UNITED STATES

SECURITIES AND EXCHANGE COMMISSION



Washington, D.C. 20549










FORM 20-F



| ̈ |  | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
|- |  | ----------------------------------------------------------------------------------------------

OR

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

For the fiscal year ended December 31, 2011

OR

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

OR

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



Commission file number 000-50790










VUANCE
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)



Nolton House, 14 Shenkar Street, P.O.B
12190, Hertzliya Pituach 46725, Israel

(Address of principal executive offices)



Mickey
Ben Harush, CFO, +972-9-889-0800, mickeyb@vuance.com,

Nolton
House, 14 Shenkar Street, P.O.B 12190, Hertzliya Pituach 46725, Israel

(Name, Telephone, E-mail and/or Facsimile
number and Address of Company Contact Person)










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.

Ordinary Shares,
par value NIS 0.0588235 per share



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: 12,035,272
Ordinary Shares, nominal value NIS 0.0588235 per share.



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



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    x No



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



xYes ̈No



Indicate by
check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).xYes   ̈  No



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

Large accelerated filer  ̈             Accelerated
filer  ̈             Non-accelerated
filer x



Indicate by check mark which basis of accounting
the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP x

International Financial Reporting Standards
as issued by the International Accounting Standards Board  ̈

Other  ̈If “Other” has been checked in response to the previous question, indicate by check mark which financial statement
item the registrant has elected to follow: Item 17  ̈Item 18  ̈



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 ̈Nox













TABLE OF CONTENTS



|PARTI                                                             |   
|----------------------------------------------------------------- | --
|                                                                  |   
|NOTE REGARDING FORWARD-LOOKING STATEMENTS                         | 4 
|                                                                  |   
|ITEM 1.  Identity of Directors, Senior Management and Advisers.   | 5 
|                                                                  |   
|ITEM 2.  Offer Statistics and Expected Timetables.                | 5 
|                                                                  |   
|ITEM 3.  Key Information.                                         | 5 
|                                                                  |   
|Selected Financial Data                                           | 5 
|Capitalization and Indebtedness                                   | 7 
|Reasons for the Offer and Use of Proceeds                         | 7 
|Risk Factors                                                      | 7 
|                                                                  |   
|ITEM 4.  Information on the company.                              | 24
|                                                                  |   
|History and Development of the Company                            | 24
|Business Overview                                                 | 27
|Organizational Structure                                          | 35
|Property, Plants and Equipment                                    | 36
|                                                                  |   
|ITEM 4A.  Unresolved Staff Comments.                              | 36
|                                                                  |   
|ITEM 5.  Operating and Financial Review and Prospects.            | 37
|                                                                  |   
|Operating results                                                 | 37
|Liquidity and Capital Resources                                   | 44
|Research and Development, patents and licenses, etc.              | 49
|Trend Information                                                 | 49
|Off Balance Sheet Arrangements                                    | 50
|Tabular Disclosure of Contractual Obligations                     | 50
|                                                                  |   
|ITEM 6.  Directors, Senior Management and Employees.              | 51
|                                                                  |   
|Directors and Senior Management                                   | 51
|Compensation                                                      | 52
|Board Practices                                                   | 53
|Employees                                                         | 55
|Share Ownership                                                   | 56
|                                                                  |   
|ITEM 7.  Major Shareholders and Related Party Transactions.       | 59
|                                                                  |   
|Major shareholders                                                | 59
|Related Party Transactions                                        | 62
|Interests of Experts and Counsel                                  | 63
|                                                                  |   
|ITEM 8.  Financial Information.                                   | 64
|                                                                  |   
|Consolidated Statements and Other Financial Information (Audited) | 64
|Significant Changes                                               | 67
|                                                                  |   
|ITEM 9.  The Offer And Listing.                                   | 67
|                                                                  |   
|Offer and Listing Details                                         | 67
|Plan of Distribution                                              | 69
|Markets                                                           | 69
|Selling Shareholders                                              | 69
|Dilution                                                          | 69
|Expenses of the Issue                                             | 69
|                                                                  |   
|ITEM 10.  Additional Information.                                 | 69





2







|Share Capital                                                                               | 69
|------------------------------------------------------------------------------------------- | --
|Memorandum and Articles of Association                                                      | 69
|Material Contracts                                                                          | 74
|Exchange Controls                                                                           | 74
|Taxation                                                                                    | 74
|Dividends and Paying Agent                                                                  | 81
|Statement by Experts                                                                        | 81
|Documents on Display                                                                        | 81
|Subsidiary Information                                                                      | 81
|                                                                                            |   
|ITEM 11.  Quantitative and Qualitative Disclosures About Market
    Risk.                   | 81
|                                                                                            |   
|Quantitative and Qualitative Information about Market Risk                                  | 81
|                                                                                            |   
|ITEM 12.  Description of Securities Other than Equity Securities.                           | 82
|                                                                                            |   
|PART II                                                                                     |   
|                                                                                            |   
|ITEM 13.  Defaults, Dividend Arrearages and Delinquencies.                                  | 82
|                                                                                            |   
|ITEM 14.  Material Modifications to the Rights of Security
    Holders and Use of Proceeds. | 83
|                                                                                            |   
|ITEM 15.  Controls and Procedures.                                                          | 83
|                                                                                            |   
|ITEM 16A.Audit Committee Financial Expert                                                   | 84
|                                                                                            |   
|ITEM 16B.  Code of Ethics                                                                   | 84
|                                                                                            |   
|ITEM 16C.  Principal Accountant Fees and Services                                           | 84
|                                                                                            |   
|ITEM 16D.  Exemptions from the Listing Standards for Audit
    Committees                   | 85
|                                                                                            |   
|ITEM 16E.  Purchases of Equity Securities by the Issuer and
    Affiliated Purchasers       | 85
|                                                                                            |   
|ITEM 16F.  Change in Registrant’s Certifying Accountant                                     | 85
|                                                                                            |   
|ITEM 16G.  corporate governance                                                             | 85
|                                                                                            |   
|ITEM 16H.  mine safety disclosure                                                           | 85
|                                                                                            |   
|PART III                                                                                    |   
|                                                                                            |   
|ITEM 17.  Financial Statements.                                                             | 85
|                                                                                            |   
|ITEM 18.  Financial Statements.                                                             | 85
|                                                                                            |   
|ITEM 19.  Exhibits.                                                                         | 86



3







NOTE REGARDING FORWARD-LOOKING STATEMENTS



This Annual Report
on Form 20-F (“Annual Report”) contains “forward-looking statements” within the meaning of the United
States Private Securities Litigation Reform Act of 1995 that are not historical facts but rather reflect our present expectations
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. These forward looking statements include, but are not limited to, statements regarding: (i)
our belief about our competitive position in the tracking, asset management and monitoring, active radio frequency identification
(“RFID"), e-ID, and our ability to become a key technological player in such markets; (ii) our belief about the commercial
possibilities for our products in such markets; (iii) our expectation to be able to leverage our current products and technologies
for the development of new applications and penetration to additional markets; (iv) our expectation to be able to continue to
participate in the government market; (v) our belief about our ability to leverage our public sector experience into the commercial
sector; (vi) our belief regarding the effects of competitive pricing on our margins, sales and market share; (vii) our expectations
regarding the effects of the legal proceedings we are involved in on our sales and operating performance (See “Legal Proceedings”
in Item 8.A); (viii) our belief regarding the fluctuations of our operating results, including our belief about the effects of
inflation and the fluctuation of the NIS/dollar exchange rate on our operating results; (ix) our expectations about our future
revenues (or absence of revenues); (x) our expectations about the effects of seasonality on our revenues and operating results;
(xi) our expectations regarding development and introduction of future products; (xii) our expectations regarding revenues from
our existing customer contracts and purchase orders, including, without limitation, the value of our agreement for our end-to-end
system for a national multi-ID issuing and control system with the government of a European country and our expectations for increased
revenues from sales of additional technology and raw materials to such government; (xiii) our expectations regarding the success
of our active RFID technology; (xiv) our expectations regarding the effectiveness of our marketing programs and generation of
business from those programs, including our ability to continue to sell products through strategic alliances and our belief about
the role customer service plays in our sales and marketing programs; (xv) our anticipation that sales to a relatively small number
of customers will continue to account for a significant portion of our net sales; and (xvi) the anticipated timing of our product
introductions. Forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results
to differ materially from those stated in such statements. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below under the captions “Risk Factors” in Item 3.D and “Operating and
Financial Review and Prospects” in Item 5 and elsewhere in this Annual Report, as well as in our reports on Form 6-K submitted
to the Securities and Exchange Commission, or the SEC. 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, and you are cautioned not to place undue reliance on these
forward-looking statements which speak only as of the date of this Annual Report.



In this Annual Report,
all references to "Vuance," the “Company,” "we," "us" or "our" are to Vuance
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 Vuance are presented in U.S. dollars.



Note:Unless
otherwise indicated herein, the prices and quantities of our ordinary shares provided in this Annual Report reflect the 1 to 5.88235
share consolidation (reverse share split) that we completed on April 29, 2007 and which became effective for trading purposes
as of May 14, 2007.



4







PART I



ITEM 1.    Identity
of Directors, Senior Management and Advisers.



Not applicable.



ITEM 2.    Offer
Statistics and Expected Timetables.



Not applicable.



ITEM 3.    Key
Information.



A.    Selected
Financial Data



The following selected consolidated
financial data as of December 31, 2011, 2010, 2009, 2008 and 2007 and for the years then ended 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 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.



5







|                                                                                                                                   |  | (IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA) |       
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------- | ------
|                                                                                                                                   |  | 2011                                                  |       
|SUMMARY OF STATEMENT OF OPERATIONS:                                                                                                |  |                                                       |       
|Revenues                                                                                                                           |  |                                                       | 7,922 
|Cost of Revenues                                                                                                                   |  |                                                       | 3,306 
|                                                                                                                                   |  |                                                       |       
|Gross Profit                                                                                                                       |  |                                                       | 4,616 
|                                                                                                                                   |  |                                                       |       
|Operating Expenses:                                                                                                                |  |                                                       |       
|Research and Development                                                                                                           |  |                                                       | 462   
|Selling and Marketing                                                                                                              |  |                                                       | 3,505 
|General and Administrative                                                                                                         |  |                                                       | 732   
|Other (income) expenses                                                                                                            |  |                                                       | (137  
|                                                                                                                                   |  |                                                       |       
|Total Operating Expenses                                                                                                           |  |                                                       | 4,562 
|                                                                                                                                   |  |                                                       |       
|Operating (Loss) Income                                                                                                            |  |                                                       | 54    
|Financial (Expenses) Income, Net                                                                                                   |  |                                                       | 990   
|                                                                                                                                   |  |                                                       |       
|Income (Loss) before Income Tax                                                                                                    |  |                                                       | 1,044 
|                                                                                                                                   |  |                                                       |       
|Income Tax                                                                                                                         |  |                                                       | (25   
|                                                                                                                                   |  |                                                       |       
|Net Income (Loss) from continuing operations                                                                                       |  |                                                       | 1,019 
|                                                                                                                                   |  |                                                       |       
|Loss from discontinued operations                                                                                                  |  |                                                       | -     
|                                                                                                                                   |  |                                                       |       
|Net income (loss)                                                                                                                  |  | $                                                     | 1,019 
|                                                                                                                                   |  |                                                       |       
|PER SHARE DATA:                                                                                                                    |  |                                                       |       
|Basic earnings (loss) from continuing operations                                                                                   |  | $                                                     | 0.11  
|Diluted earnings (loss) from continuing operations                                                                                 |  | $                                                     | 0.09  
|Basic and Diluted loss from discontinued operations                                                                                |  |                                                       | -     
|Basic earnings (loss) per share                                                                                                    |  | $                                                     | 0.11  
|Diluted earnings (loss) per share                                                                                                  |  | $                                                     | 0.09  
|                                                                                                                                   |  |                                                       |       
|SUMMARY OF BALANCE SHEET DATA:                                                                                                     |  |                                                       |       
|Cash and Cash Equivalents                                                                                                          |  |                                                       | 215   
|Marketable debt securities                                                                                                         |  |                                                       | —     
|Trade receivables (net of allowance for doubtful accounts of $ 134 and $ 1,553 as of December
    31, 2011 and 2010, respectively) |  |                                                       | 1,542 
|Inventories, net                                                                                                                   |  |                                                       | 269   
|Total Current Assets                                                                                                               |  |                                                       | 2,131 
|TOTAL ASSETS                                                                                                                       |  |                                                       | 2,455 
|Total Current Liabilities                                                                                                          |  |                                                       | 7,829 
|Accrued Severance Pay                                                                                                              |  |                                                       | 227   
|SHAREHOLDERS' EQUITY (DEFICIT)                                                                                                     |  |                                                       | (5,601








(*) Certain comparative figures have been reclassified to conform
to the current period presentation. The changes did not affect net income, cash flow or stockholders equity.

(**) Due to the sale of certain business activities in January
2010, as described in Item 4 below, those business activities are presented as discontinued operations in accordance with U.S.
GAAP.



6







| | 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 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.”



Risks Related to Our Business



We have a history of annual losses and negative operating
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 operating cash flow deficit in each of 2011, 2010 and 2009. As of December
31, 2011, we had an accumulated deficit of approximately $48,325,000. We incurred net losses of approximately $1,965,000 and $5,085,000
in the years ended December 31, 2010 and 2009, respectively. We incurred net income of approximately $1,019,000 in the year ended
December 31, 2011 (which includes a capital gain of $2,149,000 as a result of the Creditor Arrangement). We expect to spend significant
amounts of capital to enhance our products and services, develop further sales and operations and fund expansion; and therefore,
we may have net losses and negative operating cash flows in the near future. As a result, we will need to generate significant
revenue to maintain and/or to increase profitability. Even if we do achieve annual profitability, we may not be able to sustain
or increase profitability on an annual basis.



The Creditor Arrangement has not been completed, and there
is no certainty that it will be completed in a timely manner or at all. A substantial delay in its completion could materially
harm our business and financial condition.



At the annual general meeting of our shareholders
held on September 12, 2010, our shareholders resolved to afford certain of our major creditors with the opportunity to convert
the amounts owed to them into our ordinary shares, by means of a set off against the then total outstanding debt to such creditor,
at a price of $0.09 per ordinary share, subject to forgiveness of 60% of our total outstanding debt to such creditor. Our board
of directors was authorized to set all other terms of the Creditor Arrangement, including, inter alia, its timetable.



On November 3, 2010 we petitioned the Petach
Tikva District Court of the Central District in Israel, for the court approval of a creditor arrangement (the "Creditor Arrangement")
in accordance with Section 350 of the Israeli Companies Law, 5759-1999 (the “Israeli Companies Law”). We requested
that the court apply the arrangement approved by our shareholders to all of our creditors as of August 10, 2010, or the Determining
Date, and who were still creditors as of December 17, 2010 and who had submitted a claim of debt no later than January 6, 2011.
In May 2011, our shareholders subsequently approved the inclusion of additional creditors to be included under the Creditor Arrangement.
Although the Creditor Arrangement is supported by a resolution of our shareholders and was presented at the meeting of our creditors,
on July 18, 2011 the court decided not to approve our application, mainly due to an objection to the proposed arrangement which
was filed by one of our secured creditors, Special Situations Funds ("SSF"). On November 8, 2011, SSF sold, assigned
and transferred to Mr. Eliyahu Trabelsi all of its rights under the Convertible Bonds and warrants.



In February 2012, our Board of Directors
determined to proceed with the Creditor Arrangement without the involvement of the court. As of April 15, 2012, following the
forgiveness or conversion of debt pursuant to the Creditor Arrangement in the aggregate amount of $3,640,000 since December 31,
2010, additional debt of approximately $3,286,000 (computed as of December 31, 2011) remains to be forgiven or converted pursuant
thereto. However, the completion of the Creditor Arrangement has been delayed, which we believe is, as a result of a dispute over
the ownership of approximately $1,022,000 (computed as of December 31, 2011) of our convertible bonds held by Sigma Wave Ltd.
(“Sigma”). There is no certainty that the Creditor Arrangement will be completed in a timely manner or at all. A substantial
delay in its completion could materially harm our business and financial condition. For more information on the Creditor Arrangement,
see below in Item 4A. History and Development of the Company under "Recent Developments."



7







We require capital to fund our operations and may need
to curtail or cease our operations if it is not available.



As of December 31, 2011, we had a negative
working capital in the amount of $2,723,000 (excluding the Convertible Bonds which total debt is approximately $2,975,000 as of
December 31, 2011). Since September 2011, we have been financing part of our day-to-day operations with interest-free, short-term
loans from Mrs. Tsviya Trabelsi, our former chairman of the Board and the wife of our current chairman of the Board, which amounted
to approximately $69,000 as of March 31, 2012. In the past, we have partially funded our operations through the issuance of equity
securities and convertible bonds to investors and may not be able to generate a positive cash flow from operations in the future.
Continuation of our current operations after utilizing our current cash reserves is dependent upon the generation of additional
financial resources either through the issuance of additional equity or debt securities or other sources of financing, generating
cash flow from operations or the sale of certain of our assets. Any additional financings will likely cause substantial dilution
to existing shareholders. If we are unable to obtain necessary additional financing or generate cash from operations, we may be
required to reduce the scope of, or cease, our operations. Even if we raise such additional capital, we may be required to reduce
the scope of our operations and may need to implement certain operational changes in order to decrease our expenditure level.
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.These matters raise substantial doubt about our ability
to continue as a going concern. Our financial statements have been prepared assuming that we will continue as a going concern
and do not include any adjustments that might result from the outcome of this uncertainty.



Servicing our debt obligations requires a significant amount
of cash, and our ability to obtain or generate cash depends on many factors beyond our control.



Should we not complete the Creditor Arrangement,
and if we are unable to otherwise restructure our debt obligations, our ability to satisfy our debt service obligations, including
making the payments under the convertible bonds we issued in November 2006, to Brevan Howard Master Fund Limited ("BH")
(which were assigned to Sigma on August 24, 2010; see Item 4A) and to Special Situation Funds (which were assigned to Mr. Eliyahu
Trabelsi on November 8, 2011; see Item4A) (together, the “Convertible Bonds”), will depend, among other things, upon
our future operating performance and our ability to refinance indebtedness when necessary. Each of
these factors is to a large extent dependent oneconomic, financial, competitive, legislative, regulatory and other factors
that are beyond our control.



Restrictions imposed by our debt instruments may limit our
ability to finance our future operations or capital needs or engage in other business activities that may be in our interest.
Our failure to comply with our obligations under these instruments could lead to an acceleration of our indebtedness.



Our amended Convertible Bonds agreements
contain certain covenants that will, among other things, limit our ability and the ability of our subsidiaries to: (i) create
liens; (ii) sell or otherwise dispose of assets; (iii) engage in transactions with our affiliates; and (iv) merge or consolidate
with another entity or transfer all or substantially all of our assets. These restrictions could limit our ability to obtain future
financing, make acquisitions or capital expenditures, withstand economic downturns in our business, the industry or the economy
in general, conduct operations or otherwise take advantage of business opportunities that arise.



