**UNITED
        STA TES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
  **Washington,
        D.C. 20549**
 
 **AMENDMENT
          NO. 1**
 **FORM
        20-F**
  **(Mark
        One)**
  o
              
              **REGISTRATION
                  STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE
                  ACT
                  OF 1934**
 **OR**
 ý
              
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
                **For
                  the fiscal year ended December 31,
                  2005** **OR**
 o
              
              **TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
 **OR**
 o
              
              **SHELL
                  COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                  EXCHANGE
                  ACT OF 1934**
 
 Date
        of
        event requiring this shell company report
 
 **For
        the transition period from
             to**
  **Commission
        file number 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)**
  **Sagid
        House “Hasharon Industrial Park”**
 **P.O.B
        5039, Qadima 60920**
 **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:
        22,395,064  ordinary
        shares as of December 31, 2005.
 
 Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act.      Yes  ̈ No ý
 If
        this
        report is an annual or transition report, indicate by check mark if the
        registrant is not required to file reports pursuant to Section 13 or 15
        (d) of the Securities Exchange Act of
        1934.  ̈ Yes    ý No
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter 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 ý No  ࿠ Not
        applicable  ࿠
  
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
        one):
  Large
        accelerated filer  ̈ Accelerated
        filer  ̈ Non-accelerated
        filer x
 
 Indicate
        by check mark which financial statement item the registrant has elected to
        follow.
 Item
        17   ̈ Item
        18 ý
  If
        this
        is an annual report, indicate by check mark whether the registrant is a shell
        company (as defined in Rule 12b-2 of the Exchange Act).
 
 Yes   ̈ No ý
 
 (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   ̈
  ii
  EXPLANATORY
            NOTE
 
 This
            Amendment No. 1 (“Amendment No. 1”) to the Annual Report on
            Form 20-F for the year ended December 31, 2005, as filed with the U.S.
            Securities and Exchange Commission (the “SEC”) on June 29, 2006 (the
“Original Form 20-F”), is being filed solely to correct certain
            non-substantive errors to Item 6.E. Except as described above, no other
            changes
            have been made to the Original Form 20-F.
   
  **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
              3Selected
                  Financial Data
              3Capitalization
                  and Indebtedness
              5Reasons
                  for the Offer and Use of Proceeds
              5Risk
                  Factors
              5ITEM
                  4. INFORMATION ON THE CORPORATION
              18History
                  and Development of the Corporation
              18Business
                  Overview
              19Organizational
                  Structure
              37Property,
                  Plants and Equipment
              38ITEM
                  5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
              39Operating
                  Results
              39Liquidity
                  and Capital Resources
              48Research
                  and Development
              50Trend
                  Information
              51Off-Balance
                  Sheet Arrangements...................................................................................
              54Tabular
                  Disclosure of Contractual
                  Arrangements................................................................
              54ITEM
                  6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
              54Directors
                  and Senior Management
              54Compensation
              56Board
                  Practices
              57Employees
              59Share
                  Ownership
              60ITEM
                  7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
              62Major
                  shareholders
              62Related
                  Party Transactions
              63Interests
                  of Experts and Counsel
              63ITEM
                  8. FINANCIAL INFORMATION
              64Consolidated
                  Statements and Other Financial Information (Audited)
              64Significant
                  Changes
              64
  i
  ITEM
                  9THE
                  OFFER AND LISTING
              65Offer
                  and Listing Details
              65Plan
                  of Distribution
              66Markets
              66Selling
                  Shareholders
              66Dilution
              66Expenses
                  of the Issue
              66ITEM
                  10. ADDITIONAL INFORMATION
              66Share
                  Capital
              66Memorandum
                  and Articles of Association
              66Material
                  Contracts
              67Exchange
                  Controls
              67Taxation
              67Dividends
                  and Paying Agent
              74Statement
                  by Experts
              74Documents
                  on Display
              74Subsidiary
                  Information
              74ITEM
                  11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISK
              74Quantitative
                  and Qualitative Information about Market Risk
              74ITEM
                  12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
              75**PART
                II**ITEM
                13.
                DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
              75ITEM
                  14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERSAND
                  USE OF PROCEEDS
              75ITEM
                15.
                CONTROLS AND PROCEDURES
              75ITEM
                16A.
                AUDIT COMMITTEE FINANCIAL EXPERT
              76ITEM
                16B.
                CODE OF ETHICS
              76ITEM
                16C.
                PRINCIPAL ACCOUNTANT FEES AND SERVICES
              76ITEM
                16 D.
                EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
              76ITEM
                  16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
                  PURCHASERS
              76**PART
                  III**ITEM
                17.
                FINANCIAL STATEMENTS
              76ITEM
                18.
                FINANCIAL STATEMENTS
              76ITEM
                  19. EXHIBITS
              120SIGNATURE
              121
  ii
  **NOTE
        REGARDING FORWARD-LOOKING STATEMENTS**
  This
        Annual Report on Form 20-F (“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; (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 including our beliefs about the merit of the Ukrainian Department of Resources
        claim against us ;
        (vii)
        our beliefs regarding the fluctuations of our operating results ,
        including our beliefs about the effects of inflation and the fluctuation
        of the
        NIS/dollar exchange rate on 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 the effects of seasonality on our revenues and operating results; (xii)
        our plans for research and development and future products; (xiii) our beliefs
        about the markets in which we compete and our competitive position within
        those
        markets ,
        including our beliefs about the role the governmental and commercial markets
        will play in our short and long-term performance ;
        (xiv)
        our expected revenues from our customer contracts and purchase orders,
        including, without limitation, from our purchase orders with Moldova, the
        value
        of contract for a “Magna” identification system with an African government, 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, our
        expectation regarding our new technology of RF tags and our SmartDSMS product.
        (xv) our expectations regarding the effectiveness of our marketing programs
        and
        generation of business from those programs, including our beliefs about the
        role
        customer services plays in our sales and marketing programs; (xvi) our
        expectations regarding trends affecting our revenues and our statements
        regarding the impact of such trends on our
        operating results and products ,
        including, without limitation, our statements regarding the concentration
        of
        revenues in a small number of customers and the mix of our sources of revenues;
        (xvii) 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 154, SFAS 155 and SFAS 123R and the anticipated effects the adoption
        of
        SFAS 123R may have on our earnings; (xviii) our beliefs about the sufficiency
        our capital resources and other sources of liquidity to fund our planned
        operations; (xix) our
        expectations regarding our recurring revenues and backlog (xx);
        (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. (xxii) o ur
        beliefs about the effects of adopting certain new accounting pronouncements
        on
        our financial position and operating results Investors 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.
  i
 
 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.
  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, 2006, the exchange rate between the NIS
        and the
        dollar was NIS 4.518= $1. The following table shows for the periods and dates
        indicated, certain information concerning the representative $ exchange rate
        for
        translating NIS as published by the Bank of Israel for the years ended December
        31, 2001 through 2005.
 Exchange
                    RateYear
                
                At
                    End of Period
                
                Average
                    Rate (1)
                
                High
                
                Low2001
                
                4.416
                
                4.220
                
                4.416
                
                4.0412002
                
                4.737
                
                4.736
                
                4.991
                
                4.4372003
                
                4.379
                
                4.512
                
                4.924
                
                4.2832004
                
                4.308
                
                4.483
                
                4.634
                
                4.3082005
                
                4.603
                
                4.503
                
                4.741
                
                4.299
 
 (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
                    2005
                
                4.662
                
                4.579January
                    2006
                
                4.658
                
                4.577February
                    2006
                
                4.725
                
                4.664March
                    2006
                
                4.717
                
                4.658April
                    2006
                
                4.671
                
                4.503May
                    2006
                
                4.522
                
                4.428
  The
        following selected consolidated financial data as of December 31, 2003, 2004
        and
        2005 and for the years ended December 31, 2002, 2003 2004 and 2005 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, 2001 and 2002 and for the year ended December
        31, 2001 have been derived from other consolidated financial statements 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)*2001
                    
                    2002
                    
                    2003
                    
                    2004
                    
                    2005SUMMARY
                        OF STATEMENT OF OPERATIONS:Revenues
                    
                    
                    6,889
                    
                    
                    8,027
                    
                    
                    7,244
                    
                    
                    7,344
                    
                    
                    8,462Cost
                        of Revenues
                    
                    
                    2,574
                    
                    
                    1,830
                    
                    
                    3,102
                    
                    
                    3,730
                    
                    
                    4,293Inventory
                        write-off
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    287Gross
                        Profit
                    
                    
                    4,315
                    
                    
                    6,197
                    
                    
                    4,142
                    
                    
                    3,614
                    
                    
                    3,882Operating
                        Expenses:Research
                        and Development
                    
                    
                    1,225
                    
                    
                    1,334
                    
                    
                    918
                    
                    
                    845
                    
                    
                    1,182Selling
                        and Marketing
                    
                    
                    4,628
                    
                    
                    2,828
                    
                    
                    3,026
                    
                    
                    2,445
                    
                    
                    3,003General
                        and Administrative
                    
                    
                    3,604
                    
                    
                    1,988
                    
                    
                    1,829
                    
                    
                    1,955
                    
                    
                    2,968Restructuring
                        expenses
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    496Litigation
                        settlement expenses
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —
                    
                    
                    129Total
                        Operating Expenses
                    
                    
                    9,457
                    
                    
                    6,150
                    
                    
                    5,773
                    
                    
                    5,245
                    
                    
                    7,778Operating
                        Income (Loss)
                    
                    
                    (5,142
                    )
                    
                    47
                    
                    
                    (1,631
                    )
                    
                    (1,631
                    )
                    
                    (3,896
                    )Financial
                        Income (Expenses), Net
                    
                    
                    123
                    
                    
                    (35
                    )
                    
                    (233
                    )
                    
                    (214
                    )
                    
                    (25
                    )OTHER
                        INCOME (EXPENSES), NET
                    
                    
                    (241
                    )
                    
                    6,203
                    
                    
                    (83
                    )
                    
                    (27
                    )
                    
                    (30
                    )Income
                        Loss before Taxes on Income
                    
                    
                    (5,260
                    )
                    
                    6,215
                    
                    
                    (1,947
                    )
                    
                    (1,872
                    )
                    
                    (3,951
                    )Share
                        in Earnings (Loss) of an AffiliatedCompany
                        and impairment, Net of taxes
                    
                    
                    —
                    
                    
                    (38
                    )
                    
                    (48
                    )
                    
                    —
                    
                    
                    —Net
                        Income (Loss) from continuingoperations
                    
                    
                    (5,260
                    )
                    
                    6,177
                    
                    
                    (1,995
                    )
                    
                    (1,872
                    )
                    
                    (3,951
                    )Loss
                        from discontinued operations
                    
                    
                    1,288
                    
                    
                    (427)
                    
                    
                    —
                    
                    
                    —
                    
                    
                    —Net
                        income (loss)
                    
                    $
                    (6,548
                    )
                    $
                    5,750
                    
                    $
                    (1,995)
                    
                    $
                    (1,872
                    )
                    $
                    (3,951
                    )PER
                        SHARE DATA:Basic
                        and Diluted loss from continuingoperations
                    
                    $
                    (0.42
                    )
                    $
                    0.49
                    
                    $
                    (0.15
                    )
                    $
                    (0.13
                    )
                    $
                    (0.21
                    )Basic
                        and Diluted earning (loss) fromDiscontinued
                        operations
                    
                    $
                    (0.1
                    )
                    $
                    (0.04
                    )
                    $
                    —
                    
                    $
                    —
                    
                    $
                    —Basic
                        and Diluted earning (loss) per share$
                    (0.52
                    )
                    $
                    0.45
                    
                    $
                    (0.15
                    )
                    $
                    (0.13
                    )
                    $
                    (0.21
                    )SUMMARY
                        OF BALANCE SHEET DATA:Cash
                        and Cash Equivalents
                    
                    
                    274
                    
                    
                    4,567
                    
                    
                    1,729
                    
                    
                    2,894
                    
                    
                    2,294Short
                        term deposit
                    
                    
                    100
                    
                    
                    —
                    
                    
                    697
                    
                    
                    353
                    
                    
                    —Marketable
                        debt securities
                    
                    
                    --
                    
                    
                    609
                    
                    
                    117
                    
                    
                    --
                    
                    
                    650Trade
                        receivables (net of allowance for doubtfulaccounts
                        of $ 3,347 and $ 3,397 as ofDecember
                        31, 2004 and 2005, respectively)
                    
                    
                    573
                    
                    
                    2,202
                    
                    
                    1,808
                    
                    
                    1,463
                    
                    
                    1,053Inventories
                    
                    
                    3,777
                    
                    
                    3,144
                    
                    
                    3,236
                    
                    
                    2,165
                    
                    
                    2,205Total
                        Current Assets
                    
                    
                    6,006
                    
                    
                    11,092
                    
                    
                    9,881
                    
                    
                    9,254
                    
                    
                    8,023TOTAL
                        ASSETS
                    
                    
                    8,531
                    
                    
                    13,756
                    
                    
                    12,685
                    
                    
                    13,938
                    
                    
                    12,276Total
                        Current Liabilities
                    
                    
                    4,226
                    
                    
                    3,468
                    
                    
                    4,450
                    
                    
                    4,259
                    
                    
                    3,218Accrued
                        Severance Pay
                    
                    
                    442
                    
                    
                    362
                    
                    
                    436
                    
                    
                    564
                    
                    
                    616SHAREHOLDERS’
                        EQUITY:TOTAL
                        SHAREHOLDERS' EQUITY 3,863
                    
                    
                    9,497
                    
                    
                    7,612
                    
                    
                    9,115
                    
                    
                    8,247
  4
  ***B.***
              ***Capitalization and
                Indebtedness***
  Not
        applicable.
 
 ***C.***
              ***Reasons
                  for the Offer and Use of
                  Proceeds***
 
 Not
        applicable.
 
 ***D.    Risk
        Factors***
  *You
        should carefully consider the following risks together with the 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 $24,065,000 at December 31, 2005.
        We
        incurred net losses of approximately $3,951,000
        and $1,872,000
        for the years ended December 31, 2005 and 2004, 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, as of the filling
        date
        of this annual report, 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 twelve months
        based upon our anticipated business activities. However, we may need additional
        capital even within the next twelve 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, 2004 and 2003, we derived 65% and 66%,
        respectively, of our consolidated net revenue for that year from four individual
        customers. In the year ended December 31, 2005, four of our customers accounted
        for 66% of our consolidated net revenues as follows: Moldovan Government
        (see
        additional information in item 4.B - “Recent Developments”), China Travel
        Services (CHK) Ltd., African governmental agency and State Enterprise
        Poligraphic - Ukraine accounted for, 22%, 11%, 23% and 10%, 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 2005 to African governmental
        agency and State Enterprise Poligraphic, 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 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 and China Travel Services (CHK) Ltd.
        for the China
        re-entry card 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 our financial
        condition.
 
 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.
  7
 
 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.
 
 **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 5 patent cases. One registered in Israel, 2
        pending in Israel, 3 pending in USA, one registered in Honk Kong and one
        pending
        in 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
        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 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
        2005,
        our revenues from the government market totaled approximately $7,519,000
        compared to $943,000 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 us once hired. Furthermore, there may be pressure to provide
        technical employees with stock options and other equity interests in us,
        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 17%, of our officers and employees are at any one time
        obligated to perform annual reserve duty. We believe that a maximum of
        approximately 17% 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 in 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 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 12, 2006 23,315,994 ordinary shares were outstanding. In addition, there
        were a total of 3,442,740 ordinary shares issuable upon exercise 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 12, 2006,
        our
        existing stock option plan had 965,706 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 (the
        “SEC”) 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. As
        of
        June 12, 2006, we have
        also
        issued 4,393,747 warrants to acquire ordinary shares to investors and
        consultants, at various prices, which expire between 2009 to 2011. As of
        June
        12, 2006 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. In January 2006, we registered up to 6,791,126 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.
  16





**"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 SEC .
      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.





**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.





**We
      have a stockholder that is able to exercise substantial influence over us and
      all matters submitted to our stockholders which may make us difficult to be
      acquired and less attractive to new investors.**




Special
      Situations Fund III, L.P., or SSF, and its affiliates beneficially own,
      5,114,037 of our ordinary shares, representing approximately 21.93% of our
      outstanding ordinary shares, based on 23,315,994 ordinary shares currently
      outstanding. In addition, SSF and its affiliates own warrants exercisable for
      an
      additional 1,411,290 ordinary shares. Such ownership interest gives SSF and
      its
      affiliates substantial influence over the outcome of all matters submitted
      to
      our stockholders, including the election of directors and the adoption of a
      merger agreement, and such influence could make us a less attractive acquisition
      or investment target. In addition, our officers and directors beneficially
      own a
      significant amount of our ordinary shares, which may have a similar effect as
      SSF' ownership of our ordinary shares.




**If
      we trigger either the participation right granted to investors in our recent
      private placement or the anti-dilution provision contained in our warrants,
      our
      stockholders could suffer substantial dilution.**




On
      December 9, 2005, we completed a private placement of 4,919,354 ordinary shares
      and five-year warrants to purchase 1,721,772 ordinary shares. The investors
      in
      this private placement were granted the right, for one year following the
      closing of the private placement and subject to certain limitations, to
      participate in future issuances of our capital stock or securities (a
“Subsequent Financing”) up to an amount which would permit each investor to
      maintain its fully diluted percentage equity ownership at the same level
      existing prior to the Subsequent Financing (after giving effect to such
      Subsequent Financing). Additionally, all of the warrants offered in this private
      placement contain an anti-dilution mechanism whereby, subject to certain
      exceptions, the exercise price of the warrants is automatically reduced to
      the
      lowest price per share at which the ordinary shares were issued or sold if
      we
      issue or sell any ordinary shares at a price per share less than the exercise
      price of the warrants (a “Trigger Issuance”). However, there is a cap on the
      number of ordinary shares that may be purchased by any warrant holder pursuant
      to this anti-dilution mechanism. Each warrant holder may purchase only such
      number of ordinary shares which would permit such holder to maintain its fully
      diluted percentage equity ownership at the same level existing prior to the
      Trigger Issuance (after giving effect to such Trigger Issuance). Accordingly,
      if
      we trigger either the participation right granted to the investors in the
      private placement or the anti-dilution provision contained in the warrants,
      our
      stockholders could suffer substantial dilution.




**The
      number of ordinary shares which are available for sale upon exercise of our
      outstanding warrants and options is significant in relation to our currently
      outstanding ordinary shares and could cause downward pressure on the market
      price for our ordinary shares.**




The
      number of ordinary shares registered for resale upon exercise of our outstanding
      warrants and options is significant in relation to the number of ordinary shares
      currently outstanding. If those warrantholders or optionholders determine to
      sell a substantial number of shares into the market at any given time, there
      may
      not be sufficient demand in the market to purchase the shares without a decline
      in the market price for our ordinary shares. Moreover, continuous sales into
      the
      market of a number of shares in excess of the typical trading volume for our
      ordinary shares, or even the availability of such a large number of shares,
      could depress the trading market for our ordinary shares over an extended period
      of time.




17




**If
      persons engage in short sales of our ordinary shares, including sales of shares
      to be issued upon the exercise of our outstanding warrants and options, the
      price of our ordinary shares may decline.**




Selling
      short is a technique used by a stockholder to take advantage of an anticipated
      decline in the price of a security. In addition, holders of options and warrants
      will sometimes sell short knowing they can, in effect, cover through the
      exercise of an option or warrant, thus locking in a profit. A significant number
      of short sales or a large volume of other sales within a relatively short period
      of time can create downward pressure on the market price of a security. Further
      sales of ordinary shares issued upon exercise of our outstanding warrants or
      options could cause even greater declines in the price of our ordinary shares
      due to the number of additional shares available in the market upon such
      exercise or conversion, which could encourage short sales that could further
      undermine the value of our ordinary shares. You could, therefore, experience
      a
      decline in the value of your investment as a result of short sales of our
      ordinary shares.





**Being
      a foreign private issuer exempts us from certain** SEC **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 SEC 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,
      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.




18





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, 2005 to December 31, 2005, our capital expenditures
      totaled approximately $315,000 (compared to $1,088,000 during 2004 and $87,000
      during 2003), of which approximately $293,000 (compared to $1,017,000 during
      2004 and $78,000 during 2003) was expended at or upon SuperCom's facilities
      in
      Israel, and approximately $22,000 (compared to $71,000 during 2004 and $9,000
      during 2003) was expended upon various facilities of SuperCom's subsidiaries
      outside Israel. Of these expenditures, approximately $48,000 during 2005
      (compared to $41,000 during 2004 and $66,000 during 2003) was for capital
      equipment and leasehold improvements and the balance of approximately $267,000
      (compared to $1,047,000 during 2004 and $21,000 during 2003 and $40,000 during
      2002) was related to information technology.




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.




In
      February 2006, we announced the introduction of a new technology and solution
      for active tracking of people and assets, and the establishment of a new
      subsidiary Pure RF Inc, which will focus on this growing market.




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 Sagid House “Hasharon
      Industrial Park” P.O.B 5039, Qadima 60920 Israel, and our telephone number is
      +972-9-8890800. 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.




19





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. We intend
      to continue to participate in governmental ventures. We plan to also increase
      our sales efforts to the US Department of Homeland Security, state, local
      governments and to commercial markets through our distribution channels, with
      the leading distributors in the homeland security market.




