations
              
              
              375
              
              
              -
              
              
              -Net
                  cash used in operating activities from discontinued
                  operations
              
              
              (52
              )
              
              -
              
              
              -Net
                  cash used in operating activities of continuing operations
              
              
              (1,862
              )
              
              (2,107
              )
              
              (609
              )Cash
                  flows from investing activities:Proceeds
                  from sale of property and equipment
              
              
              14
              
              
              2
              
              
              1Purchase
                  of property and equipment
              
              
              (73
              )
              
              (87
              )
              
              (1,088
              )Increase
                  in severance pay fund
              
              
              (14
              )
              
              (45
              )
              
              (95
              )Proceeds
                  from (investments in) restricted cash deposits, net
              
              
              (319
              )
              
              (1,044
              )
              
              234Proceeds
                  from disposal of (investments in) short term deposits, net
              
              
              100
              
              
              (697
              )
              
              344Proceeds
                  from sale of subsidiary and issuance of shares in a subsidiary
              
              
              6,212
              
              
              -
              
              
              -Investment
                  in marketable debt securities
              
              
              (908
              )
              
              -
              
              
              -Proceeds
                  from maturity of marketable debt securities
              
              
              362
              
              
              440
              
              
              110Realization
                  of investment in a subsidiary
              
              
              (58
              )
              
              -
              
              
              -Acquisition
                  of intangible assets
              
              
              -
              
              
              (70
              )
              
              (37
              )Net
                  cash provided by (used in) investing activities
              
              
              5,316
              
              
              (1,501
              )
              
              (531
              )Cash
                  flows from financing activities:Short-term
                  bank credit, net
              
              
              (192
              )
              
              1,196
              
              
              (1,122
              )Issuance
                  of share capital through a private placement, net of issuance
                  costs
              
              
              -
              
              
              -
              
              
              3,517Proceed
                  from exercise of options
              
              
              -
              
              
              -
              
              
              84Long-term
                  loan received
              
              
              850
              
              
              250
              
              
              400Principal
                  repayment of long-term loan
              
              
              (64
              )
              
              (410
              )
              
              (574
              )Net
                  cash provided by (used in) financing activities from discontinued
                  operations
              
              
              (20
              )
              
              -
              
              
              -Net
                  cash provided by financing activities
              
              
              574
              
              
              1,036
              
              
              2,305Increase
                  (decrease) in cash and cash equivalents
              
              
              4,028
              
              
              (2,572
              )
              
              1,165Less
                  - increase (decrease) in cash and cash equivalents from discontinued
                  operations
              
              
              (1
              )
              
              -
              
              
              -Cash
                  and cash equivalents at the beginning of the year
              
              
              274
              
              
              4,301
              
              
              1,729Cash
                  and cash equivalents at the end of the year
              
              $
              4,301
              
              $
              1,729
              
              $
              2,894
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 
 77
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 
 
 **Year
                  ended**
                **December
                  31,****2002**
              
              **2003**
              
              **2004**Supplemental
                  disclosure of non-cash investing and financing
                activities:Transfer
                  of inventory to property and equipment
              
              $
              789
              
              $
              -
              
              $
              1,117Transfer
                  of trade receivable to inventory
              
              $
              -
              
              $
              -
              
              $
              860Conversion
                  of loan to ordinary shares
              
              $
              -
              
              $
              -
              
              $
              25Receivables
                  on account of shares
              
              $
              -
              
              $
              84
              
              $
              -Accrued
                  issuance costs
              
              $
              -
              
              $
              -
              
              $
              176Supplemental
                  disclosure of cash flow information:Cash
                  paid during the year for:Interest
              
              $
              60
              
              $
              135
              
              $
              128
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 
 78
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 
 
 **NOTE
                  1:-**
              **GENERAL**
 
 a.
              SuperComLtd. ("the Company") was established in 1988 in Israeland
                  has been listed for trade since October 23, 2003 on the Euronext
                  Brussels
                  stock market, under the symbol “SUP” (see Note 17b). Since November 5,
                  2004 the Company’s ordinary shares have also been trading on the
                  OTCBulletin
                  Board market under the symbol
                  "SPCBF.OB".
 
 
 The
                  Company is a technology integrator and provider of high-end smartcard
                  systems. The Company functions as a "one-stop" technological integration
                  and support source for system integrators, utilizing its know-how
                  and
                  technologies. The Company is also a developer and provider of a
                  wide-range
                  of complementary technologies and solutions for the smartcard market.
                  The
                  Company develops and markets innovative and customizable smartcards,
                  smartcard-related products, proprietary smartcard production technologies
                  and advanced identification technologies, complemented by brand
                  protection
                  and authentication technologies. The Company also sells specially
                  designed
                  kits containing the raw materials necessary to produce cards and
                  smartcards.
 
 The
        Company sells its products through centralized marketing offices in distinct
        world regions. The Company has a wholly-owned (100%) subsidiary in Hong-Kong,
        SuperCom  Asia
        Pacific Limited; and another wholly- owned (100%) subsidiary in the United
        States, SuperCom Inc. that was established by the Company during 2003 in
        order
        to market commercial and governmental contactless smart cards and readers
        in the
        United States.
 
 b.
              Concentration
                  of risk that may have a significant impact on the
                  Company:
 
 The
        Company derived most of its revenues from several major customers (see Note
        15).
 
 The
        Company purchases certain raw materials used in its products from a sole
        supplier. Although there are only a limited number of manufacturers of those
        particular raw materials, management believes that other suppliers could
        provide
        similar components on comparable terms without affecting operating
        results.
 
 c.
              Sale
                  of Inksure Technologies Inc.:
 
 During
        2002, the Company divested, (through several different transactions) its
        entire
        investment in InkSure Technologies Inc. (a former subsidiary), for a net
        proceed
        of $ 6,212.
 The
        Company recorded a capital gain in an amount of $ 6,423 as a result of the
        transactions.
 
 79
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  1:-**
              **GENERAL
                  (Cont.)**
 
 d.
              Discontinued
                  operations:
 
 In
        December 2002, the Company discontinued the operations of two of its
        subsidiaries, ("Genodous Inc." and "Kromotek, Inc.") and disposed of all
        assets
        related to them. The operations and cash flows of those two subsidiaries
        have
        been eliminated from the operations of the Company. The Company has no intention
        of continuing the activities of the subsidiaries. The Company discontinued
        the
        operations of the subsidiaries involved through (i) termination of all employees
        related to those subsidiaries, including payment of all statutory and
        contractual severance payments, by the end of the fourth quarter of 2002,
        and
        (ii) disposal of the equipment.
 
 The
        discontinuance of operations of the subsidiaries was accounted for in accordance
        with Statement of Financial Accounting Standard No. 144, "Accounting for
        the
        Impairment or Disposal of Long- Lived Assets" ("SFAS No. 144").
 
 As
        a
        result of the above, the results of operations of the two subsidiaries were
        reported separately as discontinued operations in the statement of operations
        for the years ended December 31, 2002, 2003 and 2004, respectively, and are
        summarized as follows:
 
 **Year
                  ended**
                **December
                  31,****2002**
              
              **2003**
              
              **2004**Revenues
              
              $
              -
              
              $
              -
              
              $
              -Operating
                  expenses:Research
                  and development
              
              
              132
              
              
              -
              
              
              -Selling
                  and marketing, net
              
              
              46
              
              
              -
              
              
              -General
                  and administrative
              
              
              -
              
              
              -
              
              
              -Total
                  operating loss
              
              
              178
              
              
              -
              
              
              -Financial
                  income
              
              
              -
              
              
              -
              
              
              -Other
                  expenses
              
              
              249
              
              
              -
              
              
              -Net
                  loss
              
              $
              427
              
              $
              -
              
              $
              -
  e.
              During
                  2003, Company Management decided to increase its allowance for
                  doubtful
                  accounts in an aggregate amount of $ 2,133, due to the debt of
                  the Ukraine
                  Government. (see Note 11c(4))
  
 80
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**




**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
  **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES**
 
 The
                  consolidated financial statements have been prepared in accordance
                  with
                  accounting principles generally accepted in the United States (“US
                  G.A.A.P”)
 
 a.
              Use
                  of estimates:
 
 The
                  preparation of financial statements in conformity with generally
                  accepted
                  accounting principles requires management to make estimates and
                  assumptions that affect the amounts reported in the financial statements
                  and accompanying notes. Actual results could differ from those
                  estimates.
 
 b.
              Financial
                  statements in U.S. dollars:
 
 A
                  majority of the revenues of the Company and its subsidiaries are
                  received
                  in U.S. dollars. In addition, a substantial portion of the costs
                  of the
                  Company and its subsidiaries are incurred in
                  dollars.
 
 Company
                  management believes that the dollar is the currency of the primary
                  economic environment in which the Company and its subsidiaries
                  operate.
                  Thus, the functional and reporting currency of the Company and
                  its
                  subsidiaries is the U.S. dollar.
 
 
 Accordingly,
                  monetary accounts maintained in currencies other than the dollar
                  are
                  remeasured into U.S. dollars in accordance with Statement No. 52
                  of the
                  Financial Accounting Standards Board ("FASB") "Foreign Currency
                  Translation" (“SFAS No 52”). All transaction gains and losses from the
                  remeasurement of monetary balance sheet items are reflected in
                  the
                  statements of operations as financial income or expenses as
                  appropriate.
 
 Through
                  1999, the financial statements of a subsidiary, whose functional
                  currency
                  was other than the U.S. dollar, were translated into U.S. dollars,
                  in
                  accordance with SFAS No 52. All balance sheet accounts were translated
                  using the exchange rates in effect at the balance sheet date. Statement
                  of
                  operations amounts were translated using the average exchange rate
                  prevailing during the year. The resulting aggregate translation
                  adjustments were reported as a separate component of accumulated
                  other
                  comprehensive income (loss) in shareholders’ equity. Starting January 1,
                  2000, the U.S. dollar became the functional currency of the
                  subsidiary.
 
 c.
              Principles
                  of consolidation:
 
 The
                  consolidated financial statements include the accounts of the Company
                  and
                  its wholly-owned subsidiaries (unless the minority shareholders
                  have
                  certain approval or veto rights) in Israel, the United States and
                  Hong-Kong. Material intercompany transactions and balances were
                  eliminated
                  upon consolidation. Material profits from intercompany sales, not
                  yet
                  realized outside the group, were also eliminated.
 