Our failure to make payments due under
our debt instruments, or to otherwise comply with the restrictions or our obligations thereunder, could result in an event of
default under such instruments and lead to an acceleration of our related indebtedness. In the event of such a default, we are
not certain whether we would have, or would be able to obtain, sufficient funds to make the accelerated payments, and as a result
certain lenders would be able to proceed against certain of our assets that secure the debt. As of December 31, 2011 and the filing
date of this Annual Report, we were in default with the amended Convertible Bonds agreements. For more information on the Creditor
Arrangement, see Item 4A. History and Development of the Company under "Recent Developments". For more information on
the Convertible Bonds, see Item 5.B, “Liquidity and Capital Resources,” regarding the amendments to the Convertible
Bonds.



The current economic and financial crisis may have a material
adverse effect on our results.



The crisis of the financial and credit
markets worldwide in the second half of 2008 has led to an economic slowdown worldwide, and the outlook for 2012 is uncertain.
A continuation or worsening of unfavorable economic conditions, including the on-going credit and capital markets disruptions,
could have an adverse impact on our business, operating results or financial condition in a number of ways. We may experience
declines in revenues, profitability and cash flows as a result of reduced orders, delays in receiving orders or in the completion
of projects, delays or defaults in payment or other factors caused by the economic problems of our customers and prospective customers.
We may experience supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers
and subcontractors. In addition, changes and volatility in the equity, credit and foreign exchange markets and in the competitive
landscape make it increasingly difficult for us to predict our revenues and earnings into the future.



8







Adverse capital and credit market conditions may impact
our ability to access liquidity and capital.



The capital and credit markets have been
experiencing extreme volatility and disruption in recent years. We need liquidity in our day-to-day business activities to pay
our operating expenses and interest on our debt.



We must raise financing to fund our operations.
The availability of financing will depend on a variety of factors such as market conditions, the general availability of credit,
the volume of trading activities, the overall availability of credit to the financial services industry, our credit ratings and
credit capacity, as well as the possibility that customers or lenders could develop a negative perception of our long- or short-term
financial prospects. If our internal sources of liquidity prove to be insufficient, there is a risk that external funding sources
might not be available or available at unfavorable terms.



Disruptions, uncertainty or volatility
in the capital and credit markets may also limit our access to capital required to operate our business. Such market conditions
may limit our ability to raise additional capital to support business growth.



This would have the potential to decrease
both our ability to attain profitability and our financial flexibility. Our results of operations, financial condition, cash flows
and regulatory capital position could be materially adversely affected by disruptions in the financial markets.



Depending on the impact on our business of the current economic
and financial crisis, we may face problems in managing any decline in our business.



If the current economic and financial crisis
continues to have an adverse impact on the demand for products or their profitability, we may face difficulties in managing a
decline in our business. Our success in handling a contraction of our business will depend on our ability, among other things,
to:



| | — | develop efficient forecast methods for evaluating the prospective quantity of products that will be
    ordered by our customers;                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | — | control inventories of components ordered by our contract manufacturers required to meet actual demand, including but
    not limited to handling the effects of excess inventories accumulated by such manufacturers;
| | — | reduce the costs of manufacturing our products;                                                                                                                                                                       
| | — | continue to collect receivables from our customers in full and in a timely manner; and                                                                                                                                
| | — | properly balance the size and capabilities of our workforce.                                                                                                                                                          



If we are unable to manage a decline in
business, we could fail to manage the costs associated with all aspects of our business, which would have a material adverse effect
on our business and results of operations.



We derive a substantial portion of our revenue from one
customer, and the reduction of sales to this customer could adversely impact our operating results by causing a drop in revenues.



We depend on one customer
for a substantial portion of our revenue. In 2011 and 2010, we derived 95% and 92%, respectively, of our consolidated net revenue
from one customer. In 2009, we derived 88% of our consolidated net revenue from two customers. A substantial reduction in sales
to, or loss of, our significant customer would adversely affect our business unless we were able to replace the revenue we received
from the customer, which replacement we may not be able to find. Specifically, changes that may negatively impact the political
or economic stability and environment of the European country from which we derive most of our consolidated net revenues, could
adversely affect our business and future operations in such country.



As a result of this concentration
of revenue from a limited number of customers and our increased reliance on active RFID technology resulting from our sale of
certain assets and liabilities related to our electronic access control market and our Government Services Division including
our CSMS and RAPTOR suites, our revenue has experienced wide fluctuations, and we expect our revenue to continue to experience
wide fluctuations in the future. Part of our sales is not recurring sales; therefore, quarterly and annual sales levels could
fluctuate. Sales in any period may not be indicative of sales in future periods.



9







We are relying on On Track Innovations Ltd. as a subcontractor
in our E-ID project.



On December 31, 2006,
we sold our E-ID Division to On Track Innovations Ltd. (“OTI”), an Israeli company listed on the NASDAQ Global Market.
Simultaneously, we entered into a service and supply agreement with OTI under which OTI agreed to act as our subcontractor and
provide services, products and materials necessary to carry out and complete our obligations with regard to certain projects that
were not transferred to OTI, which only one of them is currently active (the “Project”) (see description of this transaction
in Item 4.A).We will be dependent on OTI to adequately provide such services, products, and materials in order for us
to be in good standing under this Project. If OTI fails to fulfill its obligations and provide such services and products as necessary
for the Project arising from any reason, and if we are unable to find other suppliers, it could delay our receipt of revenues
for this Project, subject us to certain remedies available to our customer, and damage our business reputation, and therefore
could have a material adverse effect on our business, operating results and financial condition.



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
launches, 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 to purchase components and raw materials on favorable terms, if 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 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 could also be impaired.



We usually do not have minimum supply commitments
from our vendors for our raw materials or components and generally purchase raw materialsand 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. Many of our products 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, defects in goods
or components supplied by our vendors, or delays in projects that are performed by our subcontractors could cause our revenues
and gross margins to decline.



We rely on a limited number of vendors
and subcontractors for certain components of the products we are supplying and projects we perform. In some cases, we rely on
a single source vendor or subcontractor. 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 single suppliers 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 arrangements 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 our business reputation. We depend on subcontractors to adequately perform a substantial
part of our projects. If a subcontractor fails to fulfill its obligations under a certain project, it could delay our receipt
of revenues for such project and damage our business reputation, and therefore could have a material adverse effect on our business,
operating results and financial condition.



We acquired all of the issued and outstanding stock capital
of Security Holding Corporation in 2007 and completed the sale of this activity in 2010. Certain unexpected outcomes of this acquisition
and sale are not yet known.



In July 2007, we acquired all of the issued
and outstanding stock capital of Security Holding Corp. (“SHC”).

Prior to completion of the acquisition,
we conducted a due diligence review of SHC; however, we cannot guarantee that all contingent liabilities were brought to our knowledge.
A material liability that had not been discovered in the due diligence process, or since, might affect our business.



10







In January 2010 we completed the sale of
certain of the assets (including certain accounts receivable and inventory) and certain of the liabilities (including certain
accounts payable) of Vuance Inc. acquired in the acquisition of SHC (see a description of this transaction under the caption “History
of the Company” in Item 4.A). In connection with the sale, we recognized an impairment of goodwill and intangible assets.
Additionally, the sales agreement included an indemnification provision pursuant to which, Vuance Inc. agreed to indemnify the
purchaser from and against any claim or liability of Vuance Inc. or of ours, which may be asserted against the purchaser, with
the exception of certain business debts and other liabilities agreed to by the purchaser. Should we be required to indemnify the
purchaser our financial results could be materially adversely affected.



We acquired substantially all of the assets and liabilities
of Intelli-Site, Inc. in 2009 and completed the sale of this activity in 2010. Certain unexpected outcomes of this acquisition
and sale are not yet known.



In March 2009, we acquired substantially
all of the assets and liabilities of Intelli-Site, Inc. (“Intelli-Site”). Prior to completion of the acquisition,
we conducted a due diligence review of Intelli-Site; however, we cannot guarantee that all contingent liabilities were brought
to our knowledge. A material liability that had not been discovered in the due diligence process might affect our business.



In January 2010 we completed the sale of
certain of the assets (including certain accounts receivable and inventory) and certain of the liabilities (including certain
accounts payable) of Vuance Inc. acquired in the acquisition of Intelli-Site (see a description of this transaction under the
caption “History of the Company” in Item 4.A). In connection with the sale, we recognized an impairment of intangible
assets. Also, the sales agreement included an indemnification clause pursuant to which, each of the parties shall indemnify the
other upon the occurrence of certain agreed upon events. Should we be required to indemnify the purchaser our financial results
could be materially adversely affected.



We may pursue acquisitions or investments in complementary
technologies and businesses. We may be unsuccessful in integrating the acquired businesses and/or complementary technologies and
businesses, the acquisition of which we may pursue in the future, and such integrations could divert our resources and adversely
affect our financial results.



Other than Intelli-Site and SHC, we have
not made any other acquisitions. Integrating newly acquired business or technologies into our business could divert our management’s
attention from other business concerns and could be expensive and time-consuming. Acquisitions could expose our business to unforeseen
liabilities or risks associated with entering new markets. Consequently, we might not be successful in integrating the acquired
businesses, technologies or products into our existing business and products, and might not achieve anticipated revenue or cost
benefits. In the future, we may pursue acquisitions of, or investments in, complementary technologies and businesses. We may be
unable to identify suitable acquisition candidates in the future or to make these acquisitions on a commercially reasonable basis,
or at all. Such acquisitions present a number of potential risks and challenges that could, if not met, disrupt our business operations,
increase our operating costs and reduce the value to us of the acquired company. For example, if we identify an acquisition candidate,
we may not be able to successfully negotiate or finance the acquisition on favorable terms. In addition, future acquisitions could
result in customer dissatisfaction and performance problems with an acquired company, which could adversely affect our business.



Costs arising from our future acquisitions and dispositions
could adversely affect our financial condition.



Any acquisition or disposition that we
make could result in the use of our cash or equity securities, incurrence and assumption of debt, contingent liabilities, significant
acquisition-related expenses, amortization of certain identifiable intangible assets, and research and development write-offs,
and could require us to record goodwill and other intangible assets that could result in future impairments that could harm our
financial results. We will likely incur significant transaction costs pursuing acquisitions or dispositions, including acquisitions
or dispositions that may not be consummated. We may not be able to generate sufficient revenues from our acquisitions or dispositions
to offset their costs, which could materially adversely affect our financial condition. The recognition of impairments of tangible,
intangible and financial assets results in a non-cash charge on the income statement, which could adversely affect our results
of operations



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 the United States and parts of Europe. We establish relationships with
distributors and resellers through 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 currentlyengaged 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.



11







Our ability to terminate a distributor
who is not performing satisfactorily may be limited. Inadequate performance by a distributor could 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.



Despite the precautions we take, third
parties may copy or obtain and use our 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 successfully
defend our industrial or intellectual property rights, we may lose rights to technologies that we need to develop our business,
which may cause us to lose potential revenues, or we may be required to pay significant license fees for the use of such technologies.
To date, we have relied primarily on a combination of 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 have no patents or patent applications,
and any patents that we may register in the future may provide only limited protection for our technology and may not be sufficient
to provide competitive advantages to us. For example, competitors could be successful in challenging any issued patents or, alternatively,
could develop similar or more advantageous technologies on their own or design around our patents. 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.



Third parties may assert that we are infringing their intellectual
property rights.



We may face intellectual property litigation,
which could be costly, harm our reputation, limit our ability to sell our products, force us to modify our products or obtain
appropriate licenses, and divert the attention of management and technical personnel.



Our products employ technology that may
infringe on the proprietary rights of others, and, as a result, we could become liable for significant damages and suffer other
harm to our business. Other than the litigation with Secu-Systems Ltd., as described in Item 8 below under the caption “Legal
Proceedings,” we have not been subject to intellectual property litigation to date. We have received demand letters in the
past alleging that products or processes of ours are in breach of patents, which we have denied, but no lawsuits have been filed
in respect of such claims.



Litigation may be necessary in the future
to enforce any patents we may obtain and/or any other intellectual property rights, to protect our trade secrets, to determine
the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity, and we
may not prevail in any such future litigation. Litigation, whether or not determined in our favor or settled, could be costly,
could harm our reputation and could divert the efforts and attention of our management and technical personnel from normal business
operations. In addition, adverse determinations in litigation could result in the loss of our proprietary rights, subject us to
significant liabilities, require us to seek licenses from third parties, prevent us from licensing our technology or selling or
manufacturing our products, or require us to expend significant resources to modify our products or attempt to develop non-infringing
technology, any of which could seriously harm our business.



Our products may contain technology provided
to us by third parties. Because we did not develop such technology ourselves, we may have little or no ability to determine in
advance whether such technology infringes the intellectual property rights of any other party. Our suppliers and licensors may
not be required to indemnify us in the event that a claim of infringement is asserted against us, or they may be required to indemnify
us only with respect to intellectual property infringement claims in certain jurisdictions, and/or only up to a maximum amount,
above which we would be responsible for any further costs or damages. In addition, we have indemnification obligations to certain
parties, as well as to OTI, with respect to any infringement of third-party patents and intellectual property rights by our products.
If litigation were to be filed against these parties in connection with our technology, we would be required to defend and indemnify
such parties.



12







We may be plaintiff or defendant in various legal actions
from time to time.



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 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. For more information on the above and our
ongoing litigation see under the caption “Legal Proceedings” in Item 8.



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 further penetrate
the marketplace, the marketplace must be confident that we provide effective security protection for national and other secured
identification 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.



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 a combined products liability
and professional liability insurance. 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 theft by employees, 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 significantly increasing our costs.



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



Most of our revenues
to date have been generated in jurisdictions other than 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 and operating results, including:



| | · | increased collection
                                                                                                              risks;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------

| | · | trade restrictions;
| | - | -------------------

| | · | export duties
                                                                                                              and tariffs;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------

| | · | uncertain political,
                                                                                                              regulatory and economic
                                                                                                              developments;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | inability to
                                                                                                              protect our intellectual
                                                                                                              property rights;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | highly aggressive
                                                                                                              competitors; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------



13







| | · | 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 could also 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.



We have sought in the past and may seek in the future to
enter into contracts with governments, as well as state and local governmental agencies and municipalities, which subjects us
to certain risks associated with such types of contracts.



Most contracts with governments, or with
state or local agencies or municipalities (“Governmental Contracts”) are awarded through a competitive bidding process,
and some of the business that we expect to seek in the future will likely 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 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 governments, or the applicable
state or local agency or municipality 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 the 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, Governmental
Contracts subject 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 governmental agency. Any failure to comply with
the terms of any Governmental 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 Governmental Contracts during the suspension period.
Cancellation of any one of our major Governmental Contracts could have a material adverse effect on our financial condition.



Governments, may be in a position to obtain
greater rights with respect to our intellectual property than we would grant to other entities. Governmental 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 Governmental 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 the fines and penalties and prohibiting us from earning revenues from Governmental
Contracts during the suspension period.



Furthermore, governmental 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 certain projects in which we participated in the
past, thereby delaying orders under certain of our governmental contracts. This may make it difficult to forecast our revenues
on a quarter-by-quarter basis.



14







Some of 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 may 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 as profitably
as we hope. In February 2006, we announced the introduction of a new technology and solution for actively tracking people, objects
and assets, Active RFID Tracking Systems (“PureRF”). This technology was developed in response to growing market demand
for asset tracking solutions in the homeland security and commercial markets.



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 success. The development of these markets will depend on many factors that are beyond our control, including the following
factors (and other factors discussed elsewhere in the Risk Factors): (i) there can be no assurances that we will be able to continue
to apply our expertise and solutions developed for the government market to the commercial market; (ii) the ability of the commercial
markets to adopt and implement the active RFID solutions; and (iii) the ability of our management to successfully market our technologies
to such government and/or commercial entities.



The success of our active RFID business line is dependent
on several factors.



The success of our active
RFID business line is dependent on several factors, including proper new product definitions, product costs, timely completion
and introduction of the new product, differentiation of the new product from those of our competitors, and market acceptance of
the product, as well as our existing and potential customers’ varying budgets for capital expenditures and new product introduction.
We have addressed the need to develop new products through our internal development efforts and joint development efforts with
other companies. In light of the OTI Transaction and the sale of certain assets and liabilities related to our electronic access
control market and our Government Services Division including our CSMS and RAPTOR suites, the active RFID product line is anticipated
to be our main revenue growth generator in the future. There can be no assurance that we will successfully identify new product
opportunities and/or develop and bring new products to market in a timely manner, or that the products and technologies developed
by others will not render our products or technologies obsolete or noncompetitive. The failure of our new product development
efforts could have a material adverse effect on our business, results of operations and future growth.



If our technology and solutions ceases to be adopted and
used by government and commercial organizations, we may lose some of our existing customers and increase our losses.



Our ability to grow depends
significantly on whether governmental and commercial organizations adopt our technology and solutions 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 our technology, 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 to the commercial market.



In order for us to achieve our growth objectives,
our RFID technology must be adapted to and adopted in a variety of areas, including, but not limited to:



| | · | public safety
                                                                                                              and emergency;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

| | · | asset management;
| | - | -----------------

| | · | patient and
                                                                                                              critical equipment
                                                                                                              tracking in the
                                                                                                              health care sector;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | building automation;
| | - | --------------------

| | · | patient wandering
                                                                                                              in the homecare
                                                                                                              market;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | transportation
                                                                                                              applications using
                                                                                                              active RFID as method
                                                                                                              of monitoring and
                                                                                                              control; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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



Any or all of these areas may not adopt
our RFID technology.



We cannot accurately predict the future growth rate, if
any, or the ultimate size of the RFID technology markets. 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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | customer perception
                                                                                                              of the benefits
                                                                                                              of our RFID based
                                                                                                              solutions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



15







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

| | · | public perception
                                                                                                              of the confidentiality
                                                                                                              of private information;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | customer satisfaction
                                                                                                              with our products
                                                                                                              and services; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | marketing efforts
                                                                                                              and publicity for
                                                                                                              our products and
                                                                                                              services.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Even if our RFID solutions gain wide
market acceptance, our products and services may not adequately address market requirements and may not gain wide market acceptance.
If our 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 RFID enabled
security solutions 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 at all.



The increasing sophistication
of our RFID technology places a premium on providing innovative software systems and services to customers, in addition to manufacturing
and supplying RFID technology. While we have had some early success positioning ourselves as a provider of such 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 our RFID technology lies in the development of software and applications that will permit the use of RFID technology
in new markets. In contrast, the margins involved in manufacturing and selling RFID technology can be relatively small, and may
not be sufficient to permit us to earn an attractive return on our development investments.