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**





In
      June
      2006, we announced that we won a tender for the issuance of fire-arm license
      IDs
      and the licensing of guards to carry fire arms, with the Israeli Ministry of
      the
      Interior. The project is worth up to $500,000. This is the second time that
      we have been awarded a fire-arm license tender in Israel, following an initial
      award of $200,000 in 2003.




In
      May
      2006, we announced that our US Subsidiary, SuperCom, Inc., had received a United
      States General Services Administration (GSA), Federal Supply Schedule Contract
      for its products including its Homeland Security and First responder product
      line.  This contract award enables all U.S. federal and state agencies to
      buy SuperCom products from a GSA-approved price list with agreed upon terms
      and
      conditions.




As
      a GSA
      business partner, SuperCom and the GSA will proceed to form a marketing
      partnership. GSA Schedules provide a direct and effective procurement vehicle
      that satisfies the Government’s extensive requirements with simple
      administrative processes that significantly reduce the time and expense of
      acquisition, for both the contractor and the federal customer.




In
      April
      2006, we announced that we have received a $600,000 follow-on order from a
      West
      European government. The order is expected to be delivered during 2006 and
      follows the successful completion of E-Passport and the first stage of an eID
      project for the European government.




In
      April
      2006, we announced that we have received a follow-on order from one of our
      governmental customers, following the successful implementation of an e-ID
      system that was delivered to the customer in 2005.




20




The
      contract, which includes raw materials supply, maintenance and software support
      services over a period of 5 years starting from the first quarter of 2006,
      is
      valued at $1.25 million.




In
      March
      2006, we announced plans for Eyal Tuchman, Chief Financial Officer of Supercom
      over the past three years, to succeed Avi Schechter as Chief Executive Officer
      in April 2006. Mr. Schechter will continue to serve as a consultant for the
      Company.





In
      February 2006, we announced the introduction of a new technology for the
      tracking of people and assets, and the establishment of a new subsidiary in
      the
      U.S., Pure RF Inc., which will focus on this growing market.





The
      new
      technology expands our homeland security offerings through a Wireless Asset
      Tracking System for strategic and high value items. This offering will be
      provided to customers through the new subsidiary. The development of this new
      technology, as well as the establishment of the new subsidiary, is due to the
      growing market demand for asset tracking solutions in general and particularly
      in the homeland security market.





SuperCom’s
      “Pure RFTM” Movement Detection Solution monitors and tracks large number
      of items simultaneously, providing  an active set of different signals
      and alerts. The software and hardware solution employs small, low-powered radio
      frequency (“RF”) tags attached to an object or a person. License-free radio
      bands are used to track the RF band from a base transmitter that is programmable
      for periodic or event-driven transmissions. “Pure RFTM” can monitor and locate
      tagged items through a hand-held tracking device, which can also be integrated
      into cellular phones.




In
      February 2006, we announced that R. James Woolsey, former Director of Central
      Intelligence and one of America’s preeminent authorities on security issues,
      will be Chairman of our newly created Advisory Board.




The
      Advisory Board was established to enhance our presence in the United States
      and
      other nations, and to help identify new applications for our technologies in
      the
      homeland security, defense and document authentication markets.




In
      an era
      when both government and the private sector are faced with unprecedented
      challenges to protect public safety and personal privacy, the Advisory Board
      will serve to extend our forward-looking technologies into the U.S.
      market.




Mr.
      Woolsey will be joined on the Advisory Board by other distinguished Americans
      with experience in national security issues.  Additional Advisory Board
      members will be announced in the near future.




In
      January 2006, we announced an award of a tender to provide the technology for
      a
      biometric passport issuing and control system for a country in western Europe.
      The implementation of the project is expected to start during first quarter
      of
      2006.




The
      contract is for the implementation of a biometric passport issuing and control
      system, and includes a six-year contract for maintenance and
      support.




In
      November and December of 2005, we received aggregate gross proceeds of
      $3,050,000 from a private placement to certain investors of 4,919,354 ordinary
      shares and five-year warrants to purchase 1,721,772 ordinary shares at an
      exercise price of $0.60 per share. The private placement was made to accredited
      investors without general solicitation or marketing pursuant to Rule 506 of
      Regulation D, promulgated under the Securities Act of 1933, as amended (the
      “Securities Act”) and to foreign private investors in offshore transactions in
      reliance on Regulation S promulgated under the Securities Act. In connection
      with the private placement, our placement agent received a cash fee of $150,000
      and our placement advisors received five-year warrants to purchase 49,677
      ordinary shares at an exercise price of $0.60 per share. The investors in this
      private placement were granted the right, for one year following the closing
      of
      the private placement and subject to certain limitations, to participate in
      future issuances of our capital stock or securities (a “Subsequent Financing”)
      up to an amount which would permit each investor to maintain its fully diluted
      percentage equity ownership at the same level existing prior to the Subsequent
      Financing (after giving effect to such Subsequent Financing). Additionally,
      all
      of the warrants offered in this private placement contain an anti-dilution
      mechanism whereby, subject to certain exceptions, the exercise price of the
      warrants is automatically reduced to the lowest price per share at which the
      ordinary shares were issued or sold if we issue or sell any ordinary shares
      at a
      price per share less than the exercise price of the warrants (a “Trigger
      Issuance”). However, there is a cap on the number of ordinary shares that may be
      purchased by any warrant holder pursuant to this anti-dilution mechanism. Each
      warrant holder may purchase only such number of ordinary shares which would
      permit such holder to maintain its fully diluted percentage equity ownership
      at
      the same level existing prior to the Trigger Issuance (after giving effect
      to
      such Trigger Issuance). The warrants are callable, subject to certain
      limitations, at our option if the closing bid price per ordinary share of our
      ordinary shares equals or exceeds $1.20 for 20 trading days during the term
      of
      the warrants. We may however only call, in any 3-month period, the lesser of
      (i)
      20% of the aggregate amount of the warrants initially issued to a warrant
      holder, or (ii) the total number of warrants then held by such
      holder.




21




During
      the second half of 2005, our Vend-EZ(TM) contactless smart card-based cashless
      purchasing solution was approved by one of world's largest consumer products
      companies for use in its vending machines in the United States. We are going
      to
      re-evaluate our marketing and sales efforts with regard to this solution by
      the
      beginning of the year 2007.




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 was deployed during the second quarter of 2005.





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




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
      January 2005, we announced that we have 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.





·
            ***RF
                Tag.***The RF tag is a technology that can monitor and locate tagged items
                through a hand-held tracking device. The active RF tags solution
                is able
                to track hundreds of items simultaneously, providing an alert when
                a
                tagged item is removed from a pre-determined area tacking through
                a marked
                checkpoint or otherwise moves in an unexpected manner.





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




22




**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.





***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, 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.




23





***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 tracking solutions for people, assets and objects. 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.





***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.




24





***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 $0.9 million,
      $0.8 million and $1.2 million on research and development in 2003, 2004 and
      2005, 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, continue to develop our automatic contactless smart
      card production line, SmartSMDS, E-Passport and new technology for active
      tracking solutions. 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. Today, we have three major
      groups of solutions for our customers that are organized as separate marketing
      divisions:





·
            Our
                credentialing solutions provide ID solutions for governments, commercial
                sectors and contactless smart card production equipment for the
                governmental and commercial markets;





·
            Our
                homeland security “***SmartDSMS”***providessolution
                for facilitating the authentication and flow of on-site personnel
                in
                disaster recovery operations; and******





·
            Our
                new tracking technology using RF tags can monitor and locate tags
                items
                through a hand-held tracking device.





***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. 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.




25





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.





***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.




26





***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.





***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 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.




27




·
            **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 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.




***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.




28




***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 tracking assets and people, 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 and 2005, we generated $261,000
      and
      $240,000 respectively, in revenues pursuant to this agreement.




***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 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 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 had 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. On September 27, 2005, we received a negative award by the
      Arbitration Court. On December 12, 2005 we were informed that the Supreme Court
      of Ukraine had dismissed our appeal regarding the July 2004 decision. Based
      on
      the opinion of our legal advisors, we strongly believe that such award is wrong,
      that the claim has no merit and that there have been serious violations of
      the
      arbitration proceedings, therefore no provision was set-up in the financial
      statements in respect to the claim for restitution of $1,047,740. However,
      due
      to the developments described above we wrote off inventory in an amount of
      approximately $287,000 in the fourth quarter of 2005 and took possession of
      the
      remaining inventory that was previously delivered to the customer. In 2003,
      we
      increased the allowance for doubtful accounts in aggregate amount of $ 2,133,000
      for the debt the Ukrainian government owes to us. We did not have any revenues
      from this project in 2004 and 2005.


29




***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 2003 and 2004, we generated revenues
      of
      $1,184,000 and $1,610,000, respectively, pursuant to this agreement. During
      2005, we generated $559,000 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. During 2005,
      we generated $1,868,000 in revenues from the Moldovan government. 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 2003 and 2004, we generated revenues of $811,000
      and
      $758,000, respectively, pursuant to this agreement. During 2005, we generated
      $672,000 in revenues pursuant to this agreement.





***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. We are currently
      negotiating to extend this agreement until December 31, 2008. In 2003 and 2004,
      we generated revenues of $879,000 and $1,271,000, respectively, pursuant to
      this
      agreement. During 2005, we generated $900,000 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 2003 and 2004, we generated
      revenues of $140,000 and $129,000, respectively, pursuant to this agreement.
      During 2005, we generated revenues of $14,000 pursuant to this agreement.




30





***United
      States Government Printing Office***





On
      May 5,
      2005, the U.S. Government Printing Office (“GPO”) issued a Notice of Termination
      for Convenience involving our 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 GPO, our attempts to persuade
      the GPO to withdraw the current termination notice have been unsuccessful. 
The notice terminates our contract awards for the Electronic Passport Program.
      While the termination notice does not specify the reason for its issuance,
      we
      understand from our discussions with the GPO that it is based on unresolved
      security concerns and not related to our technological solution or our 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.




Total
      revenues that was recognized by December 31, 2005 were $360,000 pursuant to
      this
      agreement.




***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.




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,
      inc luding
      the encoded fingerprints of the cardholder.




In
      2004
      and 2005, we generated revenues of $637,000 and $1,918,000, respectively,
      pursuant to this agreement.





***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 2006. During the year 2005 our revenues from
      this project were $ 202,000.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 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 23 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.




31





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.





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,****2003**
            
            
            **2004**
            
            
            **2005****Total**
            
            
            **Total**
            
            
            **Total****revenues**
            
            
            **revenues**
            
            
            **revenues**Europe
            
            $
            3,308
            
            $
            3,218
            
            $
            3,719Asia
                Pacific
            
            
            2,067
            
            
            2,433
            
            
            2,173Africa
            
            
            536
            
            
            899
            
            
            2,158United
                States
            
            
            828
            
            
            386
            
            
            202Israel
            
            
            460
            
            
            320
            
            
            210Other
            
            
            45
            
            
            88
            
            
            -$
            7,244
            
            $
            7,344
            
            $
            8,462





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





**Year
                ended December 31,****2003**
            
            **2004**
            
            **2005**Raw
                materials and equipment
            
            $
            4,196
            
            $
            5,552
            
            $
            7,902SPPL
                1000
            
            
            2,471
            
            
            1,210
            
            
            -Maintenance
            
            
            577
            
            
            582
            
            
            560$
            7,244
            
            $
            7,344
            
            $
            8,462





**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 twelve 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.




32





**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, as of the date of this annual report,
      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.





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.




33




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.





***Patents***





As
      of the
      date of this annual report, we had 5 patent cases. One registered in Israel,
      2
      pending in Israel, 3 pending in USA, one registered in Honk Kong and one pending
      in 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.




34





**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 6 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 to 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.




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 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. On September 27, 2005, we received a negative award by the
      Arbitration Court. On December 12, 2005 we were informed that the Supreme Court
      of Ukraine had dismissed our appeal regarding the July 2004 decision. Based
      on
      the opinion of our legal advisors, we strongly believe that such award is wrong,
      that the claim has no merit and that there have been serious violations of
      the
      arbitration proceedings, therefore no provision was set-up in the financial
      statements in respect to the claim for restitution of $1,047,740. However,
      due
      to the developments described above, we wrote off inventory in an amount of
      approximately $287,000 in the fourth quarter of 2005 and took possession of
      the
      remaining inventory that was previously delivered to the customer. In 2003,
      we
      increased the allowance for doubtful accounts in aggregate amount of $ 2,133,000
      for the debt the Ukrainian government owes to us. We did not have any revenues
      from this project in 2004 and 2005.




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 was ordered to pay SuperCom Slovakia
      the amount of SKK 80,000,000 (approximately $2,500,000 million as of December
      31, 2005) plus interest accruing from March, 1999. In addition, the Ministry
      of
      Interior of the Slovak Republic was ordered to pay the costs of arbitration
      in
      the amount of EUR 42,716 (approximately $51,000 as of December 31, 2005) and
      SuperCom Slovakia's legal fees in the amount of EUR 63,611 (approximately
      $75,000 as of December 31, 2005). 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 in Vienna, Austria on February 10, 2004, whereby
      it challenged and requested to set aside the arbitral award. During September
      2005 the commercial court of Vienna dismissed the claim of the Ministry of
      the
      Interior of the Slovak Republic. On October 21, 2005 the Ministry of the
      Interior of the Slovak Republic filed an appeal.




35




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 certain commission in respect of transactions between SuperCom and certain
      third parties On September 29, 2005 we reached a settlement agreement with
      Mr.
      Yaacov Pedhatzur pursuant to which we will pay Mr. Pedhatzur the NIS equivalent
      of $ 129,000. The settlement agreement has been validated by the Magistrate
      Court. This amount was recorded in the statement of operations as litigation
      settlement expenses.




On
      December 16, 1999, Secu-Systems Ltd. ("Secu-systems" or the "Plaintiff") filed
      a
      lawsuit with the District Court in Tel-Aviv-Jaffa jointly and severally against
      us and InkSure Ltd. (a former subsidiary, which became a subsidiary of InkSure
      Technologies, Inc., ("InkSure")) 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 constitutes inter alia: (a) a
      breach of a confidentiality agreement between the Plaintiff and us; (b) unjust
      enrichment of us and InkSure; (c) a breach of fiduciary duties owed to the
      Plaintiff by us and InkSure, and (d) a tort of misappropriation of trade secrets
      and damage to the Plaintiff's property. Based on such allegations, Secu-Systems
      asked the court to order us and InkSure 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 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 $22,000 as of December 31, 2005). 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




On
      March
      15, 2006, the Court gave its ruling as follows:





1.
            The
                claim for a breach of contract was
                denied.


2.
            The
                claim for misappropriation of trade secret was accepted, but the
                court
                states explicitly that there is no room for ordering the defendant
                to
                restitute profits of breach of contract and that there is also no
                room for
                granting a remedy which orders the restitution of profits due to
                the
                causes of actions of misappropriation of trade secret or unjust
                enrichment.


3.
            Ordered
                InkSure and us to cease all activity which involves the use of the
                confidential knowledge and/or the confidential
                information.


4.
            To
                provide to the Plaintiff, within 60 days, a report certified by an
                accountant that sets forth in full the income and/or benefit that has been
                received by InkSure and us as a result of the infringing activity
                until
                the date of the judgment.


5.
            To
                pay (jointly and severally) to the Plaintiff a compensation in the
                sum of
                NIS 100,000 (bearing interest and linked to the consumer price index
                (CPI)
                from the date of the judgment), legal expenses (bearing interest
                and
                linked to the CPI from the dates they were incurred until their actual
                payment) as well as attorney's fees in the sum of NIS 30,000 plus
                VAT
                (bearing interest and linked to the CPI from the date of the
                judgment).





Secu-Systems
      has recently filed an appeal on the ruling above. At this point, we cannot
      estimate the odds of success of the appeal. We have the right to file a counter
      appeal until July 15, 2006.




On
      May 1,
      2006, Evilia Investments Ltd. ("Evilia") filed with the Magistrate's Court
      in
      Tel-Aviv-Jaffa a monetary lawsuit against InkSure and against us, jointly and
      severally, for payment of NIS 2,366,868 (as of June 15, 2006, approximately
      $530,000) plus interest, due as rent payments and related management fees for
      a
      certain real estate property in Rehovot, leased to InkSure under a lease
      agreement entered into between Evilia and InkSure on October 10, 2000, as
      amended on May 25, 2001 (the "Agreement"), to which SuperCom is a
      guarantor.




A
      motion
      for leave to defend the lawsuit has been filed with the Court by both InkSure
      and us on June 15, 2006.




Based
      upon the facts provided by InkSure, the building was not completed and was
      not
      ready for use, and hence, InkSure submitted to Evilia a notice of termination
      of
      the Agreement




Assuming
      that the facts presented by InkSure in its motion for leave to defend the
      lawsuit are adopted as true by the Magistrate's Court, we tend to believe that
      the chances the claim against InkSure and hence (since the guarantee signed
      by
      us will no longer be valid if the termination of the Agreement by InkSure is
      found to be justified by the court), also against us, will be dismissed are
      reasonably good




36




In
      addition, based on our legal consultant advisor, we believe that our liability
      under the Agreement is limited as a guarantor to InkSure's obligation, if and
      to
      the extent it is not paid by InkSure.




Accordingly,
      even if the court issues a final judgment according to which InkSure is required
      to pay the amount claimed or any part thereof, our obligation to pay any amount
      to Evilia is subject to no payment of the amounts due from InkSure, and limited
      only to such amounts.




Since
      Inksure appears to be financially capable of paying any amounts due on the
      claim, if so determined by the court, we tend to believe that our exposure
      is
      limited.




**Employees**





As
      of
      December 31, 2005 and December 31, 2004, we had 57 and 67 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.





**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, 2005:







As
      part
      of our reorganization plan during 2001 and 2002, 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.




37





**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 has been 100% owned
      by us
      since November, 2003.





**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%.





**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.





**Pure
      RF Inc.**


Pure
      RF
      inc., incorporated in Delaware in November 2005, is 80% owned by us. During
      January 2006 Pure RF Inc. established a subsidiary (100%) called Pure RF Israel
      Ltd, which will develop new technology and solution for the tracking of people
      and assets.





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




We
      do not
      own any real estate property.





We
      lease
      approximately 2,224 square meters of facilities in Kadima, Israel. Our principal
      management, administration and marketing activities occupy approximately 682
      square meters on the site. Our principal engineering, research and development
      and manufacturing activities occupy approximately 1,542 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. According
      to the agreement the lease is for a period of five years commencing on November
      1, 2005. The Company has an option to renew the lease for an additional period
      of five years. According to the agreement, the monthly fee is  approximately
      $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 2003, 2004 and 2005 were $ 311,804, $386,821 and
      $369,560, respectively, The total annual lease commitments for 2006 are
      $283,779




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




38





The
      following table details our fixed assets as of December 31, 2005 and
      2004:




**December
                31,****2004**
            
            **2005****(In
                thousands of US Dollars)****Cost:**Computers
                and peripheral equipment
            
            $
            1,013
            
            $
            1,055Machinery
                and peripheral equipment
            
            
            3,367
            
            
            3575Office
                furniture and equipment
            
            
            471
            
            
            487Leasehold
                improvements*
            
            
            1,147
            
            
            1315,998
            
            
            5,248**Accumulated
                depreciation:**Computers
                and peripheral equipment
            
            
            910
            
            
            971Machinery
                and peripheral equipment
            
            
            637
            
            
            745Office
                furniture and equipment
            
            
            218
            
            
            245Leasehold
                improvements*
            
            
            592
            
            
            772,357
            
            
            2,038**Depreciated
                cost:**
            
            $
            3,641
            
            $
            3,210





Depreciation
      expenses for the years ended December 31, 2003, 2004 and 2005 were $284,000,
      $238,000 and $746,000, respectively




*
      During
      the fiscal 2005, the Company relocated its offices. As a result the Company
      wrote down the unamortized balance of leasehold improvement in the amount of
      $471,000. This expense was recorded in the statement of operations as part
      of
“Restructuring expenses”.




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




***A.    Operating
      results***




The
      following section should be read in conjunction with our consolidated financial
      statements and the related notes thereto, 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.”





**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 2005, our revenue from
      the government market totaled approximately $7,519,000 compared to $943,000
      from
      the commercial 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
      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.





39




***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 typically  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
      Expense***




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:





A.  Revenue
      recognition


B.  Allowance
      for doubtful accounts


C.  Inventory
      valuation


D.  Impairment
      of long-lived assets


E.  Contingencies


F.  Stock
      Based Compensation





40




***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 recognized 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.As
                mentioned above we derive our revenues mainly from sale of hardware
                products that include embedded software that is considered to be
                incidental.




However,
      in limited circumstances, we provide software upgrades in respect of the
      embedded software of hardware products sold in the past. Such revenues are
      recognized when all criteria outlined in Statement of Position No. 97-2
“Software Revenue Recognition” (“SOP No. 97-2) (as amended) are met: when
      persuasive evidence of an agreement exists, delivery of the product has occurred
      (i.e. the services have been provided), no significant obligations  under
      the
      agreement remain, the fee is fixed or determinable and collectibility is
      probable.




·
            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.




·
            We
                are entitled to royalties upon sales of smartcard systems. Such royalties
                are recognized when the sales are reported to the Company. (mainly
                on a
                monthly basis)




·
            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.




41




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 $3,347,000 and $3,397,000 at December 31,
      2004 and 2005, respectively.