 
 81
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 d.
              Cash
                  equivalents:
 
 The
                  Company considers short term highly liquid investments originally
                  purchased with maturities of three months or less to be cash
                  equivalents.
 
 e.
              Restricted
                  cash:
 
 Restricted
        cash is invested in certificates of deposit, which mature within one year,
        and
        is used to secure agreements with a customer or a bank.
 
 f.
              Short-term
                  deposits:
 
 The
        Company classifies deposits with maturities of more than three months and
        less
        than one year as short-term deposits. The short-term deposits are presented
        at
        cost.
 
 g.
              Marketable
                  securities:
 
 The
        Company accounts for investments in debt securities in accordance with Statement
        of Financial Accounting Standard No. 115, "Accounting for Certain Investments
        in
        Debt and Equity Securities" ("SFAS No. 115"). Management determines the
        appropriate classification of its investments in debt and equity securities
        at
        the time of purchase and reevaluates such determinations at each balance
        sheet
        date. Debt securities are classified as held-to-maturity when the Company
        has
        the positive intent and ability to hold the securities to maturity. Held
        to
        maturity securities are stated at amortized cost. The amortized cost of such
        securities is adjusted for amortization of premiums and accretion of discounts
        to maturity. Such amortization, accretion, decline in value judged to be
        other
        than temporary and interest are included in financial income, net.
 
 According
        to Staff Accounting Bulletin No. 59 ("SAB 59"), management is required to
        evaluate, each period, whether a security's decline in value is other than
        temporary. The Company considers fair value below cost for two consecutive
        quarters to be other than a temporary impairment.
 
 Due
        to a
        permanent decline in the value of marketable debt securities, the Company
        recorded an impairment of its investments in those securities. (See Note
        3).
 
 h.
              Inventories:
 
 Inventories
        are stated at the lower of cost or market value. Inventory write-offs are
        provided to cover risks arising from slow-moving items or technological
        obsolescence. Cost is determined as follows:
 
 Raw
        materials, parts and supplies - using the moving "average cost"
        method.
  82
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 Work-in-progress
        and finished products - on the basis of direct manufacturing costs, with
        the
        addition of allocable, indirect manufacturing costs.
 
 i.
              Investment
                  in an affiliated company and majority owned
                  subsidiary:
 
 The
        investment in a company, over which the Company can exercise significant
        influence over operating and financial policies of the investee (generally,
        entities in which the Company holds 20% to 50% of ownership or voting rights),
        is presented using the equity method of accounting in accordance with Accounting
        Principle Bulletin No 18 “The Equity Method of Accounting for Investments in
        Common Stock”.
 
 The
        investment in a majority-owned company is presented using the equity method
        of
        accounting due to substantive participation rights held by the minority,
        which
        impacts the Company ability to exert control over the subsidiary. (See Note
        6).
 
 j.
              Property
                  and equipment:
 
 Property
        and equipment (including self construction equipment) are stated at cost,
        net of
        accumulated depreciation. Self-construction equipment cost represents the
        incremental direct costs that are identifiable with, and related to, the
        construction and installation of the equipment and that are necessary to
        get it
        ready for its intended use. Those costs include amounts paid to outside
        contractors and payroll-related costs of employees that are engaged in the
        construction and installation of the equipment.
  Depreciation
                  is computed using the straight-line method, over the estimated
                  usefullives, at the following annual
                  rates:
 
 **%**Computers
                  and peripheral equipment
              
              33Office
                  furniture and equipment
              
              6
                  -
                  15Leasehold
                  improvements
              
              Over
                  the shorter of the term of the lease or the life of the
                  asset
 
 
 83
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTE
                  2:-**
              **SIGNIFICANT
                  ACCOUNTING POLICIES
                  (Cont.)**
 
 k.
              Impairment
                  of long lives assets and intangible
                  assets:
 
 The
        Company's long-lived assets and certain identifiable intangibles assets are
        reviewed for impairment in accordance with Statement of Financial Accounting
        Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived
        Assets" ("SFAS No. 144") whenever events or changes in circumstances indicate
        that the carrying amount of an asset may not be recoverable. Recoverability
        of
        assets to be held and used is measured by a comparison of the carrying amount
        of
        an asset to the future undiscounted cash flows expected to be generated by
        the
        asset. If such asset is considered to be impaired, the impairment to be
        recognized is measured by the amount by which the carrying amount of the
        asset
        exceeds the fair value of the asset. Assets to be disposed of by sale are
        reported at the lower of the carrying amount or fair value less costs to
        sell.
 
 l.
              Accrued
                  severance pay:
 
 The
        liabilities of the Company for severance pay are calculated pursuant to Israel's
        Severance Pay Law based on the most recent salary of the employees multiplied
        by
        the number of years of employment as of the balance sheet date. Employees
        are
        entitled to one month's salary for each year of employment, or a portion
        thereof. The Company's commitment for all its employees is fully covered
        by
        monthly deposits with severance pay funds, insurance policies and by an accrual.
        The value of these policies is recorded as an asset in the Company's balance
        sheet.
 
 The
        deposited funds include accrued income up to the balance sheet date. The
        deposited funds may be withdrawn only upon the fulfillment of the obligation
        pursuant to Israel's Severance Pay Law or labor agreements. The value of
        the
        deposited funds is based on the cash surrendered value of these policies
        and
        includes immaterial profits.
 
 Severance
        expenses for the years ended December 31, 2002, 2003 and 2004 amounted to
        $88,
        $153 and $35, respectively.
 
 m.
              Intangible
                  assets:
 
 Intangible
        assets acquired on or after July 1, 2001, are amortized over their useful
        lives
        using a method of amortization that reflects the pattern in which the economic
        benefits of the intangible assets are consumed or otherwise used up, in
        accordance with SFAS No. 142.
 
 n.
              Revenue
                  recognition:
 
 The
                  Company and its subsidiaries generate their revenues from the sale
                  of
                  products, maintenance, training and installation. The sale of products
                  involves the sale of the Smartcard System and raw materials. The
                  Company
                  sells its products through centralized marketing offices in distinct
                  world
                  regions.
  84
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **NOTE
                        2:-**
                    **SIGNIFICANT
                        ACCOUNTING POLICIES
                        (Cont.)**
  Product
            sales of smartcard systems, contactless smart card Production Line 1000
            (SPPL
            1000) and raw materials are recognized in accordance with Staff Accounting
            Bulletin No. 104, "Revenue Recognition" ("SAB No. 104")
            when
            persuasive evidence of an agreement exists, delivery of the product has
            occurred, the fee is fixed or determinable, collectability is probable,
            and
            inconsequential or perfunctory performance obligations remain. If the
            product
            requires specific customer acceptance, revenue is deferred until customer
            acceptance occurs or the acceptance provision lapses.
  The
        Company does not provide a right of return to its customers.
 
 Based
        on
        past experience, the Company does not provide for warranty costs when revenue
        is
        recognized.
 
 The
        Company applied the provisions of EITF Issue No. 00-21 "Revenue Arrangements
        with Multiple Deliverables" for multiple element arrangements entered into
        after
        June 15, 2003. EITF Issue No. 00-21 provides guidance on how to account for
        arrangements that involve the delivery or performance of multiple products,
        services and/or rights to use assets. For such arrangements, each element
        of the
        contract is accounted as a separate unit when it provides the customer value
        on
        a stand-alone basis and there is objective evidence of the fair value of
        the
        related unit.
 
 Maintenance
                  and support revenues included in multiple-element arrangements
                  are
                  deferred and recognized on a straight-line basis over the term
                  of the
                  maintenance and support agreement For these multiple element arrangements,
                  the Company accounts for each unit of the contract (maintenance,
                  support
                  and services) as a separate unit when each unit provides value
                  to the
                  customer on a stand-alone basis and there is objective evidence
                  of the
                  fair value of the stand-alone unit.
 
 The
        Company is entitled to royalties upon the sales of smartcard systems. Such
        royalties are recognized when the sales are reported to the
        Company.
 
 Deferred
        revenues and customer advances include amounts received from customers for
        which
        revenues have not been recognized.
 
 The
        Company recognizes certain long-term contract revenue, in accordance with
        Statement of Position (“SOP”) 81-1, “Accounting for Performance of
        Construction-Type and Certain Production Type Contracts”.
  Pursuant
        to SOP 81-1, revenue from these contracts is recognized under the percentage
        of
        completion method. The Company measures the percentage of completion based
        on
        output criteria, such as contract milestones or number of units shipped,
        as
        stipulated in each contract.
  85
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES
                    (Cont.)**
  Provisions
        for estimated losses on uncompleted contracts are made during the period
        in
        which such losses are first identified, in the amount of the estimated loss
        on
        the entire contract. As of December 31, 2004, no such estimated losses were
        identified.
  The
        Company believes that the use of the percentage of completion method is
        appropriate, as the Company has the ability to make reasonably dependable
        estimates of the extent of progress towards completion, contract revenues
        and
        contract costs. In addition, contracts executed include provisions that clearly
        specify the enforceable rights of the parties to the contract, the consideration
        to be exchanged and the manner and terms of settlement. In all cases, the
        Company expects to perform its contractual obligations and the parties are
        expected to satisfy their obligations under the contract.
  In
        contracts that do not meet all the abovementioned conditions, the Company
        utilizes zero estimates of profits; equal amounts of revenue and cost are
        recognized until results can be estimated with sufficient
        preciseness.
  Revenues
        and costs recognized pursuant to SOP 81-1 on contracts in progress are subject
        to management estimates. Actual results could differ from these
        estimates.
 
 o.
              Shipping
                  and handling costs:
  Shipping
        and handling fees billed to customers are reflected as revenues while the
        related shipping and handling costs are included in cost of revenues. To
        date,
        shipping and handling costs have not been material.
 
 p.
              Research
                  and development costs:
 
 SmartCard
        systems research and development costs are expensed as incurred.
 