The time from our initial contact with a customer to a sale
may be 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.



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.



Due to the nature of our business, our financial and operating
results could fluctuate.



Our financial and operating results have
fluctuated in the past and could fluctuate in the future from quarter to quarter and from year to year 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 customers
                                                                                                              and 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 purchasing our
                                                                                                              products and services;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | unforeseen legal
                                                                                                              expenses, including
                                                                                                              litigation costs;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | expenses related
                                                                                                              to acquisitions;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------

| | · | other non-recurring
                                                                                                              financial charges;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the lack of
                                                                                                              availability, or
                                                                                                              increased cost,
                                                                                                              of key components
                                                                                                              and subassemblies;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the inability
                                                                                                              to successfully
                                                                                                              manufacture in volume,
                                                                                                              and reduce the price
                                                                                                              of, certain of our
                                                                                                              products; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | impairment loss
                                                                                                              of goodwill and
                                                                                                              intangible assets.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



16







The lead time for ordering parts for and manufacturing our
products can be significantly long and therefore based on forecasted demands rather than actual orders received.



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. If demand for our products
exceeds our forecasts, our business may be harmed as a result of delays to perform contracts.



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 RFID enabled
products is intensely competitive. We expect competition to increase as the industry grows and as RFID technology begins to converge
with the access control and 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 we do. In some cases, we compete with entities that have pre-existing relationships with
potential customers. As the active RFID enabled solutions 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 (i) are superior to our products and services, (ii) achieve greater customer acceptance or (iii) have significantly
improved functionality as compared to our existing and future 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 could adversely affect our operating results and earnings per share.



We rely on the services of certain executive officers and
key personnel, the loss of which could adversely affect 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 adversely affect our business. We do not maintain
any "key-person" life insurance with respect to any of our employees.



Our ability to remain competitive depends in part on attracting,
hiring and retaining qualified technical personnel; 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.



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 that (i) there are fewer highly qualified
employees available for hire, (ii) the costs of hiring and retaining such personnel are high, and (iii) 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 shareholders and increase our expenses.



The additions of new personnel and the
departure 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.



17







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 more.



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 in introducing, or an inability to introduce, such products in the United
States and other markets.



The rules and regulations
of the United States Federal Communications Commission (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 us through FCC certification or verification procedures must not cause harmful interference to licensed
FCC users, and may be 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 condition by increasing our compliance costs and/or limiting our sales in the United States.



We are exposed to special risks in foreign markets which
may make operating in those markets difficult 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. Risks inherent to operating in other countries range from difficulties in settling transactions in emerging
markets to possible nationalization, expropriation, price control 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 U.S. dollars or other currencies, or to take those dollars or other
currencies out of those countries.



We may fail to maintain effective internal control in accordance
with Section 404 of the Sarbanes-Oxley Act of 2002.



The Sarbanes-Oxley Act of 2002 imposed certain
duties on us and our executive officers and directors. Our efforts to comply with the requirements of the Sarbanes-Oxley Act of
2002, and in particular with Section 404 under it, resulted in increased general and administrative expenses and a diversion of
management time and attention, and we expect these efforts to require the continued commitment of resources. If we fail to maintain
the adequacy of our internal controls, we may not be able to conclude that we have effective internal control over financial reporting.
We cannot assure you that we will able to conclude in future years that we have effective internal control over financial reporting.   Controls
that are considered adequate at one time may become inadequate in the future because of changes in conditions or deterioration
in the degree of compliance with policies or procedures. Failure to maintain effective internal control over financial reporting
could result in investigations or sanctions by regulatory authorities, and could have a material adverse effect on our operating
results, investor confidence in our reported financial information, and the market price of our ordinary shares. As discussed
in Item 15. Controls and Procedures, as of December 31, 2011, we did not maintain effective internal control over financial reporting.



18







Risks Related to our Location and Incorporation in Israel



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 we also operate offices located in Israel. Political, economic and military conditions in Israel may directly
affect our operations and business. 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 from time to time in degree and intensity, has led
to security and economic problems for Israel. In addition, recent civil unrest and political turbulence in various countries in
the Middle East and Northern Africa have shaken the stability of those countries. This instability may lead to deterioration of
the political and economic relationships that exist between the State of Israel and some of these countries. In addition,
Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have
a strong influence among extremist groups in the region, such as Hamas in Gaza and Hezbollah in Lebanon. These situations may
potentially escalate in the future to more violent events which may affect Israel and us. Furthermore, several countries still
restrict trade with Israeli companies and additional countries may impose such restrictions as a result of changes in the military
and/or political conditions in Israel and/or the surrounding countries, 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.



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 under the age of 40, or older for reserves officers or citizens with certain
occupations, as well as certain female 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. 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, operating results and financial condition may be adversely affected.



Your rights and responsibilities as a shareholder will be
governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under U.S. law.



We are incorporated under
Israeli law. The rights and responsibilities of holders of our ordinary shares are governed by our Memorandum of Association and
Articles of Association, and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities
of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith
and customary manner in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders,
and to refrain from misusing his power, including, among other things, when voting at the general meeting of shareholders on certain
matters. Israeli law provides that these duties are applicable to shareholder votes on, among other things, amendments to a company’s
articles of association, increases in a company’s authorized share capital and mergers and interested party transactions
requiring shareholder approval. A shareholder also has a general duty to refrain from exploiting any other shareholder of his
or her rights as a shareholder. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it
possesses the power to determine the outcome of a shareholder vote or who, under our Articles of Association, has the power to
appoint or prevent the appointment of a director or executive officer in the company, has a duty of fairness toward the company.
Israeli law does not define the substance of this duty of fairness, but provides that remedies generally available upon a breach
of contract will apply also in the event of a breach of the duty to act with fairness. Because Israeli corporate law has undergone
extensive revision in recent years, there is little case law available to assist in understanding the implications of these provisions
that govern shareholder behavior.



Provisions of Israeli law may delay, prevent or otherwise
encumber a merger with or an acquisition of our company, which could prevent a change of control, even when the terms of such
transaction are favorable to us and our shareholders.



Israeli corporate law regulates mergers,
requires tender offers for acquisitions of shares above specified thresholds, requires special approvals for transactions involving
directors, officers or significant shareholders and regulates other matters that may be relevant to these types of transactions.
Furthermore, Israeli tax considerations may make potential transactions unappealing to us or to some of our shareholders whose
country of residence does not have a tax treaty with Israel exempting such shareholders from Israeli tax. These provisions
of Israeli law could delay, prevent or impede a merger with or an acquisition of our company, which could prevent a change of
control, even when the terms of such transaction are favorable to us and our shareholders and therefore potentially depress the
price of our shares.



19







Our shareholders may face difficulties in the enforcement
of civil liabilities against Vuance Ltd. and its officers and directors and Israeli auditors or in asserting U.S. securities law
claims in Israel.



Most of our officers and directors and
our Israeli auditors are residents of Israel or otherwise reside outside of the United States. Vuance 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. Therefore, service of process upon Vuance Ltd., such directors and
officers and our Israeli auditors may be difficult to effect in the United States. It also may be difficult to enforce a U.S.
judgment against Vuance Ltd., such officers and directors and our Israeli auditors as any judgment obtained in the United States
against such parties may not be collectible in the United States.



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



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



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



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



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



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



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



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



Fluctuations in the exchange rate between the U.S. 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 U.S. 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. During 2009 and 2010, the dollar depreciated in relation to the NIS, which raised the dollar cost of our Israeli based
operations and adversely affected our financial results, while during 2011 the dollar increased in relation to the NIS, which
reduced the dollar cost of our Israeli based operations costs. Although we may use hedging techniques in the future (which we
currently do not use), we will 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. (See also Item 5, "Impact of Inflation and
Currency Fluctuations".)



We are unlikely to pay dividends in the foreseeable future
and any return on investment may be limited to the value of our ordinary shares.



We distributed a cash
dividend to our shareholders on one occasion on August 26, 1997 in the aggregate amount of NIS 1.0 million (approximately $266,000
based on the exchange rate between the U.S. dollar and the NIS published by the Bank of Israel on April 22, 2012) and prior to
that dividends in the form of bonus shares were distributed on two other occasions. Under the Israeli Companies Law, dividends
may only be paid out of profits legally available for distribution 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 Israeli Companies Law requirements, a payment
which does not meet the profits test, 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. 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. If we do not pay dividends, our ordinary shares may be less valuable because a return on your investment will
only occur if our share price appreciates.



20







Risks Pertaining to Ownership of Our Ordinary Shares



The number of ordinary shares that are available for sale
upon exercise of our outstanding warrants, options and convertible bonds is significant in relation to our currently outstanding
ordinary shares. Sales of a significant number of our ordinary shares in the public market, or the perception that they may occur,
may depress the market price for our ordinary shares.



The number of ordinary shares available
for sale upon the exercise of our outstanding warrants, options and convertible bonds is significant in relation to the number
of ordinary shares currently outstanding. As of December 31, 2011, 12,035,272 of our ordinary shares were outstanding. In addition,
we had a total of 2,163,857 ordinary shares issuable upon the exercise of outstanding options, which we have issued 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 ofDecember 31, 2011, we had a total of3,002,859
ordinary sharesissuable upon the exercise of outstanding warrants issued to investors and consultants,
at various prices, which expire between 2012 and 2016. As of December 31, 2011, we had a total of
840,459 ordinary sharesissuable upon the conversion of convertible bonds. As of December 31,
2011, our authorized share capital permitted us to issue up to additional 33,957,553 ordinary shares in connection with future
grants of options, warrants, shares and other financial instruments.



On April 2, 2012 we issued 9,094,400 ordinary
shares in respect of the Creditor Arrangement (see Item 4A. History and Development of the Company under "Recent Developments").
As of that date, there were 21,129,672 of our ordinary shares outstanding.



In order to complete the Creditor Arrangement
we will be required to issue a significant amount of ordinary shares and/or warrants convertible into our ordinary shares.



If our warrant or option holders exercise
their warrants or options, or holders of convertible bonds covert their bonds into ordinary shares, and 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 or the perception
that these sales could occur, could cause substantial dilution to existing shareholders, decrease the market price of our ordinary
shares, and impair our ability to raise capital in the future.



The trading market for our ordinary shares has low liquidity,
which could make it difficult for our shareholders to sell their shares at desired prices and amounts.



Our ordinary shares currently are traded
on the Pink Sheets Electronic Quotation Service. Currently, we do not meet the initial listing conditions of the Nasdaq Stock
Market. The market for shares quoted on the Pink Sheets is typically less liquid than that for shares listed on the Nasdaq Stock
Market. This could make it more difficult for our shareholders to sell their shares at desired prices and amounts.



Our ordinary shares may become subject to the “penny
stock” rules of the SEC which will make transactions in our ordinary shares cumbersome and may reduce the value of our shares.



Trading in our ordinary
shares may become subject to the "penny stock" regulations adopted by theSEC. 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, such as if the issuer of the security has net tangible assets in excess of $2,000,000. The
market price of our ordinary shares is currently less than $5.00 per share and our net tangible assets as of December 31, 2011
were approximately $2,455,000. While we believe that our ordinary shares are currently exempt from the definition of penny
stock, there is no assurance that they will continue to be exempt from such definition. If our ordinary shares become subject
to the “penny stock” rules of the SEC, it will make transactions in our ordinary shares cumbersome and may reduce
the value of our shares. This is because for any transaction involving a penny stock, unless exempt, Rule 15g-9 generally requires:



21







| | · | that a broker
                                                                                                              or dealer approve
                                                                                                              a person's account
                                                                                                              for transactions
                                                                                                              in penny stocks;
                                                                                                              and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the broker or
                                                                                                              dealer receive from
                                                                                                              the investor a written
                                                                                                              agreement to the
                                                                                                              transaction, setting
                                                                                                              forth the identity
                                                                                                              and quantity of
                                                                                                              the penny stock
                                                                                                              to be purchased.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In order to approve a person's account
for transactions in penny stocks, the broker or dealer must:

| | · | obtain financial
                                                                                                              information and
                                                                                                              investment experience
                                                                                                              objectives of the
                                                                                                              person; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | make a reasonable
                                                                                                              determination that
                                                                                                              the transactions
                                                                                                              in penny stocks
                                                                                                              are suitable for
                                                                                                              that person and
                                                                                                              the person has sufficient
                                                                                                              knowledge and experience
                                                                                                              in financial matters
                                                                                                              to be capable of
                                                                                                              evaluating the risks
                                                                                                              of transactions
                                                                                                              in penny stocks.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The broker or dealer must also deliver,
prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which,
in highlight form:

| | · | sets forth the
                                                                                                              basis on which the
                                                                                                              broker or dealer
                                                                                                              made the suitability
                                                                                                              determination; and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | that the broker
                                                                                                              or dealer received
                                                                                                              a signed, written
                                                                                                              statement from the
                                                                                                              investor prior to
                                                                                                              the transaction.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Disclosure also has to be made by the
broker or dealer about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny
stocks.



Generally, brokers may be less willing to execute transactions
in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our ordinary
shares and cause a decline in our market value if we were to become subject to the said "penny stock" rules.



Our default under certain registration rights agreements
may result in liquidated damages.



In connection with private placements completed
in September 2004 and December 2005, in which we issued to the investors ordinary shares and warrants to purchase our ordinary
shares, we entered into registration rights agreements pursuant to which we undertook to register such ordinary shares in accordance
with the Securities Act of 1933. Accordingly, we filed Forms F-1 on November 2004 and January 5, 2006. Our failure to properly
update the Forms (and to make subsequent registrations) in accordance with the registration rights agreements could result in
an event of default under such agreements and subject us to liquidated damages.



We have shareholders that are able to exercise substantial
influence over us and all matters submitted to our shareholders.



Sigma is the beneficial
owner of approximately 41.81% of our outstanding shares. See Item 7A for more information. Such ownership interest gives Sigma
the ability to influence and direct our activities, subject to approvals that may be required for related-party transactions pursuant
to Israeli law. Sigma will have influence over the outcome of most matters submitted to our shareholders, 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. Because the interests of Sigma may differ from the interests of our other shareholders, actions taken by Sigma with respect
to us may not be favorable to our other shareholders.



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



Selling
short is a technique used by a shareholder to take advantage of an anticipated decline in the price of a security. In addition,
holders of options, warrants and convertible bonds will sometimes sell short knowing they can, in effect, cover the sale through
the exercise of an option, warrant or convertible bond, 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, options or convertible bonds 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.



22







A change in tax laws of any country in which we operate
could result in a higher tax expense or a higher effective tax rate on our worldwide earnings.



We conduct our operations in various countries
throughout the world. Tax laws and regulations are highly complex and subject to interpretation. Consequently, we are subject
to changing tax laws, treaties and regulations in and between countries in which we operate, including treaties between nations.
Our income tax expense is based upon our interpretation of the tax laws in effect in various countries at the time that the expense
was incurred. A change in these tax laws, treaties or regulations, or in the interpretation thereof, or in the valuation of our
deferred tax assets, which is beyond our control could result in a materially higher tax expense or a higher effective tax rate
on our worldwide earnings.



A loss of a major tax dispute or a successful tax challenge
to our operating structure, intercompany pricing policies or the taxable presence of our subsidiaries in certain countries could
result in a higher tax rate on our worldwide earnings, which could result in a significant negative impact on our earnings and
cash flows from operations.



Our income tax returns are subject to review
and examination. We do not recognize the benefit of income tax positions we believe are more likely than not to be disallowed
upon challenge by a tax authority. If any tax authority successfully challenges our operational structure or the taxable presence
of our subsidiaries in certain countries; or if the terms of certain income tax treaties are interpreted in a manner that is adverse
to our structure; or if we lose a material tax dispute in any country, our effective tax rate on our worldwide earnings could
increase substantially and our earnings and cash flows from operations could be materially adversely affected.



While we believe that we are not currently a PFIC and do
not anticipate becoming a PFIC, United States tax authorities could treat us as a "passive foreign investment company,"
which could have adverse United States federal income tax consequences to United States holders.



Generally, if for any taxable year, 75%
or more of our gross income is passive income, or at least 50% of the value of our assets, averaged quarterly, are held for the
production of, or produce, passive income, we will be characterized as a passive foreign investment company ("PFIC")
for U.S. federal income tax purposes. A determination that we are a PFIC could cause our U.S. shareholders to suffer adverse tax
consequences, including having gains realized on the sale of our shares taxed at ordinary income rates, rather than capital gains
rates, and being subject to an interest charge on such gain. Similar rules apply to certain "excess distributions" made
with respect to our ordinary shares. A determination that we are a PFIC could also have an adverse effect on the price and marketability
of our shares. If we are a PFIC for U.S. federal income tax purposes, highly complex rules would apply to U.S. holders owning
our ordinary shares. Accordingly, you are urged to consult your tax advisors regarding the application of such rules. See "Item
10.E. Taxation - Passive Foreign Investment Company" below.



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 U.S. public companies including:



| | · | the rules under
                                                                                                              the Exchange Act
                                                                                                              requiring the filing
                                                                                                              with the SECof quarterly
                                                                                                              reports on Form
                                                                                                              10-Q and current
                                                                                                              reports on Form
                                                                                                              8-K;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the sections
                                                                                                              of the Exchange
                                                                                                              Act regulating the
                                                                                                              solicitation of
                                                                                                              proxies in connection
                                                                                                              with shareholder
                                                                                                              meetings;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the provisions
                                                                                                              of Regulation FD
                                                                                                              aimed at preventing
                                                                                                              issuers from making
                                                                                                              selective disclosures
                                                                                                              of material information;
                                                                                                              and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | 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 U.S.



23







ITEM 4.    Information on the Company.



| | A. | History and
                                                                              Development of the Company
| | -- | --------------------------------------------------------------------------------------------------------------------



History of the Company



Vuance
Ltd. was incorporated in Israel, as a company limited by shares, on July 4, 1988, under the provisions of the then-current Israeli
Companies Ordinance. We now operate under the Israeli Companies Law, which became effective on February 1, 2000, and the Israeli
Companies Ordinance (New Version) 1983, as amended.



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. In 2001,
we implemented a reorganization plan, which we completed in 2002. As a result of the reorganization, we expanded our marketing
and sales efforts to include the commercial market with a new line of advanced smart card and identification technologies products,
while maintaining our governmental market business.



During
2002, we sold, in three separate transactions with third party purchasers, our entire equity interest in a U.S. subsidiary, InkSure
Technologies, Inc., for which we received aggregate proceeds of approximately $6,600,000. In December 2002, we discontinued the
operations, disposed of all of the assets and terminated the employees of two U.S. subsidiaries, Genodus Inc. and Kromotek, Inc.