***Inventories
      Valuation***




At
      each
      balance sheet date, we evaluate our inventory balance for excess quantities
      and
      technical 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.




42




***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***




Until
      December 31, 2005 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, (SFAS 123)” 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,
      through December 31, 2005, 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. However, as more
      fully described in note 2(v) to the accompanying financial statement. In
      December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R),
      a revision of 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 the Company.




The
      Company expects that SFAS 123R, will be applied using the modified prospective
      application transition method, as permitted by the statement. Under this
      transition method, upon the adoption of SFAS 123R, the new standard will be
      implemented as from the first quarter of 2006, with no restatement of prior
      periods.




Considering
      this transition method, the Company expects that the effect of applying this
      statement on the Company’s results of operations in 2006 as it relates to
      existing option plans, would not be materially different from the FAS 123 pro
      forma effect previously reported.




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.





43





**Results
      of Operations**





The
      following table sets forth selected consolidated income statement data for
      SuperCom for each of the three years ended December 31, 2003, 2004 and 2005
      expressed as a percentage of total revenues.


2003
              
              2004
              
              2005Revenues
              
              
              100
              %
              
              100
              %
              
              100
              %Cost
                  of revenues
              
              
              42.8
              
              
              50.8
              
              
              50.7Inventory
                  write-off
              
              
              --
              
              
              --
              
              
              3.4Gross
                  profit
              
              
              57.2
              
              
              49.2
              
              
              45.9Operating
                  expenses:Research
                  and development
              
              
              12.7
              
              
              11.5
              
              
              14.0Selling
                  and marketing, net
              
              
              41.8
              
              
              33.3
              
              
              35.5General
                  and administrative
              
              
              25.2
              
              
              26.6
              
              
              35.0Restructuring
                  expenses
              
              
              --
              
              
              --
              
              
              5.9Litigation
                  settlement expenses
              
              
              --
              
              
              --
              
              
              1.5Total
                  operating expenses
              
              
              79.7
              
              
              71.4
              
              
              91.9Operating
                  income (loss)
              
              
              (22.5
              )
              
              (22.2
              )
              
              (46.0
              )Financial
                  income (expenses), net
              
              
              (3.2
              )
              
              (2.9
              )
              
              (0.3
              )Other
                  income (expenses), net
              
              
              (1.1
              )
              
              (0.3
              )
              
              (0.4
              )Income
                  (loss) before income taxes
              
              
              (26.8
              )
              
              (25.5
              )
              
              (46.7
              )Equity
                  in losses of affiliates and
                  impairment,
                    net of taxes
              
              
              (0.7
              )
              
              --
              
              
              --Net
                  income (loss) from
              
              
              (27.5
              )
              
              (25.5
              )
              
              (46.7
              )continuing
                  operationsLoss
                  from discontinued operations
              
              
              --
              
              
              --
              
              
              --Net
                  income (loss)
              
              
              (27.5)
                  (25.5
              )
              
              (46.7
              )





**Operating
      Results**





**Year
      Ended December 31, 2005 Compared to Year Ended December 31, 2004**





***Revenues***




Our
      revenues in 2005 were $8,462,000 compared to $7,344,000 in 2004, an increase
      of
      15%. The increase is primarily due to an increase in revenues from existing
      governmental customers, primarily in Europe and Africa. We anticipate that
      our
      mix of revenues from the government and commercial markets for the twelve months
      ended December 31, 2006 will be consistent with our mix of revenues in 2005.
      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.




44




***Gross
      Profit***





Our
      gross
      profits in 2005 were $3,882,000 compared to gross profits of $3,614,000 in
      2004,
      an increase of 7.4%. The gross profit margin for the year 2005 decreased by
      3.3%
      as compared to 49% in 2004. The decrease in our 2005 gross profit margin was
      primarily due to Inventory write-off in the amount of $287,000 related to the
      Ukraine project, and due to different mix of products, which carry lower
      margins.





***Expenses***





Our
      operating expenses in 2005 were $7,778,000 compared to $5,245,000 in 2004,
      an
      increase of 48%. The increase in operating expenses was due to the increase
      in
      selling and marketing expenses, general and administrative expenses, research
      and development expenses, restructuring expenses of $496,000 relating to
      cost-cutting measures that we implemented during the year 2005 and settlement
      expenses of $129,000.




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 2005 were $3,003,000 compared to $2,445,000 in 2004, an increase
      of
      23%. The increase in the sales and marketing expenses was due to the increase
      in
      labor expenses and sales promotion expenses related to the increase in revenues.




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 2005 were $2,968,000 compared to $1,955,000 in 2004,
      an increase of 52%. 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, the commencement of trading of our shares in the United
      States on the OTC Bulletin Board, and increases in our legal expenses related
      to
      our ID solutions for governmental markets activity.




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 2005 were
      $1,182,000 compared to $845,000 in 2004, an increase of 40%. The increase in
      the
      research and development expenses was primarily due to research and development
      expenses associated with our ID solutions for governmental markets and to new
      products development including SmartSMDS, E-Passport. We expect, that our
      research and development expenses will increase in 2006 due to research and
      development expenses associated with our SmartSMDS, E-Passport and new
      technology for active tracking solutions.




Restructuring
      expenses contains certain financial measures related to expenses totaling
      $496,000 that are associated with cost-cutting measures implemented by us during
      year 2005.




Additionally,
      in 2005, we paid settlement expenses totaling $129,000 relating to a litigation
      settlement that we entered into with Mr. Yaacov Pedhatzur in connection with
      the
      Yaacov Pedhatzur litigation.




***Financial
      Interest Expense, net***




Financial
      interest expense for the twelve months ended December 31, 2005, and 2004, was
      $53,000 and $166,000, respectively. Interest expense during 2005 and 2004
      consisted of interest accrued from bank loans net of bank deposit.




***Other
      Expenses, Net***




Other
      expenses, net for the twelve months ended December 31, 2005, and 2004, was
      $
      30,000 and $27,000, respectively.




***Net
      Loss***




As
      a
      result of the factors described above, our net loss in 2005 was $3,951,000
      compared to a net loss of $1,872,000 in 2004, an increase of 111%.




45








**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. As a result of negative
      developments in the arbitration relating to the Ukraine ID Project we wrote
      off
      inventory during the fourth quarter of 2005 in the amount of approximately
      $287,000. Additionally, during the year 2003, 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.




***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%.





***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
      Expenses, Net***




Other
      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.




46




***Net
      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%.




**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
      2005,
      the rate of devaluation of the NIS against the U.S. dollar was 6.8% and the
      rate
      of inflation was 2.4%. 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,
      2005, 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 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.” 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**





SFAS
      151
“Inventory Costs, an amendment of ARB No. 43, Chapter 4”




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.




As
      applicable to the Company SFAS 151 will be effective for inventory costs
      incurred after January 1, 2006. The Company believes that FAS 151, when adopted,
      will not have a significant impact on its financial position or results of
      operations.




47





SFAS
      154 “ Accounting
      Changes and Error Corrections ”




In
      May
      2005, the FASB published SFAS 154 “ Accounting
      Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB
      Statement No. 3 ” (SFAS
      154), SFAS 154 replaces APB Opinion 20, “ Accounting
      Changes ” ,
      and
      SFAS 3, “ Reporting
      Accounting Changes in Interim Financial Statements ” ,
      and
      changes the requirements for the accounting for and reporting of a change in
      accounting principle.  SFAS 154 applies to all voluntary changes in
      accounting principle, and to changes required by an accounting pronouncement
      in
      the unusual instance that the pronouncement does not include specific transition
      provisions.





As
      applicable to the Company, the provisions of FAS 154 are effective as for the
      year beginning January 1, 2006. The adoption of this Standard is not expected
      to
      have a material effect on the Company’s financial position and results of
      operations.





FAS
      155 “ accounting
      for certain Hybrid Financial Instruments ”




In
      February 2006, the FASB issued FAS 155, accounting for certain Hybrid Financial
      Instruments, an amendment of FASB statements No. 133 and 140. This statement
      permits fair value measurement for any hybrid financial instrument that contains
      an embedded derivative that otherwise would require bifurcation.




This
      statement shall be effective for all financial instruments acquired or issued
      ,
      or subject to a remeasurement (new basis) after the beginning of an entity’s
      first fiscal year that begins after September 15, 2006. Earlier adoption is
      permitted as of the beginning of an entity’s fiscal year, provided that no
      interim period financial statements have bee issued for the financial year.




Management
      is currently evaluating the impact of this statement, if any, on the Company’s
      financial statements or its 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 the
      Company.





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.


In
      March
      2005, the SEC issued Staff Accounting Bulletin 107 (“SAB 107”). In particular,
      SAB 107 provides supplemental implementation guidance on SFAS 123R, including
      guidance on valuation methods, classification of compensation expense, inventory
      capitalization of share-based compensation cost, income statement effects,
      disclosures and several other issues. The Company will apply the principles
      of
      SAB 107 in conjunction with the adoption of SFAS 123R




The
      Company expects that SFAS 123R, will be applied using the modified prospective
      application transition method, as permitted by the statement. Under this
      transition method, upon the adoption of SFAS 123R, the new standard will be
      implemented as from the first quarter of 2006, with no restatement of prior
      periods.


Considering
      this transition method, the Company expects that the effect of applying this
      statement on the Company’s results of operations in 2006 as it relates to
      existing option plans, would not be materially different from the FAS 123 pro
      forma effect previously reported.





***B.    Liquidity
      and Capital Resources***




Net
      cash
      used in operating activities from continuing operations for the twelve months
      ended December 31, 2005 was $2,954,000 compared to $609,000 during the period
      ended December 31, 2004, an increase of $2,345,000 or 385%. This increase was
      primarily as a result of an increase in loss from operational activities, in
      addition to a decrease in trade payable, an increase in inventories of $40,000
      in the year ended 2005 compared to a decrease of $ 814,000 during the year
      ended
      2004 and a decrease of $ 407,000 in accrued expenses and other liabilities
      during the year ended 2005 compared to an increase of $ 747,000 during the
      year
      ended 2004. On the other hand, our other accounts receivable and prepaid
      expenses decreased by $517,000 in the year ended 2005, compared to an increase
      of $403,000 in the year ended 2004 and our trade receivable decreased by
      $448,000 in the year ended 2005, compared to an increase of $398,000 in the
      year
      ended 2004.




48





Net
      cash
      used in investing activities during the period ended December 31, 2005 was
      $635,000 compared to $531,000 during the period ended December 31, 2004, an
      increase of $104,000. This increase was primarily due to investment in
      marketable debt securities of $ 650,000 during the year ended 2005 compared
      to a
      proceeds from maturity of $110,000 during the year 2004. On the other hand
      during the year 2005 we purchased property and equipment in the amount of $
      315,000 compared to $ 1,088,000 during the year 2004.




Net
      cash
      provided by financing activities during the period ended December 31, 2005
      was
      $2,989,000 compared to $2,305,000 during the period ended December 31, 2004,
      an
      increase of $684,000. This increase was primarily due to an increase in short
      term bank credit of $120,000 compared to a decrease in short term bank credit
      of
      $1,122,000 in 2004 and an increase in issuance of share capital through a
      private placement, net of issuance costs.





As
      of
      December 31, 2005, our cash and cash equivalents, short-term deposits and
      marketable debt securities totaled $2,944,000, compared to $3,247,000 as of
      December 31, 2004. Restricted cash totaled $1,088,000 as of December 31, 2005
      compared to $1,129,000 as of December 31, 2004. 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 $24,065,000 from our inception through
      December 31, 2005, and we have continued to accumulate net losses since December
      31, 2005. 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, in 2004, private placements of our ordinary shares and warrants
      to
      purchase our ordinary shares and in 2005, private placements of our ordinary
      shares and warrants to purchase our ordinary shares. As of
      December 31, 2005, our principal source of liquidity was $2,944,000 of cash,
      cash equivalents and marketable securities. As of December 31, 2005, we had
      $855,000 of debt outstanding relating to obligations under our credit facility,
      $195,000 of debt outstanding relating to long-term loan, net of current
      maturities and an obligation for severance pay to Israeli employees of $616,000
      of which $492,000 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.





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. During the year 2005, 320,294 warrants were exercised for
      an
      aggregate amount of approximately $ 352,000.





In
      November and December of 2005, we received aggregate gross proceeds of
      $3,050,000 from a private placement to certain investors of 4,919,354 ordinary
      shares (out of which, 887,096 shares were issued after balance sheet date.)
      and
      five-year warrants to purchase 1,721,772 ordinary shares at an exercise price
      of
      $0.60 per share. The private placement was made to accredited investors without
      general solicitation or marketing pursuant to Rule 506 of Regulation D,
      promulgated under the Securities Act of 1933, as amended (the “Securities Act”)
      and to foreign private investors in offshore transactions in reliance on
      Regulation S promulgated under the Securities Act. In connection with the
      private placement, our placement agent received a cash fee of $150,000 and
      our
      placement advisors received five-year warrants to purchase 49,677 ordinary
      shares at an exercise price of $0.60 per share. The investors in this private
      placement were granted the right, for one year following the closing of the
      private placement and subject to certain limitations, to participate in future
      issuances of our capital stock or securities (a “Subsequent Financing”) up to an
      amount which would permit each investor to maintain its fully diluted percentage
      equity ownership at the same level existing prior to the Subsequent Financing
      (after giving effect to such Subsequent Financing). Additionally, all of the
      warrants offered in this private placement contain an anti-dilution mechanism
      whereby, subject to certain exceptions, the exercise price of the warrants
      is
      automatically reduced to the lowest price per share at which the ordinary shares
      were issued or sold if we issue or sell any ordinary shares at a price per
      share
      less than the exercise price of the warrants (a “Trigger Issuance”). However,
      there is a cap on the number of ordinary shares that may be purchased by any
      warrant holder pursuant to this anti-dilution mechanism. Each warrant holder
      may
      purchase only such number of ordinary shares which would permit such holder
      to
      maintain its fully diluted percentage equity ownership at the same level
      existing prior to the Trigger Issuance (after giving effect to such Trigger
      Issuance). The warrants are callable, subject to certain limitations, at our
      option if the closing bid price per ordinary share of our ordinary shares equals
      or exceeds $1.20 for 20 trading days during the term of the warrants. We may
      however only call, in any 3-month period, the lesser of (i) 20% of the aggregate
      amount of the warrants initially issued to a warrant holder, or (ii) the total
      number of warrants then held by such holder.




49





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, 2005, we had credit lines from several banks in an aggregate amount
      of $803,000 including current maturities of long-term loans in an amount of
      $167,000 (from time to time the bank may increase our credit line for a limited
      period), of which $587,000 is denominated in NIS and bears interest at a rate
      of
      Prime, plus an additional 0.5% to 2.5%, and $ 216,000 is denominated in dollars
      and bears interest at a rate of LIBOR plus +2.5% to +2.9%. (As of December
      31,
      2005, the rates of the LIBOR and Prime were 4.8% and 6% respectively) The
      weighted average interest rate on the credit lines as of December 31, 2004
      and
      2005 was approximately 5.7% and 5.9%, respectively.





We
      had an
      unused credit facility in the amount of approximately $0 as of December 31,
      2005. There is no fee for the unused portion of the credit facility.





During
      the period from January 1, 2005 to December 31, 2005, our capital expenditures
      totaled approximately $315,000 (compared to $1,088,000 during 2004 and $87,000
      during 2003), of which approximately $293,000 (compared to $1,017,000 during
      2004 and $78,000 during 2003) was expended at or upon SuperCom's facilities
      in
      Israel, and approximately $22,000 (compared to $71,000 during 2004 and $9,000
      during 2003) was expended upon various facilities of SuperCom's subsidiaries
      outside Israel. Of these expenditures, approximately $48,000 during 2005
      (compared to $41,000 during 2004 and $66,000 during 2003) was for capital
      equipment and leasehold improvements and the balance of approximately $267,000
      (compared to $1,047,000 during 2004 and $21,000 during 2003) 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 24 people as of December 31, 2005. We spent $0.9 million, $0.8
      million and $1.2 on research and development in 2003, 2004 and 2005,
      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, continue to develop our automatic contactless smart card
      production line, SmartSMDS, E-Passport and new technology for active tracking
      solutions. There can be no assurance that we can achieve any or all of our
      research and development goals.




50







***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.





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) 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, 2005, 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 2005 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.




Our
      revenues from the government market for 2005 and 2004 totaled $7,519,000 and
      $6,330,000, respectively. In comparison our revenues from the commercial market
      for 2005 and 2004 totaled $943,000 and $1,014,000, respectively. We anticipate
      that our mix of revenues from government and commercial markets for 2006 will
      be
      consistent with our mix of revenues in 2005.




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 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 aggressively bidding on a number of large national
      identification projects
      and expect to achieve fair results.




51




During
      the second half of the year 2005, our Vend-EZ(TM) contactless smart card-based
      cashless purchasing solution was approved by one of world's largest consumer
      products companies for use in its vending machines in the United States. We
      are
      going to re-evaluate our marketing and sales efforts with regard to this
      solution by the beginning of the year 2007.




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 was deployed during the second quarter of 2005.





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. As
      of the
      date of this annual report, we expect
      that our 2006 revenues will be primarily derived from:





·
            Smart
                ID 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.




We
      recently entered into a lease agreement for a new office in Kadima, Israel,
      which replaced our office in Ra’anna, Israel. As a result of this relocation as
      part of a cost-cutting program, we wrote off certain assets.





In
      June
      2006, we announced that we won a tender for the issuance of fire-arm license
      IDs
      and the licensing of guards to carry fire arms with the Israeli Ministry of
      the
      Interior. The project is valued at up to $500,000. This is the second time
      that
      we have been awarded a fire-arm licenses tender in Israel, following an initial
      award of $200,000 in 2003.




In
      May
      2006, we announced that our U.S. subsidiary, SuperCom, Inc., has received a
      United States General Services Administration (GSA) Federal Supply Schedule
      Contract for its products including its Homeland Security and First responder
      product line.  This contract award enables all U.S. federal and state
      agencies to buy SuperCom products from a GSA-approved price list with agreed
      upon terms and conditions. As a GSA business partner, SuperCom and the GSA
      will
      proceed to form a marketing partnership. GSA Schedules provide a direct and
      effective procurement vehicle that satisfies the Government’s extensive
      requirements with simple administrative processes that significantly reduce
      the
      time and expense of acquisition, for both the contractor and the federal
      customer.




In
      April
      2006, we announced that we have received a $600,000 follow-on order from a
      West
      European government. The order is expected to be delivered during 2006 and
      follows the successful completion of E-Passport and the first stage of an eID
      project for the European government.




In
      April
      2006, we announced that we have received a follow-on order from one of our
      governmental customers, following the successful implementation of an e-ID
      system that was delivered to the customer in 2005. The contract, which includes
      raw materials supply, maintenance and software support services over a period
      of
      5 years starting from the first quarter of 2006, is valued at $1.25
      million.




In
      March
      2006, we announced plans for Eyal Tuchman, Chief Financial Officer of Supercom
      over the past three years, to succeed Avi Schechter as Chief Executive Officer
      in April 2006. Mr. Schechter will continue to serve as a consultant for the
      Company.





In
      February 2006, we announced the introduction of a new technology for the
      tracking of people and assets, and the establishment of a new subsidiary in
      the
      U.S., Pure RF Inc., which will focus on this growing market. The new technology
      expands our Homeland Security offerings through a Wireless Asset Tracking System
      for strategic and high value items. This offering will be provided to customers
      through the new subsidiary. The development of this new technology, as well
      as
      the establishment of the new subsidiary, is due to the growing market demand
      for
      asset tracking solutions in general and particularly in the Homeland Security
      market. SuperCom’s “Pure RFTM” Movement Detection Solution monitors and tracks
      large number of  items simultaneously, providing  an active set of
      different signals and alerts. The software and hardware solution employs small,
      low-powered RF tags attached to an object or a person. License-free radio bands
      are used to track the RF band from a base transmitter that is programmable
      for
      periodic or event-driven transmissions. “Pure RFTM” can monitor and locate tagged
      items through a hand-held tracking device, which can also be integrated into
      cellular phones.




52





In
      February 2006, we also announced that R. James Woolsey, former Director of
      Central Intelligence and one of America’s preeminent authorities on security
      issues, will be named Chairman of our newly created Advisory Board. The Advisory
      Board was established to enhance our presence in the United States and other
      nations, and to help identify new applications for our technologies in the
      homeland security, defense and document authentication markets. In an era when
      both government and the private sector are faced with unprecedented challenges
      to protect public safety and personal privacy, the Advisory Board will serve
      to
      extend our forward-looking technologies into the U.S. market. Mr. Woolsey will
      be joined on the Advisory Board by other distinguished Americans with experience
      in national security issues. Additional Advisory Board members will be announced
      in the near future.





In
      January 2006, we announced an award of a tender to provide the technology for
      a
      biometric passport issuing and control system for a country in western Europe.
      The implementation of the project started during first quarter of 2006. The
      contract is for the implementation of a biometric passport issuing and control
      system, and includes a six-year contract for maintenance and
      support.