 Research
        and development costs incurred in the process of software production before
        establishment of technological feasibility, are charged to expenses as incurred.
        Costs of the production of a product master incurred subsequent to the
        establishment of technological feasibility are capitalized according to the
        principles set forth in SFAS No. 86 "Accounting for the Costs of Computer
        Software to be Sold, Leased or Otherwise Marketed". Based
        on
        the Company's product development process, technological feasibility is
        established upon completion of a detailed program design or a working
        model.
 
 Capitalized
        software development costs are amortized on a product-by-product basis
        commencing with general product release by the greater of the amount computed
        using: (i) the ratio that current gross revenues from sales of the software
        bear
        to the total of current and anticipated future gross revenues from sales
        of that
        software, or (ii) the straight-line method over the estimated useful life
        of the
        software product (three years).
  86
 **SUPERCOM
                      LTD. AND ITS SUBSIDIARIES**
  **NOTES
                  TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
                          2:-**
                      **SIGNIFICANT
                          ACCOUNTING POLICIES
                          (Cont.)**
 The
                  Company assesses the recoverability of this intangible asset on
                  a regular
                  basis by determining whether the amortization of the asset over
                  its
                  remaining life can be recovered through undiscounted future operating
                  cash
                  flows from the specific software product sold. Based on its most
                  recent
                  analyses, management believes that no impairment of capitalizedsoftware
                  development costs exists as of December 31,
                  2004
 
 q.
              Income
                  taxes:
 
 The
        Company and its subsidiaries account for income taxes in accordance with
        Statement of Financial Accounting Standard (SFAS) 109, "Accounting for Income
        Taxes". This statement prescribes the use of the liability method whereby
        deferred tax asset and liability account balances are determined based on
        differences between the financial reporting and tax bases of assets and
        liabilities and are measured using the enacted tax rates and laws that will
        be
        in effect when the differences are expected to reverse. The Company and its
        subsidiaries provide a valuation allowance, if necessary, to reduce deferred
        tax
        assets to their estimated realizable value.
 
 r.
              Concentrations
                  of credit risk:
 
 Financial
        instruments that potentially subject the Company to concentrations of credit
        risk consist principally of cash and cash equivalents, marketable debt
        securities and trade receivables. The Company's trade receivables are derived
        from sales to customers located primarily in Europe (including Eastern Europe),
        South-East Asia, England, Turkey, the United States and Israel. The Company
        performs ongoing credit evaluations of its customers' financial conditions.
        The
        allowance for doubtful accounts is determined with respect to specific debts
        that the Company has determined to be doubtful of collection.
 
 Cash
                  and cash equivalents, restricted cash deposits and marketable debt
                  securities are deposited with major banks in Israel, Hong-Kong
                  and the
                  United States. Management believes that the financial institutions
                  that
                  hold the Company's investments are financially sound, and accordingly,
                  minimal credit risk exists with respect to these
                  investments.
 
 The
                  Company's marketable debt securities include investments in securities
                  of
                  U.S. corporations. Minimal credit risk exists with respect to these
                  marketable debt securities.
 
 The
                  Company has no significant off-balance-sheet concentration of credit
                  risk
                  such as foreign exchange contracts, option contracts or other foreign
                  hedging arrangements.
 
 87
 **SUPERCOM
                  LTD. AND ITS SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
                      2:-**
                  **SIGNIFICANT
                      ACCOUNTING POLICIES
                      (Cont.)**
  s.
              Basic
                  and diluted net earnings (loss) per
                  share:
 
 Basic
                  net earnings (loss) per share is computed based on the weighted
                  average
                  number of Ordinary shares outstanding during each year. Diluted
                  net
                  earnings (loss) per share is computed based on the weighted average
                  number
                  of Ordinary shares outstanding during each year, plus the dilutive
                  potential stock options outstanding during the year, in accordance
                  with
                  FASB Statement No. 128, "Earnings Per
                  Share".
 
 All
        outstanding stock options and warrants have been excluded from the calculation
        of the diluted net earnings (loss) per share since the Company reported losses
        for the years 2004 and 2003 and since the inclusion of the shares upon the
        assumed exercise of employee stock options for the year 2002 is anti-dilutive.
        The number of outstanding options and warrants were 880,712, 1,534,514 and
        5,082,763, for the years ended December 31, 2002, 2003 and 2004,
        respectively.
 
 t.
              Fair
                  value of financial instruments:
 
 The
        following methods and assumptions were used by the Company and its subsidiaries
        in determining their fair value disclosures for financial
        instruments:
 
 At
        December 31, 2004 and 2003, the carrying amounts of cash and cash equivalents,
        restricted cash deposits, short-term deposits, current trade receivables,
        other
        accounts receivable, trade payables, short-term bank credit and other accounts
        payable approximate their fair value due to the short-term maturity of such
        instruments. The fair value for marketable securities is based on quoted
        market
        prices.
 The
        carrying amount of the Company's long-term loan approximates its fair value.
        The
        fair value was estimated using discounted cash flows analyses, using current
        interest rates for loans or similar terms and maturities.
 
 u.
              Accounting
                  for stock-based compensation:
 
 The
        Company accounts for its employee stock option plans using the intrinsic
        value-based method of accounting prescribed by APB 25, “Accounting for Stock
        Issued to Employees” and related interpretations. Accordingly, the compensation
        is measured as the excess of the market price of the underlying stock over
        the
        exercise price on the date of grant, if any. Such compensation is amortized
        over
        the vesting period.
 
 Under
        Statement of Financial Accounting Standard No. 123 Accounting for Stock-based
        Compensation (“SFAS No 123”), pro forma information regarding net income and
        income per share is required, and has been determined as if the Company had
        accounted for its employee share options under the fair value method of SFAS
        No.
        123.
  88
 **SUPERCOM
                  LTD. AND ITS SUBSIDIARIES**
  **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
                      2:-**
                  **SIGNIFICANT
                      ACCOUNTING POLICIES
                      (Cont.)**
 The
        fair
        value of these options is amortized over their vesting period and estimated
        at
        the date of grant using a Black-Scholes option pricing model with the following
        weighted-average assumptions for 2002, 2003 and 2004: risk-free interest
        rate of
        6.2%, 8.4% and 4.2%, respectively, with a dividend yielded of 0% for each
        year,
        volatility factors of the expected market price of the Company's Ordinary
        shares
        of 1.403, 1.499 and 1.139, respectively, and a weighted-average expected
        life of
        the option of five years for each year.
 
 The
        following table summarizes relevant information as to reported results under
        the
        Company's intrinsic value method of accounting for stock awards, with
        supplemental information as if the fair value recognition provisions of SFAS
        No.
        123, "Accounting for Stock Based Compensation," had been applied:
 
 Pro
        forma
        information under SFAS 123:
  **Year
                  ended December
                  31,**2002
              
              2003
              
              2004Net
                  income (loss) from continuing operations as
                reported
              
              $
              6,177
              
              $
              (1,995
              )
              $
              (1,872
              )Deduct:
                  Stock based compensation expenses
                determined
                  under fair value based method
              
              
              256
              
              
              280
              
              
              766Add:
                  stock based compensation expenses included in reported net income
                  (loss)
              
              
              -
              
              
              26
              
              
              9Pro
                  forma net income (loss) from continuing operations
              
              $
              5,921
              
              $
              (2,249
              )
              $
              (2,629
              )Basic
                  and diluted net earnings (loss) per share from continuing operations
                  as
                  reported
              
              $
              0.49
              
              $
              (0.15
              )
              $
              (0.13
              )Pro
                  forma basic and diluted net earnings (loss) from continuing
                  operations
              
              $
              0.47
              
              $
              (0.17
              )
              $
              (0.18
              )Net
                  loss from discontinuing operations as reported
              
              $
              (427
              )
              $
              -
              
              $
              -Deduct:
                  Stock based compensation expenses
                determined
                  under fair value based method
              
              
              -
              
              
              -
              
              
              -Add:
                  stock based compensation expenses included in reported net income
                  (loss)
              
              
              -
              
              
              -
              
              
              -Pro
                  forma net loss from discontinuing operations
              
              $
              (427
              )
              $
              -
              
              $
              -Pro
                  forma basic and diluted loss from discontinuing operations
              
              $
              (0.04
              )
              $
              -
              
              $
              -Net
                  income (loss) as reported
              
              $
              5,750
              
              $
              (1,995
              )
              $
              (1,872
              )Deduct:
                  Stock based compensation expenses
                determined
                  under fair value based method
              
              
              256
              
              
              280
              
              
              766Add:
                  stock based compensation expenses included in reported net income
                  (loss)
              
              
              -
              
              
              26
              
              
              9Pro
                  forma net income (loss)
              
              $
              5,494
              
              $
              (2,249
              )
              $
              (2,629
              )Basic
                  and diluted net earnings (loss) per share as reported
              
              $
              0.45
              
              $
              (0.15
              )
              $
              (0.13
              )Pro
                  forma basic and diluted loss per share
              
              $
              0.43
              
              $
              (0.17
              )
              $
              (0.18
              )
 
 89
 **SUPERCOM
                    LTD. AND ITS SUBSIDIARIES**
  **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
                        2:-**
                    **SIGNIFICANT
                        ACCOUNTING POLICIES
                        (Cont.)**
 
 The
        Company applied SFAS 123 and Emerging Issue Task Force No. 96-18 “Accounting for
        Equity Instruments that are Issued to Other Than Employees for Acquiring,
        or in
        Conjunction with Selling, Goods or services” (EITF No. 96-18) with respect to
        options issued to non-employees.
 
 v.
              Advertising
                  costs:
 
 The
        Company expenses advertising costs as incurred. Advertising expenses for
        the
        years ended December 31, 2002, 2003 and 2004 were approximately $ 48,
        $ 58 and $ 10, respectively.
 
 w.
              Reclassifications:
 
 Certain
        comparative figures have been reclassified to conform to the current year
        presentation.
 
 x.
              Recently
                  issued accounting pronouncements:
 
 In
        March
        2004, the EITF reached a consensus on recognition and measurement guidance
        previously discussed under EITF 03-01. The consensus clarifies the meaning
        of
        other-than-temporary impairment and its application to investments classified
        as
        either available-for-sale or held-to-maturity under SFAS No. 115, “Accounting
        for Certain Investments in Debt and Equity Securities,” and investments
        accounted for under the cost method or the equity method.
 