We became
a publicly-traded company on NASDAQ Europe stock market (formerly EASDAQ) on April 19, 1999. On October 23, 2003, following the
closing of the NASDAQ Europe stock market, we transferred the listing of our ordinary shares to the Euronext Brussels stock market
under the symbol “SUP,” which became “VUNC” after our corporate name change on May 14, 2007. We applied
for delisting of our shares from the Euronext Brussels stock market, and our application was approved on May 6, 2008, effective
August 4, 2008.



On
July 29, 2004, we filed a Registration Statement on Form 20-F under the Exchange Act. When the Registration Statement became effective
on September 29, 2004, we became a foreign private issuer reporting company under the Exchange Act. On November 5, 2004, our ordinary
shares began trading in the U.S. on the OTC Bulletin Board under the symbol “SPCBF.OB," which following our name change
on May 14, 2007 became “VUNCF.OB.” On August 23, 2007, our ordinary shares were approved for trading on The NASDAQ
Capital Market under the symbol “VUNC” and the trading of our shares on the OTC Bulletin Board ceased. On October 1,
2009 our shares were delisted from The NASDAQ Capital Market and beginning on the same date, our shares were quoted under the
ticker symbol “VUNCF” in the Pink Sheets.For more information and details on the history of the listing of
our ordinary shares see under Item 9.A "Offer and Listing Details".



During the fourth quarter of 2005, we established
a new Delaware subsidiary (of which we initially owned 80%), Vuance-RFID Inc. (formerly, Pure RF Inc.), which began operations
during the first quarter of 2006. During the first quarter of 2006, Vuance-RFID Inc. established a wholly-owned Israeli subsidiary,
Vuance RFID Ltd. (formerly, Pure RF Ltd.). Vuance-RFID Inc. and Vuance RFID Ltd. focused on new technologies and solutions for
active tracking of people and objects. In February 2007, we purchased the remaining 20% of the stock of Vuance - RFID Inc. from
its minority stockholders for an amount of $100,000, whereupon it became our wholly-owned subsidiary. In August 2007, all the
employees of Vuance RFID Ltd. were transferred to us, and on December 31, 2007 we purchased all the assets and liabilities of
Vuance RFID Ltd. During the year 2008, Vuance-RFID Inc. engaged in an activity to distribute complementary locks and electronic
locks. This activity was terminated and it is presented in the financial reports, as discontinued operations.



During the fourth quarter of 2006, we established
a new wholly-owned subsidiary, S.B.C. Aviation Ltd., (incorporated in Israel) which began operations in 2007 and until 2009 focused
on executing information technology and security projects.



In 2006
we decided to sell our E-ID Division in order to focus on opportunities in the U.S. for our CSMS business, which we later sold
in 2010, and current active RFID tracking businesses, and on December 31, 2006, we sold the E-ID Division to On Track Innovations
Ltd., or OTI for 2,827,200 restricted ordinary shares of OTI (of which 212,040 shares were related to consultants, as part of
the direct expenses of this transaction). Under the terms of our agreement with OTI, OTI committed to file with the SEC a registration
statement covering these ordinary shares and made such filing on April 24, 2007. As of December 31, 2008, we sold all the OTI
shares received in the OTI Transaction.



Simultaneously,
we entered into a service and supply agreement with OTI under which (i) OTI agreed to act as our subcontractor and provide services,
products and materials necessary to carry out and complete certain projects that were not transferred to OTI (the “Existing
Projects”), and (ii) OTI granted us an irrevocable, worldwide, non-exclusive, non-assignable and non-transferable license
to use in connection with our Existing Projects, certain intellectual property rights transferred to OTI as part of the OTI Transaction,
for the duration of such projects. The sale of our E-ID division and the services and supply agreement are collectively referred
to herein as the “OTI Transaction”.



24







On July 3, 2007, we entered, through our
wholly-owned subsidiary, Vuance, Inc., into an agreement (the “SHC Purchase Agreement”) to acquire all of the issued
and outstanding stock capital of Security Holding Corp. (“SHC”) from Homeland Security Capital Corporation (OTCBB:
HOMS.OB(“HMSC”)) and other minority shareholders (collectively, “Sellers”) for approximately $4,335,000
in our ordinary shares and direct expenses of approximately $600,000 in our ordinary shares. The closing date of this transaction
was August 28, 2007 (“SHCClosingDate”). SHCwasa Delaware corporation engaged in the
business of manufacturing and distributing RFID-enabled solutions, access control and security management systems. As consideration
for the acquisition of the stock capital of SHC, 1,097,426 of our ordinary shares ,which were subject to certain lock up mechanism,
were issued to the Sellers. HMSC further agreed that at the SHC Closing Date it will grant an irrevocable power of attorney to
our Chairman of the Board of Directors to exercise all voting rights related to its Vuance shares until the sale or transfer of
such Vuance shares by HMSC to an unaffiliated third party in an arm’s-length transaction. We guaranteed all of the obligations
of Vuance Inc. under the SHC Purchase Agreement. During the fourth quarter of 2007, SHC and its subsidiaries were merged into
Vuance Inc.



In September
2007, we announced that we had entered into a definitive agreement to acquire, through our U.S. subsidiary, Vuance Inc., the credentialing
division of Disaster Management Solutions Inc., ("DMS") for approximately $100,000 in cash and up to $650,000 in royalties
that will be paid upon sales of the advanced first responder credentialing system (named “RAPTOR”) during the first
twelve months following the acquisition (the closing was in August 2007). This acquisition complemented our former incident management
solutions business and added the RAPTOR to our former CSMS business (both of which were sold in 2010).



On March 25, 2009 we and our subsidiary,
Vuance, Inc., completed the acquisition of certain of the assets and certain of the liabilities of Intelli-Site, pursuant to an
asset purchase agreement dated March 6, 2009 with Intelli-Site and Integrated Security Systems, Inc (“ISSI”). On the
date of closing, Vuance, Inc. agreed to pay Intelli-Site $262,000 payable in cash and in our shares (which were subject to a certain
lock up mechanism) and included a contingent consideration of up to $600,000 based upon certain conditions.



In January 2010, Vuance, Inc., our wholly-owned
subsidiary, completed the sale to OLTIS Security Systems International, LLC (“OSSI”) of certain of its assets (including
certain accounts receivable and inventory) and certain of its liabilities (including certain accounts payable) related to our
electronic access control market. OSSI paid Vuance, Inc. $146,822 in cash.  In addition, OSSI paid off a loan that Vuance,
Inc. took from Bridge Bank, National Association.  We and Vuance, Inc. no longer have any liabilities associated with
such loan.



In January 2010, we and our subsidiary,
Vuance, Inc., completed the sale of certain of the assets and certain of the liabilities of Vuance, Inc. related to our Government
Services Division (the “Vuance CSMS Business”), pursuant to a certain asset purchase agreement between us, Vuance,
Inc., WidePoint Corporation (“WidePoint”) and Advance Response Concepts Corporation. WidePoint paid Vuance, Inc. $250,000.  In
addition, WidePoint agreed to pay Vuance, Inc. a maximum earnout of $1,500,000 over the course of calendar years 2010, 2011, and
2012, subject to the performance of certain financial requirements of the Vuance CSMS Business during each of those years.



On January 21, 2010, we incorporated a
new wholly-owned subsidiary in the state of Delaware, PureRFid, Inc., to focus on marketing and sales for our active RFID solutions.



On March 22, 2010, we entered into a Subscription
Agreement with a private investor, Mr. Yitzchak Babayov, pursuant to which at a March 23, 2010 closing we issued 1,538,461 ordinary
shares of the Company at a par value of  NIS 0.0588235 (the “Transaction Shares”) in consideration of a
one-time cash payment in the amount of $200,000.



Simultaneously with execution of the Subscription
Agreement, we entered into a Warrant Agreement with Mr. Babayov, pursuant to which he received a warrant (the “Warrant”)
to purchase up to 553,846 of our ordinary shares for an exercise price of $0.15 per share. The Warrant has a term of five
(5) years and contains standard adjustments for stock dividends, stock splits, reclassification and similar events. Our shareholders
approved and ratified at our annual general meeting held on September 12, 2010, that the purpose of the private placement of the
Transaction Shares and Warrant was to provide Mr. Babayov with more than twenty five percent (25%) of our issued and outstanding
shares in accordance with Israeli law, which exempts such an acquisition from Israeli tender offer requirements.



In March 2010, as part of a significant
restructuring of our business operations, our former chief executive officer Eyal Tuchman resigned and we appointed Ron Peer,
our former President, as our new chief executive officer.



In July 2010, Mrs. Tsviya Trabelsi and
Messrs. David Mimon and Menachem Mirski were appointed to our board of directors. Ms. Trabelsi was appointed as chairman of our
board of directors in place of Mr. Eli Rozen who also resigned from our board of directors.



In September 2010, Mr. Arie Trabelsi was
appointed on behalf of Sigma to serve on our board of directors. In October 2010, Mr. Trabelsi resigned as our director and was
appointed as our chief executive officer in place of Ron Peer.



25







In October 2010, we entered into an agreement
for the sale of our entire equity interest in SuperCom Asia Pacific Ltd., for no consideration. As part of this sale, we assigned
to the purchaser certain outstanding loans due to us by SuperCom Asia Pacific in the amount of $1.4 million.



Recent Developments



On February 10, 2011 we received a credit
line in an aggregate amount of $100,000 from an Israeli bank. The credit line is secured by a personal guarantee provided by Mr.
Arie Trabelsi and Mrs. Tsviya Trabelsi, which in turn is expected to be secured by an unlimited floating lien on our assets. In
addition, on May 6, 2012 we received a bridge loan from the said Israeli bank amounted to NIS100,000 (approximately $26,000, based
on the exchange rate between the U.S. dollar and the NIS published by the Bank of Israel on December 31, 2011) which is secured
by a personal guarantee provided by Mrs. Tsviya Trabelsi.



On October 30, 2011,
our board of directors appointed Mr. Arie Trabelsi as a director and to serve as the Vice Chairman of our board of directors,
together with Mrs. Tsviya Trabelsi. Mr. Arie Trabelsi resigned from his position as CEO effective November 1, 2011. Our board
of directors appointed Mr. Doron Levy as our new CEO, effective November 1, 2011.



On December 8, 2011 our shareholders appointed
Mr. Avi Ayash as an external director, replacing Mr. Shimon Cohen, who resigned from our board of directors on October 5, 2011.



On December 12, 2011, Mrs. Tsviya Trabelsi
resigned from our board of directors, and our board of directors approved the appointment of Mr. Arie Trabelsi as its new
Chairman.



Creditor Arrangement



At the annual general meeting of our shareholders
held on September 12, 2010, our shareholders resolved to afford certain of our major creditors with the opportunity to convert
the amounts owed to them into our ordinary shares, by means of a set off against the then total outstanding debt to such creditor,
at a price of $0.09 per ordinary share, subject to forgiveness of 60% of our total outstanding debt to such creditor. Our board
of directors was authorized to set all other terms of the Creditor Arrangement, including, inter alia, its timetable.



On November 3, 2010, we petitioned the
court, for the court approval of a Creditor Arrangement in accordance with Section 350 of the Israeli Companies Law. We requested
that the court apply the Creditor Arrangement approved by our shareholders to all of our creditors as of August 10, 2010, or the
Determining Date, and who were still creditors as of December 17, 2010 and who had submitted a claim of debt no later than January
6, 2011. We requested that pursuant to the proposed arrangement all such creditors (whether secured, preferential (by statute)
and unsecured) shall be considered to have released us from our debt obligations towards them as of such date in exchange for
the allotment to all such creditors of our ordinary shares or warrants to purchase our ordinary shares (that are immediately exercisable
in a cashless transaction and with an expiration date of December 31, 2012) at a price of $0.09 per ordinary share, valued at
40% of our total outstanding debt to our creditors and in consideration for which the creditors would forgive the remaining 60%
of the outstanding debt. In May 2011, our shareholders subsequently approved the inclusion of additional creditors to be included
under the Creditor Arrangement.



During 2010, as a part of the Creditor
Arrangement, certain creditors agreed to convert $271,000 (the total aggregate amounts owed to them) into warrants to purchase
an aggregate of 1,206,142 of our ordinary shares.



Although the Creditor Arrangement is supported
by a resolution of our shareholders and was presented at the meeting of our creditors, on July 18, 2011 the court decided not
to approve our application, mainly due to an objection to the proposed arrangement which was filed by one of our secured creditors,
Special Situations Funds ("SSF"). On November 8, 2011, SSF sold, assigned and transferred to Mr. Eliyahu Trabelsi all
of its rights under the Convertible Bonds and warrants. For more information on the Convertible Bonds see Item 5 – Liquidity
and Capital Resources. In February 2012, our Board of Directors determined to proceed with the Creditor Arrangement without
the involvement of the court. On December 5, 2011 we received from the Execution Office in Israel a foreclosure order in accordance
with Section 44 to the Execution Law Records, vol. 1967, in respect of convertible bonds held by Sigma, up to an amount of NIS
3,903,866 (approximately $1,022,000, based on the exchange rate between the U.S. dollar and the NIS published by the Bank of Israel
on December 31, 2011) in favor of a third party. We followed the order’s instructions and recorded the said foreclosure.
As of April 15, 2012, following the forgiveness or conversion of debt pursuant to the Creditor Arrangement in the aggregate amount
of $3,640,000 since December 31, 2010, additional debt of approximately $3,286,000 (computed as of December 31, 2011) remains
to be forgiven or converted pursuant thereto. However, the completion of the Creditor Arrangement has been delayed, which we believe
is, as a result of a dispute over the ownership of approximately $1,022,000 (computed as of December 31, 2011) of our convertible
bonds held by Sigma. There is no certainty that the Creditor Arrangement will be completed in a timely manner or at all.



26







On March 30, 2011,
we entered into a financing agreement with Sigma that entitles us to refinance the short-term obligations under certain convertible
bonds held by Sigma on a long-term basis. Pursuant to the agreement, and subject to certain conditions and covenants, Sigma postponed
all of our requirements to pay our debts under Sigma's Convertible Bond, relating to principal and interest, as of December 31,
2010, to January 1, 2012. In addition, the agreement requires that interest amounts with respect to fiscal 2011 will become due
during July 2011 and thereafter. For more information on the convertible bonds see Item 5 – Liquidity and Capital Resources.



As a part of the Creditor Arrangement process,
on August 4, 2011, Sigma agreed to convert $400,000 of the amounts owed to it into 4,444,444 of our ordinary shares (which number
was determined on June 30, 2011) and to forgive $600,000 of our outstanding debt to Sigma. The ordinary shares were issued on
August 11, 2011.



On December 31, 2011, as a part of the
Creditor Arrangement process, Sigma agreed to convert $722,250 of the amounts owed to them into 8,025,000 of our ordinary shares
(which were granted to a trustee, according to Sigma’s request) and to forgive $1,083,375 of our outstanding debt to Sigma.
The ordinary shares were issued to Sigma on April 2, 2012. As a result of the conversion of the debt pursuant to the Creditor
Arrangement, Sigma has become our controlling shareholder. On December 31, 2011, as a part of the Creditor Arrangement process,
Mr. Eliyahu Trabelsi agreed to convert $96,246 of the amounts owed to him into our 1,069,400 ordinary shares and to forgive $144,369
of our outstanding debt to him. The ordinary shares were issued on April 2, 2012.



During 2011, as a part of the Creditor
Arrangement, certain creditors agreed to convert $322,000 (the total aggregate amounts owed to them) into warrants to purchase
1,081,871 of our ordinary shares and options to purchase 300,000 of our ordinary shares.



Principal capital expenditures
and divestitures



From January 1, 2011 to December 31, 2011,
our capital expenditures totaled approximately $23,000 (compared to $4,000 during 2010 and $100,000 during 2009), of which approximately
$23,000 (compared to $4,000 during 2010 and $7,000 during 2009) can be attributed to our facilities in Israel, and approximately
$0 (compared to $0 during 2010 and $93,000 during 2009) can be attributed to various facilities of our subsidiaries outside of
Israel. During the first financial quarter of 2012, our capital expenditures totaled approximately $6,000.



See Item 4 - History of the Companyfor information on our sale of SuperCom Asia; the sale of certain assets and liabilities of Vuance Inc., related to our Government
Services Division; and the sale by Vuance, Inc., of certain of its assets and liabilities related to our electronic access control
market.



Corporate information



Our headquarters
are located in Israel at Nolton House 14 Shenkar Street, Hertzliya Pituach 46725, Israel and our telephone number is +972-9-889-0800.
Our U.S. office is located at Oak Creek, Wisconsin. Our Internet website address is http://www.vuance.com. The information contained
on our corporate websites is not a part of this Annual Report.



Our agent
for SEC matters in the U.S. only is our subsidiary, PureRFid Inc., whose address is 9817 S. 13th Street, Oak Creek
WI 53154, telephone number (414)301-9435.



| | B. | Business Overview
| | -- | -----------------



From
1988 through 2006, our principal business was the design, development and marketing of advanced smart card and identification
technologies and products for governmental and commercial customers in Europe, Asia and Africa. As described in Item 4.A (“History
and Development of the Company”) above, we decided to sell our E-ID Division in 2006 to focus on opportunities for our RFID
and former CSMS businesses (sold in 2010).



On July
3, 2007, we entered, through our wholly-owned subsidiary, Vuance, Inc., into an agreement to acquire all of the issued and outstanding
capital stock of Security Holdings Corp. (“SHC”), a Delaware corporation engaged in the business of manufacturing
and distributing RFID-enabled solutions, access control and security management systems. Following the acquisition of SHC, in
March 2009, we completed the acquisition of certain of the assets and certain of the liabilities of Intelli-Site, Inc. to further
position ourselves in the offering of competitive RFID security solutions to existing and prospective customers.



27







Prior to January 2010, we offered three
principal product suites to our customers: an Active RFID solution under the AAID brand (currently the PureRFid Suite), Electronic
Access Control Suite and Credentialing & Incident Management Suite. On January 28, 2010, our wholly-owned subsidiary, Vuance,
Inc., completed the sale of certain of its assets and certain of its liabilities related to our electronic access control market,
and on January 29, 2010, we and Vuance, Inc. completed the sale of certain of the assets and certain of the liabilities of Vuance,
Inc. related to our Government Services Division including our Critical Situation Management System and Credentialing suites (see
a description of this transaction under the caption “History of the Company” in Item 4.A). Following the divestitures
indicated above, from 2010, we are focusing our sales and marketing efforts on our core competencies, active RFID technology,
our PureRFid Suite and existing e-ID projects.



Our Products



Consequently,
since 2010, we currently offer the following principal product suite to our customers:



Active RFID



Active
RFID is long, active radio frequency identification equipment that utilizes active radio frequency communications to track assets,
people and objects for potential governmental agency and commercial customers. Our solutions are programmable, small, sensitive
and relatively cost effective, providing significant competitive advantages.