Due
      to
      the Ukraine ID Project litigation, we did not recognize any revenues from this
      project during the year 2004 and 2005. 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 2006. See
      Item
      3, “Risk Factors”- 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.” above. During
      2004, we classified the cost of goods that were sold to the Ukraine Ministry
      of
      Internal Affairs from trade receivables to inventory. As a result of negative
      developments in the arbitration relating to the Ukraine ID project, we wrote
      off
      inventory in the amount of approximately $287,000 in the fourth quarter of
      2005.
      Moreover, there is no assurance that we will ultimately collect the amounts
      due
      under our contract with the Ministry of Internal Affairs of
      Ukraine.





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 was deployed during the second quarter of 2005.




On
      May 5,
      2005, the U.S. Government Printing Office (“GPO”) issued a Notice of Termination
      for Convenience involving our 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 GPO, our attempts to persuade
      the GPO to withdraw the current termination notice have been unsuccessful.
      The
      notice terminates our contract awards for the Electronic Passport Program.
      While
      the termination notice does not specify the reason for its issuance, we
      understand from our discussions with the GPO that it is based on unresolved
      security concerns and not related to our technological solution or our cost
      proposal. 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 Moldovan
      government per purchase order. We do not expect any significant changes in
      our
      revenues as a result of the termination of this agreement.




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 were recognized during the year 2004 and 2005, of $
      637,230 and $ 1,917,671 respectively and we anticipate additional revenues
      from
      this project during the coming years.




During
      the fourth quarter of 2004, we sold an automated smart card production system
      to
      the government of an European nation. We recognized revenues from the sale
      in
      the amount of approximately $1.25 million during the forth quarter 2004. During
      the year 2005 our revenues from this project were $ 202,000.




53





***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, 2005 that will require significant cash outlays in the
      future:





**Contractual
                Obligations**
            
            **Total**
            
            **2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**Long-term
                debt obligations
            
            $
            362,000
            
            $
            167,000
            
            $
            167,000
            
            $
            28,000
            
            
            --
            
            
            --Capital
                (finance) lease obligations
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Operating
                lease obligations
            
            $
            1,074,000
            
            $
            284,000
            
            $
            242,000
            
            $
            193,000
            
            $
            193,000
            
            $
            162,000Unconditional
                purchase obligations
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --
            
            
            --Total
                contractual cash obligations
            
            $
            1,436,000
            
            $
            451,000
            
            $
            409,000
            
            $
            221,000
            
            $
            193,000
            
            $
            162,000





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
            52
            Director,
                Chairman of the BoardAvi
                Landman
            52
            DirectorDaniel
                Spira
            52
            DirectorAvi
                Elkind
            52
            External
                DirectorMichal
                Brikman
            36
            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''.




54





***Daniel
      Spira*** **,** became
      a
      member of the Board of Directors on July 28, 2005 and is a member of the
      remuneration committee as well as the audit committee. Mr. Spira is a Certified
      Public Accountant with extensive management and accounting experience. Since
      1985, Mr. Spira is a partner in an accounting firm, which is one of the top
      professional services firm in Israel in the field of Internal auditing. In
      addition to his appointment to SuperCom’s Board of Director, he also serves on
      the Board of another public companies in Israel.





***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.








***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 companies in
      Israel.  Ms. Brikman received her Masters in Finance from Baruch College in
      New York City and later relocated to Israel.





**Executive
      Officers and Key Employees** ****




Our
      executive officers and certain key employees who are not also directors are:




**Name**
              **Age******
              **Position**Eyal
                  Tuchman
              38
              Chief
                  Executive OfficerEli
                  Basson
              45
              Vice
                  President IPS (Int'l Project Solutions) DivisionYaron
                  Shalom
              39
              Vice
                  President, Chief Financial OfficerMoshe
                  Wolfson
              54
              Vice
                  President, SalesGali
                  Gana
              40
              Internal
                  Auditor
  ***Eyal
        Tuchman*** ,
        Chief
        Executive Officer. In April 2006, Mr. Tuchman became SuperCom’s Chief Executive
        Officer, after 4 years of service as SuperCom’s Chief Financial Officer and
        Chief Operational Officer. Mr. Tuchman brings to SuperCom years of experience
        in
        business development finance and operational management 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 Kesselman & Kesselman (today,
        PriceWaterhouseCoopers). Mr. Tuchman holds a B.A. in Economics & Accounting
        from Ben Gurion University, as well as a C.P.A.





***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.




***Yaron
      Shalom*** , Vice
      President, Corporate Finance and Chief Financial Officer. Mr. Shalom joined
      us on June 11, 2006 and brings with him years of financial management
      experience, having served as Chief Financial Officer at a number of
      multinational high-tech companies, including BigBand Networks and Finjan
      Software. Prior to joining us, Mr. Shalom served as Chief Financial Officer
      of
      Messagevine from October 2004 until March 2006. From August 1999 until September
      2004, Mr. Shalom served as Chief Financial Officer of BigBand Networks. Mr.
      Shalom is a licensed CPA and holds an M.B.A. in Finance and Marketing and a
      B.A.
      in Accounting and Economics, both from Tel Aviv University.




On
      June
      29, 2006, our board of directors unanimously resolved that Eyal Tuchman, our
      current Chief Executive Officer and former Vice President, Corporate Finance
      and
      Chief Financial Officer, will remain our principal financial officer until
      ninety (90) days following Mr. Shalom’s hire date of June 11, 2006.




55




***Moshe
      Wolfson,*** 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.





***Gali
      Gana*** ,
      is our
      internal auditor since August 2005. Mr. Gana has years of experience in internal
      audit and investigation audit. Since 1997 Mr. Gana is a partner in an accounting
      firm. Mr. Gana holds a B.A. in Business Administrative
      & Accounting from Hmichlala Leminhal, as well as a C.P.A and M.A in Internal
      audit and Public Administration from
      Bar-Ilan University, C.I.A (certified internal auditor) and C.I.S.A (certified
      information system auditor).




***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, 2005 was approximately $840,000 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.




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 and 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, 2005, we had set aside approximately $ 95,000 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, 2005***





During
      the twelve months ended December 31, 2005, we granted the following options
      to
      purchase ordinary shares under our 2003 Employee Stock Option Plan to the
      following directors and Named Executive Officers.





**Name**
            **Options
                to Purchase Ordinary Shares Awarded during FY Ended Dec. 31,
                2005**
            **Exercise
                Price**
            **Expiration
                Date**Eli
                Rozen
            250,000
            0.85
            10
                January, 2015Eli
                Rozen (1)
            50,000
            0.85
            10
                January, 2015Avi
                Landman
            50,000
            0.85
            10
                January, 2015




(1).
      Held
      by Finel Architecture and Engineering Ltd. ,
      a
      company owned solely by Mr. Rozen (“Finel”) .




56





***Aggregated
      Option/SAR Exercises during the Year Ended December 31, 2005 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, 2005 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, 2005:





**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
            70,000
            141,600
            830,000
            $61,600Eyal
                Tuchman - Vice President, Chief Financial Officer
            20,000
            40,620
            380,000
            $29,400Eli
                Basson - Vice President, Research and Development and Chief Operating
                Officer
            -
            -
            300,922
            $15,158Moshe
                Wolfson
              Vice
                President Sales
            15,000
            30,370
            185,000
            $9,800




(1)
      Based
      on the closing price of our ordinary shares on the OTC Bulletin Board of $
      0.7
      on December 31, 2005 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.




***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-presentAvi
                Elkind
            External
                Director
            July
                25, 2000-presentMichal
                Brikman
            External
                Director
            October
                28, 2004-presentDaniel
                Spira
            Director
            July
                28, 2005-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 five 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).




57





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 a recent amendment to the Companies Law, 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,
      are required
      to have “accounting
      and financial skills” and
      the
      other external directors are required to have "professional skills", as such
      terms are defined in regulations recently 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.





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
      have
      the following committees:





**Audit
      Committee**





The
      Companies Law requires public companies to appoint an 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 Israeli law. 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 or the Articles of Association.
      The
      Audit Committee is comprised of Mr. Avi Elkind, Ms.Michal Brikman and Mr. Daniel
      Spira.




58





**Remuneration
      Committee**





We
      have a
      remuneration committee (the "Remuneration Committee"). 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, Ms. Michal Brikman and Mr. Daniel
      Spira.





**Management** **Employment
      Agreements**





We
      maintain written employment agreements with substantially all of our key
      employees. These agreements provide, among other matters, for monthly salaries,
      our contributions to Managers’ Insurance and an Education Fund and severance
      benefits. All of our agreements with our key employees are subject to
      termination by either party upon the delivery of notice of termination as
      provided therein.





***D.    Employees***




As
      of
      December 31, 2005 and December 31, 2004, we had 57 and 67 full-time employees,
      respectively. The following table describes our employees and the employees
      of
      our subsidiaries by department.





**Dec.
                31, 2003**
            **Dec.
                31, 2004**
            **Dec.
                31, 2005**Research,
                Development & Manufacturing
            21
            28
            24Marketing
                and Sales
            27
            27
            23Administration
            11
            12
            10**Total**
            **59**
            **67**
            **57**





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, 2005 all but 18 of our employees are located at our, 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.




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 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.




59





***E.    Share
      Ownership***





The
          following table sets forth certain information regarding the beneficial
          ownership of our ordinary shares by our directors and Named Executive Officer as
          of May
          31, 2006. As of that date, we had 23,315,994 ordinary shares
          outstanding.
  **Name**
                  **Ordinary
                      Shares held directly and beneficially**
                  **%
                      of Outstanding Ordinary Shares as of May 31,
                      2006**Eli
                      Rozen
                  3,271,340(1)
                  13.54%Avi
                      Landman
                  2,429,097(2)
                  10.38%Eyal
                      Tucman
                  480,000
                      (3)
                  2.00%Eli
                      Basson
                  300,922
                      (4)
                  1.27%Directors
                      and Named Executive Officers as a Group ([9] persons)(6)
                  6,716,359(5)
                  26.59%
  (1)
        Includes (a) 2,425,359 shares held directly by Eli Rozen, and (b) options
        to
        purchase 845,981 ordinary shares which are currently exercisable or exercisable
        within 60 days of May 31, 2006, of which 679,314 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 83,333 ordinary
        shares which are currently exercisable or exercisable within 60 days of May
        31,
        2006.
 (3)
          Includes options to purchase 480,000 ordinary shares which are currently
          exercisable or exercisable within 60 days of May 31, 2006.
 (4)
          Includes options to purchase 300,922 ordinary shares which are currently
          exercisable or exercisable within 60 days of May 31, 2006.
 (5)
          Includes options to purchase 1,945,236 ordinary shares which are currently
          exercisable or exercisable within 60 days of May 31, 2006.
 (6)
          See
          notes 1, 2,3,4 and 5. Each
          of
          the directors and executive officers not separately identified in the above
          table beneficially own less than 1% of our outstanding ordinary shares
          (including options held by each such party, and which are exercisable or exercisable within
          60
          days of May
          31,
          2006 )
          and
          have therefore not been separately disclosed.




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 SEC 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 (40,000,000) 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
      2005, options to purchase a total of 540,000, 165,005, and 221,666 ordinary
      shares (having respective weighted exercise prices of $0.84, $0.94 and $0.42
      per
      share) were awarded, cancelled and exercised, respectively, under this Plan.
      As
      of December 31, 2005, under this Plan, options to purchase a total of 3,505,706 ordinary
      shares and having a weighted average exercise price of $0.98 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 a mounts
      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.”




60





On
      December 29, 2005, our Board of Directors and our audit committee, approved
      the
      acceleration of the vesting schedule for certain of the stock options granted
      to
      our employees and officers as an incentive. As a result, options to purchase
      a
      total of 712,500 ordinary shares became exercisable as of such
      date.





A
      summary
      of our stock option activity, and related information is as follows:





**Year
                ended December 31****2003**
            
            **2004**
            
            **2005****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
            
            
            880,712
            
            $
            2.88
            
            
            1,534,514
            
            $
            1.17
            
            
            3,352,377
            
            $
            0.97Granted
            
            
            1,005,981
            
            $
            0.42
            
            
            2,030,000
            
            $
            1.23
            
            
            540,000
            
            $
            0.84Exercised
            
            
            (200,533
            )
            $
            0.42
            
            
            -
            
            $
            -
            
            
            (221,666
            )
            $
            0.42Canceled
                and forfeited
            
            
            (151,646
            )
            $
            0.72
            
            
            (212,137
            )
            $
            5.03
            
            
            (165,005
            )
            $
            0.94Outstanding
                at end of year
            
            
            1,534,514
            
            $
            1.17
            
            
            3,352,377
            
            $
            0.97
            
            
            3,505,706
            
            $
            0.98Exercisable
                at end of year
            
            
            1,113,580
            
            $
            1.44
            
            
            1,681,360
            
            $
            0.58
            
            
            3,032,372
            
            $
            1.03




The
          options outstanding as of December 31, 2005, have been separated into ranges
          of
          exercise price as follows:


**Exercise**
              **price**
            
            **Options
                outstanding as of**
              **December
                31, 2005**
            
            **Weighted
                average**
              **remaining**
              **contractual
                life (years)**
            
            **Weighted
                average**
              **exercise
                price**
            
            **Options
                exercisable**
              **as
                of**
              **December
                31, 2005**
            
            **Weighted
                average**
              **exercise
                price**$
                0.42 - $ 1
            
            
            2,852,115
            
            
            7.97
            
            $
            0.62
            
            
            2,378,781
            
            $
            0.61$
                2
                - $ 2.52
            
            
            640,000
            
            
            8.69
            
            $
            2.51
            
            
            640,000
            
            $
            2.51$
                4.00 - $ 5.62
            
            
            11,201
            
            
            2.74
            
            $
            4.73
            
            
            11,201
            
            $
            4.73$
                9.64
            
            
            2,390
            
            
            0.54
            
            $
            9.64
            
            
            2,390
            
            $
            9.643,505,706
            
            
            8.08
            
            $
            0.99
            
            
            3,032,372
            
            $
            1.03






61




**ITEM
      7.** ***Major
      Shareholders And Related Party Transactions.*** ****




***A.    Major
      shareholders***




The
      following table lists the beneficial ownership of our securities as of May
      31,
      2006 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 SEC 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, Special Situations Fund III, L.P., Special Situations Fund III, Q.P
      .P..
      and Special Situations Cayman Fund, L.P.  ) is c/o SuperCom Ltd., Sagid
      House “Hasharon Industrial Park” P.O.B 5039, Qadima 60920 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 31, 2006 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.




**Name
                of Beneficial Owner**
            **Number
                of Shares****Beneficially Owned**
            **Percentage
                of Shares****Outstanding**Jacob
                Hassan (1)
            2,346,358
            10.06%Avi
                Landman (2)
            2,429,097
            10.38%Eli
                Rozen (3)
            3,271,340
            13.54%Special
                Situations Fund III, L.P. (“SSF”)(4)
            6,525,327
            27.04%Special
                Situations Fund III, Q.P. (“SSFQP”)(5)
            6,525,327
            27.04%Special
                Situations Cayman Fund, L.P. (“Cayman”)(6)
            6,525,327
            27.04%




(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 83,333 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 845,981 ordinary shares which are currently exercisable
                or
                exercisable within 60 days of May 30, 2005, of which 679,314 ordinary
                shares are held by Finel.


(4)
            Includes
                (a) 328,261 ordinary shares, (b) options to purchase 90,990 ordinary
                shares which are currently exercisable or exercisable within 60 days
                of
                May 30, 2005, (c) 3,752,074 shares held by its affiliate, SSFQP,
                (d)
                options held by SSFQP to purchase 1,038,042 ordinary shares which
                are
                currently exercisable or exercisable within 60 days of May 30, 2005,
                (e)
                1,033,702 ordinary shares held by its affiliate, Cayman, and (f) options
                held by Cayman to purchase 282,258 ordinary shares which are currently
                exercisable or exercisable within 60 days of May 30,
                2005.


(5)
            Includes
                (a) 3,752,074 ordinary shares, (b) options to purchase 1,038,042
                ordinary
                shares which are currently exercisable or exercisable within 60 days
                of
                May 30, 2005, (c) 328,261 shares held by its affiliate, SSF, (d)
                options
                held by SSF to purchase 90,990 ordinary shares which are currently
                exercisable or exercisable within 60 days of May 30, 2005, (e) 1,033,702
                ordinary shares held by its affiliate, Cayman, and (f) options held
                by
                Cayman to purchase 282,258 ordinary shares which are currently exercisable
                or exercisable within 60 days of May 30,
                2005.


(6)
            Includes
                (a) 1,033,702 ordinary shares, (b) options to purchase 282,258 ordinary
                shares which are currently exercisable or exercisable within 60 days
                of
                May 30, 2005, (c) 3,752,074 shares held by its affiliate, SSFQP,
                (d)
                options held by SSFQP to purchase 1,038,042 ordinary shares which
                are
                currently exercisable or exercisable within 60 days of May 30, 2005,
                (e)
                328,261 ordinary shares held by its affiliate, SSF, and (f) options
                held
                by SSF to purchase 90,990 ordinary shares which are currently exercisable
                or exercisable within 60 days of May 30,
                2005.





To
      the
      best of our knowledge based on the information known to us, there have not
      been
      any significant change in the percentage ownership of the Company’s major
      shareholders during the last three years other than changes resulting from
      our
      private placements in 2004 and 2005 and the exercise of warrants issued in
      those
      offerings, and the grant of options to Messrs. Rozen and Landman.





As
      of
      December 31, 2005, to the best of our knowledge based on the information
      available to us, we had approximately 70 total registered holders of our
      ordinary shares. As of December 31, 2005 to the best of our knowledge based
      on
      the information available to us, approximately 40% 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.





62





***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 2003, 2004 and 2005 the Company
      paid $ 147,000, $ 144,000 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, who is one of the
      Company's co-founders and a principal shareholder. On January 13 2005, the
      general shareholders meeting approved the following amendments:




·
            As
                of the date of the approval of the General Shareholders Meeting,
                to
                increase the consideration set forth in the said agreement to an
                amount of
                $ 7,000 per month.


·
            Upon
                the termination of the current car leasing period, to upgrade the
                car
                provided, to any car whose leasing price is up to NIS 4,200 (approximately
                $ 1,000 as of December 31, 2005), (excluding tax) per
                month.


·
            To
                grant a one-time bonus of NIS 130,000 (approximately $ 30,000 as
                of
                December 31, 2005), including VAT.




In
      consideration of these services, the Company has undertaken to pay $ 7,000
      per
      month plus motor vehicle expenses. In addition the Company pays $ 1,500 per
      month as a directors fee. During 2003, 2004 and 2005, the Company paid $ 76,000,
      $ 73,000 and $ 132,000, 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 2003, 2004 and 2005, the Company paid $ 68,000, $ 69,000
      and $ 71,000, pursuant to this 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.




On
      January 13, 2005 the general shareholders meeting approved among other items
      the
      board of directors decision dated October 4, 2004 to grant an option to acquire
      up to 300,000 shares of the Company to 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. 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.




***C.***  ***Interests
      of Experts and Counsel***




Not
      applicable.


63




**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 (the
      “Profits Criteria”) under the Israeli Companies Law, 5759-1999 (the “Companies
      Law”), ,
      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.





***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 2003, 2004 and 2005 was $ 460,000, $ 320,000and $210,000,
      respectively. Export sales during the year 2003, 2004 and 2005 was $ 6,784,000
      (94%), $ 7,024,000 (96%) and $ 8,252,000 (98%), 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.


64




**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
                OTCBulletin 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-05
            $2.79
            $0.53
            $2.56
            $0.56Dec-04
            $2.66
            $0.55
            $2.65
            $2.14Dec-03
            $0.75
            $0.28
            -
            -Dec-02
            $0.565
            $0.1
            -
            -Dec-01
            $1.6
            $0.25
            -
            -





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:







**NasdaqEurope/
                Euronext OTC-BB****Quarter
                ended:**
            High
              ($)
            Low
              ($)
            High
              ($)
            Low
              ($)Q1/06
              Jan-Mar
            $0.87
            $0.54
            $1.1
            $0.61Q4/05
              Oct-Dec
            $0.79
            $0.53
            $0.89
            $0.56Q3/05
              July-Sept
            $0.82
            $0.74
            $0.95
            $0.66Q2/05
              Apr-Jun
            $2.22
            $0.75
            $2.38
            $0.68Q1/05
              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
            -
            -




65




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-06
            $0.76
            $0.58
            $0.88
            $0.67April-06
            $0.78
            $0.74
            $0.87
            $0.75March-06
            $0.84
            $0.75
            $0.95
            $0.73Feb-06
            $0.87
            $0.77
            $1.1
            $0.8Jan-06
            $0.82
            $0.54
            $0.95
            $0.61Dec-05
            $0.60
            $0.53
            $0.70
            $0.56





5.     The
      Company has not issued any securities in connection with a pre-emptive
      issue.





***B.***  ***Plan
      of Distribution***





Not
      applicable.





***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.





66


***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 is a summary of the current material Israeli tax laws applicable
      to
      companies in Israel with special reference to its effect on us. This section
      also contains a discussion of certain Israeli government programs from which
      we
      may benefit. This summary does not discuss all the acts of Israeli tax law
      that
      may be relevant to a particular investor in light of his or her personal
      investment circumstances or to some types of investors subject to special
      treatment under Israeli law. Examples of this kind of investor include traders
      in securities or persons that own, directly or indirectly, 5% or more of our
      outstanding capital, all of whom are subject to special tax regimes not covered
      in this discussion. Some parts of this discussion are based on new tax
      legislation that has not been subject to judicial or administrative
      interpretation. Accordingly, we cannot assure you that the views expressed
      in
      the discussion will be accepted by the tax authorities in question. The
      discussion is not intended and should not be construed as legal or professional
      tax advice and does not cover all possible tax considerations.