 In
        September 2004, the FASB delayed the accounting provisions of EITF 03-01,
        but
        the disclosure requirements remained effective. During the period of the
        delay,
        the current authoritative literature should be applied regarding “other than
        temporary” impairments.
 The
        company does not expect the adoption of recognition and measurement guidance
        of
        EITF 03-01 in future periods to have material impact on its results of
        operations or financial condition.
  In
        November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
        of
        ARB No. 43, Chapter 4" ("SFAS 151"). SFAS 151 clarifies the accounting for
        abnormal amounts of idle facility expenses, freight, handling costs, and
        wasted
        material (spoilage). SFAS 151 requires that those items be recognized as
        current-period charges regardless of whether they meet the criterion of "so
        abnormal". In addition, it requires that allocation of fixed production overhead
        to the costs of conversion be based on the normal capacity of the production
        facilities. SFAS 151 is effective for inventory costs incurred during fiscal
        years beginning after June 15, 2005. Earlier application
  90
 **SUPERCOM
                    LTD. AND ITS SUBSIDIARIES**
  **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
                        2:-**
                    **SIGNIFICANT
                        ACCOUNTING POLICIES
                        (Cont.)**
 is
        permitted. The Company believes that FAS 151, when adopted, will not have
        a
        significant impact on its financial position or results of operations.
  In
        December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”
        (SFAS 123R), a revision of SFAS No. 123, “Accounting for Stock Based
        Compensation (SFAS 123). Among other items, SFAS 123R eliminates the use
        of APB
        25 and the intrinsic value method of accounting, and requires companies to
        recognize in their financial statements, the cost of employee services received
        in exchange for awards of equity instruments, based on the fair value of
        those
        awards at the grant date. The effective date of SFAS 123R is the first reporting
        fiscal year period beginning after June 15, 2005, which is the first
        quarter 2006 for calendar year companies. Early adoption of SFAS 123R is
        encouraged. SFAS 123R permits companies to adopt its requirements using either
        a
“modified prospective” method, or a “modified retrospective” method. Under the
“modified prospective” method, compensation cost is recognized in the financial
        statements beginning with the effective date, based on the requirements of
        SFAS
        123R for all share-based payments granted after that date, and based on the
        requirements of SFAS 123 for all unvested awards granted prior to the effective
        date of SFAS 123R. Under the “modified retrospective” method, the requirements
        are the same as under the “modified prospective” method, but it also permits
        entities to restate financial statements of previous periods based on pro
        forma
        disclosures made in accordance with SFAS 123.
  The
        Company currently expects to adopt SFAS 123R effective January 1,
        2006;
  However,
        the adoption of SFAS 123R could have a material impact on the amount of earnings
        the Company reports in fiscal 2006. The Company has not yet determined the
        specific impact that adoption of this standard will have on its financial
        position or results of operations
  In
        December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets - An
        Amendment of APB Opinion No. 29”. SFAS 153 amends APB opinion No. 29, “Acounting
        for nonmonetary Transactions”. SFAS 153 eliminates the APB 29 exception for
        nonmonetary exchanges of similar productive assets and replaces it with a
        general exception for exchanges of nonmonetary assets that do not have
        commercial substance. The provisions in SFAS 153 are effective for nonmonetary
        asset exchanges accruing in fiscal periods beginning after June 15, 2005
        (which
        is third quarter of 2005 for the Company), and the provisions of this statement
        shall be applied prospectively. Earlier application is permitted. The Company
        does not expect the adoption of SFAS 153 to have a material effect on the
        Company’s financial statements or its results of operations.
  91
 **SUPERCOM
                    LTD. AND ITS SUBSIDIARIES**
  **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                    3:-**
                **MARKETABLE
                    DEBT SECURITIES**
 
 The
        following is a summary of held-to-maturity debt securities:
 
 **Amortized**
                **cost**
              
              **Unrealized**
                **gains
                  (losses)**
              
              **Estimated**
                **fair
                  value****2003**
              
              **2004**
              
              **2003**
              
              **2004**
              
              **2003**
              
              **2004**Corporate
                  obligations
              
              $
              117
              
              $
              -
              
              $
              (12
              )
              $
              -
              
              $
              105
              
              $
              -
 
 All
        marketable debt securities were matured by January 15, 2004. During 2003,
        due to
        a permanent decline in value for some of the securities, the Company recorded
        an
        impairment of its investment in those securities. The impairment was in the
        amount of $ 52.
 
 **NOTE
                4:-**
              **OTHER
                  ACCOUNT RECEIVABLE AND PREPAID
                  EXPENSES**
 
 **December
                  31,****2003**
              
              **2004**Prepaid
                  expenses
              
              $
              378
              
              $
              773Authorities
              
              
              79
              
              
              192Advance
                  payment to suppliers
              
              
              96
              
              
              -Others
              
              
              378
              
              
              285$
              931
              
              $
              1,250
 
 
 **NOTE
                5:-**
              **INVENTORIES**
 
 **December
                  31,****2003**
              
              **2004**Raw
                  materials, parts and supplies
              
              $
              1,662
              
              $
              1,305Finished
                  products
              
              
              1,574
              
              
              860$
              3,236
              
              $
              2,165
 
 During
                  2004, the Company reclassified the cost of the goods that were
                  sold to the
                  Ministry of Ukraine****from
                  trade receivable to inventory (see Note 11c(4)).
 
 
 92
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  6:-**
              **INVESTMENT
                  IN AFFILIATES AND OTHERS**
 
 a.
              During
                  2004, the Company sold its entire holding (40%) in an affiliate
                  company
                  for an amount of $0.001. The affiliate company served as a regional
                  marketing office responsible for marketing in the former Soviet
                  territories (excluding the Ukraine and Moldavia). During 2003,
                  the
                  affiliate company downsized all of its operations, and the Company
                  decided
                  to write-off its entire investment in the affiliate company in
                  the amount
                  of $ 48.
 
 b.
              In
                  December 1997, the Company established SuperComSlovakia
                  in equal parts with another investor as a result of a transaction
                  with the
                  Ministry of Interior of the Slovak
                  Republic.
 
 In
        March
        2000, the Company purchased an additional 16% of SuperCom  Slovakia,
        at a nominal value of $1, and granted to the third party a loan in the amount
        of
        $275, bearing interest of 0.7% per month for any amounts outstanding. This
        interest is compounded to the outstanding principal of the loan and will
        be
        repaid under the same conditions of the loan.
 
 The
                  third party has an option to buy back 16% of the shares, for $1,
                  subsequent to repayment of the loan to the
                  Company.
 
 The
                  Company currently owns 66% of SuperComSlovakia's
                  outstanding shares. The Company has accounted for this investment
                  using
                  the equity method of accounting, due to the minority interest substantive
                  participation rights,which impacts the Company ability to exert control over the
                  subsidiary.
                  (See also Note 11c(1)).
 
 **NOTE
                  7:-**
              **PROPERTY
                  AND EQUIPMENT**
  **December
                  31,****2003**
              
              **2004**Cost:Computers
                  and peripheral equipment
              
              $
              2,281
              
              $
              4,380Office
                  furniture and equipment
              
              
              408
              
              
              471Leasehold
                  improvements
              
              
              1,107
              
              
              1,1473,796
              
              
              5,998Accumulated
                  depreciation:Computers
                  and peripheral equipment
              
              
              1,412
              
              
              1,547Office
                  furniture and equipment
              
              
              192
              
              
              218Leasehold
                  improvements
              
              
              516
              
              
              5922,120
              
              
              2,357Depreciated
                  cost
              
              $
              1,676
              
              $
              3,641
 
 Depreciation
        expenses for the years ended December 31, 2002, 2003 and 2004 were $ 442,
        $ 284
        and $ 238, respectively.
 
 
 93
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  8:-**
              **INTANGIBLE
                  ASSETS**
 
 On
        November 17, 2003, the Company purchased 20% of the remaining shares of
        SuperCom  Asia
        Pacific from the minority in consideration of $ 70.
 
 The
        acquisition was accounted for under the purchase method of accounting.
        Accordingly, the consideration of $ 70 was attributed to customer-related
        intangible assets that will be amortized based on is estimated useful life
        which, according to management, was determined to be five years.
 
 **December
                  31,****2003**
              
              **2004**Customer-related
                  intangible assets
              
              $
              70
              
              $
              56Capitalized
                  software production costs, net (see Note 2n)
              
              
              86
              
              
              -Patent
                  - registration expenses
              
              
              -
              
              
              37$
              156
              
              $
              93
 
 Amortization
        of intangible assets amounted to $ 0, $ 87 and $ 100 for the years ended
        December 2002, 2003 and 2004, respectively.
 
 **NOTE
                  9:-**
              **BANK
                  CREDIT**
 
 a.
              As
                  of December 31, 2004, the Company had credit lines from several
                  banks in
                  an aggregate amount of $ 1,238 (including current maturities
                  of
                  long-term credit lines in an amount of $ 454), of which
                  $ 751 is
                  denominated in NIS and bears interest at a rate of Prime, plus
                  an
                  additional 1% - 2.5%, and $ 487 is denominated in dollars
                  and bears
                  interest at a rate of LIBOR plus 2.5% -3.2%. (As of December 31,
                  2004, the
                  rate of the LIBOR was 2.41%)
 
 The
        weighted average interest rate on the credit lines as of December 31, 2003
        and
        2004 was approximately 6.8% and approximately 5.7%, respectively.
 