Prior
to January 2010, we offered an active RFID solution under the AAID brand, which we acquired in the acquisition of SHC. The AAID
brand was established and well known in the market for tracking vehicles. Since January 2010, we have been engaged in leveraging
the marketing position of the AAID brand to introduce our latest product suite, PureRFid. The PureRFid Suite is superior to the
AAID Suite, providing a secure, precise and cost-effective means to positively identify, locate, track, monitor, count and protect
people and objects, including inventory and vehicles.



Our Strategy



In 2006, we sold our E-ID division in order
to focus on opportunities mainly in the U.S. for our active RFID enabled solutions and CSMS businesses. The sale was completed
on December 31, 2006 (See a description of this transaction in Item 4.A above). In August 2007, we completed the acquisition of
SHC, a Delaware corporation engaged in the business of manufacturing and distributing RFID-enabled solutions, access control and
security management systems. In January 2010, we completed the sale of certain of the assets acquired in the acquisition of SHC,
including our Electronic Access Control Suite and our Credentialing & Incident Management Suite to focus on our core competencies,
active RFID technology and solutions and e-ID project and solutions.



Our four-pronged sales strategy is to:



| | · | Develop strong
                                                                                                              strategic relationships
                                                                                                              with our business
                                                                                                              partners, including
                                                                                                              our systems integrators
                                                                                                              and distributors
                                                                                                              who introduce our
                                                                                                              solutions into their
                                                                                                              respective markets.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Employ dedicated
                                                                                                              sales personnel
                                                                                                              to work closely
                                                                                                              with such business
                                                                                                              partners. Since
                                                                                                              January 2010, our
                                                                                                              sales personnel
                                                                                                              focus on active
                                                                                                              RFID sales through
                                                                                                              leading system integrators.
                                                                                                              Our sales personnel
                                                                                                              customize and adapt
                                                                                                              solutions that can
                                                                                                              then be installed
                                                                                                              and supported by
                                                                                                              these business partners.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Expand our active
                                                                                                              RFID sales into
                                                                                                              other geographical
                                                                                                              areas such as Europe,
                                                                                                              Israel and Far East.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Leverage on
                                                                                                              our reputation,
                                                                                                              talented personnel,
                                                                                                              and project management
                                                                                                              capabilities in
                                                                                                              the e-ID market,
                                                                                                              to secure additional
                                                                                                              project and solutions
                                                                                                              In the growing e-ID
                                                                                                              and e-Government
                                                                                                              markets
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have a multi-pronged approach to growth:



| | · | Grow organically:
| | - | -----------------



| | 1. | Increase existing products’ value (e.g., offer products
                                                                which are smaller, better and cost effective);
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------



28







| | 2. | Identify new vertical markets and applications for our existing
                                                                products and solutions;
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Develop new products/solutions that meet clients’ needs;
                                                                and
| | -- | ----------------------------------------------------------------------------------------------------------------------------

| | 4. | Build a superior sales force. We are dedicating sales teams,
                                                                coordinated through our U.S. and Israel corporate offices to sell
                                                                more products/solutions through our growing number of business
                                                                partners. Cross-selling products and solutions will increase sales
                                                                to existing customers and create new opportunities.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Increase our
                                                                                                              activities and sales
                                                                                                              in the e-ID and
                                                                                                              e-Gov growing markets,
                                                                                                              by establishing
                                                                                                              joint ventures with
                                                                                                              partners worldwide.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Providing our
                                                                                                              customer in the
                                                                                                              e-ID markets, advanced
                                                                                                              technologies and
                                                                                                              solutions for additional
                                                                                                              e-ID and e-GOV needs.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Make synergistic
                                                                                                              acquisitions. Continue
                                                                                                              to “leapfrog”
                                                                                                              growth through strategic
                                                                                                              acquisitions of
                                                                                                              companies with complementary
                                                                                                              products and/or
                                                                                                              relations with business
                                                                                                              partners.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Enhancing Our Presence



We currently
concentrate our marketing efforts for our wireless solutions and technology in the U.S. and Israel.



In order
to expand our presence, we may pursue acquisitions of or joint venture with one or more companies that have an existing customer
base and proved revenues or that can otherwise offer us business synergies in Europe and in the Far East.



Identifying New Applications for
Our Technologies



Our management
and its external advisors are working to identify new vertical markets and applications for our technologies in the security,
transportation, healthcare, supply chain, energy and other markets. At a time when both government and the private sector are
faced with unprecedented challenges to protect public safety and personal privacy, we expect to extend our forward-looking technologies
to the U.S. market and to other geographical regions.



Leveraging Knowledge and Experience



We believe that our exposure to the governmental
market and experience in customizing solutions in our e-ID group will contribute to our ability to develop and market products
in our wireless ID market. We intend to leverage such knowledge and experience in order to respond to the needs of existing and
potential customers in the security and other markets.



We also believe that our exposure to the
governmental market and experience in solutions in our e-ID group will contribute to our ability to market additional solutions
in the growing e-ID and e-Gov Markets. We intend to leverage such knowledge and experience in order to provide our existing customer
with advanced technologies and solutions for additional e-ID and e-GOV needs, and in order to locate and secure additional projects
in those markets.



Seeking Partnerships With Other Relevant
Companies



To bolster our sales and marketing efforts:



| | · | We
                                                                                                               may seek to partner
                                                                                                               with distributors
                                                                                                               that can offer
                                                                                                               us new relationships
                                                                                                               within the commercial
                                                                                                               sector as well
                                                                                                               as with government
                                                                                                               agencies and help
                                                                                                               us increase our
                                                                                                               geographic breadth
                                                                                                               and penetrate other
                                                                                                               selected vertical
                                                                                                               markets. In addition,
                                                                                                               we may seek to
                                                                                                               partner with system
                                                                                                               integrators experienced
                                                                                                               in handling large-scale
                                                                                                               security projects.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | We
                                                                                                               may seek to enter
                                                                                                               into strategic
                                                                                                               partnerships with
                                                                                                               companies that
                                                                                                               offer technologies
                                                                                                               that complement
                                                                                                               ours.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | We
                                                                                                               may seek to enter
                                                                                                               into joint ventures
                                                                                                               with other companies
                                                                                                               in order to secure
                                                                                                               and operate large
                                                                                                               projects in different
                                                                                                               countries, where
                                                                                                               we have no presence
                                                                                                               or local advantages,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29









Current Businesses



Wireless ID Business



In February
2006, we introduced our active RFID technology, which utilizes active radio frequency communications to track people and objects.
We developed this new technology to meet the growing market demand for asset and person tracking solutions. The new technology
expands our wide range of products aimed at the private, the homeland security and the governmental market through a wireless asset
tracking system.



Prior
to January 2010, we offered an active RFID solution under the AAID brand, which we acquired in the acquisition of SHC. The AAID
brand was established and well known in the market for tracking vehicles. Since January 2010, we have been engaged in leveraging
the marketing position of the AAID brand to introduce our latest product suite, PureRFid. The PureRFid Suite is superior to the
AAID Suite, providing a secure, precise and cost-effective means to positively identify, locate, track, monitor, count and protect
people and objects, including inventory and vehicles.



Product



We expect
our PureRFid Suite, a complete location position (LP) system solution based on active RFID tag technology, to offer commercial
customers and governmental agencies enhanced asset management capabilities. The system can be deployed in physical security applications.
The basic components of our PureRFid Suite include:



| | · | an active tag, which contains a microchip equipped transmitter, an antenna, a capacitor and battery attached to the item to
be identified, located or tracked;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a web-based management system, which captures and processes the signal from the active tag, and may be configured to provide
an alert upon the occurrence of a trigger event;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | one or more wireless receivers;
| | - | -------------------------------

| | · | one or more activators; and
| | - | ---------------------------

| | · | the tag's initializer, which is used to configure the PureRFid tags.
| | - | --------------------------------------------------------------------



The PureRFid
Suite provides a secure, precise and cost-effective means to positively identify, locate, track, monitor, count and protect people
and objects, including inventory and vehicles. The ability to reliably identify and track the movement of people and objects in
real time will enable PureRFid Suite customers to detect unauthorized movement of vehicles, trace packages and containers, control
personnel and vehicle access to premises, and protect personnel in hazardous working environments and disaster management situations.



Customers



Most of
our customers are also our business partners, i.e., system integrators and distributors who introduce our solutions into their
prospective markets. As part of our decision to provide a complete solutions to customers, we anticipate that in year 2012 and
on, the number of direct commercial and governmental customers will increase.



Market Opportunity



Radio
frequency identification, or RFID, is a widely adopted technology in the auto-identification market, which addresses electronic
identification and location of objects. Typically, an RFID tag or transponder is attached to or incorporated into a product or
person. A handheld or stationary device that receives the radio frequency waves from these tags is used to determine their locations.
Prior to the adoption of RFID, users identified and tracked assets manually as well as through the use of bar code technology.
These solutions were limited because of the need for ongoing human intervention and the lack of instantaneous location capabilities.
RFID technology possesses greater range, accuracy, speed and lower line−of−sight requirements than bar code technology.



Our PureRFid
Suite can track items simultaneously, providing an alert when a tagged item is removed from a pre-determined area, passes through
a marked checkpoint or otherwise moves. We believe that potential customers for our PureRFid Suite include the following:



Civil and Military Governments.
Our PureRFid Suite can provide secure access control into restricted areas and map and track visitors throughout a facility. Many
high security facilities, including governmental and industrial facilities, need access monitoring. For example, nuclear power
plants, national research laboratories and correctional facilities need to accurately and securely monitor inbound and outbound
activity. Line of sight identifiers, such as identification cards, suffer from problems that our RFID technology readily overcomes,
including reliance on human visual identification, forgery and tampering. Our PureRFid Suite also enables identification and location
of individuals in restricted areas in real time.



30







Airport and Port Security
Infrastructure Providers. Our PureRFid Suite can offer solutions for the transportation sector by enabling common carriers
to monitor, track, locate and manage multiple baggage items simultaneously, thereby reducing risk of lost baggage, increasing customer
service and improving security.



Businesses and Industrial
Companies. Our PureRFid Suite can be used by businesses, shippers and warehouse operators to manage and track cartons, pallets,
containers and individual items in order to facilitate movement, order picking, inventory verification and reduce delivery time.
In addition, industrial companies can manage and track their mobile equipment and tools. We believe that our PureRFid Suite can
increase efficiency at every stage of asset, inventory and supply chain management by enabling long-range identification and location
of products and removing the need for their human visual identification. Our products also work in conjunction with existing bar
coding and warehouse systems to reduce the risk of loss, theft and slow speed of transfer.



Hospitals and Care Homes.
The healthcare sector has successfully utilized RFID technologies for the purposes of infant protection in maternity wards and
wander prevention in care homes similar to our asset and personnel location and identification system targeted at the secure facility
and hazardous business sectors. Our PureRFid Suite can provide solutions for the healthcare sector for asset, staff, patient and
medical record location and identification. We believe that as hospitals continue to upgrade their security measures, RFID technology
will be utilized in real time location systems that are designed to immediately locate persons, equipment and objects within the
hospital.



Livestock Owners. Our
PureRFid Suite can be used as livestock identification, tracking and safeguarding system.



e-ID and e-Gov Business



From 1988
to 2006, our principal business was the design, development and marketing of advanced smart card and identification technologies
and products for governmental and commercial customers in Europe, Asia and Africa. Our applications and solutions included e-passports,
visas and other border entry documents, national identification and military, police and commercial access identification. As detailed
above, in 2006, we decided to sell our e-ID division in order to focus on opportunities in the U.S. for our active RFID (and CSMS
businesses, which we sold in 2010).



In our
e-ID Division, we developed a fully automated production line for picture identification contactless smart cards, and offered our
customers raw materials, maintenance and service agreements. We provided identification solutions and contactless smart card production
equipment for governmental and commercial customers. As described above, as of the selling date of the e-ID division to OTI, OTI
agreed to act as our subcontractor and provide services, products and materials necessary to carry out and complete certain projects
that were not transferred to OTI. The customers and contracts of our e-ID Division in 2011, 2010 and 2009 included the following:



| | · | A contract for a national multi-ID with a European country - In 2006,
we entered into an agreement with a European country which we estimate will generate approximately $50 million in revenues during
the 10-year term of the project. Under the agreement we will provide the end-to-end system for a national multi-ID issuing and
control system. There can be no assurance, however, that we will realize the full estimated value of this agreement.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The project, which commenced during the third quarter
of 2006, involves the implementation of an end-to-end national ID issuing and control system based on our Magna system and includes
the supply of digital enrollment and production equipment, software, maintenance and supply of secured raw material for the production
of various national ID cards.



| | · | Other Projects – including:
| | - | ---------------------------



| | · | Biometric Visa system to a European Government
| | - | ----------------------------------------------

| | · | Automated Smart Card Production System to a European Government
| | - | ---------------------------------------------------------------

| | · | E-Passport with a European Country
| | - | ----------------------------------



At the
beginning of 2012, we have decided to leverage on our experience in the e-ID market and have decided to increase our position in
the market; (i) by proposing other new technologies and solutions to our existing e-ID customer, (ii) by securing other e-ID projects
and solutions by virtue of setting joint ventures with partners presenting worldwide presentence, and with companies holding complementary
theologies and products.



31







Security and Border Control



In 2007, we entered into an agreement
(the “Airport Agreement”) with an international airport in Europe ("EIA") to provide an integrated perimeter
security system and a border control system. The establishment of the security and control system began during the third quarter
of 2007. Under the Airport Agreement, once the system has been fully implemented and a transmission and acceptance report is signed
by the EIA, we would enter a ten-year maintenance period. During the last few weeks our wholly-owned subsidiary, SBC Aviation Ltd.,
had negotiated an additional agreement with EIA, pursuant to which EIA confirmed the final acceptance and transmission of the system
and committed to make a final payment for the system. Recent change of the management of EIA has lead to a delay in the completion
and execution of the agreement. We committed to provide final tuning to the system within three months after the said payment.
Also, the parties agreed not to enter into the ten-year maintenance period.



Research and Development



Our past research and development efforts
helped us to achieve the goal of offering our customers a complete line of products and solutions. We spent $0.5 million, $0.4
million, and $0.9 million on research and development in 2011, 2010 and 2009, respectively. These amounts were spent on the development
or improvement of our technologies and products, primarily in the areas of wireless ID. We will continue to research and develop
new technologies and products for the wireless ID market. There can be no assurance that we can achieve any or all of our research
and development goals.



Sales and Marketing



We sell our systems and products worldwide
through distribution channels that include direct sales and traditional distributor or reseller sales. We currently have 2 employees
that are directly engaged in the sale, distribution and support of our products through centralized marketing offices in distinct
world regions, including the employees of PureRFid, Inc., which sell our products in the U.S. We are also represented by several
independent distributors and resellers with which we often have distribution agreements.



Our distributors and resellers sell our
systems and products to business enterprises 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.



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, |      
|------------- |  | ----------------------- | -----
|              |  | 2011                    |      
|              |  | Total                   |      
|              |  | revenues                |      
|              |  |                         |      
|Europe        |  | $                       | 7,498
|Asia Pacific  |  |                         | -    
|United States |  |                         | 344  
|Israel        |  |                         | 80   
|              |  |                         |      
|              |  | $                       | 7,922



32







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



|                                              |  | Year ended December 31, |      
|--------------------------------------------- |  | ----------------------- | -----
|                                              |  | 2011                    |      
|                                              |  |                         |      
|Raw materials and equipment                   |  | $                       | 5,822
|Maintenance, royalties and project management |  |                         | 2,100
|                                              |  |                         |      
|                                              |  | $                       | 7,922



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 grow in our existing markets, as well as to our efforts to penetrate and grow in new markets.
In addition, we believe that our interaction with our customers and the customers’ feedback involved in our ongoing support
functions provide us with information on customer needs and contribute to our product development efforts. We generally provide
maintenance services under separate, tailor made agreements. We provide our service through customer training, local third-party
service organizations, our subsidiaries, or our personnel, including appropriate personnel sent from any of our offices in U.S.,
or Israel. We generally provide our customers with a warranty for our products for 12 months. Costs incurred annually by us for
product warranties have to date been insignificant; however, there can be no assurance that these costs will not increase significantly
in the future.



Manufacturing and Availability of Raw Materials



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



Our manufacturing consists
of a range of RFID products solutions. We outsource the manufacturing for our PCB to a number of different suppliers. We sometimes
commit to a long-term relationship with such suppliers in exchange for receiving competitive pricing. All PCBs and enclosures are
built to our engineering specifications. All PCBs are received in our manufacturing facilities in Israel and then tested, assembled,
and retested. Other products are off-the-shelf products, which we purchase from a number of different suppliers.



Some of the activities
for e-ID Project, such as purchasing, logistics, making integration, installation and testing, are done by third parties according
to our instructions and under our supervision.



Competition



We assess our competitive
position from our experience and market intelligence, and from reviewing third party competitive research materials.



We
believe that Zebra, RF Code, Axcess, Ekahau, Wave Trend, VT and Aeroscout are potential competitors, in niche areas, to us with
respect to our wireless ID tracking products and solutions.



Our management expects
competition to intensify as the markets in which our products and solutions compete continue to develop. Some of our competitors
may be more technologically sophisticated or have substantially greater technical, financial, or marketing resources than we do,
or may have more extensive pre-existing relationships with potential customers. Although we believe that our products combine technologies
and features that provide customers with complete and comprehensive solutions, we cannot assure that other companies will not offer
similar products in the future or develop products and services that are superior to our products and services, achieve greater
customer acceptance or have significantly improved functionality as compared to our products and services. Increased competition
may result in our experiencing reduced margins, loss of sales or decreased market shares.



33







Due to the developing
nature of the markets for our wireless ID products and solutions and the ongoing changes in this market, the above-mentioned list
may not constitute a full list of all of our competitors and additional companies may be considered our competitors.



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. However, these legal protections afford only limited protection for our proprietary technology and intellectual property.



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 U.S. Our means of
protecting our intellectual property rights in Israel, the U.S. or any other country in which we operate may not be adequate to
fully protect such rights.



Licenses



We license technology and software, such
as operating systems and database software, from third parties for incorporation into our 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.



As part
of the OTI Transaction, we received an irrevocable, worldwide, non-exclusive, non-assignable and non-transferable license to use,
in connection with the Existing Projects, the intellectual property that we transferred to OTI. Generally speaking, the license
will be valid for the duration of all Existing Projects.



Government Regulation



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, some of our Israeli employees are also subject to minimum mandatory military service requirements. (See
the discussion under the caption “Employees” in Section D of Item 6.)



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.



Employees



As of December 31, 2011 we had 14 full-time
employees, compared to 17 full-time employees as of December 31, 2010. (See the discussion under the caption “Employees”
in Item 6.D.)



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. The period between our
initial contact with a potential customer and the sale 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 36 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 or federal and state grants. 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.



34







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
Vuance Ltd.'s holdings in its subsidiaries and affiliates as of December 31, 2011 and April 30, 2012:







Vuance, Inc. (formerly, SuperCom Inc.)