Potential
      investors are urged to consult their own tax advisors as to the Israeli or
      other
      tax consequences of the purchase, ownership and disposition of our ordinary
      shares, including, in particular, the effect of any foreign, state or local
      taxes.




The
      following discussion describes the material Israeli tax consequences regarding
      ownership and disposition of SuperCom’s ordinary shares applicable to
      non-Israeli shareholders, including U.S. shareholders.




***General
      Corporate Tax Structure***




Israeli
      companies are generally subject to corporate tax on their taxable income at
      a
      rate that is 34% for the 2005 tax year. This rate was 35% in the 2004 tax year
      and will be 31% in the 2006 tax year, 29% for the 2007 tax year, 27% for the
      2008 tax year, 26% for the 2009 tax year and 25% thereafter.




However,
      as discussed below, the rate is effectively reduced for income derived from
      an
“approved enterprise.”




**Special
      provisions relating to taxation under inflationary
      conditions**




The
      Income Tax Law (Inflationary Adjustments), 1985, generally referred to as the
      Inflationary Adjustments Law, represents an attempt to overcome the problems
      presented to a traditional tax system by an economy undergoing rapid inflation.
      The Inflationary Adjustments Law is highly complex. The provisions that are
      material to us, are summarized as follows:




Ø
            Where
                a company’s equity, as calculated under the Inflationary Adjustments Law,
                exceeds the depreciated cost of its fixed assets (as defined in the
                Inflationary Adjustments Law), a deduction from taxable income is
                permitted equal to the above excess multiplied by the applicable
                annual
                rate of inflation. The maximum deduction permitted in any single
                tax year
                is 70% of taxable income, with the unused portion permitted to be
                carried
                forward, linked to the Israeli consumer price
                index.




67




Ø
            Where
                a company’s depreciated cost of fixed assets exceeds its equity, then the
                excess multiplied by the applicable annual rate of inflation is added
                to
                taxable income.




Ø
            Subject
                to specified limitations, depreciation deductions on fixed assets
                and
                losses carried forward are adjusted for inflation based on the change
                in
                the consumer price index.




Under
      the
      Inflationary Adjustments Law, results for tax purposes are measured in real
      terms, in accordance with changes in the Israeli consumer price index. We are
      taxed under this law. The difference between the change in the Israeli consumer
      price index and the exchange rate of Israeli currency in relation to the dollar
      may in future periods cause significant differences between taxable income
      and
      the income measured in dollars as reflected in our consolidated financial
      statements.




***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. As of the date of this prospectus, we were qualified as
      such.




A
      qualifying Industrial Company is entitled to deduct expenses related to public
      offering in equal amounts over three years and is also entitled to amortization
      of the cost of purchased know-how and patents over an eight - year period for
      tax purposes. 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.




In
      April
      2005, a comprehensive amendment to the Investment Law came into effect. Our
      current tax benefits are subject to the provisions of the Investment Law prior
      to its revision, while new benefits that will be received in the future, if
      any,
      will be subject to the provisions of the Investment Law, as amended.
      Accordingly, the following discussion is a summary of the Investment Law prior
      to its amendment as well as the relevant changes contained in the new
      legislation.




According
      to the Investment Law prior to its amendment, in order to obtain benefits,
      an
      approval from the Investment Center of the Israeli Ministry of Industry and
      Trade had to be obtained. Each certificate of approval for an Approved
      Enterprise relates to a specific investment program in the Approved Enterprise,
      delineated both by the financial scope of the investment and by the physical
      characteristics of the facility or the asset.




An
      Approved Enterprise may elect to forego any entitlement to the grants otherwise
      available under the Investment Law and, in lieu of the foregoing, participate
      in
      an alternative benefits program, under which the undistributed income from
      the
      Approved Enterprise is fully exempt from corporate tax for a defined period
      of
      time. The period of tax exemption ranges between two and 10 years, depending
      upon the location within Israel of the Approved Enterprise and the type of
      Approved Enterprise. Upon expiration of the exemption period, the Approved
      Enterprise would be eligible for the otherwise applicable reduced tax rates
      under the Investment Law for the remainder, if any, of the otherwise applicable
      benefits period. If a company has more than one Approved Enterprise program
      or
      if only a portion of its capital investments are approved, its effective tax
      rate is the result of a weighted combination of the applicable rates. The tax
      benefits from any certificate of approval relate only to taxable profits
      attributable to the specific Approved Enterprise. Income derived from activity
      that is not integral to the activity of the Approved Enterprise should not
      be
      divided between the different Approved Enterprises and would therefore not
      enjoy
      tax benefits.




68




Income
      derived from an Approved Enterprise is generally subject to a tax rate of 25%
      for a period of seven years. However, further reductions in tax rates depending
      on the percentage of the non-Israeli investment in a company’s share capital
      (conferring rights to profits, voting and appointment of directors) and the
      percentage of its combined share and loan capital owned by non-Israeli
      residents, would apply. The tax rate is 20% if the non-Israeli investment level
      is 49% or more but less than 74%, 15% if the non-Israeli investment level is
      74%
      or more but less than 90%, and 10% if the non-Israeli investment level is 90%
      or
      more. The lowest level of foreign investment during the year will be used to
      determine the relevant tax rate for that year. These tax benefits are granted
      for a limited period not exceeding seven years or 10 years with respect to
      a
      company whose foreign investment level exceeds 25% during the first year in
      which the Approved Enterprise has taxable income after utilizing its net
      operating losses. The period of benefits may in no event, however, exceed
      the  lesser
      of
      (a) 12 years from the year in which the program was activated and (b) 14 years
      from the year of receipt of Approved Enterprise status.




A
      company
      that has elected to participate in the alternative benefits program and that
      subsequently pays a dividend out of the income derived from the Approved
      Enterprise during the tax exemption period will be subject to corporate tax
      in
      respect of the amount distributed (including withholding tax thereon) at the
      rate that would have been applicable had the company not elected the alternative
      benefits program (generally 10% to 25%). The dividend recipient is taxed at
      the
      reduced withholding tax rate of 15%, applicable to dividends from the Approved
      Enterprises if the dividend is distributed within 12 years after the benefits
      period or other rate provided under a treaty. The withholding tax rate will
      be
      20% or 25% for a substantial shareholder after such period or a lower rate
      as
      provided by a relevant treaty. In the case of a company with a foreign
      investment level (as defined by the Investment Law) of 25% or more, the 12-year
      limitation on reduced withholding tax on dividends does not apply.




The
      Investment Law also provides that an Approved Enterprise is entitled to
      accelerated tax depreciation on property and equipment included in an approved
      investment program.




The
      benefits available to an Approved Enterprise are conditional upon our fulfilling
      certain conditions stipulated in the Investment Law and its regulations and
      the
      criteria set forth in the specific certificate of approval. If we were to
      violate those conditions, in whole or in part, we would be required to refund
      the amount of tax benefits, plus an amount linked to the Israeli consumer price
      index, plus interest and penalties.




Pursuant
      to the recent amendment to the Investment Law, only Approved Enterprises
      receiving cash grants require the approval of the Investment Center. Approved
      Enterprises that do not receive benefits in the form of governmental cash
      grants, such as benefits in the form of tax benefits, are no longer required
      to
      obtain this approval. In lieu of such approval, these Approved Enterprises
      are
      required to make certain investments as specified in the law. Such Approved
      Enterprises may, at their discretion, elect to apply for a pre-ruling from
      the
      Israeli tax authorities confirming that they are in compliance with the
      provisions of the law.




The
      amended Investment Law specifies certain conditions that an Approved Enterprise
      has to comply with in order to be entitled to benefits. These conditions
      include:




Ø
            that
                the Approved Enterprise’s revenues from any single country not exceed 75%
                of the Approved Enterprise’s total revenues; or




Ø
            that
                25% of the Approved Enterprise’s revenues during the benefits period be
                derived from sales into a single country with a population of at
                least 12
                million.




In
      addition, the amendment addresses benefits that are being granted to Approved
      Enterprises and the length of the benefits period. For example, under the
      alternative program, an Approved Enterprise located in certain areas that used
      to be tax-exempt is now entitled to elect to pay an 11.5% tax rate instead,
      and,
      in such case, upon the distribution of its profits, no additional corporate
      tax
      will be paid. In addition, if an Approved Enterprise elects to pay the 11.5%
      tax
      rate, dividends that may be distributed to foreign residents will be subject
      only to a 4% withholding tax.




SuperCom
      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 We believe our Approved Enterprises
      operate in substantial compliance with all such conditions and criteria as
      of
      December 31, 2005.




69




***Taxation
      of Capital Gains Applicable to Israeli Shareholders and Non-Israeli
      Shareholders***




***General***




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.




**Israeli
      residents**




Individuals
      and corporations which are not subject to the provisions of the Inflationary
      Adjustments Law **The
      law in effect until December 31, 2005**




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 a recognized stock market
      in a country that has a treaty for the prevention of double taxation with
      Israel. (such as NASDAQ) or companies traded on both the TASE and NASDAQ or
      another recognized stock market. 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.




**Corporations
      which are subject to the provisions of the Inflationary Adjustments
      Law**




In
      2005,
      the gain on the sale of securities is subject to tax at the date of sale, at
      the
      corporate tax law for that year ( 34%), on the entire increase in value in
      real
      terms from the date of purchase until the date of sale.




**The
      law, commencing January 1, 2006:**




**Individuals:**




Commencing
      in January 1, 2006, a real capital gain deriving to an individual will be taxed
      at a rate of 20%, on condition that the income is not classified as business
      income from the vantage point of the individual. This will apply to the entire
      real capital gain accrued since the date of purchase, or since January 1, 2003
      if the purchase preceded that date.




Notwithstanding
      the above, the real capital gain will be taxed at a rate of 25% in the following
      instances:




1.  The
      individual deducts interest expenses and linkage differentials.




2.  The
      seller is a "significant shareholder" at the date of the sale of the securities
      or at any time during the 12-month period preceding the sale. A "significant
      shareholder" is defined in general as shareholder who holds, either directly
      or
      indirectly, alone or together with another, at least 10% of any form of a means
      of control in a company. The term "together with another" means together with
      a
      relative, or together with someone who is not a relative with which the
      individual, either directly or indirectly, has a regular cooperative agreement
      regarding the affairs of the company.




70





**Companies
      not subject to the provisions of the Adjustment Law:**




Companies
      not subject to the provisions of the Adjustment Law in 2005, will be taxed
      at a
      rate of 25% upon the capital gain on the sale of securities in the period 2006
      -
      2009. In 2010 and thereafter, capital gains will be taxed at a corporate rate,
      which in 2010 is expected to be 25%.




**Companies
      subject to the provisions of the Adjustment Law:**




The
      real
      capital gain on the sale of securities by a company subject to the provisions
      of
      the Adjustment Law will be taxed at the corporate tax rate applicable during
      the
      year of sale, as follows: 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009 - 26%, 2010
      -
      25%.




Non-Israeli
      residents:




Non-residents
      of Israel will be exempt from capital gains tax in relation to the sale of
      ordinary shares for as long as (a) the ordinary shares are listed for trading
      on
      a stock exchange in a jurisdiction with which Israel has a treaty, (b) the
      capital gains are not accrued or derived by the non-resident shareholder’s
      permanent enterprise in Israel, (c) the ordinary shares in relation to
      which the capital gains are accrued or derived were acquired by the non-resident
      shareholder after the initial listing of the ordinary shares on a stock exchange
      outside of Israel and (d) neither the shareholder nor the particular capital
      gain is otherwise subject to certain sections of the Israeli Income Tax
      Ordinance.




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
      addition, pursuant to the Income Tax Treaty between Israel and the United
      States, which we refer to as the Tax Treaty, gains derived from the sale,
      exchange or disposition of our ordinary shares by a person who qualifies as
      a
      resident of the United States within the meaning of the Tax Treaty and who
      is
      entitled to claim the benefits afforded to US residents under the Tax Treaty,
      referred to as a Treaty US Resident, would not be subject to Israeli capital
      gains tax, unless such Treaty US Resident owned, directly or indirectly, shares
      representing 10% or more of the voting power of our company at any time during
      the 12-month period preceding such sale, exchange or
      disposition.




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. 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.




***Income
      Taxes on Dividend Distribution to Israeli and Non-Israeli
      Shareholders***




According
      to the Israeli tax law, any distribution of dividend from income attributed
      to
      an “Approved Enterprise” will be subject to tax in Israel at the rate of
      15%.




Any
      distribution of dividend from income, which is not attributed to an “Approved
      Enterprise” will be subject to tax in Israel at the rate of 20%, except for
      dividend distributed, to Individual deemed “a substantial shareholder” which
      will be subject to tax at the rate of 25%.




Under
      the
      Tax Treaty, the maximum Israeli withholding tax on dividends paid to a holder
      of
      shares who is a Treaty US Resident is 25%. However, as mentioned above under
      “—Law for the Encouragement of Capital Investments, 1959”, dividends of an
      Israeli company paid out of income derived from an Approved Enterprise during
      the benefit period will still be subject to a reduced tax rate of
      15%.




The
      Tax
      Treaty further provides that a 12.5% Israeli withholding tax would apply to
      dividends paid to a US corporation owning 10% or more of an Israeli company’s
      voting stock during, in general, the current and preceding tax years of the
      Israeli company. The lower 12.5% rate applies only to dividends from income
      not
      derived from an Approved Enterprise in the applicable period and provided that
      not more than 25% of the Israeli company’s gross income consists of interest or
      dividend.




71




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.





**United
      States Federal Income Taxation**





***General***





The
      following is a summary of certain material U.S. federal income tax consequences
      to U.S. persons holding our ordinary shares and warrants (“U.S. holders”) of
      purchasing, owning, and disposing of such shares and warrants. For this purpose,
      a U.S. person is, in each case as defined for U.S. federal income tax purposes:
      (a) an individual who is a citizen or resident of the United States; (b) a
      corporation or other entity taxable as a corporation under federal income tax
      laws created or organized in or under the laws of the United States, any state
      of the United States or the District of Columbia; (c) an estate the income
      of
      which is subject to U.S. federal income tax regardless of its source; or (d)
      a
      trust that is subject to the primary supervision of a court over its
      administration and one or more U.S. persons control all substantial decisions,
      or a trust that has validly elected to be treated as a domestic trust under
      applicable Treasury Regulations. This summary does not address any tax
      consequences to persons other than U.S. persons.




This
      discussion is a general summary and does not address all aspects of U.S. federal
      income taxation that may be relevant to particular U.S. holders based on their
      particular investment or tax circumstances. It does not address any tax
      consequences to certain types of U.S. holders that are subject to special
      treatment under the U.S. federal income tax laws, such as insurance companies,
      tax-exempt organizations, financial institutions or broker-dealers, dealers
      in
      securities or currencies, traders in securities that elect to use the
      mark-to-market method of accounting for their securities, partnerships or other
      pass-through entities for U.S. federal tax purposes, regulated investment
      companies, real estate investment companies, expatriates, persons liable for
      alternative minimum tax, persons owning, directly or by attribution, 10 percent
      or more, by voting power or value, of our ordinary shares, persons whose
“functional currency” is not the United States dollar, or persons holding
      ordinary shares or warrants as part of a hedging, constructive sale or
      conversion, straddle, or other risk-reducing transaction.




This
      summary addresses only ordinary shares and warrants that: (a) are held as
      capital assets; (b) were acquired upon original issuance at their initial
      offering price.




This
      summary relates only to U.S. federal income taxes. It does not address any
      other
      tax, including but not limited to state, local, or foreign taxes, or any other
      U.S. federal taxes other than income taxes.




The
      statements in this summary are based on the current U.S. federal income tax
      laws
      as contained in the Internal Revenue Code, Treasury Regulations, and relevant
      judicial decisions and administrative guidance. The U.S. federal tax laws are
      subject to change, and any such change may materially affect the U.S. federal
      income tax consequences of purchasing, owning, or disposing of our ordinary
      shares or warrants. We cannot assure you that new laws, interpretations of
      law
      or court decisions, any of which may take effect retroactively, will not cause
      any statement in this summary to be inaccurate. There can be no assurance that
      the positions we take on our tax returns will be accepted by the Internal
      Revenue Service.




This
      section is not a substitute for careful tax planning. Prospective investors
      are
      urged to consult their own tax advisors regarding the specific U.S. federal,
      state, foreign and other tax consequences to them, in light of their own
      particular circumstances, of the purchase, ownership and disposition of our
      ordinary shares and warrants and the effect of potential changes in applicable
      tax laws.





***Dividends***





A
      U.S. holder will be required to take into account as dividends any
      distributions with respect to our ordinary shares made out of our current or
      accumulated earnings and profits. The dividends received deduction will not
      be
      available to a U.S. holder that is taxed as a corporation. With certain
      exceptions (including but not limited to dividends treated as investment income
      for purposes of investment interest deduction limitations), qualified dividends
      received by a non-corporate U.S. holder generally will be subject to tax at
      the maximum tax rate accorded to capital gains, if certain holding period and
      other conditions are satisfied, through December 31, 2008, after which the
      rate
      applicable to dividends is scheduled to return to the tax rate generally
      applicable to ordinary income. Dividends will generally be from a non-U.S.
      source and treated as “passive income” or “financial services income” for U.S.
      foreign tax credit purposes.




72




The
      amount of any dividend paid in Israeli currency will equal its U.S. dollar
      value, calculated by reference to the exchange rate in effect on the date the
      dividend is received by the U.S. holder, regardless of whether the Israeli
      currency is converted into U.S. dollars. If the Israeli currency is not
      converted into U.S. dollars on the date of receipt, the U.S. holder will have
      a
      basis in the Israeli currency equal to its U.S. dollar value on the date of
      receipt. Any subsequent gain or loss upon the conversion or other disposition
      of
      the Israeli currency will be treated as ordinary income or loss, and generally
      will be income or loss from U.S. sources.




A
      U.S. holder will not incur tax on a distribution with respect to our
      ordinary shares in excess of our current and accumulated earnings and profits
      if
      the distribution does not exceed the adjusted basis of the U.S. holder’s
      ordinary shares. Instead, the distribution will reduce the adjusted basis of
      the
      shares. Any such distribution in excess of both our current and accumulated
      earnings and profits and the U.S. holder’s adjusted basis will be treated as
      capital gain, long-term if the U.S. holder has held the shares for more than
      one
      year, and generally will be gain or loss from U.S. sources. See “Disposition of
      Ordinary Shares or Warrants” below for a discussion of capital gains tax rates
      and limitations on deductions for losses.





***Exercise
      or Lapse of Warrants***





Upon
      the
      exercise of our warrants, a U.S. holder will not recognize gain or loss and
      will have a tax basis in the ordinary shares received equal to the
      U.S. holder’s tax basis in the warrant plus the exercise price of the
      warrant. The holding period for the shares purchased pursuant to the exercise
      of
      a warrant will begin on the day following the date of exercise and will not
      include the period during which the U.S. holder held the warrant. If a
      warrant lapses unexercised, a U.S. holder will recognize a capital loss in
      an amount equal to its tax basis in the warrant. Such loss will be long-term
      if
      the warrant has been held for more than one year. See “Disposition of Ordinary
      Shares or Warrants” below for a discussion of capital gains tax rates and
      limitations on deductions for losses. The loss will generally be from U.S.
      sources, but the loss may be from a non-U.S. source under some circumstances
      under the U.S.-Israel Tax Treaty. U.S. holders should consult their own
      independent tax advisors regarding the sourcing of any losses due to the lapse
      of our warrants before exercise.





***Disposition
      of Ordinary Shares or Warrants***





In
      general, a U.S. holder must treat any gain or loss recognized upon a
      taxable disposition of our ordinary shares or warrants as capital gain or loss,
      long-term if the U.S. holder has held the shares or warrants for more than
      one
      year. In general, a U.S. holder will recognize gain or loss in an amount
      equal to the difference between the sum of the fair market value of any property
      and the amount of cash received in such disposition and the U.S. holder’s
      adjusted tax basis. A U.S. holder’s adjusted tax basis generally will equal the
      U.S. holder’s acquisition cost less any return of capital. Long-term
      capital gain realized by a non-corporate U.S. holder generally will be subject
      to a reduced maximum rate of 15 percent through December 31, 2008, after which
      the maximum capital gains rate is scheduled to return to 20 percent. The
      deduction of capital losses is subject to limitations, as are losses upon a
      taxable disposition of our ordinary shares or warrants if the U.S. holder
      purchases, or enters into a contract or option to purchase, substantially
      identical stock or securities within 30 days before or after any
      disposition. Gain or loss from the disposition of our ordinary shares or
      warrants will generally be from U.S. sources, but such gain or loss may be
      from
      a non-U.S. source under some circumstances under the U.S.-Israel Tax Treaty.
      U.S. holders should consult their own independent tax advisors regarding the
      sourcing of any gain or loss on the disposition of our ordinary shares or
      warrants, as well as regarding any foreign currency gain or loss in connection
      with such a disposition.