 
 The
        Company had an unused credit facility in an amount of approximately $ 16
        as
        of December 31, 2004 (there is no fee for the unused portion of the
        credit
        facility).
 
 b.
              Long-term
                  loans:
 **December
                  31,****2003**
              
              **2004**Banks
              
              $
              628
              
              $
              454Less
                  - current maturities of long-term loans
              
              
              441
              
              
              454$
              187
              
              $
              -
 
 The
        loans
        bear annual average interest at a rate of LIBOR + 2.8%.
 94
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  10:-**
              **ACCRUED
                  EXPENSES AND OTHER
                  LIABILITIES**
 **December
                  31,****2003**
              
              **2004**Customer
                  advances
              
              $
              166
              
              $
              1,162Deferred
                  revenues
              
              
              437
              
              
              180Accrued
                  expenses
              
              
              171
              
              
              397Other
              
              
              48
              
              
              6$
              822
              
              $
              1,745
 
 **NOTE
                  11:-**
              **COMMITMENTS
                  AND CONTINGENT LIABILITIES**
 
 a.
              Lease
                  commitments:
 
 The
        Company's facilities and those of certain subsidiaries are rented under several
        operating lease agreements for periods ending in 2006.
 
 Future
        minimum lease commitments under non-cancelable operating leases for the years
        ended December 31, are as follows:
 
 2005
              
              $
              2702006
              
              
              67$
              337
 
 Rent
        expenses for the years ended December 31, 2002, 2003 and 2004, were
        approximately $ 414, $ 312 and $ 387, respectively.
 See
        also
        Note 19e - subsequent events.
 
 b.
              Guarantees
                  and liens:
 
 1.
              The
                  Company issued bank guarantees in an amount of $ 60, in order to
                  secure
                  the Company's lease and, as a condition for those guarantees, the
                  Company
                  deposited $ 60 with the bank. The Company provided bank guarantees
                  in an
                  amount of $ 99, in order to secure other
                  obligations.
  2.
              In
                  order to secure bank credit and covenants to the bank, the Company
                  mortgaged its deposits in an amount of $ 189 in Israel Discount
                  Bank Ltd.
                  in favor of the bank, an amount of $ 261 in favor of Bank Otsar
                  Ha-Hayal
                  Ltd. and an amount of $ 499 in the Bank of Jerusalem
 
 3.
              In
                  order to secure an agreement with a customer, the Company provided
                  bank
                  guarantees in an amount of $ 78 which was deposited by the Company
                  in the
                  bank.
 
 4.
              The
                  Company has a permanent mortgage in favor of Bank Otsar Ha-Hayal
                  Ltd. on
                  the funds and rights that are generated from Intercomsoft Ltd.
                  See also
                  Note 19(d).
  95
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  11:-**
              **COMMITMENTS
                  AND CONTINGENT LIABILITIES****(Cont.)**
 
 c.
              Litigation:
 
 1.
              On
                  January 19, 2000, SuperCom Slovakia, a 66%-owned subsidiary of
                  the
                  Company, filed a claim against the Ministry of Interior of the
                  Republic of
                  Slovakia for breach of the agreement in respect of delivery of
                  technology,
                  co-operation and services. The Company requests performance of
                  the
                  agreement. On October 30, 2003, the arbitration procedure was finalized
                  and the Ministry of Interior of the Slovak Republic was ordered
                  to pay
                  SuperComSlovakia
                  an amount of SKK 80,000,000 (approximately US$ 2,807 as of December
                  31,
                  2004) plus an average interest rate of 16.4% from March 1999. In
                  addition,
                  the Ministry of Interior of the Slovak Republic was ordered to
                  pay the
                  costs of arbitration in an amount of € 42,716 (approximately $ 58 as of
                  December 31, 2004) and SuperComSlovakia's
                  legal fees in an amount of € 63,611 (approximately $ 87 as of December 31,
                  2004). The Ministry of Interior of the Slovak Republic filed a
                  claim to
                  the Commercial Court in Vienna, Austria, on 10 February 2004 whereby
                  it
                  challenged the Arbitral Award and requested to set aside the Award.
                  According to the legal advisor of the Company, the reasons for
                  such a
                  challenge are strictly limited under Austrian law. Thus such proceeding
                  on
                  a challenge is not the equivalent of an appeal against a court
                  judgment.
                  Furthermore, the statement of claim itself has no effect on the
                  validity
                  of the Arbitral Award. Only if the Austrian court renders a final
                  and
                  enforceable judgment whereby the Arbitral Award is set aside would
                  the
                  validity of Arbitral Award cease.
  2.
              On
                  December 16, 1999, Secu-Systems filed a lawsuit with the District
                  Court in
                  Tel-Aviv-Jaffa jointly and severally against the Company and InkSure
                  Ltd.
                  (a former subsidiary) seeking a permanent injunction and damages.
                  The
                  plaintiff asserted in its suit that the printing method applied
                  to certain
                  products that have been developed by InkSure Ltd. constitutes inter
                  alia:
                  (a) the breach of a confidentiality agreement between the plaintiff
                  and
                  the Company; (b) unjust enrichment of the Company and InkSure Ltd;
                  (c) a breach of fiduciary duties owed to the plaintiff by
                  the Company
                  and InkSure Ltd., and (d) a tort of misappropriation of trade secrets
                  and
                  damage to plaintiff's property. Based on such allegations, Secu-Systems
                  asked the court to order the Company and InkSure Ltd. to: (i) cease
                  any
                  activity which involves the plaintiff's confidential information;
                  (ii)
                  furnish the plaintiff with a certified report detailing all profits
                  derived by the Company and InkSure Ltd from such activity; (iii)
                  pay the
                  plaintiff an amount equal to all such profits, and (iv) pay the
                  plaintiff
                  additional liquidated damages in the amount of NIS 100,000 (approximately
                  $ 23 as of December 31, 2004). Alternatively, the plaintiff asked
                  the
                  court to declare that the above-mentioned products are jointly
                  owned, in
                  equal shares by the plaintiff and InkSure and that the plaintiff
                  is
                  entitled to 50% of all profits derived therefrom.
  96
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  11:-**
              **COMMITMENTS
                  AND CONTINGENT LIABILITIES****(Cont.)**
 
 Based
        upon the facts known to the Company and those provided by InkShure Ltd.,
        as well
        as the advice of the Company's legal advisors which is based, inter-alia,
        on
        said facts, Company Management is of the opinion that the prospects are
        favorable that the court will not grant the permanent injunction or award
        damages of a substantial amount in connection with the litigation. Accordingly,
        Company Management did not provide for such potential
        liability.
 
 3.
              On
                  July 14, 2003, Mr. Yaacov Pedhatzur, an Israeli citizen, filed
                  a lawsuit
                  against the Company with the Magistrate Court in Tel Aviv, Israel.
                  The
                  plaintiff claims that SuperCom owes him commission on transactions
                  between
                  SuperCom and certain third parties and he asks the court to order
                  SuperCom
                  to furnish the plaintiff with a report on transactions made with
                  such
                  third parties. Subject to such report, the plaintiff has set the
                  amount of
                  the lawsuit against us at NIS 250,000 (approximately $ 58 as of
                  December
                  31), in commissions allegedly due for his part in establishing
                  business
                  connections for the Company in Eastern Asia during the years 1993-1998.The
                  Company is contesting this claim.
 
 Company
        Management and its legal advisors cannot assess at this stage the outcome
        of
        this claim. Accordingly, Management did not provide for such potential
        liability.
 
 4.
              In
                  April 2004, The Company was informed by the International Commercial
                  Arbitration Court at the Ukrainian Chamber of Commerce and Industry
                  (“Arbitration Court”) that the Department for Resources Supply of the
                  Ministry had filed with the Arbitration Court a statement of claim
                  to
                  declare the Contract No. 10/82, dated April 9, 2002 between SuperCom
                  and
                  the Ministry of Internal Affairs of Ukraine as void due to defaults
                  in the
                  tender proceedings under which the Contract had been awarded to
                  SuperCom.
                  On July 22, 2004 the Company was informed by the law firm representing
                  us
                  in the arbitration proceedings that on July 19, 2004, the Arbitration
                  Court issued a negative award declaring the Contract as void. The
                  Company
                  strongly believes that the award is wrong due to many defaults
                  that
                  occurred in the arbitration proceedings. On April 27, 2005 the
                  Company
                  challenged the validity of the award in the High Commercial court
                  of
                  Ukraine. In May 2005 the Company was informed by the Arbitration
                  Court
                  that the Department for Resources Supply of the Ministry had filed
                  with
                  the Arbitration Court a new statement of claim to a restitution
                  of $1,048,
                  paid to the Company by the Department for Resources Supply of the
                  Ministry.
 
 Management,
        based on its legal advisor, believes that the claim has no merits and intends
        to
        vigorously defend the validity of the contract.
 
 97
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  12:-**
              **TAXES
                  ON INCOME**
 
 a.
              Tax
                  benefits under the Israeli Law for the Encouragement of Capital
                  Investments, 1959 ("the law"):
 
 The
                  Company's production facilities have been granted the status as
                  an
                  "Approved Enterprise", under the law, for three separate investment
                  programs that were approved in July 1992, October 1994 and March
                  1996.
 
 Since
                  the Company operates more than one approved enterprise and since
                  the
                  Company is not entitled to tax benefits on part of its taxable
                  income that
                  is taxed at the regular corporate tax rate, under the abovementioned
                  law,
                  its effective tax rate will be the result of a weighted combination
                  of the
                  various applicable rates and tax exemptions. The computation is
                  made in
                  respect of income derived from each project, on the basis of formulas
                  specified by law and approvals.
 
 Entitlement
                  to the above benefits is contingent upon the Company’s fulfilling the
                  conditions stipulated by the law, regulations published thereunder
                  and the
                  letters of approval for the specific investments in "approved
                  enterprises". In the event of failure to comply with these conditions,
                  the
                  benefits may be canceled and the Company may be required to refund
                  the
                  amount of the benefits, in whole or in part, including interest.
                  As of
                  December 31, 2004, Management believes that the Company is in compliance
                  with all of the aforementioned conditions.
 