Vuance, Inc., incorporated in Delaware, is our wholly-owned
subsidiary, and was responsible for our sales and marketing efforts in the U.S until January 2010.



Vuance - RFID Inc.

Vuance - RFID Inc. (formerly, Pure RF Inc.) incorporated in
Delaware in November 2005. Upon its incorporation we owned 80% of its shares. During January 2006, Vuance - RFID Inc. established
a wholly owned Israeli subsidiary, Vuance RFID Ltd. (formerly, Pure RF Ltd.), which focuses on new technologies and solutions for
the tracking of people and assets. During February 2007, we purchased the remaining 20% of Vuance - RFID Inc. for $100,000, whereupon
Vuance - RFID Inc. became our wholly-owned subsidiary. In August 2007, all the employees of Vuance RFID Ltd. were transferred to
us, and on December 31, 2007 we purchased all of the assets and liabilities of Vuance RFID Ltd. Commencing year 2008, Vuance RFID
Inc. engaged in an activity to distribute complementary locks and electronic locks. This activity was terminated in the fourth
quarter of 2008 and it is presented in the financial reports as discontinued operations.



S.B.C Aviation Ltd.

S.B.C Aviation Ltd., incorporated in Israel in the fourth quarter
of 2006, is our wholly-owned subsidiary, which commenced operations in 2007, and focused until 2009 on executing information technology
and security projects.



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 of the economic interests of SuperCom
Slovakia, our voting power in SuperCom Slovakia is 50%.



PureRFid, Inc.

PureRFid, Inc., incorporated in Delaware, is our wholly-owned
subsidiary, and as of January 2010 is responsible for our sales and marketing efforts in the U.S.



SuperCom Asia Pacific Limited (“SuperCom Asia Pacific”)

SuperCom Asia Pacific, incorporated in Hong Kong, had been our
wholly-owned subsidiary since November 2003, and had been responsible for our sales and marketing efforts in Asia Pacific. In the
third quarter of 2009, we began to wind down operations of SuperCom Asia Pacific. We sold our entire equity interest in SuperCom
Asia Pacific, for no consideration pursuant to a purchase agreement entered into on or about October 21, 2010.



35







| | D. | Property, Plants and Equipment
| | -- | ------------------------------



We do not own any real estate.



We lease approximately 685 square meters
of facilities in Hertzliya Pituach, Israel under a two-year lease contract, currently expiring on September 30, 2013. According
to the agreement, the monthly fee (including management fees) is approximately$15,000.



Vuance, Inc. leases a facility in Peachtree
City, GA of approximately 465 square meters for an average monthly fee of $3,100. The lease commenced on March 1, 2008 and expires
on February 28, 2013.



In 2009, Vuance, Inc. signed a lease agreement
in Oak Creek, Wisconsin, which was amended on February 23, 2011, of approximately 557 square meters for an average monthly fee
of $5,200. The lease commenced on April 1, 2010 and expires on March 31, 2015.



All such leased properties in the U.S. consist
of office space for management, administrative, operation, sales and marketing activities.



The total annual rental fees, net of rent
income from subleases, for 2011, 2010 and 2009 were $176,000, $121,000 and $331,000, respectively. The total annual lease commitments
for 2012 are $280,000.



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



The following table details our fixed assets as of December
31, 2011, 2010 and 2009:



|                                   |  | December 31,                 |    
|---------------------------------- |  | ---------------------------- | ---
|                                   |  | 2011                         |    
|                                   |  | (In thousands of US Dollars) |    
|Cost:                              |  |                              |    
|Computers and peripheral equipment |  | $                            | 254
|Office furniture and equipment     |  |                              | 194
|Leasehold improvements             |  |                              | 24 
|                                   |  |                              |    
|                                   |  |                              | 472
|Accumulated depreciation:          |  |                              |    
|Computers and peripheral equipment |  |                              | 246
|Office furniture and equipment     |  |                              | 128
|Leasehold improvements             |  |                              | 2  
|                                   |  |                              |    
|                                   |  |                              | 376
|                                   |  |                              |    
|Depreciated cost:                  |  | $                            | 96 



Depreciation expenses
for the years ended December 31, 2011, 2010 and 2009 were $28,000 $47,000 and $77,000, respectively.



ITEM 4A.    Unsolved
Staff Comments.



Not applicable.



36







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 expressed or implied by such forward-looking
statements. (See “Note Regarding Forward Looking Statements” at the beginning of this report, and “Risk Factors”
In Item 3.D)



Revenues



The Company and its subsidiaries generate
their revenues from the sale of products, maintenance, royalties and long term contracts (including training and installation).
The sale of products involves the sale of active RFID products and existing e-ID project. Following delivery of such products,
usually revenues from the sale of such products are recognized.



Some of our products 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.



Operating Expenses



Our costs associated with a particular project
may vary significantly depending on the specific requirements of the customer, 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 and related, raw material, subcontractors, depreciation costs and overheads allocated to research and development activities.



Our selling and marketing expenses consist
primarily of salaries and related costs, commissions earned by sales and marketing personnel, trade shows, promotional expenses
and overhead costs allocated to selling and marketing activities, as well as depreciation expenses and travel costs.



Our general and administrative expenses
consist primarily of salaries and related costs, allocated overhead costs, office supplies and administrative costs, fees and expenses
of our directors, human resources, information technology, depreciation, and professional service fees, including legal counsel,
insurance and audit fees.



Net Income (Loss)



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



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. We evaluate our estimates and judgments on an ongoing basis.



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 U.S. ("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. Our management believes that the accounting policies
which affect the more significant judgments and estimates used in the preparation of our consolidated financial statements and
which are the most critical to fully understanding and evaluating our reported results include the following:



37







| | · | Revenue recognition;
| | - | --------------------

| | · | Allowance for doubtful accounts;
| | - | --------------------------------

| | · | Contingencies;
| | - | --------------

| | · | Goodwill and other intangible assets; and
| | - | -----------------------------------------

| | · | Going concern.
| | - | --------------



Revenue Recognition



We generate our revenues
from the sale of products, maintenance, royalties and long term contracts including training and installation. The sale of products
currently involves the sale of active RFID products and existing e-ID project. We sell our products in the U.S. through distributors
and our local subsidiary, PureRFid, Inc., and directly throughout the rest of the world.



Product sales 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 reasonably assured, 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.



We recognized certain
long-term contract revenues in accordance with ASC Topic 605-35, "Construction-Type and Production-Type Contracts". Pursuant
to ASC Topic 605-35, revenues from these contracts are recognized under the percentage of completion method. We measure the percentage
of completion based on output or input criteria, such as contract milestones, percentage of engineering completion or number of
units shipped, as applicable 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, 2011,
no such estimated losses were identified. As of December 31, 2011, all the long-term contracts were completed and their related
revenues were recognized in full. We believe that the use of the percentage of completion method is appropriate, since we have
the ability, using also independent subcontractor's evaluation, to make reasonably dependable estimates of the extent of progress
made 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 the terms of
settlement. In all cases, we expect to perform our contractual obligations and the parties are expected to satisfy their obligations
under the contract. In contracts that do not meet all the conditions mentioned above, we utilize zero estimates of profits; equal
amounts of revenue and cost are recognized until results can be estimated with sufficient accuracy. Revenues and costs recognized
pursuant to ASC Topic 605-35 on contracts in progress are subject to management estimates. Actual results could differ from these
estimates.



We are not obligated to accept returned
products or issue credit for returned products, unless a product return has been approved by us in advance and is according to
specific terms and conditions. As of December 31, 2011 we had an allowance for customer's returns in an insignificant amount.



Our warranty period
is typically 12 months. Based primarily on our historical experience, we do not provide for warranty costs when revenue is recognized,
since such costs are not material.



Deferred revenues and
customer advances include amounts received from customers for which revenues have not been recognized.



We are entitled to royalties
upon of the issuance of a certificate. Such royalties are recognized when the sales are reported to us (usually on a monthly basis).



Allowance for doubtful accounts



The allowance for doubtful
accounts is determined with respect to specific debts that we have determined to be of doubtful collection.



We perform ongoing credit
evaluations of our customers' financial conditions and we require collateral as we deem 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 conditions
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 $134,000 and $1,553,000 at December 31, 2011 and 2010, respectively.



38







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 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” in Item
8, there are no material pending legal proceedings in which we are a party or of which our property is subject.



Goodwill and other intangible assets



Under ASC
Topic 350, "Intangibles - Goodwill and Other", goodwill acquired in a business combination is deemed to have indefinite
life and is not to be amortized. ASC Topic 350 requires goodwill to be tested for impairment at least annually or between annual
tests in certain circumstances, and written down when impaired, rather than being amortized. Goodwill is tested for impairment
by comparing the fair value of each reporting unit to its carrying value ("step 1"). If the fair value exceeds the carrying
value of the reporting unit net assets, goodwill is considered not impaired, and no further testing is required. If the carrying
value exceeds the fair value of the reporting unit, then the implied fair value of goodwill is determined by subtracting the fair
value of all the identifiable net assets from the fair value of the reporting unit. An impairment loss is recorded for the excess,
if any, of the carrying value of the goodwill allocated to the reporting unit over its implied fair value ("step 2").



Due to the sale of activities in January
2010, we recorded in 2009 an impairment loss of the entire remaining balance of the goodwill which was attributed to the components
sold in an amount of $685,000 and in addition we recorded an impairment loss of certain other intangible assets in an amount of
$434,000. As of December 31, 2011 and 2010, the balance of goodwill and intangible assets is nil.



Going concern



We incurred substantial
losses and negative cash flows from operations since our inception. We had an operating cash flow deficit in each of 2011, 2010,
and 2009. As of December 31, 2011, we had an accumulated deficit of approximately $48,325,000 and a working capital deficit
of $2,723,000 (excluding the Convertible Bonds which total debt is approximately $2,975,000 as of December 31, 2011). We incurred
net losses of approximately $1,965,000 and $5,085,000 in the years ended December 31, 2010 and 2009, respectively. In the year
ended December 31, 2011, we incurred net income of approximately $1,019,000 (which includes a capital gain of $2,149,000 as a result
of extinguishment of debt in 2011). We may continue to have an annual losses and negative cash flows for the near 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 revenues to achieve annual profitability. Even if we do achieve annual profitability,
we may not be able to sustain or increase profitability on a quarterly or annual basis. Continuation of our current operations
after utilizing our current cash reserves and other current assets is dependent upon the generation of additional financial resources.
As described in Item 4.A under the caption “Recent Developments”, we wish to complete the Creditor Arrangement, and
also are seeking to raise funds either via issuance of additional equity or through receipt of additional bank credit lines. These
matters raise substantial doubt about our ability to continue as a going concern. The financial statements have been prepared assuming
that we will continue as a going concern. The financial statements do not include any adjustments that might result from the outcome
of this uncertainty.



Results of Operations



The following table sets forth selected
our consolidated income statement data for each of the three years ended December 31, 2011, 2010 and 2009 expressed as a percentage
of total revenues.



39







|                                  |  | 2011 |      |   | 2010 |  |       | 2009 | 
|--------------------------------- |  | ---- | ---- | - | ---- |  | ----- | ---- | 
|                                  |  |      |      |   |      |  |       |      | 
|Revenues                          |  |      | 100  | % |      |  | 100   | %    | 
|Cost of revenues                  |  |      | 41.7 |   |      |  | 27.8  |      | 
|Gross profit                      |  |      | 58.3 |   |      |  | 72.2  |      | 
|Operating expenses                |  |      |      |   |      |  |       |      | 
|Research and development          |  |      | 5.8  |   |      |  | 5.2   |      | 
|Selling and marketing             |  |      | 44.2 |   |      |  | 59.6  |      | 
|General and administrative        |  |      | 9.2  |   |      |  | 26.9  |      | 
|Other (income) expenses           |  |      | (1.7 | ) |      |  | (5.4  | )    | 
|Total operating expenses          |  |      | 57.6 |   |      |  | 86.3  |      | 
|Operating (loss) income           |  |      | 0.7  |   |      |  | (14.2 | )    | 
|Financial (expenses) income, net  |  |      | 12.5 |   |      |  | (9.2  | )    | 
|Income (loss) before income tax   |  |      | 13.2 |   |      |  | (23.4 | )    | 
|Income tax                        |  |      | (0.3 | ) |      |  | (0.7  | )    | 
|Loss from discontinued operations |  |      | -    |   |      |  | (2.6  | )    | 
|Net (loss) income                 |  |      | 12.9 |   |      |  | (26.6 | )    | 



Operating Results



Year Ended December 31, 2011 Compared to Year Ended December
31, 2010



Revenues



Our revenues from continuing operations
in 2011 were $7,922,000, compared to $7,389,000 in 2010, an increase of 7%. The increase in our revenues from continuing operations
is primarily due to an increase in revenues from our E-id project.



Gross Profit



Our gross profits from continuing operations
in 2011 were $4,616,000 compared to $5,332,000 in 2010, a decrease of 13%. The gross profit margin for the year 2011 was 58% compared
to 72% in 2010. The decrease in gross profit margin attributed to changes in our mix of revenues from products and services. Revenues
from the selling of services have higher gross profit than revenues from selling of products.



Expenses



Our
operating expenses from continuing operations in 2011 were $4,562,000,
compared to $6,380,000 in 2010, a decrease of 28%. The decrease in operating expenses from continuing operations was primarily
due to a decrease in selling and marketing expenses and a decrease in general and administrative expenses, as discussed below.



Research
and development from continuing operations expenses consist primarily of salaries and related costs, raw material, subcontractors,
depreciation and amortization costs and overheads allocated to research and development activities. Our research and development
expenses from continuing operations in 2011 were $462,000, compared to $386,000 in 2010, an increase of 20%. The increase in our
research and development expenses from continuing operations was primarily due to an increase in salaries and related costs due
to headcount increase.



40







Sales
and marketing expenses from continuing operations consist primarily of salaries and related costs, commissions earned by sales
and marketing personnel and partners, trade shows and overheads allocated to selling and marketing activities, as well as depreciation
and amortization expenses and travel costs. Our sales and marketing expenses from continuing operations in 2011 were $3,505,000,
compared to $4,405,000 in 2010, a decrease of 20%. The decrease in the sales and marketing expenses from continuing operations
was primarily due to a decrease in promotional expenses, arising from the increase in revenues from the selling of products, which
resulted in fewer promotional expenses.



General
and administrative expenses from continuing operations consist primarily of salaries and related costs, allocated overheads, office
supplies and administrative, fees and expenses of our directors, bad debts expenses, human resource, information technology, depreciation
and amortization, and professional service fees, including legal counsel, insurance and audit fees. Our general and administrative
expenses from continuing operations in 2011 were $732,000, compared to $1,985,000 in 2010, a decrease of 63%. The decrease in general
and administrative expenses from continuing operations was primarily due to a decrease in salaries and related costs, a decrease
in legal expenses and due to a change in management's estimation with respect to the collectability of certain debt which was considered
doubtful in 2010 and as of December 31, 2011, on the basis of communications held with the customer, is not considered as doubtful
of collection.



Other income from continuing operations
in 2011 was $137,000 and consisted primarily of gain from the extinguishment of working capital related liabilities as part of
the Creditor Arrangement, compared to $396,000 in 2010, which consisted of capital gain from the sale of our Hong Kong subsidiary
and gain from the Creditor Arrangement.



Financial (Expenses) Income, net



Financial (expenses) incomefrom
continuing operations consist primarily of interest related to our Convertible Bonds, bank fees, gain on extinguishment of convertible
bonds as part of the Creditor Arrangement and exchange rate expenses. Financial incomefrom
continuing operations for the year ended December 31, 2011 was $990,000 compared to financial expenses from continuing operations
in 2010 of $678,000. The transfer from financial expenses to financial income is mainly due to a $2,006,000 capital gain on extinguishment
of debt related to convertible bonds, recognized in 2011, as part of the Creditor Arrangement, which
was maintained by an increase in financial expenses with respect to our Convertible Bonds caused by an increase in the interest
rate of the bonds and due to our breach of the covenants under the Convertible Bonds, as amended, which required us to incur additional
interest of 3% per month on unpaid amounts. The additional interest expenses amounted to $271,000 during the year ended December
31, 2011.



Income Tax



Income taxes from continuing operations
are mainly expenses related to withholding tax at source related to our project with a European country. Income taxes on income
from continuing operations for the year ended December 31, 2011 and 2010 were $25,000 and $50,000, respectively. The decrease is
mainly due to a decrease related to withholding tax at its source expenses.



Loss from discontinued operations



Loss from discontinued operations for the
year ended December 31, 2010 was $189,000. The loss from discontinued operations is attributed to the sale of our EAC and CSMS
businesses, which were sold in January 2010.



Net (Loss)Income



As a result of the factors described above,
our net income in 2011 was $1,019,000, compared to a net loss of $1,965,000 in 2010.



Year Ended December 31, 2010 Compared to Year Ended December
31, 2009



Revenues



Our revenues from continuing operations
in 2010 were $7,389,000, compared to $9,304,000 in 2009, a decrease of 21%. The decrease in our revenues from continuing operations
is primarily due to a completion of large airport control system in a European country during 2009.



41







Gross Profit



Our gross profits from continuing operations
in 2010 were $5,332,000 compared to $5,939,000 in 2009, a decrease of 10%. The gross profit margin for the year 2010 was 72% compared
to 64% in 2009. The increase in gross profit margin attributed to changes in our mix of revenues.



Expenses



Our
operating expenses from continuing operations in 2010 were $6,380,000,
compared to $7,807,000 in 2009, a decrease of 18%. The decrease in operating expenses from continuing operations was primarily
due a decrease in research and development expenses, in selling and marketing expenses and in other expenses (income), which are
discussed below.



Our research
and development expenses from continuing operations in 2010 were $386,000, compared to $898,000 in 2009, a decrease of 57%. The
decrease in our research and development expenses from continuing operations was primarily due to a decrease in stock-based compensation
accounted for in 2009.



Our sales
and marketing expenses from continuing operations in 2010 were $4,405,000, compared to $5,131,000 in 2009, a decrease of 14%. The
decrease in the sales and marketing expenses from continuing operations was primarily due to the decrease in revenues.



Our general
and administrative expenses from continuing operations in 2010 were $1,985,000, compared to $1,648,000 in 2009, an increase of
20%. The increase in general and administrative expenses from continuing operations was primarily due to an increase in legal expenses
in year 2010.



Additionally,
other (income) expenses from continuing operationsconsisted in 2010 of other income associated
with the selling of our Hong Kong subsidiary and with the Creditor Arrangement. Other expenses from continuing operations in 2009
consisted of expenses that relate to litigations that were settled during the reported period, as described in "Legal Proceedings"
in Item 8, and accruals related to legal proceeding exposures. Our other income from continuing operations in 2010 were $396,000,
compared to other expenses of $130,000 in 2009.