***Credit
      for Foreign Taxes Withheld***





Payments
      to U.S. holders as dividends or consideration for ordinary shares or warrants
      may in some circumstances be subject to Israeli withholding taxes. See “Israeli
      Taxation” above. Generally, such withholding taxes in lieu of Israeli income
      taxes imposed on such transactions are creditable against the U.S. holder’s U.S.
      tax liability, subject to numerous U.S. foreign tax credit limitations,
      including additional limitations in the case of qualified dividends eligible
      for
      the maximum rate accorded to capital gains. A U.S. holder should consult its
      own
      independent tax advisor regarding use of the U.S. foreign tax credit and its
      limitations. A U.S. holder (except an individual who does not itemize
      deductions) may elect to take a deduction rather than a credit for foreign
      taxes
      paid.





***Passive
      Foreign Investment Company***





A
      “passive foreign investment company” (“PFIC”) is defined as any foreign
      corporation at least 75 percent of whose consolidated gross income for the
      taxable year is passive income, or at least 50 percent 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 the corporation is not and has not been a PFIC for U.S. 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. holders 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. holders will not be eligible for
      the
      maximum capital gains tax rate on qualified dividends.




73





***Backup
      Withholding and Information Reporting***





A
      non-corporate U.S. holder may, under certain circumstances, be subject to
      information reporting requirements and backup withholding at a rate of 28
      percent on payments of dividends, interest, and other reportable payments.
      A
      non-corporate U.S. holder should consult its own independent tax advisor
      regarding the possibility of information reporting and backup withholding on
      payments in connection with the purchase, ownership, or disposition of our
      ordinary shares or warrants.




***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.




74





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 2006. 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.




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, 2005, 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 $48,000
      in
      the year ended December 31, 2005 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, 2005, 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 as and when required. There
      are
      inherent limitations to the effectiveness of any system of disclosure controls
      and procedures, including the possibility of human error and the circumvention
      or overriding of the controls and procedures. Accordingly, even effective
      disclosure controls and procedures can provide only reasonable assurance of
      achieving their control objectives .
      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 our
      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
      effective to provide reasonable assurance that information required to be
      disclosed on
      Form
      20-F and filed with the Securities and Exchange Commission is recorded,
      processed, summarized and reported as and when required. 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, 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, 2007, 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.




75





**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: Sagid House
      “Hasharon Industrial Park” P.O.B 5039, Qadima 60920 Israel.








**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, 2005 and 2004:




**2005**
            
            **2004**Audit
                Fees
            
            
            55,000
            
            
            45,000Audit-Related
                Fees
            
            
            28,000
            
            
            139,000Tax
                Fees
            
            
            -
            
            
            20,000**Total**
            
            
            83,000
            
            
            204,000




*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.***




76





Report
      of
      the Independent Registered Public Accounting Firm





**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, 2005 and 2004, and the related statements of
      income, stockholders’ deficit and cash flows for the years ended December 31,
      2005 and 2004. 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 audits.





We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audits include consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. Our audit also 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 provide a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of the Company as of December 31,
      2005
      and 2004 and the results of its operations and cash flows for the years ended
      December 31, 2005 and 2004 in conformity with accounting principles generally
      accepted in the United States of America.





**BDO
      McCabe Lo Limited**


Certified
      Public Accountants





**Hong
      Kong,**





**February
      13, 2006**





77




SUPERCOM
      LTD. AND ITS SUBSIDIARIES




CONSOLIDATED
      FINANCIAL STATEMENTS




AS
      OF
      DECEMBER 31, 2005




IN
      U.S.
      DOLLARS





INDEX





PageReport
                of Independent Registered Public Accounting Firm
            79Consolidated
                Balance Sheets
            80-81Consolidated
                Statements of Operations
            82Statements
                of Changes in Shareholders' Equity
            83Consolidated
                Statements of Cash Flows
            84Notes
                to Consolidated Financial Statements
            85-119





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





78


**Certified Public
                  Accountants**


**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, 2004 and 2005, 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,
      2005. 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 4% of total consolidated assets as of December 31, 2004 and 2005,
      respectively., and whose revenues included in the consolidation constituted
      approximately 28.5%, 33% and 26% of total consolidated revenues for the years
      ended December 31, 2003, 2004 and 2005, 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. The Company is not
      required to have, nor were we engaged to perform an audit of its internal
      control over financial reporting. Our audits included consideration of internal
      control over financial reporting as a basis for designing audit procedures
      that
      are appropriate in the circumstances, but not for the purpose of expressing
      an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit also 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 audits 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, 2004 and 2005, and the consolidated results
      of their operations, and their cash flows for each of the three years in the
      period ended December 31, 2005, in conformity with accounting principles
      generally accepted in the United States.





Fahn
      Kanne & Co.


Certified
      Public Accountants (Isr.)


Tel-Aviv,
      ISRAEL


March
      2,
      2006


(Except
      for Note 18, for which the date is June 29, 2006).


Head
        Office:
 Levinstein
        Tower
 23
        Menachem Begin Road
 Tel-Aviv,
        66184 ISRAEL
 P.O.B.
        36172, 61361
 Tel **.** 972-3-7106666
 Fax
        972-3-7106660
 info@gtfk.co.il
 www.gtfk.co.il





79




**SUPERCOM
      LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**U.S.
      dollars in thousands**




**December
                31,****2004**
            
            **2005**ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            2,894
            
            $
            2,294Restricted
                cash deposits
            
            
            1,129
            
            
            1,088Short-term
                deposit
            
            
            353
            
            
            -Marketable
                debt securities
            
            
            -
            
            
            650Trade
                receivables (net of allowance for doubtful accounts of $ 3,347 and$ 3,397
                as of December 31, 2004 and 2005, respectively)
            
            
            1,463
            
            
            1,053Other
                accounts receivable and prepaid expenses
            
            
            1,250
            
            
            733Inventories
            
            
            2,165
            
            
            2,205Totalcurrent
                assets
            
            
            9,254
            
            
            8,023INVESTMENTS
                AND LONG-TERM RECEIVABLES:Long-term
                trade receivables
            
            
            247
            
            
            209Investment
                in an affiliated company
            
            
            275
            
            
            275Severance
                pay fund
            
            
            428
            
            
            492Totallong-term investments and receivables
            
            
            950
            
            
            976PROPERTY
                AND EQUIPMENT, NET
            
            
            3,641
            
            
            3,210INTANGIBLE
                ASSETS
            
            
            93
            
            
            67Totalassets
            
            $
            13,938
            
            $
            12,276




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




80




**SUPERCOM
      LTD. AND ITS SUBSIDIARIES**


**CONSOLIDATED
      BALANCE SHEETS**


**U.S.
      dollars in thousands, except share data**




**December
                31,****2004**
            
            **2005**LIABILITIES
                AND SHAREHOLDERS' EQUITYCURRENT
                LIABILITIES:Short-term
                bank credit and current maturities of long-term loan
            
            $
            1,022
            
            $
            855Trade
                payables
            
            
            1,135
            
            
            770Employees
                and payroll accruals
            
            
            357
            
            
            322Accrued
                expenses and other liabilities
            
            
            1,745
            
            
            1,271Totalcurrent liabilities
            
            
            4,259
            
            
            3,218LONG-TERM
                LIABILITIES:Long-term
                loan, net of current maturities
            
            
            -
            
            
            195Accrued
                severance pay
            
            
            564
            
            
            616Totallong-term liabilities
            
            
            564
            
            
            811COMMITMENTS
                AND CONTINGENT LIABILITIESSHAREHOLDERS'
                EQUITY:Share
                capital:
              Ordinary
                shares of NIS 0.01 par value -Authorized:
                26,500,000 and 40,000,000 shares as of December 31, 2004 and 2005respectively;Issued
                and outstanding: 17,703,199 and 22,395,064 shares as of December 31,
                2004 and 2005, respectively
            
            
            51
            
            
            61Additional
                paid-in capital
            
            
            29,094
            
            
            31,702Deferred
                stock compensation
            
            
            (59
            )
            
            (15
            )Receipt
                on account of shares
            
            
            143
            
            
            564Accumulated
                deficit
            
            
            (20,114
            )
            
            (24,065
            )Totalshareholders' equity
            
            
            9,115
            
            
            8,247Totalliabilities and shareholders' equity
            
            $
            13,938
            
            $
            12,276





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




81




SUPERCOM
      LTD. AND ITS
      SUBSIDIARIES


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**U.S.
      dollars in thousands, except share data**




**Year
                ended**
              **December
                31,****2003**
            
            **2004**
            
            **2005**Revenues
            
            $
            7,244
            
            $
            7,344
            
            $
            8,462Cost
                of revenues
            
            
            3,102
            
            
            3,730
            
            
            4,293Inventory
                write-off
            
            
            -
            
            
            -
            
            
            287Gross
                profit
            
            
            4,142
            
            
            3,614
            
            
            3,882Operating
                expenses:Research
                and development
            
            
            918
            
            
            845
            
            
            1,182Selling
                and marketing
            
            
            3,026
            
            
            2,445
            
            
            3,003General
                and administrative
            
            
            1,829
            
            
            1,955
            
            
            2,968Restructuring
                expenses
            
            
            -
            
            
            -
            
            
            496Litigation
                settlement expenses
            
            
            -
            
            
            -
            
            
            129Totaloperating expenses
            
            
            5,773
            
            
            5,245
            
            
            7,778Operating
                loss
            
            
            (1,631
            )
            
            (1,631
            )
            
            (3,896
            )Financial
                expenses, net
            
            
            (233
            )
            
            (214
            )
            
            (25
            )Other
                expenses, net
            
            
            (83
            )
            
            (27
            )
            
            (30
            )Loss
                before income taxes
            
            
            (1,947
            )
            
            (1,872
            )
            
            (3,951
            )Impairment
                of investment in an affiliated company, net of taxes
            
            
            (48
            )
            
            -
            
            
            -Net
                Loss
            
            $
            (1,995
            )
            $
            (1,872
            )
            $
            (3,951
            )Net
                loss per share:Basic
                and diluted net loss per share
            
            $
            (0.15
            )
            $
            (0.13
            )
            $
            (0.21
            )Weighted
                average number of ordinary shares outstanding
            
            
            12,718,426
            
            
            14,590,346
            
            
            18,563,943




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




82




SUPERCOM
      LTD. AND ITS
      SUBSIDIARIES


**STATEMENTS
      OF CHANGES IN SHAREHOLDERS' EQUITY** 
 **U.S.
      dollars in thousands, except share amounts**


**Ordinary
                  shares****Number
                  of**
                **Shares**
              
              **Share**
                **capital**
              
              **Additional**
                **paid-in**
                **capital**
              
              **Deferred**
                **stock**
                **compensation**
              
              **Accumulated**
                **Deficit**
              
              **Receipt
                  on account of shares**
              
              **Total**
                **comprehensive**
                **income
                  (loss)**
              
              **Total**
                **shareholders'**
                **equity**Balance
                  as of January 1, 2003
              
              
              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
              
              
              
              
              
              9,115Deferred
                  stock compensation
              
              
              -
              
              
              -
              
              
              11
              
              
              (11
              )
              
              
              
              
              -
              
              
              
              
              
              -Issuance
                  of shares in a private placement, net
              
              
              4,032,258
              
              
              9
              
              
              2,047
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              2,056Exercise
                  of warrants and options
              
              
              659,607
              
              
              1
              
              
              550
              
              
              -
              
              
              -
              
              
              (129
              )
              
              
              
              
              422Receipt
                  on account of shares to be allotted
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              -
              
              
              550
              
              
              
              
              
              550Amortization
                  of stock compensation
              
              
              -
              
              
              -
              
              
              -
              
              
              55
              
              
              -
              
              
              -
              
              
              
              
              
              55Net
                  loss
              
              
              -
              
              
              -
              
              
              -
              
              
              
              
              
              (3,951
              )
              
              -
              
              $
              (3,951
              )
              
              (3,951
              )Total
                  comprehensive loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              (3,951
              )Balance
                  as of December 31, 2005
              
              
              22,395,064
              
              $
              61
              
              $
              31,702
              
              $
              (15
              )
              $
              (24,065
              )
              $
              564
              
              
              
              
              $
              8,247





*)  Less
      than
      $ 1.





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





83


SUPERCOM
        LTD. AND ITS
        SUBSIDIARIES
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**


**U.S.
      dollars in thousands**




**Year
                ended December 31,****2003**
            
            **2004**
            
            **2005**Cash
                flows from operating activities:Net
                loss
            
            $
            (1,995
            )
            $
            (1,872
            )
            $
            (3,951
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            371
            
            
            338
            
            
            772Accrued
                severance pay
            
            
            74
            
            
            128
            
            
            52Amortization
                of deferred stock compensation
            
            
            26
            
            
            9
            
            
            55Decline
                in market value below cost of marketable debt securities
            
            
            52
            
            
            7
            
            
            -Decrease
                (increase) in trade receivables
            
            
            30
            
            
            (398
            )
            
            448Decrease
                (increase) in other accounts receivable and prepaid
                expenses
            
            
            (239
            )
            
            (403
            )
            
            517Decrease
                (Increase) in inventories
            
            
            (92
            )
            
            814
            
            
            (40
            )Increase
                (decrease) in trade payables
            
            
            450
            
            
            (31
            )
            
            (365
            )Increase
                (decrease) in employees and payroll accruals
            
            
            73
            
            
            51
            
            
            (35
            )Increase
                (decrease) in accrued expenses and other liabilities
            
            
            (912
            )
            
            747
            
            
            (407
            )Loss
                on sale of property and equipment
            
            
            5
            
            
            1
            
            
            -Accumulated
                interest on long-term loan
            
            
            2
            
            
            -
            
            
            -Write-off
                of investment in an affiliate
            
            
            48
            
            
            -
            
            
            -Net
                cash used in operating activities
            
            
            (2,107
            )
            
            (609
            )
            
            (2,954
            )Cash
                flows from investing activities:Proceeds
                from sale of property and equipment
            
            
            2
            
            
            1
            
            
            -Purchase
                of property and equipment
            
            
            (87
            )
            
            (1,088
            )
            
            (315
            )Increase
                in severance pay fund
            
            
            (45
            )
            
            (95
            )
            
            (64
            )Proceeds
                from (investments in) restricted cash deposits, net
            
            
            (1,044
            )
            
            234
            
            
            41Proceeds
                from disposal of (investments in) short term deposits, net
            
            
            (697
            )
            
            344
            
            
            353Proceeds
                from (investment in) maturity of marketable debt
                securities
            
            
            440
            
            
            110
            
            
            (650
            )Acquisition
                of intangible assets
            
            
            (70
            )
            
            (37
            )
            
            -Net
                cash used in investing activities
            
            
            (1,501
            )
            
            (531
            )
            
            (635
            )Cash
                flows from financing activities:Short-term
                bank credit, net
            
            
            1,196
            
            
            (1,122
            )
            
            120Issuance
                of share capital through a private placement, net of issuance
                costs
            
            
            -
            
            
            3,517
            
            
            2,539Proceed
                from exercise of options and warrants
            
            
            -
            
            
            84
            
            
            422Long-term
                loan received
            
            
            250
            
            
            400
            
            
            500Principal
                repayment of long-term loan
            
            
            (410
            )
            
            (574
            )
            
            (592
            )Net
                cash provided by financing activities
            
            
            1,036
            
            
            2,305
            
            
            2,989Increase
                (decrease) in cash and cash equivalents
            
            
            (2,572
            )
            
            1,165
            
            
            (600
            )Cash
                and cash equivalents at the beginning of the year
            
            
            4,301
            
            
            1,729
            
            
            2,894Cash
                and cash equivalents at the end of the year
            
            $
            1,729
            
            $
            2,894
            
            $
            2,294





**Year
                ended**
              **December
                31,****2003**
            
            **2004**
            
            **2005**Supplemental
                disclosure of non-cash investing and financing
                activities:Transfer
                of inventory to property and equipment
            
            $
            -
            
            $
            1,117
            
            $
            -Transfer
                of trade receivable to inventory
            
            $
            -
            
            $
            860
            
            $
            -Conversion
                of loan to ordinary shares
            
            $
            -
            
            $
            25
            
            $
            -Receivables
                on account of shares
            
            $
            84
            
            $
            -
            
            $
            -Accrued
                issuance costs
            
            $
            -
            
            $
            176
            
            $
            109Supplemental
                disclosure of cash flow information:Cash
                paid during the year for:Interest
            
            $
            135
            
            $
            128
            
            $
            87





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




84


**SUPERCOM
        LTD. AND ITS SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
        dollars in thousands**   **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”. 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 smart card 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 or ID 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 subsidiary in Hong-Kong,
          SuperCom
          Asia Pacific Limited; and another wholly- owned 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.
 
 During
          the fourth quarter of 2005, the Company established a new subsidiary (80%),
          Pure
          RF Inc that began operations during January 2006 and will focus on new
          technology and solutions for active tracking of people and assets.
 
 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
          14).
 
 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.
 
 85
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
  **NOTE
                    1:-**
                **GENERAL
                    (Cont.)**
 
 **c.**
                In
                    November and December of 2005, the Company received aggregate
                    gross
                    proceeds of $3,050 from a private placement to certain investors
                    of
                    4,919,354 ordinary shares and five-year warrants to purchase
                    1,721,772
                    ordinary shares at an exercise****price
                    of $0.60 per share. (See note
                    12(f))
  
 **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.
                      Useof
                          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:
 
 Most
          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. Therefore, 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.
 
 c.
                Principles
                    of consolidation:
 
 The
          consolidated financial statements include the accounts of the Company and
          its
          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
 86
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
  **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES
                    (Cont.)**
 
 d.
                Cash
                    equivalents:
 
 The
          Company considers unrestricted 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.
 
 g.
                Marketable
                    debt securities:
 
 The
          Company accounts for investments in marketable 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 marketable debt
          securities and commercial papers at the time of purchase and reevaluates
          such
          determinations at each balance sheet date.
 As
          of
          December 31, 2005, all securities covered by SFAS No. 115 were designated
          by
          Company Management as trading securities.
 
 As
          such,
          the securities are stated at market value. The changes in market value
          of these
          securities are carried to financial income or expense.
 
 Trading
          gains for the year 2005 amounted approximately to $15 in respect to trading
          securities held by the Company as of December 31, 2005.
 
 
 h.
                Allowance
                    for doubtful accounts:
 
 The
          allowance for doubtful accounts is determined with respect to specific
          amounts
          the Company has determined to be doubtful of collection. In determining
          the
          allowance for doubtful accounts, the Company considers, among other things,
          its
          past experience with such customers and the information available on such
          customers.
 
 87
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES
                    (Cont.)**
 
 i.
                Inventories:
 
 Inventories
          are stated at the lower of cost or market value. Inventory write-offs are
          mainly
          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.
 
 Work-in-progress
          and finished products - on the basis of direct manufacturing costs, with
          the
          addition of allocable, indirect manufacturing costs.
 
 j.
                Investment
                    in an affiliated company and a 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’s ability to exert control over the subsidiary. (See Note
          5).
 
 k.
                Property
                    and equipment:
 
 Property
          and equipment (including self construction equipment) are stated at cost,
          net of
          accumulated depreciation. Self-construction equipment costs represent 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 useful lives,
          at
          the following annual rates:
  88
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES
                    (Cont.)**
 
 **%**Computers
                    and peripheral equipment
                
                33Machinery
                    and peripheral equipment
                
                6
                    -
                    20Office
                    furniture and equipment
                
                6
                    -
                    15Leasehold
                    improvements
                
                Over
                    the shorter of the term of the lease or the life of the
                    asset
 
 
 l.
                Impairment
                    of long lives assets and intangible
                    assets:
 
 The
          Company's long-lived assets and certain identifiable intangible 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.
 
 m.
                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 liability 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 presented 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 surrender value of these policies
          and
          includes immaterial profits.
 
 Severance
          expenses for the years ended December 31, 2003, 2004 and 2005 amounted
          to $153,
          $151 and $ 115, respectively.
  89
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES
                    (Cont.)**
 
 n.
                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, “Goodwill and other Intangible Assets.
 
 o.
                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.
  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.
  90
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES
                    (Cont.)**
 
 The
          Company is entitled to royalties upon sales of smartcard systems. Such
          royalties
          are recognized when the sales are reported to the Company. (mainly on a
          monthly
          basis)
 
 Deferred
          revenues and customer advances include amounts received from customers
          for which
          revenues have not been recognized.
 
 The
          Company recognizes certain long-term contract revenues, 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, revenues from these contracts are 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.
  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, 2005, 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 sufficientaccuracy.
  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.
 
 The
          Company derives its revenues mainly from sale of hardware products that
          include
          embedded software that Management considers to be incidental. Such revenues
          are
          recognized in accordance with SAB No. 104, as mentioned above.
 
 However,
          in limited circumstances, the Company provides software upgrades in respect
          of
          the embedded software of hardware products sold to its customers in the
          past.
          Such revenues are recognized when all criteria outlined in Statement of
          Position
          No. 97-2 “Software Revenue Recognition” (“SOP No. 97-2) (as amended) are met:
          when persuasive evidence of an agreement exists, delivery of the product
          has
          occurred (i.e. the services have been provided), no significant obligations
          under the agreement remain, the fee is fixed or determinable and collectibility
          is probable.
  91
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES
                    (Cont.)**
 
 p.
                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.
 
 q.
                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).
  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.
 
 r.
                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.
 