 The
                  tax-exempt profits attributable to the Company's "Approved Enterprises"
                  can be distributed to shareholders without subjecting the Company
                  to taxes
                  only upon the complete liquidation of the Company. If these retained
                  tax-exempt profits are distributed in a manner other than as part
                  of the
                  complete liquidation of the Company, they would be taxed at the
                  corporate
                  tax rate applicable to such profits as if the Company had not elected
                  the
                  alternative benefits track (currently 25% for an "Approved Enterprise").
                  The Company's Board of Directors has determined that such tax-exempt
                  income will not be distributed as
                  dividends.
 
 The
                  period of tax benefits, detailed above, is limited to the earlier
                  of 12
                  years from the commencement of production, or 14 years from the
                  approval
                  date.
 
 98
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  12:-**
              **TAXES
                  ON INCOME (Cont.)**
 
 The
                  law also grants entitlement to claim accelerated depreciation on
                  buildings, machinery and equipment used by the "Approved Enterprise",
                  during the first five tax years.
 
 Should
                  the Company derive income from sources other than an "Approved
                  Enterprise"
                  during the relevant period of benefits, such income will be taxable
                  at
                  regular corporate tax rate. See Note 12(d).
 
 
 b.
              Tax
                  benefits under the Israeli Law for the Encouragement of Industry
                  (Taxation), 1969:
 
 The
                  Company is an "industrial company", as defined by this law and,
                  as such,
                  is entitled to certain tax benefits, mainly accelerated depreciation
                  of
                  machinery and equipment, the right to claim public issuance expenses
                  and
                  amortization of patents and other intangible property rights as
                  a
                  deduction for tax purposes.
 
 c.
              Measurement
                  of results of operations for tax purposes under the Israeli Income
                  Tax Law
                  (Inflationary Adjustments), 1985.
 
 Results
                  of operations for tax purposes are measured in terms of earnings
                  in NIS
                  after adjustments for changes in Israel's Consumer Price Index
                  ("CPI"). As
                  explained in Note 2b, the financial statements are measured in
                  U.S.
                  dollars. The difference between the annual change in Israel's CPI
                  and in
                  the NIS/dollar exchange rate causes a further difference between
                  taxable
                  income and the income before taxes shown in the financial statements.
                  In
                  accordance with paragraph 9(f) of SFAS No. 109, the Company has
                  not
                  provided deferred income taxes on the above difference between
                  the
                  functional currency and the tax bases of assets and
                  liabilities.
 
 d.
              Reduction
                  in corporate tax rates:
 
 On
        June
        29, 2004, the Israeli Parliament passed Amendment to the Income Tax Ordinance
        (No. 140 and Temporary Order) - 2004, gradually reducing the tax rate applicable
        to the Company, commencing on January 1, 2004, from 35% in 2004 to 30% in
        2007.
 
 e.
              Non-Israeli
                  subsidiaries:
 
 Non-Israeli
        subsidiaries are taxed according to the tax laws in their country of
        residence.
 
 
 99
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  12:-**
              **TAXES
                  ON INCOME (Cont.)**
 
 f.
              Deferred
                  income taxes:
 
 Deferred
                  income taxes reflect the net tax effects of temporary differences
                  between
                  the carrying amounts of assets and liabilities for financial reporting
                  purposes and the amounts used for income tax purposes. Significant
                  components of the deferred tax assets of the Company and its subsidiaries
                  are as follows:
 
 **December
                  31,****2003**
              
              **2004**Operating
                  loss carryforward
              
              $
              3,130
              
              $
              3,648Reserves
                  and allowances
              
              
              791
              
              
              798Net
                  deferred tax asset before valuation allowance
              
              
              3,921
              
              
              4,446Valuation
                  allowance
              
              
              (3,921
              )
              
              (4,446
              )Net
                  deferred tax asset
              
              $
              -
              
              $
              -Deferred
                  income taxes consist of the following:Domestic
              
              $
              3,726
              
              $
              4,069Valuation
                  allowance
              
              
              (3,726
              )
              
              (4,069
              )Foreign
              
              
              195
              
              
              377Valuation
                  allowance
              
              
              (195
              )
              
              (377
              )$
              -
              
              $
              -
 
 The
                  Company and its subsidiaries have provided valuation allowances
                  of $ 4,446
                  in respect of deferred tax assets resulting from tax loss carryforwards
                  and other temporary differences. Management currently believes
                  that since
                  the Company and its subsidiaries have a history of losses, the
                  deferred
                  tax assets will not be realized in the foreseeable
                  future.
 
 g.
              Net
                  operating loss carryforwards, capital loss and loss from marketable
                  securities:
 
 SuperCom
                  Ltd. has accumulated losses for tax purposes as of December 31,
                  2004, in
                  an amount of approximately $ 14,500, which may be carried
                  forward and
                  offset against taxable income in the future for an indefinite period.
                  SuperComLtd.
                  also has a capital loss of approximately $ 4,200 which can be carried
                  forward and offset against capital gains and a loss on marketable
                  securities in an amount of $ 300, which may be carried forward
                  and
                  offset against gains on marketable securities for an indefinite
                  period.
 
 
 
 100
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  12:-**
              **TAXES
                  ON INCOME (Cont.)**
  SuperCom
        's subsidiaries in the United States and Hong Kong have estimated total
        available carryforward tax losses of $ 641 and $ 854, respectively,
        which are available to offset against future taxable income, if any, in the
        future for an indefinite period in Hong Kong and expiring in 2024 in the
        United
        States.
 
 Utilization
                  of U.S. net operating losses may be subject to a substantial annual
                  limitation due to the "change in ownership" provisions of the Internal
                  Revenue Code of 1986 and similar state provisions. The annual limitation
                  may result in the expiration of net operating losses before
                  utilization.
 
 h.
              SuperCom
                  Ltd has received final assessment until the year ended December
                  31, 2001.
 
 i.
              Income
                  (loss) from continuing operations before taxes on incomeconsists
                  of the following:
 **Year
                    ended December 31,****2002**
                
                **2003**
                
                **2004**Domestic
                
                $
                5,614
                
                $
                (1,902
                )
                $
                (1,446
                )Foreign
                
                
                601
                
                
                (45
                )
                
                (426
                )$
                6,215
                
                $
                (1,947
                )
                $
                (1,872
                )
 
 j.
              Reconciliation
                  of the theoretical tax expense (benefit) to the actual tax expense
                  (benefit):
 
 A
                  reconciliation of theoretical tax expense, assuming all income
                  is taxed at
                  the statutory rate applicable to the income of companies in Israel,
                  and
                  the actual tax expense, is as
                  follows:
 **Year
                    ended December 31,****2002**
                
                **2003**
                
                **2004**Income
                    (loss) from continuing
                  operations
                    before taxes on income,
                  as
                    reported in the consolidated
                  statements
                    of operations
                
                $
                6,215
                
                $
                (1,947
                )
                $
                (1,872
                )Statutory
                    tax rate in Israel
                
                
                36
                %
                
                36
                %
                
                35
                %Theoretical
                    tax expenses (benefit)
                
                $
                2,237
                
                $
                (701
                )
                $
                (655
                )Carryforward
                    losses and other deferred
                  taxes
                    for which a full valuation
                  allowance
                    was recorded
                
                
                (2,348
                )
                
                375
                
                
                525Differences
                    in Taxes resulting from
                  approved
                    enterprise benefits and
                  from
                    rate applicable to foreign
                  subsidiary
                    and others
                
                
                111
                
                
                326
                
                
                130Actual
                    income tax
                
                $
                -
                
                $
                -
                
                $
                -
  101
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE13:-**
              **SHARE
                  CAPITAL**
 
 a.
              On
                  October 23, 2003, the Company transferred the listing of its Ordinary
                  shares to the Euronext Brussels stock market, under the symbol
                  SUP and
                  requested the delisting from NASDAQ Europe following the announcement
                  by
                  NASDAQ Europe that it will be discontinuing its operations by the
                  end of
                  November 2003. The delisting was effected at the close of business
                  on
                  November 27, 2003.
 Since
                  November 5, 2004 the Company’s ordinary shareshave also been trading on the NASDAQ Over-the-Counter Bulletin
                  Board
                  market. The Company’s stock symbol is
                  "SPCBF.OB".
 
 b.
              Shareholders'
                  rights:
 
 The
        ordinary shares confer upon the holders the right to receive notice to
        participate and vote in the general meetings of the Company, and the right
        to
        receive dividends, if declared.
 
 c.
              Stock
                  options:
 
 1.
              On
                  February 14, 1999, the Board of Directors adopted, and the Company
                  shareholders subsequently approved, the 1999 Employee Stock Option
                  Plan,
                  which was amended and restated in March 2002 and November 2003
                  (the
                  "Option Plan"). The Option Plan is intended to provide incentives
                  to the
                  Company employees, officers, directors and/or consultants by providing
                  them with the opportunity to purchase our ordinary shares. Under
                  the
                  Option Plan, options to purchase an aggregate of up to the number
                  of the
                  Company’s authorized ordinary shares (26,500,000) may, from time to time,
                  be awarded to any employee, officer, director and/or consultant.
                  The
                  Option Plan is, subject to the provisions of the Companies Law,
                  administered by the Remuneration Committee, and is designed: (i)
                  to comply
                  with Section 102 of the Tax Ordinance or any provision which may
                  amend or
                  replace it and rules promulgated thereunder and to enable the Company
                  and
                  grantees thereunder to benefit from Section 102 of the Tax Ordinance
                  and
                  the Commissioner’s Rules; and (ii) to enable the Company to grant options
                  and issue shares outside the context of Section 102 of the Tax
                  Ordinance.
                  Options become exercisable ratably over a period of three to five
                  years,
                  commencing with the date of grant. The options generally expire
                  no later
                  than 10 years from the date of grant. Any options which are forfeited
                  or
                  canceled before expiration, become available for future grants.
 