Financial Expenses, net



Financial expensesfrom continuing
operations consist primarily of interest related to our Convertible Bonds, banks fees and exchange rate expenses. Financial expensesfrom continuing operations for the year ended December 31, 2010 and 2009 were $678,000 and $620,000, respectively. The increase
in financial expenses from continuing operations is mainly due to an increase in financial expenses with respect to our Convertible
Bonds and due to an increase in exchange rate expenses arise from the decline in the NIS/dollar rate.



Income Tax



Income taxes from continuing operations
are mainly expenses related to withholding tax at source related to our project with a European country. Income taxes on income
from continuing operations for the year ended December 31, 2010 and 2009 were $50,000 and $71,000, respectively. The decrease is
mainly due to a one-time allowance for income taxes recorded in 2009 in relation to our Israeli subsidiary.



Loss from discontinued operations



Loss from discontinued operations for the
year ended December 31, 2010 and 2009 were $189,000 and $2,526,000, respectively. The loss from discontinued operations is attributed
to the sale of our EAC and CSMS businesses, which were sold in January 2010.



Net Loss



As a result of the factors described above, our net loss in
2010 was $1,965,000, compared to a net loss of $5,085,000 in 2009.



Impact of Inflation and Currency Fluctuations



Because the majority of our revenue is paid
in or linked to the U.S. dollar, we believe that inflation and fluctuation in the NIS/dollar exchange rate has limited 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 NIS/dollar exchange rate fluctuations does have some impact on our expenses and, as
a result, on our 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.



42







Historically, the New Israeli Shekel has
been devalued in relation to the U.S. dollar and other major currencies principally to reflect the extent to which inflation in
Israel exceeds average inflation rates in Western economies. Such devaluations in any particular fiscal period are never completely
synchronized with the rate of inflation and therefore may lag behind or exceed the underlying inflation rate.



In 2011, the rate of appreciation of the
NIS against the U.S. dollar was 8% and the rate of inflation, in Israel, was 2.2%. It is unclear what the devaluation/evaluation
and inflation rates 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 the evaluation 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,
2011, 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 our 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 caption “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”in Item 3.D. 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 agencies 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 expenses,
particularly for government and government agencies 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



Accounting pronouncements adopted
in 2011



ASC Topic 605 - 25 “Revenue Recognition
- Multiple-Element Arrangements”



In October 2009, the FASB issued Accounting
Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements – a consensus of the FASB Emerging Issues
Task Force. The amended guidance modified the criteria for recognizing revenue in multiple element arrangements and requires companies
to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration using the relative
selling price method. In addition, the amendments eliminated the residual method for allocating arrangement considerations.



The amended guidance became effective prospectively
for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (fiscal year
2011 for us). The adoption of the new guidance did not have a material impact on our financial position, results of operations
or cash flows.



ASC Topic 985 - 605, "Software - Revenue
Recognition"



In October 2009, the FASB issued Accounting
Standards Update (ASU) 2009-14, “Certain Revenue Arrangements That Include Software Elements – a consensus of
the FASB Emerging Issues Task Force”, to amend the scope of arrangements under ASC 985, Software, 605, “Revenue
Recognition” to exclude tangible products containing software components and non-software components that function together
to deliver a product’s essential functionality. Such components will be subject to ASC Topic 605 - 25 “Revenue Recognition
- Multiple-Element Arrangements”.



43







The amended guidance became effective prospectively
for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 (fiscal year
2011 for us). The adoption of the new guidance did not have a material impact on our financial position, results of operations
or cash flows.



Accounting pronouncements not yet
effective:



ASC Topic 220, “Comprehensive Income”



In June 2011, the FASB issued Accounting
Standard Update (ASU) 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income” (ASU 2011-05). ASU
2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires
an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.



ASU 2011-05 will be effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011 (fiscal year 2012 for us) and should be applied
retrospectively.



In December 2011, the FASB issued Accounting
Standard Update (ASU) 2011-12, which defers certain provisions contained in ASU 2011-05 requiring the requirement to present components
of reclassifications of other comprehensive income on the face of the income statement or in the notes to the financial statements.
However, this deferral does not impact the other requirements contained in the new standard on comprehensive income as described
above. ASU 2011-12 is effective during interim and annual periods beginning after December 15, 2011 (fiscal year 2012 for us).



The adoption of ASU 2011-05 and ASU 2011-12
is not expected to have a material impact on our financial condition, results of operations or cash flows.



ASC Topic 210, “Balance Sheet”



In December 2011, the FASB issued Accounting
Standard Update (ASU) 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and Liabilities” (ASU
2011-11). ASU 2011-11, enhance disclosures about financial instruments and derivative instruments that are either offset in
accordance with the Accounting Standards Codification or are subject to an enforceable master netting arrangement or similar agreement.



The amended guidance will be effective for
annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods (fiscal year
2013 for us) and should be applied retrospectively to all comparative periods presented.



We are currently evaluating the impact that
the adoption of ASU 2011-11 would have on our consolidated financial statements, if any.



| | B. | Liquidity and Capital Resources
| | -- | -------------------------------



Net cash used in operating activities for
the year ended December 31, 2011 was $189,000 compared to $1,212,000 during the period ended December 31, 2010, a decrease of $1,023,000,
or 84%. This decrease was primarily due to net income of $1,019,000 in 2011 compared to a net loss of $1,965,000 during 2010, which
was maintained by an increase in capital gain from the extinguishment of liabilities in 2011 of $2,149,000 compared to $124,000
in 2010.



Net cash provided by investing activities
during the year ended December 31, 2011 was $116,000, compared to $639,000 during the period ended December 31, 2010, a decrease
of $523,000. This decrease was primarily due to the proceeds from the sale of operations net of cash disposed of in 2010.



Net cash provided by financing activities
during the year ended December 31, 2011 was $91,000, compared to $114,000 during the year ended December 31, 2010, a decrease of
$23,000.



As of December 31, 2011, our cash and cash
equivalents totaled $215,000, compared to $197,000 as of December 31, 2010. Restricted cash totaled $0 as of December 31, 2011,
compared to $130,000 as of December 31, 2010. The restricted cash deposit was related to a bank deposit to secure a documentary
credit to a supplier, related to our certain project with a European country.



44







We have accumulated net losses of approximately
$48,325,000 from our inception through December 31, 2011.



As of December 31, 2011, we had a negative
working capital in the amount of $2,723,000 (excluding the Convertible Bonds which total debt is approximately $2,975,000 as of
December 31, 2011). We believe that we do not have sufficient working capital to meet our anticipated operating expenditure requirements
for 2012. Since September 2011, we have been financing part of our day-to-day operations with interest-free, short-term loans from
Mrs. Tsviya Trabelsi, our former chairman of the Board and the wife of our current chairman of the Board, which amounted to approximately
$69,000 as of March 31, 2012. In the past, we have partially funded our operations through the issuance of equity securities and
convertible bonds to investors and may not be able to generate a positive cash flow from operations in the future. Continuation
of our current operations after utilizing our current cash reserves is dependent upon the generation of additional financial resources
either through the issuance of additional equity or debt securities or other sources of financing, generating cash flow from operations
or the sale of certain assets of the Company. Any additional financings will likely cause substantial dilution to existing shareholders.
If we are unable to obtain necessary additional financing or generate cash from operations, we may be required to reduce the scope
of, or cease, our operations. Even if we raise such additional capital, we may be required to reduce the scope of our operations
and may need to implement certain operational changes in order to decrease our expenditure level. 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.
These matters raise substantial doubt about our ability to continue as a going concern. Our financial statements have been prepared
assuming that we will continue as a going concern and do not include any adjustments that might result from the outcome of this
uncertainty.



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), and, to a lesser extent, from our sale of the shares of our former subsidiary,
InkSure Technologies, Inc., from borrowings from financial institutions, from private placements of our ordinary shares and warrants
to purchase our ordinary shares, in 2004, 2005 and 2010, from issuance of convertible bonds and warrants, from the sale of certain
activities of Vuance Inc. in January 2010, and in 2006, 2007 and 2008 from the sale of OTI shares that were received from the sale
of the E-ID Division to OTI. As of December 31, 2011, our principal source of liquidity was $215,000 of cash and cash equivalents.
As of December 31, 2011, we had $2,975,000 of debt outstanding relating to obligations under our Convertible Bonds and accrued
expenses of $2,164,000.



During June and July 2004, we received aggregate
gross proceeds of $1,225,000 from the private placement of 265,001 ordinary shares and five-year warrants to purchase 106,001 ordinary
shares at an exercise price of $6.47 per share. In connection with the private placement, our placement advisors received warrants
to purchase 77,941 ordinary shares at an exercise price of $6.47 per share.



In August and September 2004, we received
gross proceeds of $2,200,000 from a private placement to accredited investors of 420,000 ordinary shares and five-year warrants
to purchase 168,000 ordinary shares at an exercise price of $6.47 per share. In connection with the private placement, our placement
agent received warrants to purchase 30,240 ordinary shares at an exercise price of $6.47 per share and 75,601 ordinary shares at
an exercise price of $5.00 per share. All of such warrants issued in this private placement, except 75,601 warrants with an exercise
price of $5.00, were called by us at a redemption price of $0.0588 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 $14.70 per share for 10 out of any 15 consecutive trading days. The investors exercised warrants to purchase an aggregate
of 194,627 ordinary shares. During the fourth quarter of 2004, 120,176 warrants were exercised for an aggregate amount of approximately
$778,000, and approximately $130,000 was received with respect to shares to be allotted in 2005. During the year 2005, 54,451 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 by certain investors of 836,292 ordinary shares (of which 150,807
shares were issued after December 31, 2005) and five-year warrants to purchase 292,701 ordinary shares at an exercise price of
$3.53 per share. The private placement was made to accredited investors 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 8,446 ordinary shares at an
exercise price of $3.53 per share. The investors that participated 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). 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 $7.06 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.



45







In November 2006, we raised
$3,156,500 through the issuance of units consisting of convertible bonds, or the Convertible Bonds and warrants. Units valued at
$2,500,000 were issued to Brevan Howard Master Fund Limited or “BH” and units valued at $656,500 were issued to Special
Situation Funds (SSF), based on the participation rights provided in a private placement during 2005, which were existing shareholders
of us. According to their original terms the Convertible Bonds matured three years from the date of issuance and bore interest
at an annual rate of 8%. The Convertible Bonds provided that any withholding and other taxes payable with respect to the interest
will be grossed up and paid by us (approximately 3% of the principal of the bonds); and payment of interest will be net of any
tax. Subject to certain redemption provisions, the Convertible Bonds may be converted at any time, at the option of the holders,
into our ordinary shares at an original conversion price of $5 per share. The holders were also granted warrants entitling them
to acquire a total of 134,154 ordinary shares at an original exercise price of $5 per share during the next five years. In respect
of this transaction, we paid approximately $215,000 cash as issuance expenses and granted an option to acquire up to 25,000 of
our ordinary shares to a third party, exercisable at an original $5 per share. The fair market value of this grant was $ 40,000.



Pursuant to their terms,
if we fail to fulfill certain conditions of the Convertible Bonds, the holders may accelerate repayment of the principal amount
of $3,156,500 of the Convertible Bonds, in which case all interest payable up to the maturity date will immediately become due
and payable.



We have determined that the embedded conversion
feature should not be separated from the host instrument because it is qualified for equity classification. Therefore the transaction
was accounted for in accordance with ASC Topic 470 – 20, “Debt – Debt with Conversion and Other Options”.



In November 2007, due
to a breach of certain conditions of the Convertible Bonds, the holders had the right to accelerate the repayment of the principal
with all the interest payable until the maturity date of the bonds. However, we signed an amendment to the agreement with the holders
under which we were required to pay to one of the holders interest in the amount of $276,000 (together with any withholding and
other taxes payable with respect to the interest (approximately 3% of the principal of the Convertible Bonds)) and with respect
to the other holder we changed the conversion ratio of the Convertible Bonds to $4.25. In a consideration the holders waived their
right to accelerate the repayment of the Convertible Bonds. We accounted for the amendment as a modification of the Convertible
Bonds.



In June 2008, following
a breach in the amended terms of the Convertible Bonds, we reached an agreement with BH, pursuant to which, among other things,
BH waived the requirement that we comply with certain covenants under its Convertible Bonds, in exchange for:



| | 1. | Increasing the interest rate to 10% starting March 31, 2008. Any withholding and other taxes payable
with respect to the interest will be grossed up and paid by us (approximately 3% of the principal of the bonds).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Reducing the exercise price of the bond and the warrants to $3 and $2.8, respectively.
| | -- | --------------------------------------------------------------------------------------

| | 3. | Our undertaking to place a fixed charge on all income and/or rights in connection with a certain European
Airport Project. This charge shall be senior to any indebtedness and/or other pledge and encumbrance, but shall, however, be subject
to certain rights of us to use part of the income.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Our granting of certain anti-dilution rights with respect to the warrants held by BH.
| | -- | -------------------------------------------------------------------------------------



In addition, it was agreed
that under certain circumstances BH may demand an early payment in part or in full of the principal amount of its Convertible Bond.
We accounted for the amendment as an extinguishment of the Convertible Bonds.



Due to the breach of certain of the covenants
under the Convertible Bonds, we had to recognize, in 2008, financial expenses in the amount of $553,000, to accelerate deferred
expenses in the amount of $138,000 and to accelerate the remaining discount amounts (attributed to warrants and beneficial conversion
feature) in the amount of $724,000. In addition, as of December 31, 2008, the Convertible Bond was classified as a current liability.



On August 12, 2009, we entered into an agreement
with BH to make additional amendments to certain terms of its Convertible Bond, (the “Amendment Agreement”), pursuant
to which, in exchange for security in certain of our assets, including all incomes and/or rights in connection therewith to which
we and our Subsidiaries are and shall be entitled to as a result of certain legal proceedings involving our Slovakian subsidiary
SuperCom Slovakia, and all amounts in connection with the project related to the legal proceedings, BH agreed to (a) waive the
requirement that we comply with and (b) amend certain provisions of, its Convertible Bond including, (i) increasing the applicable
rate of interest to 12% and by 0.5% every 180 days afterward, (ii) releasing us from certain payments upon the completion of certain
payments of principal and interest due under the Convertible Bond, (iii) making monthly payments of $41,000 against the total amount
due under the Convertible Bond over an eight (8) year period, and (iv) increasing the number of warrants granted to 159,375 and
amend their exercise price of all the warrants to $0.40 per share. The modification was determined to be a debt extinguishment.For more information on the legal proceedings involving SuperCom Slovakia, see Item 8 – Legal Proceedings.



46







On November 9, 2009, we
entered into an amendment agreement with Special Situation Funds or “SSF”, the holder of the Convertible Bond in the
amount of $623,565, pursuant to which, in exchange for a security in certain of our assets, SSF agreed to (a) waive its requirement
that we comply with and (b) amend certain provisions of, its Convertible Bond including, (i) increasing the applicable rate of
interest to 12% and by 0.5% every 180 days afterward, (ii) releasing us from certain payments upon the completion of certain payments
of principal and interest due under its Convertible Bond, (iii) making monthly payments of $10,000 against the total amount due
under the Convertible Bond over an eight (8) year period, (iv) reducing the exercise price of the Convertible Bond and the warrants
to $3 and $0.4, respectively and, (v) increase the number of warrants granted to 31,238. The modification was determined to be
a debt extinguishment.



As of December 31, 2009,
in light of the above amendments, total principal amount of $430,000 is presented in current liabilities and a total principle
amount of $2,624,000 is presented in long-term liabilities. In addition, an amount of $1,693,000 which includes interest and penalties
that it was agreed to be paid after the principal amount is paid, and therefore is presented among long-term loan and others.



As of December 31, 2009
we were in compliance with covenants under the amendment Convertible Bond agreements.



In January 2010, we have
received the investors’ consent to sell our EAC and CSMS businesses (as described in Item 4). In addition, we created a specific
(fixed) charge in favor of the investors on the intellectual property rights belonging to our remaining RFID business.



On August 24, 2010, BH
entered into an Absolute Assignment and Transfer of Bond and Warrant (“Assignment”) with Sigma, an Israeli company
and our controlling shareholder. Pursuant to the Assignment, BH transferred to Sigma all of its rights in the BH Convertible Bonds
and warrants. The Assignment had no impact on our assets or liabilities or our financial results.



At the annual general meeting of our shareholders
held on September 12, 2010, our shareholders resolved to afford certain of our major creditors with the opportunity to convert
the amounts owed to them into our ordinary shares, by means of a set off against the then total outstanding debt to such creditor,
at a price of $0.09 per ordinary share, subject to forgiveness of 60% of our total outstanding debt to such creditor. Our board
of directors was authorized to set all other terms of the Creditor Arrangement, including, inter alia, its timetable.



On November 3, 2010, we petitioned the court,
for the court approval of a Creditor Arrangement in accordance with Section 350 of the Israeli Companies Law. We requested that
the court apply the Creditor Arrangement approved by our shareholders to all of our creditors as of August 10, 2010, or the Determining
Date, and who were still creditors as of December 17, 2010 and who had submitted a claim of debt no later than January 6, 2011.
We requested that pursuant to the proposed arrangement all such creditors (whether secured, preferential (by statute) and unsecured)
shall be considered to have released us from our debt obligations towards them as of such date in exchange for the allotment to
all such creditors of our ordinary shares or warrants to purchase our ordinary shares (that are immediately exercisable in a cashless
transaction and with an expiration date of December 31, 2012) at a price of $0.09 per ordinary share, valued at 40% of our total
outstanding debt to our creditors and in consideration for which the creditors would forgive the remaining 60% of the outstanding
debt. In May 2011, our shareholders subsequently approved the inclusion of additional creditors to be included under the Creditor
Arrangement.



Although the Creditor
Arrangement is supported by a resolution of our shareholders and was presented at the meeting of our creditors, on July 18, 2011
the court decided not to approve our application, mainly due to an objection to the proposed arrangement which was filed by one
of our secured creditors, Special Situations Funds ("SSF"). On November 8, 2011, SSF sold, assigned and transferred to
Mr. Eliyahu Trabelsi all of its rights under the Convertible Bonds and warrants. In February 2012, our Board of Directors determined
to proceed with the Creditor Arrangement without the involvement of the court. On December 5, 2011 we received from the Execution
Office in Israel a foreclosure order in accordance with Section 44 to the Execution Law Records, vol. 1967, in respect of convertible
bonds held by Sigma, up to an amount of NIS 3,903,866 (approximately $1,022,000, based on the exchange rate between the U.S. dollar
and the NIS published by the Bank of Israel on December 31, 2011) in favor of a third party. We followed the order’s instructions
and recorded the said foreclosure. As of April 15, 2012, following the forgiveness or conversion of debt pursuant to the Creditor
Arrangement in the aggregate amount of $3,640,000 since December 31, 2010, additional debt of approximately $3,286,000 (computed
as of December 31, 2011) remains to be forgiven or converted pursuant thereto. However, the completion of the Creditor Arrangement
has been delayed, which we believe is, as a result of a dispute over the ownership of approximately $1,022,000 (computed as of
December 31, 2011) of our convertible bonds held by Sigma. If the Creditor Arrangement is not consummated, our ability to satisfy
our debt service obligations will depend, among other things, upon our future operating performance and
our ability to refinance indebtedness when necessary.