 92
 **SUPERCOM
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands**
 **NOTE
                      2:-**
                  **SIGNIFICANT
                      ACCOUNTING POLICIES
                      (Cont.)**
  s.
                Concentrations
                    of credit risk:
 
 Financial
          instruments that potentially subject the Company to concentrations of credit
          risk consist principally of cash and cash equivalents, restricted cash
          deposits,
          marketable debt securities and trade receivables. The Company's trade
          receivables are derived from sales to customers located primarily in Europe
          (including Eastern Europe), Asia pacific, Africa, 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
          Municipals Bounds. 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. See note 8(a) regarding bank credit denominated in currencies
          other than dollars.
 
 t.
                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 loss per share since the Company reported losses for
          the
          years 2003, 2004 and 2005. The number of outstanding options and warrants
          were
          1,534,514, 5,082,763 and 6,594,600, for the years ended December 31, 2003,
          2004
          and 2005, respectively.
  93
 **SUPERCOM
            LTD. AND ITS SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
            dollars in thousands**
 **NOTE
                      2:-**
                  **SIGNIFICANT
                      ACCOUNTING POLICIES
                      (Cont.)**
 
 u.
                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, 2005 and 2004, the carrying amounts of cash and cash equivalents,
          restricted cash deposits, short-term deposits, m arketable
          debt securities 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 flow analyses, using current
          interest rates for loans or similar terms and maturities.
 
 v.
                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.
 
 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 2003, 2004 and 2005: risk-free interest
          rate of
          8.4%, 4.2% and 3.68%, respectively, with a dividend yield of 0% for each
          year,
          volatility factors of the expected market price of the Company's ordinary
          shares
          of 1.499, 1.139 and 1.019, 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, had been applied:
  94
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES****(Cont.)**
 
 Pro
          forma
          information under SFAS 123:
  **Year
                    ended December 31,****2003**
                
                
                **2004**
                
                
                **2005**Net
                    loss as reported
                
                $
                (1,995
                )
                $
                (1,872
                )
                $
                (3,951
                )Deduct:
                    Stock based compensation expenses
                  determined
                    under fair value based method
                
                
                280
                
                
                766
                
                
                1,475Add:
                    stock based compensation expenses included in reported net
                    loss
                
                
                26
                
                
                9
                
                
                55Pro
                    forma net loss
                
                $
                (2,249
                )
                $
                (2,629
                )
                $
                (5,371
                )Basic
                    and diluted net loss per share as reported
                
                $
                (0.15
                )
                $
                (0.13
                )
                $
                (0.21
                )Pro
                    forma basic and diluted net loss
                
                $
                (0.17
                )
                $
                (0.18
                )
                $
                (0.29
                )
 
 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.
 
 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
          the
          Company.
 
 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.
  95
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES****(Cont.)**
 
 In
          March
          2005, the SEC issued Staff Accounting Bulletin 107 (“SAB 107”). In particular,
          SAB 107 provides supplemental implementation guidance on SFAS 123R, including
          guidance on valuation methods, classification of compensation expense,
          inventory
          capitalization of share-based compensation cost, income statement effects,
          disclosures and several other issues. The Company will apply the principles
          of
          SAB 107 in conjunction with the adoption of SFAS 123R
  The
          Company expects that SFAS 123R, will be applied using the modified prospective
          application transition method, as permitted by the statement. Under this
          transition method, upon the adoption of SFAS 123R, the new standard will
          be
          implemented as from the first quarter of 2006, with no restatement of prior
          periods.
 Considering
          this transition method, the Company expects that the effect of applying
          this
          statement on the Company’s results of operations in 2006 as it relates to
          existing option plans, would not be materially different from the FAS 123
          pro
          forma effect previously reported.
 
 w.
                Advertising
                    costs:
 
 The
          Company expenses advertising costs as incurred. Advertising expenses for
          the
          years ended December 31, 2003, 2004 and 2005 were approximately $ 58,
          $ 10 and $ 21, respectively.
 
 x.
                Comprehensive
                    Income:
 The
          Company has no comprehensive income components other than net income
          (loss).
 
 y.
                Reclassifications:
 
 Certain
          comparative figures have been reclassified to conform to the current year
          presentation.
 
 z.
                Recently
                    issued accounting pronouncements:
 
 SFAS
          151
“Inventory Costs, an amendment of ARB No. 43, Chapter 4”
  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.
  96
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    2:-**
                **SIGNIFICANT
                    ACCOUNTING POLICIES****(Cont.)**
 
 As
          applicable to the Company SFAS 151 will be effective for inventory costs
          incurred after January 1, 2006. The Company believes that FAS 151, when
          adopted,
          will not have a significant impact on its financial position or results
          of
          operations.
  SFAS
          154
“Accounting Changes and Error Corrections”
  In
          May
          2005, the FASB published SFAS 154 “Accounting Changes and Error Corrections - a
          replacement of APB Opinion No. 20 and FASB Statement No. 3” (SFAS 154), SFAS 154
          replaces APB Opinion 20, “Accounting Changes”, and SFAS 3, “Reporting Accounting
          Changes in Interim Financial Statements”, and changes the requirements for the
          accounting for and reporting of a change in accounting principle.  SFAS 154
          applies to all voluntary changes in accounting principle, and to changes
          required by an accounting pronouncement in the unusual instance that the
          pronouncement does not include specific transition provisions.
  As
          applicable to the Company, the provisions of FAS 154 are effective as for
          the
          year beginning January 1, 2006. The adoption of this Standard is not expected
          to
          have a material effect on the Company’s financial position and results of
          operations.
 
 FAS
          155
“accounting for certain Hybrid Financial Instruments”
  In
          February 2006, the FASB issued FAS 155, accounting for certain Hybrid Financial
          Instruments, an amendment of FASB statements No. 133 and 140. This statement
          permits fair value measurement for any hybrid financial instrument that
          contains
          an embedded derivative that otherwise would require bifurcation.
  This
          statement shall be effective for all financial instruments acquired or
          issued ,
          or subject to a remeasurement (new basis) after the beginning of an entity’s
          first fiscal year that begins after September 15, 2006. Earlier adoption
          is
          permitted as of the beginning of an entity’s fiscal year, provided that no
          interim period financial statements have bee issued for the financial year.
  Management
          is currently evaluating the impact of this statement, if any, on the Company’s
          financial statements or its results of operations.
  97
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
          3:-**  **OTHER
          ACCOUNT RECEIVABLE AND PREPAID EXPENSES**
 
 **December
                    31,****2004**
                
                **2005**Prepaid
                    expenses
                
                $
                773
                
                $
                428Government
                    authorities
                
                
                192
                
                
                96Advance
                    payment to suppliers
                
                
                -
                
                
                86Others
                
                
                285
                
                
                123$
                1,250
                
                $
                733
 
 **NOTE
          4:-**  **INVENTORIES**
 
 **December
                    31,****2004**
                
                **2005**Raw
                    materials, parts and supplies
                
                $
                1,305
                
                $
                1,632Finished
                    products
                
                
                860
                
                
                573$
                2,165
                
                $
                2,205
 
 During
          2004, the Company took possession and reclassified the cost of the goods
          that
          were sold in the past to the Ukrainian Ministry **** of
          Internal Affairs, from trade receivables to inventory (see Note 10c(1)),
          in an
          amount of $ 860. Due to the developments, as more fully described in note
          10c(1), the Company wrote-off inventory in an amount of $287.
 
 **NOTE
                    5:-**
                **INVESTMENT
                    IN AFFILIATES AND OTHERS**
 
 a.
                During
                    2004, the Company sold its entire holding (40%) in an affiliated
                    company
                    for an amount of $0.001. The affiliated company served as a regional
                    marketing office responsible for marketing in the former Soviet
                    territories (excluding the Ukraine and Moldavia). During 2003,
                    the
                    affiliated company downsized all of its operations, and the Company
                    decided to write-off its entire investment in the affiliated
                    company in an
                    amount of approximately $ 48.
 
 b.
                In
                    December 1997, the Company established SuperComSlovakia
                    in equal parts with another unrelated investor, in order to execute
                    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 the third party a loan in an 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 as the loan.
  98
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    5:-**
                **INVESTMENT
                    IN AFFILIATES AND OTHERS
                    (Cont.)**
 
 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 SuperCom  Slovakia's
          outstanding shares. The Company has accounted for this investment using
          the
          equity method of accounting, due to the substantive participation rights
          held by
          the minority, which
          impacts the Company’s ability to exert control over the subsidiary .
          (See
          also Note 10c(2)).
 
 **NOTE
                    6:-**
                **PROPERTY
                    AND EQUIPMENT**
 
 **December
                    31,****2004**
                
                **2005**Cost:Computers
                    and peripheral equipment
                
                $
                1,013
                
                $
                1,055Machinery
                    and peripheral equipment
                
                
                3,367
                
                
                3,575Office
                    furniture and equipment
                
                
                471
                
                
                487Leasehold
                    improvements*
                
                
                1,147
                
                
                1315,998
                
                
                5,248Accumulated
                    depreciation:Computers
                    and peripheral equipment
                
                
                910
                
                
                971Machinery
                    and peripheral equipment
                
                
                637
                
                
                745Office
                    furniture and equipment
                
                
                218
                
                
                245Leasehold
                    improvements*
                
                
                592
                
                
                772,357
                
                
                2,038Depreciated
                    cost
                
                $
                3,641
                
                $
                3,210
 
 Depreciation
          expenses for the years ended December 31, 2003, 2004 and 2005 were $ 284,
          $ 238
          and $ 746, respectively.
 
 *
          During
          the fiscal 2005, the Company relocated its offices. As a result, the Company
          wrote down the unamortized balance of leasehold improvement in the amount
          of
          $471. This expense was recorded in the statement of operations as part
          of
“Restructuring expenses”.
 
 99
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    7:-**
                **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 its estimated useful
          life
          which, according to management, was determined to be five years.
 
 **December
                    31,****2004**
                
                **2005**Customer-related
                    intangible assets
                
                $
                56
                
                $
                42Patent
                    - registration expenses
                
                
                37
                
                
                25$
                93
                
                $
                67
 Amortization
          of intangible assets amounted to $ 87, $ 100 and $ 26 for the years ended
          December 2003, 2004 and 2005, respectively.
 
 **NOTE
                    8:-**
                **BANK
                    CREDIT**
 
 a.
                As
                    of December 31, 2005, the Company had credit lines from several
                    banks in
                    an aggregate amount of $ 803 including current maturities of
                    long-term loans in an amount of $ 167 (from time to time the bank may
                    increase the Company credit line for a limited period), of which
                    $ 587 is denominated in NIS and bears interest at a rate of Prime,
                    plus an additional 0.5% - 2.5%, and $ 216 is denominated in dollars
                    and bears interest at a rate of LIBOR plus 2.5% -2.9%. (As of
                    December 31,
                    2005, the rates of the LIBOR and Prime were 4.8% and 6%
                    respectively)
 
 The
          weighted average interest rate on the credit lines as of December 31, 2004
          and
          2005 was approximately 5.7% and approximately 5.9%, respectively.
 
 The
          Company had an unused credit facility in an amount of approximately $ 0 as
          of December 31, 2005 (there is no fee for the unused portion of the credit
          facility).
 
 b.
                Long-term
                    loans:
  **December
                    31,****2004**
                
                **2005**Banks
                
                $
                454
                
                $
                362Less
                    - current maturities of long-term loans
                
                
                454
                
                
                167$
                -
                
                $
                195
                    (*
                )
 
 The
          loans
          bear annual average interest at a rate of LIBOR + 2.9%.
 (*)
          The
          principal of the long-term loans is due as follows:
 2007
          $167
          and 2008 $28.
  100
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**
 **NOTE
                    9:-**
                **ACCRUED
                    EXPENSES AND OTHER
                    LIABILITIES**
  **December
                    31,****2004**
                
                **2005**Customer
                    advances
                
                $
                1,162
                
                $
                38Deferred
                    revenues
                
                
                180
                
                
                571Accrued
                    expenses
                
                
                397
                
                
                577Other
                
                
                6
                
                
                85$
                1,745
                
                $
                1,271
 
 **NOTE
                    10:-**
                **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 2010.
 
 On
          April
          18, 2005, the Company signed a contract to lease new offices in Kadima.
          This
          contract replaces the current lease agreement. According to the agreement
          the
          lease is for a period of five years, commencing on November 1, 2005. The
          Company
          has an option to extend the period for an
          additional five
          years at the similar terms. According to the agreement the monthly fee
          is
          $16.
 
 Future
          minimum lease commitments under non-cancelable operating leases for the
          years
          ended December 31, are as follows:
 
 $2006
                
                
                2842007
                
                
                2422008
                
                
                1932009
                
                
                1932010
                
                
                162$
                1,074
 
 Rent
          expenses for the years ended December 31, 2003, 2004 and 2005, were
          approximately $ 312, $ 387 and $ 369, respectively.
 
 b.
                Guarantees
                    and liens:
 
 1.
                The
                    Company issued bank guarantees in an amount of $ 60 and $ 49,
                    in order to
                    secure the Company's lease and, as a condition for those guarantees,
                    the
                    Company deposited $ 84 with the bank which is included as part
                    of
                    restricted cash. The Company provided bank guarantees in an amount
                    of $
                    23, in order to secure other
                    obligations.
  101
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    10:-**
                **COMMITMENTS
                    AND CONTINGENT LIABILITIES****(Cont.)**
 
 2.
                In
                    order to secure bank credit and covenants to the bank, the Company
                    mortgaged its deposits in an amount of $412 in favor of Bank
                    Otsar
                    Ha-Hayal Ltd. and an amount of $ 505 in the Bank of Jerusalem.
                    Such
                    amounts are included as part of restricted
                    cash.
  Certain
          loan agreements and debentures contain restrictive covenants, mainly the
          requirement to maintain certain financial ratios. As of December 31, 2005
          the
          Company was in compliance with all financial covenants.
 
 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. and is included as part of restricted cash. The Company
                    has a fixed
                    mortgage in favor of Bank Discount Ltd. on the funds and rights
                    that are
                    generated from the Ethiopian
                    immigration.
 
 4.
                The
                    Company has a fixed mortgage in favor of Bank Otsar Ha-Hayal
                    Ltd. on the
                    funds and rights that are generated from Intercomsoft Ltd. See
                    also Note
                    17(b).
 
 5.
                See
                    also note 18(a)
 
 c.
                Litigation:
  1.
                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 Ukraine Contract had been
                    awarded to
                    SuperCom. On July 22, 2004, the Company was informed by the law
                    firm
                    representing the Company in the arbitration proceedings that
                    on July 19,
                    2004, the Arbitration Court issued a negative award declaring
                    the Ukraine
                    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 for
                    restitution of $1,048, paid to the Company by the Department
                    for Resources
                    Supply of the Ministry. On September 27, 2005, the Company received
                    a
                    negative award by the Arbitration Court. On December 12, 2005
                    the Company
                    was informed that the Supreme Court of Ukraine had dismissed
                    the Company’s
                    appeal regarding the July 2004 decision.
  102
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    10:-**
                **COMMITMENTS
                    AND CONTINGENT LIABILITIES****(Cont.)**
 
  Based
          on
          the opinion of its legal advisors, the Company strongly believes that such
          award
          is wrong, that the claim has no merit and that there have been serious
          violations of the arbitration proceedings, therefore no provision was set-up
          in
          the financial statements in respect to the claim for restitution of $1,048.
          However, due to the developments described above the Company wrote off
          inventory
          in an amount of approximately $287 and took possession of the remaining
          inventory that was previously delivered to the customer. In 2003, the Company
          increased the allowance for doubtful accounts in an aggregate amount of
          $ 2,133
          for the debt of the Ukrainian government owes to the Company.
  The
          Company did not have any revenues from this project in 2004 and 2005.
  2.
                On
                    October 30, 2003, SuperCom Slovakia, a subsidiary (66%) of SuperCom
                    Ltd.,
                    received an award from the International Arbitral Center 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
                    was
                    ordered to pay SuperCom Slovakia the amount of SKK 80,000,000
                    (approximately $2,500 as of December 31, 2005) plus interest
                    accruing from
                    March, 1999. In addition, the Ministry of Interior of the Slovak
                    Republic
                    was ordered to pay the costs of arbitration in the amount of
                    EUR 42,716
                    (approximately $51 as of December 31, 2005) and SuperCom Slovakia’s legal
                    fees in the amount of EUR 63,611 (approximately $75 as of December
                    31,
                    2005). The Company has begun the enforcement procedure of the
                    arbitral
                    award. The Ministry of the Interior of the Slovak Republic filed
                    a claim
                    with the Commercial Court in Vienna, Austria on February 10,
                    2004, whereby
                    it challenged and requested to set aside the arbitral award.
                    During
                    September 2005 the commercial court of Vienna dismissed the claim
                    of the
                    Ministry of the Interior of the Slovak Republic. On October 21,
                    2005 the
                    Ministry of the Interior of the Slovak Republic filed an appeal.
 103
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    10:-**
                **COMMITMENTS
                    AND CONTINGENT LIABILITIES****(Cont.)**
 
  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 the Company owes him certain commissions
                    in respect
                    of transactions between SuperCom and certain third parties On
                    September
                    29, 2005 the Company reached a settlement agreement with Mr.
                    Yaacov
                    Pedhatzur pursuant to which SuperCom will pay Mr. Pedhatzur the
                    NIS
                    equivalent of $ 129. The settlement agreement has been validated
                    by the
                    court. This amount was recorded in the statement of operations
                    as
                    litigation settlement expenses.
  4.
                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, which became 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 the Company;
                    (b)
                    unjust enrichment of the Company and InkSure Ltd; (c) 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 damages in
                    the amount
                    of NIS 100,000 (approximately $22 as of December 31, 2005). 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.
                  
                  Regardingthe
                      developments of this litigation see note
                      18(b).
  5.
                See
                    also note 18(a)
  104
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    11:-**
                **TAXES
                    ON INCOME**
 
 a.
                Tax
                    benefits under the Israeli Law for the Encouragement of Capital
                    Investments, 1959 ("the law"):
 
 Certain
          of 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 average 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, 2005, 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.
 
 105
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    11:-**
                **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
          the
          regular corporate tax rate. See Note 11(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
          July
          25, 2005 the Israeli Parliament passed an amendment to the Income Tax Ordinance
          (No. 147) - 2005, gradually reducing the tax rate applicable to the Company
          (regarding profits not eligible for “approved enterprise” benefits mentioned
          above) as follows: in 2006 - 31%, in 2007 - 29%, in 2008 - 27%, in 2009
          - 26%
          and in 2010 and thereafter - 25%.
 According
          to a previous amendment to the Income Tax Ordinance (No. 140) 2004, the
          tax
          rates were reduced as follows: in 2004 - 35% and in 2005 - 34%.
 
 The
          effect of the amendment on the deferred income taxes balances was not
          material.
 
 e.
                Non-Israeli
                    subsidiaries:
 
 Non-Israeli
          subsidiaries are taxed according to the tax laws in their country of
          residence.
 
 106
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    11:-**
                **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,****Tax
                    Benefits:**
                
                **2004**
                
                **2005**Operating
                    loss carryforward
                
                $
                3,648
                
                $
                4,626Reserves
                    and allowances
                
                
                798
                
                
                805Net
                    deferred tax asset before valuation allowance
                
                
                4,446
                
                
                5,431Valuation
                    allowance
                
                
                (4,446
                )
                
                (5,431
                )Net
                    deferred tax asset
                
                $
                -
                
                $
                -Deferred
                    income taxes consist of the following:Domestic
                
                $
                4,069
                
                $
                4,643Valuation
                    allowance
                
                
                (4,069
                )
                
                (4,643
                )Foreign
                
                
                377
                
                
                788Valuation
                    allowance
                
                
                (377
                )
                
                (788
                )$
                -
                
                $
                -
 As
          of
          December 31, 2005 the Company and its subsidiaries have provided valuation
          allowances of $ 5,431 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 are not considered more likely than not to be realized
          in
          the foreseeable future.
 
 g.
                Net
                    operating loss carryforwards, capital loss and loss on marketable
                    securities:
  SuperCom
          Ltd. has accumulated losses for tax purposes as of December 31, 2005, in
          an
          amount of approximately $ 17,500, which may be carried forward and offset
          against taxable income in the future for an indefinite period.
          SuperCom  Ltd.
          also
          has a capital loss of approximately $ 4,000 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.
 