 On
        January 26, 2003, at the general meeting, it was resolved to grant an option
        to
        acquire up to 50,000 shares of the Company to each of the directors of the
        Company, who are not outside directors. The exercise price under the terms
        of
        such options is $ 0.42 per share.
 
 102
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE13:-**
                **SHARE
                    CAPITAL (Cont.)**
 It
        was
        also approved to grant an option to acquire up to 670,981 shares of the Company
        ("the Option") to Mr. Eli Rozen in lieu of his rights in respect of the
        termination of his employment. The exercise price under the terms of the
        Option
        is $ 0.42 per share.
 
 On
        November 13, 2003, the Board of Directors approved to reprice 136,919 options
        to
        two senior employees from $ 4.02 per share to $ 0.42. The options vest over
        five
        equal portions each over a 12 month period, with the first portion vesting
        on
        February 2, 1999. During December 2003, the employees exercised the
        options.
 On
        October 4, 2004, the Board of Directors approved a grant of options to acquire
        up to 755,000 shares to certain employees as compensation for their efforts
        in
        the process of the private placement. The exercise price under the terms
        of the
        Option is $ 0.85 per share.
 
 Regarding
        options granted to related parties and directors subsequent balance date,
        see
        Note 19a.
 
 2.
              A
                  summary of the Company's stock option activity, and related information
                  is
                  as follows:
 
 **Year
                  ended December 31****2002**
              
              **2003**
              
              **2004****Number
                  of**
                **options**
              
              **Weighted
                  average exercise price**
              
              **Number
                  of**
                **options**
              
              **Weighted
                  average exercise price**
              
              **Number
                  of**
                **options**
              
              **Weighted
                  average exercise price**Outstanding
                  at beginning of year
              
              
              543,495
              
              $
              5.19
              
              
              880,712
              
              $
              2.88
              
              
              1,534,514
              
              $
              1.17Granted
              
              
              443,081
              
              $
              0.42
              
              
              1,005,981
              
              $
              0.42
              
              
              2,030,000
              
              $
              1.23Exercised
              
              
              -
              
              $
              -
              
              
              (200,533
              )
              $
              0.42
              
              
              -
              
              $
              -Canceled
                  and forfeited
              
              
              (105,864
              )
              $
              4.41
              
              
              (151,646
              )
              $
              0.72
              
              
              (212,137
              )
              $
              5.03Outstanding
                  at end of year
              
              
              880,712
              
              $
              2.88
              
              
              1,534,514
              
              $
              1.17
              
              
              3,352,377
              
              $
              0.97Exercisable
                  at end of year
              
              
              462,655
              
              $
              4.32
              
              
              1,113,580
              
              $
              1.44
              
              
              1,681,360
              
              $
              0.58
 
 Compensation
                  expenses recognized by the Company related to its share-based employee
                  compensation awards were $ 0, $ 26 and $ 9 for the years ended
                  December 31, 2002, 2003 and 2004,
                  respectively.
 
 The
                  options outstanding as of December 31, 2004, have been separated
                  into
                  ranges of exercise price as
                  follows:
 
 103
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE13:-**
                **SHARE
                    CAPITAL (Cont.)**
 **Exercise**
                **price**
              
              **Options
                  outstanding as of**
                **December
                  31, 2004**
              
              **Weighted
                  average**
                **remaining**
                **contractual
                  life (years)**
              
              **Weighted
                  average**
                **exercise
                  price**
              
              **Options
                  exercisable**
                **as
                  of**
                **December
                  31, 2004**
              
              **Weighted
                  average**
                **exercise
                  price**$
                  0.42 - $ 1
              
              
              2,692,115
              
              
              8.75
              
              $
              0.55
              
              
              1,650,343
              
              $
              0.50$
                  2
                  - $ 2.52
              
              
              640,000
              
              
              9.02
              
              $
              2.50
              
              
              12,000
              
              $
              2$
                  4.00 - $ 5.62
              
              
              13,690
              
              
              3.45
              
              $
              4.89
              
              
              12,445
              
              $
              4.98$
                  9.64
              
              
              6,572
              
              
              1.14
              
              $
              9.64
              
              
              6,572
              
              $
              9.643,352,377
              
              
              8.76
              
              $
              0.97
              
              
              1,681,360
              
              $
              0.58
  d.
                  In
                      2004, the Company completed private placements of an aggregate
                      of
                      4,029,415 of its ordinary shares to institutional and private
                      investors at
                      an aggregate purchase price of approximately $3.5 million at
                      a price of
                      $0.85 per share.  In addition, such investors were issued
                      warrants
                      exercisable for five years from the closing date for the purchase
                      of an
                      aggregate of up to 1,611,769 ordinary shares at an exercise
                      price of $1.10
                      per share.
                    
                    Additionally,
                      warrants were issued to
                      consultants as follows: 444,706 ordinary shares issuable upon
                      the exercise
                      of warrants having an exercise price of $0.85 per share and
                      177,882
                      ordinary shares issuable upon the exercise of warrants having
                      an exercise
                      price of $1.10 per share that were issued to Broadband Capital
                      LLC as a
                      portion of the placement agent fee issued in connection with
                      a private
                      placement completed on September 10, 2004; 75,000 ordinary
                      shares issuable
                      upon the exercise of warrants having an exercise price of $1.10
                      per share
                      that were issued to Meitav Capital Ltd. as a portion of the
                      placement
                      agent fee issued in connection with a private placement completed
                      on July
                      15, 2004; and 2,941 ordinary shares issuable upon the exercise
                      of warrants
                      having an exercise price of $1.10 per share that were issued
                      to Max Tech
                      Ltd. as a portion of the placement agent fee issued in connection
                      with a
                      private placement completed on July 15, 2004.
                    
                    During
                      the forth quarter of 2004, 706,912
                      warrants were exercised for an aggregate amount of approximately
                      $ 778 and
                      approximately $ 130 was received in respect of shares to be
                      allotted in
                      2005
 
 e.
                  In October 2004, as part of a private placement,
                    two
                    consultants received warrants exercisable for five years for
                    the purchase
                    of an aggregate of up to 25,000 and 100,000 ordinary shares at
                    an exercise
                    price of $0.85 per share.
 
 f.
                  The warrants granted to the consultants as
                    describe in
                    Note 13(d) and (e) above were fully vested on the date of grant.
                    The fair
                    value of the warrants is $ 340 as computed using the Black & Scholes
                    pricing model with the following weighted average assumption:
                    risk free
                    interest of 4.1%, dividend yield of 0, volatility factors of
                    the excepted
                    market price of the Company’s ordinary shares of 0.983, and contractual
                    life of the warrants of 5 years. The Company recorded the issuance
                    costs
                    directly to additional paid in capital.
  104
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
 
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE13:-**
                  **SHARE
                      CAPITAL (Cont.)**
 g.
              Dividends:
 
 In
        the
        event that cash dividends are declared in the future, such dividends will
        be
        paid in NIS. The Company does not intend to pay cash dividends in the
        foreseeable future.
 
 **NOTE
                  14:-**
              **RELATED
                  PARTY TRANSACTIONS**
 
 a.
              On
                  October 1, 2001, the Company entered into a consulting agreement
                  with a
                  company owned by the Chairman of the Board of Directors who is
                  one of the
                  co-founders of the Company.
 
 In
        consideration of these services, the Company has undertaken to pay $ 10.5
        per
        month plus motor vehicle expenses. In addition the Company pays $ 1.5 per
        month
        as a directors fee. During 2002, 2003 and 2004 the Company paid $ 148,
        $ 147 and $ 144, pursuant to this agreement.
 
 b.
              On
                  October 1, 2001, the Company entered into a consulting agreement
                  with a
                  company owned by a member of the Company's Board of Directors,
                  one of the
                  Company's co-founders and a principal
                  shareholder
 
 In
        consideration of these services, the Company has undertaken to pay $ 4.6
        per
        month plus motor vehicle expenses. In addition the Company pays $ 1.5 per
        month
        as a directors fee. During 2002, 2003 and 2004, the Company paid $ 65, $ 76
        and $ 73, pursuant to this agreement.
 
 c.
              On
                  October 1, 2001, the Company entered into a consulting agreement
                  with a
                  company owned by one of the co-founders of the Company.
 
 In
        consideration for these services, the Company has undertaken to pay $ 4.6
        per
        month plus motor vehicle expenses. During 2002, 2003 and 2004, the Company
        paid
        $ 78, $ 68 and $ 69, pursuant to this agreement.
 
 d.
              On
                  September 1, 2001, the Company entered into an agreement with its
                  40%
                  affiliate company, pursuant to which the Company agreed to sub-lease
                  office space in the Raanana, Israel facility to CT Card Tech and
                  to
                  provide CT Card Tech with certain additional services in consideration
                  of
                  a monthly payment of $ 1. In November 2003, CT Card Tech
                  surrendered
                  a portion of its office space, which reduced the monthly payment
                  to $ 0.5
                  and in March 2004 to $ 0, until CT Card Tech surrendered all its
                  office
                  space.
 
 105
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  14:-**
              **RELATED
                  PARTY TRANSACTIONS (**Cont.)
 
 e.
              During
                  2002, Avi Landman, one of the Company's co-founders, received $152
                  as past
                  compensation in connection with salary and social benefits for
                  the period
                  he served as an employee in connection with the termination of
                  his
                  employment agreement.
 
 f.
              As
                  of December 31, 2004 the balance of the debts of related parties
                  were $ 31
                  (net of allowance $22)
 
 g.
              See
                  Note 19, subsequent events with related
                  parties.
  **NOTE
                15:-**
              **SEGMENTS,
                  MAJOR CUSTOMERS AND GEOGRAPHIC
                  INFORMATION**
 
 a.
              Summary
                  information about geographic areas:
 
 The
        Company manages its business on the basis of one reportable segment (see
        Note 1
        for a brief description of the Company's business) and follows the requirements
        of SFAS 131, "Disclosures about Segments of an Enterprise and Related
        Information".
 
 The
                  following is a summary of operations within geographic areas, based
                  on the
                  location of customers and data regarding long-lived
                  assets:
 
 **Year
                  ended December 31,****2002**
              
              **2003**
              
              **2004****Total**
              
              **Long-lived**
              
              **Total**
              
              **Long-lived**
              
              **Total**
              
              **Long-lived****revenues**
              
              **assets**
              
              **revenues**
              
              **assets**
              
              **revenues**
              
              **assets**Europe
              
              $
              5,237
              
              $
              -
              
              $
              3,308
              
              $
              -
              
              $
              3,218
              
              $
              -Asia
                  Pacific
              
              
              1,942
              
              
              58
              
              
              2,067
              
              
              28
              
              
              2,433
              
              
              20Africa
              
              
              -
              
              
              -
              
              
              536
              
              
              -
              
              
              899United
                  States
              
              
              581
              
              
              -
              
              
              828
              
              
              1
              
              
              386
              
              
              65Israel
              
              
              229
              
              
              1,822
              
              
              460
              
              
              1,647
              
              
              320
              
              
              3,556Other
              
              
              38
              
              
              -
              
              
              45
              
              
              -
              
              
              88$
              8,027
              
              $
              1,880
              
              $
              7,244
              
              $
              1,676
              
              $
              7,344
              
              $
              3,641
 
 
 106
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
  **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                  15:-**
                **SEGMENTS,
                    MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
                    (Cont.)**
 b.
              Summary
                  of operations based on products and
                  services:
 
 **Year
                  ended December 31,****2002**
              
              **2003**
              
              **2004**Raw
                  materials and equipment
              
              $
              4,879
              
              $
              4,196
              
              $
              5,552SPPL
                  1000
              
              
              2,080
              
              
              2,471
              
              
              1,210License
                  fee
              
              
              446
              
              
              -
              
              
              -Maintenance
              
              
              622
              
              
              577
              
              
              582$
              8,027
              
              $
              7,244
              
              $
              7,344
 c.
              Major
                  customer data as a percentage of total
                  sales:
 
 **Year
                  ended December 31,****2002**
              
              **2003**
              
              **2004**Customer
                  A
              
              
              26
              %
              
              27
              %
              
              -Customer
                  B
              
              
              19
              %
              
              16
              %
              
              22
              %Customer
                  C
              
              
              16
              %
              
              -
              
              
              -Customer
                  D
              
              
              12
              %
              
              12
              %
              
              17
              %Customer
                  E
              
              
              *)
                  -
              
              
              11
              %
              
              10
              %Customer
                  F
              
              
              -
              
              
              -
              
              
              16
              %
  *)  Less
        than
        10%.
 
 **NOTE
                  16:-**
              **FINANCIAL
                  INCOME (EXPENSES), NET**
  **Year
                    ended December 31,****2002**
                
                **2003**
                
                **2004**Financial
                    expenses:Interest,
                    bank charges and fees
                
                $
                (119
                )
                $
                (207
                )
                $
                (194
                )Foreign
                    currency translation
                
                
                -
                
                
                (98
                )
                
                (48
                )Total
                    financial expenses
                
                
                (119
                )
                
                (305
                )
                
                (242
                )Financial
                    income:Foreign
                    currency translation
                
                
                50
                
                
                -
                
                
                -Interest
                
                
                34
                
                
                72
                
                
                28Total
                    financial income
                
                
                84
                
                
                72
                
                
                28Net
                    total
                
                $
                (35
                )
                $
                (233
                )
                $
                (214
                )
 
 107
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
  **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
  **NOTE
                  17:-**
              **OTHER
                  INCOME (EXPENSES), NET**
  Loss
                  on sale of property and equipment, net
              
              $
              (209
              )
              $
              (5
              )
              $
              (1
              )Decline
                  in market value of held-to-maturity securities
              
              
              -
              
              
              (52
              )
              
              (7
              )Gain
                  on issuance of subsidiary’s shares and sale of subsidiary's
                  shares
              
              
              6,423
              
              
              -
              
              
              -Other
              
              
              (11
              )
              
              (26
              )
              
              (19
              )$
              6,203
              
              $
              (83
              )
              $
              (27
              )
 
 **NOTE
                    18:-**
                **SIGNIFICANT
                    EVENT**
  On
        October 11, 2004, the Company announced that the United States Government
        Printing Office (GPO) has informed that the Company’s proposal as a prime
        contractor for the integration of smart card technology in the US new electronic
        passports has been accepted for award.  In addition, SuperCom’s proposal as
        a sub-contractor with a leading American system integrator corporation has
        also
        been accepted for award in this project.
  On
                  May 5, 2005, the Company announced that the U.S. Government Printing
                  Office (GPO) issued a Notice of Termination for Convenience involving
                  the
                  Company’s participation in the three-phase testing of technology for a
                  new
                  electronic passport. While an earlier termination notice was withdrawn
                  after discussions with the U.S. Government, the Company’s attempts to
                  persuade the Government to withdraw the current termination notice
                  have
                  been unsuccessful to date.  The notice terminates SuperCom’s contract
                  awards for the Electronic Passport
                  Program.
  
 108
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **NOTE
                    19:-**
                **SUBSEQUENT
                    EVENTS**
 
 a.
              On
                  January 13 2005, at the general meeting, it was resolved to grant
                  an
                  option to acquire up to 300,000 shares of the Company to Mr. Eli
                  Rozen,
                  the chairman of the board of directors and 50,000 shares of the
                  Company to
                  each of the two directors of the Company, who are not outside directors,
                  Mr. Menachem Meron and Mr. Avi Landman. The exercise price under
                  the terms
                  of such options is $ 0.85 per share. Those options were
                  granted as
                  compensation for their efforts in a private placement during 2004.
 
 b.
              On
                  January 13, the general meeting approved the following amendments
                  to the
                  service agreement between the Company and Mr. Avi Landman, dated
                  October
                  1, 2001:
 
 ·
              As
                  of the date of the approval of the General Meeting, to increase
                  the
                  consideration set forth in the said agreement to an amount of NIS
                  30,000(approximately
                  $ 7 as of December 31, 2004),per
                  month.
 ·
              Upon
                  the termination of the current car leasing period, to upgrade the
                  car
                  provided to Mr. Landman to any car whose leasing price is up to
                  NIS 4,200(approximately
                  $ 1 as of December 31, 2004),(excluding
                  tax) per month.
 ·
              To
                  grant Mr. Landman a one-time bonus of NIS 130,000(approximately
                  $ 30 as of December 31, 2004),including VAT.
 
 c.
              Subsequent
                  events regarding the GPO project - see Note
                  18
 
 d.
              On
                  March 24, 2005, SuperCom Ltd entered into a termination agreement
                  with
                  Intercomsoft Limited with respect to the Sales Agreement between
                  the
                  parties (relating to the Moldova National Documentation Project),
                  from
                  which the Company has derived revenues of $1,555, $1,184and $1,610
                  during
                  the fiscal years ended December 31, 2002, 2003 and 2004, respectively.
                  Under the terms of the termination agreement, SuperCom will supply
                  equipment, consumables, and software directly to the Moldovan government.
                  As a result of the termination, the Company does not anticipate
                  any
                  significant changes in its
                  revenues.
 
 e.
              On
                  April 18, 2005 the Company signed a contract to lease new offices
                  in
                  Kadima. Those offices will replace the current lease agreement.
                  According
                  to the agreement the lease is for a period of five years commencing
                  on
                  August 1, 2005. The Company has an option to extend the period
                  for five
                  more years. According to the agreement the monthly fee is $ 16.
 
 109


**** **ITEM
      19.    Exhibits.**





1.1*
            Memorandum
                of Association.





1.2*
            Articles
                of Association.





1.3*
            Amendment
                to Articles of Association.





2.1*
            Forms
                of Stock Certificates Representing Ordinary
                Shares.




4.1*
            The
                SuperCom Ltd. 1999 Employee Stock Option Plan (as Amended and Restated
                in
                2002).





4.1(a)**
            The
                SuperCom Ltd. 2003 Israeli Share Option
                Plan





4.2*
            Service
                Agreement between SuperCom and Avi Schechter, dated July 1,
                2002.





4.3*
            Employment
                Agreement between SuperCom and Eyal Tuchman, dated July 1,
                2002.





4.4*
            Employment
                Agreement between SuperCom and Eli Basson, dated July
                28,1997.





4.5*
            Service
                Agreement between SuperCom and Eli Rozen, dated October 1,
                2001.





4.6*
            Service
                Agreement between SuperCom and Avi Landman, dated October 1,
                2001.





4.7*
            Stock
                Purchase Agreement between SuperCom and Elad Ink, dated as of March
                4,
                2002.





4.8*
            Stock
                Purchase Agreement between SuperCom and ICTS BV, dated as of April
                29,
                2002.





4.9*
            Stock
                Purchase Agreement between SuperCom and ICTS-USA, Inc., dated as
                of
                September 27, 2002.





8
            List
                of Subsidiaries of SuperCom Ltd.





11.1
            Code
                of Ethics




12.1
            Certification
                of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act.




12.2
            Certification
                of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
                Act.




13.1
            Certification
                of Chief Executive Officer and Chief Financial Officer Pursuant to
                Section
                906 of theSarbanes-Oxley
                Act.





15.1
            Consent
                of Fahn, Kanne & Co., a member of Grant Thornton, dated June 30,
                2005.





15.2
            Consent
                of BDO McCabe Lo & Company, independent public accountants, dated June
                30, 2005.





__________________________________________


*
                Previously filed as exhibits to, and incorporated herein by reference
                from, the Company’s Registration Statement on Form 20-F (File No.: 0-50790
                filed on September 14, 2004).**
                Previously filed as Exhibit 99.2 to, and incorporated herein by reference
                from, the Company’s Registration Statement on Form S-8 (File No.
                333-121231filed on December 14, 2004).


110


**SIGNATURE**




SuperCom
      Ltd. 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.




**SUPERCOM
                LTD.**Date: June
              30, 2005
            
            /s/
                Avi Schechter**By:
                **Avi
                Schechter******Its:
                **Chief
                Executive
                Officer****






111