 107
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    11:-**
                **TAXES
                    ON INCOME (Cont.)**
 
 SuperCom's
          subsidiaries in the United States and Hong Kong have estimated total available
          carryforward tax losses of $ 1,831 and $ 801, respectively. In
          Hong-Kong Tax losses are available to offset against future taxable income,
          if
          any, for an indefinite period. In the United States tax losses can be carried
          forward for 20 years.
  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.
                Loss
                    before taxes on incomeconsists
                    of the following:
  **Year
                    ended December 31,****2003**
                
                **2004**
                
                **2005**Domestic
                
                $
                (1,902
                )
                $
                (1,446
                )
                $
                (2,787
                )Foreign
                
                
                (45
                )
                
                (426
                )
                
                (1,164
                )$
                (1,947
                )
                $
                (1,872
                )
                $
                (3,951
                )
 
 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,****2003**
                
                
                **2004**
                
                
                **2005**Loss
                    before taxes on income, as reported in the consolidated statements
                    of
                    operations
                
                $
                (1,947
                )
                $
                (1,872
                )
                $
                (3,951
                )Statutory
                    tax rate in Israel
                
                
                36
                %
                
                35
                %
                
                34
                %Theoretical
                    tax expenses (benefit)
                
                $
                (701
                )
                $
                (655
                )
                $
                (1,343
                )Carryforward
                    losses and other deferred taxes for which a full valuation allowance
                    was
                    recorded
                
                
                375
                
                
                525
                
                
                1,021Differences
                    in Taxes resulting from approved enterprise benefits and from
                    rate
                    applicable to foreign subsidiary and others
                
                
                326
                
                
                130
                
                
                322Actual
                    income tax
                
                $
                -
                
                $
                -
                
                $
                -
 
 108
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    12:-**
                **SHARE
                    CAPITAL**
  a.
                The
                    Company has been listed for trade since October 23, 2003 on the
                    Euronext
                    Brussels stock market, under the symbol “SUP”. Since November 5, 2004 the
                    Company’s ordinary shares have also been trading on the OTCBulletin
                    Board market under the symbol
                    "SPCBF.OB".
 
 
 b.
                During
                    the year 2005, the Company increased its authorized share capital
                    to
                    40,000,000 shares.
 
 c.
                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.
 
 d.
                Stock
                    options:
 
 1.
                On
                    February 14, 1999, the Board of Directors adopted, and Company’s
                    shareholders subsequently approved, the 1999 Employee Stock Option
                    Plan
                    Option Plan, which was amended and restated in March 2002 (the
“1999
                    Option Plan”). The Company no longer uses the 1999 Option Plan to issue
                    stock options. In 2003, the Company adopted a new stock option
                    plan under
                    which the Company now issue stock options (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 (40,000,000) 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.
 109
  **NOTE
                    12:-**
                **SHARE
                    CAPITAL**
  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 the Company 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, the
          Company
          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 the Company had previously been entitled to do under
          Section
          102.
  On
          January 26, 2003, at the general shareholders 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.
  It
          was
          also approved to grant an option to acquire up to 670,981 shares of the
          Company
          ("the Option") to the current chairman of the board 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, see Note 13d.
  110
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    12:-**
                **SHARE
                    CAPITAL**
 
 2.
                A
                    summary of the Company's stock option activity, and related information
                    is
                    as follows:
 
 **Year
                    ended December 31****2003**
                
                **2004**
                
                **2005****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
                
                
                880,712
                
                $
                2.88
                
                
                1,534,514
                
                $
                1.17
                
                
                3,352,377
                
                $
                0.97Granted
                
                
                1,005,981
                
                $
                0.42
                
                
                2,030,000
                
                $
                1.23
                
                
                540,000
                
                $
                0.84Exercised
                
                
                (200,533
                )
                $
                0.42
                
                
                -
                
                $
                -
                
                
                (221,666
                )
                $
                0.42Canceled
                    and forfeited
                
                
                (151,646
                )
                $
                0.72
                
                
                (212,137
                )
                $
                5.03
                
                
                (165,005
                )
                $
                0.94Outstanding
                    at end of year
                
                
                1,534,514
                
                $
                1.17
                
                
                3,352,377
                
                $
                0.97
                
                
                3,505,706
                
                $
                0.98Exercisable
                    at end of year
                
                
                1,113,580
                
                $
                1.44
                
                
                1,681,360
                
                $
                0.58
                
                
                3,032,372
                
                $
                1.03
 
 Compensation
          expenses recognized by the Company related to its share-based employee
          compensation awards were $ 26, $ 9 and $ 47 for the years ended
          December 31, 2003, 2004 and 2005, respectively.
 
 On
          December 29, 2005, the Board of Directors and the audit committee, approved
          the
          acceleration of the vesting schedule for certain of the stock options granted
          to
          employees and officers as an incentive. As a result, options to purchase
          a total
          of 712,500 ordinary shares became exercisable as of such date.
 
 The
          options outstanding as of December 31, 2005, have been separated into ranges
          of
          exercise price as follows:
  **Exercise**
                  **price**
                
                **Options
                    outstanding as of**
                  **December
                    31, 2005**
                
                **Weighted
                    average**
                  **remaining**
                  **contractual
                    life (years)**
                
                **Weighted
                    average**
                  **exercise
                    price**
                
                **Options
                    exercisable**
                  **as
                    of**
                  **December
                    31, 2005**
                
                **Weighted
                    average**
                  **exercise
                    price**$
                    0.42 - $ 1
                
                
                2,852,115
                
                
                7.97
                
                
                0.62
                
                
                2,378,781
                
                
                0.61$
                    2
                    - $ 2.52
                
                
                640,000
                
                
                8.69
                
                
                2.51
                
                
                640,000
                
                
                2.51$
                    4.00 - $ 5.62
                
                
                11,201
                
                
                2.74
                
                
                4.73
                
                
                11,201
                
                
                4.73$
                    9.64
                
                
                2,390
                
                
                0.54
                
                
                9.64
                
                
                2,390
                
                
                9.643,505,706
                
                
                8.08
                
                
                0.99
                
                
                3,032,372
                
                
                1.03
 
 111
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                      12:-**
                  **SHARE
                      CAPITAL**
 e.
                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 fourth quarter of 2004, 706,912 warrants were exercised for an aggregate
          amount of approximately $ 778 and approximately $ 130 was received in respect
          of
          117,647 shares that were issued in 2005.
  During
          the year 2005, 320,294 warrants were exercised for an aggregate amount
          of
          approximately $ 352.
  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.
 
 The
          warrants granted to the consultants as describe 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.
 112
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                      12:-**
                  **SHARE
                      CAPITAL**
 f.
                    In November
                        and December of 2005, the Company received aggregate gross
                        proceedsof
                        $3,050 from a private placement to certain investors of 4,919,354
                        ordinary
                        shares (out of which 887,096 shares were issued after balance
                        sheet date)
                        and five-year warrants to purchase 1,721,772 ordinary shares
                        at an
                        exercise price of $0.60 per share. The private placement
                        was made to
                        accredited investors without general solicitation or marketing
                        pursuant to
                        Rule 506 of Regulation D, promulgated under the Securities
                        Act of 1933, as
                        amended (the “Securities Act”) and to foreign private investors in
                        offshore transactions in reliance on Regulation S promulgated
                        under the
                        Securities Act. In connection with the private placement,
                        the Company
                        placement agent received a cash fee of $150 and the Company’s placement
                        advisors received five-year warrants to purchase 49,677 ordinary
                        shares at
                        an exercise price of $0.60 per share. The investors in this
                        private
                        placement were granted the right, for one year following
                        the closing of
                        the private placement and subject to certain limitations,
                        to participate
                        in future issuances of the Company’s capital stock or securities (a
                        “Subsequent Financing”) up to an amount which would permit each investor
                        to maintain its fully diluted percentage equity ownership
                        at the same
                        level existing prior to the Subsequent Financing (after giving
                        effect to
                        such Subsequent Financing). Additionally, all of the warrants
                        offered in
                        this private placement contain an anti-dilution mechanism
                        whereby, subject
                        to certain exceptions, the exercise price of the warrants
                        is automatically
                        reduced to the lowest price per share at which the ordinary
                        shares were
                        issued or sold if the Company issues or sells any ordinary
                        shares at a
                        price per share less than the exercise price of the warrants
                        (a “Trigger
                        Issuance”). However, there is a cap on the number of ordinary shares
                        that
                        may be purchased by any warrant holder pursuant to this anti-dilution
                        mechanism. Each warrant holder may purchase only such number
                        of ordinary
                        shares which would permit such holder to maintain its fully
                        diluted
                        percentage equity ownership at the same level existing prior
                        to the
                        Trigger Issuance (after giving effect to such Trigger Issuance).
                        The
                        warrants are callable, subject to certain limitations, at
                        the option of
                        the Company if the closing bid price per ordinary share of
                        the Company's
                        ordinary shares equals or exceeds $1.20 for 20 trading days
                        during the
                        term of the warrants. The Company may however only call,
                        in any 3-month
                        period, the lesser of (i) 20% of the aggregate amount of
                        the warrants
                        initially issued to a warrant holder, or (ii) the total number
                        of warrants
                        then held by such
                        holder.
  113
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                        12:-**
                    **SHARE
                        CAPITAL (Cont.)**
 The
          warrants granted to the consultant as described above were fully vested
          on the
          date of grant. The fair value of the warrants is $ 15 as computed using
          the
          Black & Scholes pricing model with the following weighted average
          assumption: risk free interest of 4%, dividend yield of 0, volatility factors
          of
          the excepted market price of the Company’s ordinary shares of 0.74, and
          contractual life of the warrants of 5 years. The Company recorded the issuance
          costs directly to additional paid in capital.
 
 g.
                During
                    the year 2005, 25,000 warrants were issued to a consultant. The
                    fair value
                    of the warrants is $ 13. During the year 2005 the Company recognized
                    $ 8
                    as compensation expenses.
 
 h.
                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
                    13:-**
                **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 2003, 2004 and 2005 the Company paid $ 147, $
          144 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,
                    who is one
                    of the Company's co-founders and a principal shareholder. On
                    January 13
                    2005, the general shareholders meeting approved the following
                    amendments:
  ·
                As
                    of the date of the approval of the General Shareholders Meeting,
                    to
                    increase the consideration set forth in the said agreement to
                    an amount of
                    $ 7 per month.
 ·
                Upon
                    the termination of the current car leasing period, to upgrade
                    the car
                    provided, to any car whose leasing price is up to NIS 4,200 (approximately
                    $ 1 as of December 31, 2005), (excluding tax) per
                    month.
 ·
                To
                    grant a one-time bonus of NIS 130,000 (approximately $ 30 as
                    of December
                    31, 2005), including VAT.
 114
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    13:-**
                **RELATED
                    PARTY TRANSACTIONS (**Cont.)
 
 In
          consideration of these services, the Company has undertaken to pay $ 7
          per month
          plus motor vehicle expenses. In addition the Company pays $ 1.5 per month
          as a
          directors fee. During 2003, 2004 and 2005, the Company paid $ 76, $ 73 and
          $ 132, 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 2003, 2004 and 2005, the Company
          paid
          $ 68, $ 69 and $ 71, pursuant to this agreement.
 d.
                On
                    January 13, 2005 the general shareholders meeting approved among
                    other
                    items the board of directors decision dated October 4, 2004 to
                    grant an
                    option to acquire up to 300,000 shares of the Company to 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. 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.
 
 e.
                As
                    of December 31, 2004 and 2005 the balance of the debts of related
                    parties
                    were $ 31 and $ 0, respectively, (net of allowance $22 and $55
                    respectively)
 
 **NOTE
                    14:-**
                **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:
  115
 **SUPERCOM
              LTD. AND ITS SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
              dollars in thousands**
 **NOTE
                      14:-**
                  **SEGMENTS,
                      MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION 
                      (Cont.)**
 **Year
                    ended December 31,****2003**
                
                **2004**
                
                **2005****Total**
                
                **Long-lived**
                
                **Total**
                
                **Long-lived**
                
                **Total**
                
                **Long-lived****revenues**
                
                **assets**
                
                **revenues**
                
                **assets**
                
                **revenues**
                
                **assets**Europe
                
                $
                3,308
                
                $
                -
                
                $
                3,218
                
                $
                -
                
                $
                3,719
                
                $
                -Asia
                    Pacific
                
                
                2,067
                
                
                28
                
                
                2,433
                
                
                20
                
                
                2,173
                
                
                16Africa
                
                
                536
                
                
                -
                
                
                899
                
                
                -
                
                
                2,158
                
                
                -United
                    States
                
                
                828
                
                
                1
                
                
                386
                
                
                65
                
                
                202
                
                
                61Israel
                
                
                460
                
                
                1,647
                
                
                320
                
                
                3,556
                
                
                210
                
                
                3,133Other
                
                
                45
                
                
                -
                
                
                88
                
                
                -
                
                
                -
                
                
                -$
                7,244
                
                $
                1,676
                
                $
                7,344
                
                $
                3,641
                
                $
                8,462
                
                $
                3,210
 
 b.
                Summary
                    of operations based on products and
                    services:
 
 **Year
                    ended December 31,****2003**
                
                **2004**
                
                **2005**Raw
                    materials and equipment
                
                $
                4,196
                
                $
                5,552
                
                
                7,902SPPL
                    1000
                
                
                2,471
                
                
                1,210
                
                
                -Maintenance
                
                
                577
                
                
                582
                
                
                560$
                7,244
                
                $
                7,344
                
                $
                8,462
 c.
                Major
                    customer data as a percentage of total
                    sales:
 
 **Year
                    ended December 31,****2003**
                
                **2004**
                
                **2005**Customer
                    A
                
                27%
                
                -
                
                -Customer
                    B
                
                16%
                
                22%
                
                *Customer
                    C
                
                -
                
                *
                
                23%Customer
                    D
                
                12%
                
                17%
                
                11%Customer
                    E
                
                11%
                
                10%
                
                *Customer
                    F
                
                -
                
                16%
                
                *Customer
                    G
                
                -
                
                *
                
                10%Customer
                    H
                
                -
                
                -
                
                22%
  *)  Less
          than
          10%.
 
 116
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                    15:-**
                **FINANCIAL
                    EXPENSES, NET**
  **Year
                    ended December 31,****2003**
                
                **2004**
                
                **2005**Financial
                    expenses:Interest,
                    bank charges and fees
                
                $
                (207
                )
                $
                (194
                )
                $
                (119
                )Exchange
                    differences
                
                
                (98
                )
                
                (48
                )
                
                -Total
                    financial expenses
                
                
                (305
                )
                
                (242
                )
                
                (119
                )Financial
                    income:Exchange
                    differences
                
                
                -
                
                
                -
                
                
                28Interest
                
                
                72
                
                
                28
                
                
                66Total
                    financial income
                
                
                72
                
                
                28
                
                
                94Net
                    total
                
                $
                (233
                )
                $
                (214
                )
                $
                (25
                )
 
 **NOTE
                    16:-**
                **OTHER
                    EXPENSES, NET**
  **2003**
                
                **2004**
                
                **2005****Year
                    ended December 31,**Loss
                    on sale of property and equipment, net
                
                $
                (5
                )
                $
                (1
                )
                $
                -Decline
                    in market value of held-to-maturity securities
                
                
                (52
                )
                
                (7
                )
                
                -Other
                
                
                (26
                )
                
                (19
                )
                
                (30
                )$
                (83
                )
                $
                (27
                )
                $
                (30
                )
  **NOTE
                      17:-**
                  **SIGNIFICANT
                      EVENTS**
  a.
                In
                    October 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 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 GPO, the Company’s attempts to
          persuade the GPO to withdraw the current termination notice have been
          unsuccessful.  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
          GPO that it is based on unresolved security concerns and not related to
          the
          Company’s technological solution or its cost proposal.
  117
 **SUPERCOM
                LTD. AND ITS SUBSIDIARIES**
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
                dollars in thousands**
 **NOTE
                        17:-**
                    **SIGNIFICANT
                        EVENTS**
  b.
                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 $1,184, $1,610 and
                    $559 during
                    the fiscal years ended December 31, 2003, 2004 and 2005, respectively.
                    Under the terms of the termination agreement, SuperCom will supply
                    equipment, consumables, and software directly to the Moldovan
                    government.
                    During the year 2005 the Company generated $1,868 in revenues
                    from the
                    Moldovan government. As a result of the termination, the Company
                    does not
                    anticipate any significant changes in its
                    revenues.
 
 c.
                On
                    April 18, 2005 the Company signed a contract to lease new offices
                    in
                    Kadima. See Note 11a.
 
 d.
                In
                    November and December of 2005, the Company received aggregate
                    gross
                    proceeds of $3,050 from a private placement to certain investors
                    of
                    4,919,354 ordinary shares and five-year warrants to purchase
                    1,721,772
                    ordinary shares at an exercise price of $0.60 per share. See
                    Note
                    12
 **NOTE
                        18:-**
                    **SUBSEQUENT
                        EVENTS**
 a.
                On
                    May 1, 2006, Evilia Investments Ltd. ("Evilia") filed with the
                    Magistrate's Court in Tel-Aviv-Jaffa a monetary lawsuit against
                    InkSure
                    Ltd. (a former subsidiary, which became a subsidiary of InkSure
                    Technologies, Inc., ("InkSure")) and against the Company, jointly
                    and
                    severally, for payment of NIS 2,366,868 (as of June 15, 2006,
                    approximately $530) plus interest, due as rent payments and related
                    management fees for a certain real estate property in Rehovot,
                    leased to
                    InkSure under a lease agreement entered into between Evilia and
                    InkSure on
                    October 10, 2000, as amended on May 25, 2001 (the "Agreement"),
                    to which
                    SuperCom is a guarantor.
  A
          motion
          for leave to defend the lawsuit has been filed with the Court by both InkSure
          and the Company on June 15, 2006.
  Based
          upon the facts provided by InkSure, the building was not completed and
          was not
          ready for use, and hence, InkSure submitted to Evilia a notice of termination
          of
          the Agreement.
  Assuming
          that the facts presented by InkSure in its motion for leave to defend the
          lawsuit are adopted as true by the Magistrate's Court, the Company tend
          to
          believe that the chances the claim against InkSure and hence (since the
          guarantee signed by the Company will no longer be valid if the termination
          of
          the Agreement by InkSure is found to be justified by the court), also against
          the Company, will be dismissed are reasonably good.
  In
          addition, based on the Company’s legal consultant advisor, the Company believes
          that the Company’s liability under the Agreement is limited as a guarantor to
          InkSure's obligation, if and to the extent it is not paid by
          InkSure.
  Accordingly,
          even if the court issues a final judgment according to which InkSure is
          required
          to pay the amount claimed or any part thereof, the Company’s obligation to pay
          any amount to Evilia is subject to no payment of the amounts due from InkSure,
          and limited only to such amounts.
  118
 **SUPERCOM
          LTD. AND ITS SUBSIDIARIES**
 **NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS**
 **U.S.
          dollars in thousands**
 **NOTE
                        18:-**
                    **SUBSEQUENT
                        EVENTS (Cont.)**
 
 Since
          Inksure appears to be financially capable of paying any amounts due on
          the
          claim, if so determined by the court, the Company tend to believe that
          its
          exposure is limited. Therefore, no reserve has been setup in the financial
          statement in respect of this litigation.
 
 b.
                As
                    disclosed in note 10(c)(4), on December 16, 1999, Secu-Systems
                    Ltd.
                    ("Secu-systems" or the "Plaintiff") filed a lawsuit with the
                    District
                    Court in Tel-Aviv-Jaffa jointly and severally against the Company
                    and
                    InkSure 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 constitutes inter alia: (a) a breach
                    of a
                    confidentiality agreement between the Plaintiff and the Company;
                    (b)
                    unjust enrichment of the Companyand InkSure; (c) a breach of
                    fiduciary
                    duties owed to the Plaintiff by the Company and InkSure, and
                    (d) a tort of
                    misappropriation of trade secrets and damage to the Plaintiff's
                    property.
                    Based on such allegations, Secu-Systems asked the court to order
                    the
                    Company and InkSure 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
                    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 $22 as of December 31, 2005). 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.
 
 On
          March
          15, 2006, the Court gave its ruling as follows:
 
 1.
                The
                    claim for a breach of contract was denied.
 2.
                The
                    claim for misappropriation of trade secret was accepted, but
                    the court
                    states explicitly that there is no room for ordered InkSure and
                    the Comany
                    to restitute profits of breach of contract and that there is
                    also no room
                    for granting a remedy which orders the restitution of profits
                    due to the
                    causes of actions of misappropriation of trade secret or unjust
                    enrichment.
 3.
                Ordered
                    InkSure and the Comany to cease all activity which involves the
                    use of the
                    confidential knowledge and/or the confidential information.
 4.
                To
                    provide to the Plaintiff, within 60 days, a report certified
                    by an
                    accountant that sets forth in full the income and/or benefit
                    that has been
                    received by InkSure and the Company as a result of the infringing
                    activity
                    until the date of the judgment.
 5.
                To
                    pay (jointly and severally) to the Plaintiff a compensation in
                    the sum of
                    NIS 100,000 (bearing interest and linked to the consumer price
                    index (CPI)
                    from the date of the judgment), legal expenses (bearing interest
                    and
                    linked to the CPI from the dates they were incurred until their
                    actual
                    payment) as well as attorney's fees in the sum of NIS 30,000
                    plus VAT
                    (bearing interest and linked to the CPI from the date of the
                    judgment).
 
 Secu-Systems
          has recently filed an appeal on the ruling above. At this point, the Company
          cannot estimate the odds of success of the appeal. The Company has the
          right to
          file a counter appeal until July 15, 2006.
 
 -
          - - - -
          - - - - - -
 119


**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 Plan4.2*
              Stock
                  Purchase Agreement between SuperCom and Elad Ink, dated as of March
                  4,
                  2002.4.3*
              Stock
                  Purchase Agreement between SuperCom and ICTS BV, dated as of April
                  29,
                  2002.4.4*
              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 Ethics12.1
              Certification
                  pursuant to Section 302 of the Sarbanes-Oxley Act.13.1
              Certification
                  pursuant to Section 906 of the Sarbanes-Oxley Act.15.1
              Consent
                  of Fahn, Kanne & Co., a member of Grant Thornton, dated June 29,
                  2006.15.2
              Consent
                  of BDO McCabe Lo & Company, independent public accountants, dated June
                  29, 2006.





*
                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).


120


**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.**/s/ Eyal
              Tuchman**By:
                Eyal Tuchman****Its:
                Chief Executive Officer**




Date: July
        24, 2006




121