47







On March 30, 2011, we
entered into a financing agreement with Sigma that entitles us to refinance the short-term obligations under the Convertible Bonds
held by Sigma on a long-term basis. Pursuant to the agreement, and subject to certain conditions and covenants, Sigma postponed
all mature amounts, relating to principal and interest, as of December 31, 2010, to January 1, 2012. In addition, the agreement
required that interest amounts with respect to fiscal 2011 will become due during July 2011 and thereafter. As a consequence of
the financing agreement, as of December 31, 2010, our total outstanding debt to Sigma under the Convertible Bonds was $4,262,000,
of which $2,453,000 was presented on our balance sheet among convertible bonds (long-term balance) and $1,810,000 was presented
among long-term loan and others.



As of December 31, 2010,
we were in compliance with the covenants under the amended Convertible Bonds agreements with respect to bonds held by SSF.



As a part of the Creditor Arrangement process,
on August 4, 2011, Sigma agreed to convert $400,000 of the amounts owed to it into 4,444,444 of our ordinary shares (which number
was determined on June 30, 2011) and to forgive $600,000 of our outstanding debt to Sigma. The ordinary shares were issued on August
11, 2011.



On November 8, 2011,
SSF sold, assigned and transferred to Mr. Eliyahu Trabelsi all of their rights under the Convertible Bonds and warrants.



On December 31, 2011, as a part of the Creditor
Arrangement process, Sigma agreed to convert $722,250 of the amounts owed to them into 8,025,000 of our ordinary shares (which
were granted to a trustee, according to Sigma’s request) and to forgive $1,083,375 of our outstanding debt to Sigma. The
ordinary shares were issued to Sigma on April 2, 2012. On December 31, 2011, as a part of the Creditor Arrangement process, Mr.
Eliyahu Trabelsi agreed to convert $96,246 of the amounts owed to him into our 1,069,400 ordinary shares and to forgive $144,369
of our outstanding debt to him. The ordinary shares were issued on April 2, 2012.



During 2011, as a part
of the Creditor Arrangement, certain creditors agreed to convert $322,000 (the total aggregate amounts owed to them) into warrants
to purchase 1,081,871 of our ordinary shares and options to purchase 300,000 of our ordinary shares.



As of December 31, 2011
and the filing date of this Annual Report, we were not in compliance with the covenants under the amended Convertible Bonds. In
2011, we experienced an increase in financial expenses with respect to our Convertible Bonds caused by an increase in the interest
rate of the bonds and due to our breach of the covenants under the Convertible Bonds, as amended, which required us to incur additional
interest of 3% per month on unpaid amounts. The additional interest expenses amounted to $271,000 during the year ended December
31, 2011.



On December
31, 2006, we concluded the sale of our E-ID division to On-Track Innovations Ltd., or OTI (the "OTI Transaction") for
consideration which consisted of 2,827,200 restricted ordinary shares of OTI.



As a result of the OTI
Transaction, we recognized $10,536,000 as a capital gain on the sale of the E-ID Division in fiscal year 2006.



The capital gain was calculated based on
OTI’s share price on the closing date, less a discount due to the lock up restrictions of the shares (based on an independent
appraisal), the carrying value of the assets that were transferred to OTI and direct expenses (in an amount of $1,550,000) associated
with the sale.



The direct expenses included,
inter alia, the fair value of 212,040 shares out of the shares received by us from OTI that were transferred to consultants, as
a finder and legal fee, in connection with the transaction.



In connection with the completion of the
sale, during January 2007, a financial institution extended a $2,500,000 loan to us. In order to secure this loan we deposited
our OTI shares in favor of the financial institution. This loan was repaid in full during 2007.



During 2007 and 2008,
we sold 1,414,716 and 1,200,444 shares of OTI for a total consideration of $7,639,000 and $3,192,000, respectively.



48







In January 2010, Vuance, Inc., our wholly-owned
subsidiary, completed the sale of certain of its assets and certain of its liabilities related to our electronic access control
market as well as our Government Services Division, pursuant to certain agreements signed at that time. For additional information
on the sale of these businesses please see Item 4.A under "History of the Company".



On March 22, 2010,
we entered into a Subscription Agreement with a private investor, Mr. Yitzchak Babayov (the “Investor”), pursuant to
which at a March 23, 2010 closing we issued 1,538,461 ordinary shares of the Company (the “Transaction Shares”) in
consideration of a one-time cash payment in the amount of $200,000.



Concurrent with the issuance of the Transaction
Shares, we entered into a Warrant Agreement with the Investor, pursuant to which the Investor received a warrant (the “Warrant”)
to purchase up to 553,846 of our ordinary shares at an exercise price of $0.15 per share. The Warrant has a term of five (5)
years and contains standard adjustments for stock dividends, stock splits, reclassification and similar events.



During the period from January 1, 2011 to
December 31, 2011, our capital expenditures totaled approximately $23,000 (compared to $4,000 during 2010 and $100,000 during 2009),
of which approximately $23,000 (compared to $4,000 during 2010 and $7,000 during 2009) was expended at or upon our facilities in
Israel, and approximately $0 (compared to $0 during 2010 and $93,000 during 2009) was expended upon the various facilities of our
subsidiaries outside of Israel. During the first financial quarter of 2012, our capital expenditures totaled approximately $6,000.



| | C. | Research and Development, Patents and Licenses, etc.
| | -- | ----------------------------------------------------



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 of December 31, 2011 the number of employees in our research and development activities was 4. We focus on the new technology
of our wireless ID, and expect to maintain our current research and development efforts. We spent $0.5 million, $0.4 million and
$0.9 million on research and development in 2011, 2010 and 2009, respectively. These amounts were spent on the development or improvement
of our technologies and products, primarily in the area of wireless ID. We will continue to research and develop our wireless ID
technology and products. There can be no assurance that we can achieve any or all of our research and development goals.



| | D. | Trend Information
| | -- | -----------------



See – “Results of operations”
in Item 5.A for additional information.



Industry Trends



The increased demand for better security
systems and services has positively affected trends within the industry. Personnel and asset management are now leading security
concerns in commercial and governmental enterprises. This has created an increasing demand for secure, precise and cost-effective
means to positively identify, locate, track, monitor, count and protect people and objects, including inventory and vehicles. Our
wireless ID-enabled security solutions provide an optimal solution to these problems as our solutions reliably identify and track
the movement of people and objects in real time enabling our customers to detect unauthorized movement of vehicles, trace packages
and containers, control personnel and vehicle access to premises.



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,
as well as competitive pressures and the ability of our partners, distributors and system integrators to become effective in selling
and marketing our products, as well as other factors.



We expect to benefit from marketing programs
and leads generated by partnerships, distributions and systems integration 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 2011 revenues
was derived from our governmental projects and the remainder was derived from commercial customers. Historically, our revenues
have been concentrated in a few large orders and in a relatively small number of customers. We expect this trend to change and
we expect that future revenues will come from larger number of orders and customers.



49







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” in Item 3.D., the sections captioned “Results of Operations” in Item 5.A and the section
captioned “Liquidity and Capital Resources” in Item 5.B.



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 December 2006, we concluded the sale
of our E-ID Division to OTI. The sale allowed management to focus primarily on the market opportunities we identified for our former
CSMS and active RFID solutions. Following the events of September 11, 2001 and other major disasters it has become increasingly
important for agencies to track personnel, assets, and other objects on a local positioning basis. Prior to January 2010, we offered
our CSMS and RAPTOR solutions to fulfill critical homeland security requirements for public safety and emergency services agencies
and local counter-terrorism task forces. In January 2010, we completed the sale of our Electronic Access Control business and our
CSMS business to focus our sales and marketing efforts on our core competencies, active RFID technology and our PureRFid Suite.



As of the date
of this Annual Report, weexpect that our 2012 revenues will be primarily derived from:



| | · | e-ID and e-Gov projects; and
| | - | ----------------------------

| | · | Wireless ID products and solutions.
| | - | -----------------------------------



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.
For more information see the section captioned “Recent Developments” in Item 4.



| | 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, expenses, results of operations, liquidity, capital expenditures or capital resources.



| | F. | Tabular Disclosure of Contractual Obligations
| | -- | ---------------------------------------------



Contractual Obligations



The following table summarizes our material
contractual obligations and commitments as of December 31, 2011:



|Contractual Obligations             |  | Total |           |  | Less than 1 year |   |           | 1-3 years |  |   | 3-5 years |  |  | More than 5 years |       
|----------------------------------- |  | ----- | --------- |  | ---------------- | - | --------- | --------- |  | - | --------- |  |  | ----------------- | ------
|Long-term debt obligations          |  |       | —         |  |                  |   | —         |           |  |   | —         |  |  |                   | —     
|Capital (finance) lease obligations |  |       | —         |  |                  |   | —         |           |  |   | —         |  |  |                   | —     
|Operating lease obligations         |  | $     | 565,000   |  |                  | $ | 280,000   |           |  | $ | 269,000   |  |  | $                 | 16,000
|Purchase obligations                |  |       | —         |  |                  |   | —         |           |  |   | —         |  |  |                   | —     
|Convertible bonds*                  |  | $     | 2,975,000 |  |                  | $ | 2,975,000 |           |  |   | --        |  |  |                   | —     
|Total contractual cash obligations  |  | $     | 3,540,000 |  |                  | $ | 3,255,000 |           |  | $ | 269,000   |  |  | $                 | 16,000



Operating lease obligations represent commitments under several
lease agreements for our facilities and the facilities of certain subsidiaries. Purchase obligations represent purchase orders
to an account payable. Convertible bonds represent the amount due to the investors under the convertible bonds assuming there will
no conversion to shares, which is described in Item 18, Note 13 to the financial statements included in this Annual Report. Total
contractual cash obligations represent significant outstanding commitments for loans from banks, convertible bonds, purchase obligations
and lease agreements for facilities. We are not a party to any capital leases.



50







(*) As of December 31, 2011 and the filing date of this Annual
Report, we were not in compliance with the terms and conditions of our Convertible Bonds, as amended. See Item 5.B, “Liquidity
and Capital Resources,” regarding amendments to our agreements with the holders of the Convertible Bonds. Despite of the
contractual cash obligations related to our Convertible Bonds, if the Creditor Arrangement is consummated (see Item 4.A), 60% of
these obligations shall be forgiven and 40% of these obligations shall be converted into equity and thus, in such event no cash
outlay will be required with respect to this obligation.



ITEM 6.    Directors, Senior Management
and Employees.



| | A. | Directors and Senior Management
| | -- | -------------------------------



Board of Directors



We are managed by our Board of Directors.
Pursuant to our Articles of Association, the number of directors may be determined from time to time by the Board of Directors,
and unless otherwise determined, the number of directors comprising the Board of Directors will be between four and ten. Directors
are elected for a one year term ending at the following annual general meeting of shareholders, except for our external directors,
who are elected for three year terms in accordance with the Israeli Companies Law. However, if no directors are elected at an annual
meeting, then the persons who served as directors immediately prior to the annual meeting shall be deemed re-elected at the same
meeting. The General Meeting may resolve that a director be elected for a period longer than the time ending at the next annual
meeting but not longer than that ending at the third next annual meeting. 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                       
|--------------- |  | --- |  | -------------------------------
|Arie Trabelsi   |  | 54  |  | Director, Chairman of the Board
|Menachem Mirski |  | 56  |  | Director                       
|Avi Ayash       |  | 41  |  | External Director (1)          
|David Mimon     |  | 51  |  | Director                       
|Shlomo Benjamin |  | 61  |  | External Director (1)          



(1) “External Director” as defined
in the Israeli Companies Law.



Arie Trabelsi has served as a director since November
1, 2011 and as the Chairman of our Board of Directors since December 12, 2011. From September 15, 2010 until October 28, 2010 Mr.
Arie Trabelsi was an appointee, on behalf of Sigma Wave Ltd. ("Sigma"), to our board of directors. Mr. Trabelsi served
as our Chief Executive Officer, from October 28, 2010 to November 1, 2011. Mr. Trabelsi has over 28 years of experience in the
global wireless, internet and communication industries. Prior to joining us, Mr. Trabelsi led Sigma and Sigma Wave Inc., providers
of innovative internet and wireless technologies & solutions. Mr. Trabelsi is the sole director of Sigma. Mr. Trabelsi holds
Bsc in Electrical and Computer engineering from the Ben Gurion University, Israel and Msc in Electrical and Computer
engineering from Drexel University, USA. Mr. Trabelsi's wife, Mrs. Tsviya Trabelsi, is the sister of Mr. David Mimon.



Menachem Mirski has served as a director and as a member
of our audit committee since July 25, 2010. Mr. Mirski is the founder and a partner of Raz - El Ltd., a software and system development
company in Israel. He has more than 25 years of significant experience and expertise as a software developer and project manager
for embedded real time systems, including RF-based systems. Mr. Mirski holds a Bachelor of Science in Computing and Electrical
Engineering from Ben-Gurion University.



David Mimon has served as a director since July 25, 2010.
Mr. Mimon is an Israeli advocate and notary with extensive experience in providing legal representation and consulting services
to individuals and companies in various areas of law. He is the owner of a legal practice with offices in Netanya and Haifa, Israel.
Mr. Mimon holds a LLM from the University of Tel-Aviv. Mr. Mimon is the brother of Mrs. Tsviya Trabelsi, the wife of Mr. Arie Trabelsi.



Shlomo Benjamin has served as an external director and
as a member of our audit committee since September 17, 2009. Mr. Benjamin is a shareholder and managing director of 4BEST Consulting
and Management Ltd., a company engaged in financial consulting to companies and businesses. From 2004 to 2006, Mr. Benjamin was
CFO of Globus Group Ltd. From 2002 to 2003, Mr. Benjamin was CEO of H. Aloni Enterprises Ltd. From 1992 to 2002, Mr. Benjamin was
CFO and Deputy CEO of Ytong Industries Ltd. From 1987 to 1992, Mr. Benjamin was Finance and Administration Manager in the Azorim
group. From 1981 to 1987, Mr. Benjamin served in several executive positions at the Tadiran Group, including as Deputy CEO of T.F.L
Ltd. and Chief Accountant of Tadiran Communications Ltd. From 1977 to 1981, Mr. Benjamin was a “Senior” at Braude &
Co. accounting firm. Mr. Benjamin is an authorized accountant in Israel and holds a first degree in economics and accounting from
the Tel Aviv University.



51







Avi Ayash has served as an external director and as a
member of our audit committee since December 8, 2011. Mr. Ayash is the owner of Inbarim, a consulting firm for corporations and
employees in the area of actuarial compensation, pensions and insurance, and serves as a member of the board of directors of the
ROM fund, as an external director and as the chairman of its audit committee and a member of its investment committee. Mr Ayash
has more than 15 years of extensive experience in financial, pension and insurance consulting. Mr. Ayash holds a BA degree and
MA degree in Economics from The Hebrew University, a degree in Actuarial Studies from Haifa University and a pension consultant
license.



Executive
Officers and Key Employees



As of the date of this
Annual Report, our executive officers and certain key employees who are not also directors are:



|Name              |  | Age |  | Position                                               
|----------------- |  | --- |  | -------------------------------------------------------
|Doron Levy        |  | 54  |  | Chief Executive Officer                                
|Mickey Ben Harush |  | 35  |  | Chief Financial Officer                                
|Brenda Gebhardt   |  | 48  |  | President and Chief Operations Officer of PureRFid Inc.



Doron Levy, Chief Executive Officer. Mr. Levy joined
us in November 2011. Until February 2011, Mr. Levy served for over twenty years managing various international commercial operations
for the State of Israel. Mr. Levy has extensive knowledge of global business operations and management and has significant expertise
in our core technologies.



Brenda Gebhardt,PureRFid, Inc. - President and
Chief Operations Officer. With over 15 years of experience in the fire and security industry, Ms. Gehhardt has managed projects
at Vuance Inc., ADT and Cintas. She has experience in operations including the integration of RFID technologies and facility management
applications to control space and assets. Ms. Gehhardt holds a diploma in nursing.



Mickey Ben Harush, Chief Financial Officer. Prior to
joining us in 2010, Mr. Ben Harush served for four years as the Finance Controller of Elbit Vision Systems Ltd. (OTCBB:EVSNF.OB).
Mr. Ben Harush began his financial career at KPMG Israel in 2003, where he served as a Senior Auditor. Mr. Ben Harush holds a Bachelor
of Arts in Economics and Accounting from the Haifa University, Israel and a Master of Business Administration from the Tel
Aviv University, Israel and is a Certified Public Accountant in Israel.



| | B. | Compensation
| | -- | ------------



The aggregate amount of compensation paid
by us to our board members and executive officers (collectively, the “Named Executive Officers”) as a group for the
year ended December 31, 2011 was approximately $380,000. This sum includes amounts paid for salary and social benefits. In addition,
we have provided automobiles to our certain executive officers at our expense. During 2011, we issued an aggregate amount of options
to purchase up to 550,000 of our ordinary shares to current and former officers.



At the Special General Meeting of our shareholders,
held on May 12, 2011, our shareholders adopted the recommendations of our Audit Committee and Board of Directors to offer to our
then officers (with the exception of Mr. Arie Trabelsi) and non-external directors (with the exception of Mrs. Tsviya Trabelsi)
(the "Participants"), subject to certain terms and conditions, to join a temporary arrangement commencing April 1, 2011
and ending on September 30, 2012, pursuant to which all or part of the remuneration payable to them for such applicable period,
may be paid in fully vested options to purchase our ordinary shares in lieu of fees and/or salary amounts (as applicable). As of
the date of this Annual Report none of the participants has chosen to accept said offer.



As of the date of this Annual Report the
monthly fee of a director (other than our Chairman of the Board) is $1,500 and the monthly fee of an external director is approximately
$617 plus approximately $471 for every board or audit committee meeting. In December 2011, our audit committee and board of directors
approved an agreement with Mr. Arie Trabelsi for his services as our active Chairman of the Board. The agreement provides for a
monthly payment equal to 60% of our compensation costs, excluding any bonuses, for our Chief Executive Officer, a company car and
reimbursement of business expenses. The agreement is subject to the approval of our shareholders, including a majority of the shares
voted by shareholders other than Sigma or other shareholders that have a personal interest in the matter. These compensation terms
are substantially similar to those of our previous Chairman of the Board.



52







As of December 31, 2011, we had set aside
approximately $10,000 to provide pension, retirement or similar benefits for our certain executive officers.



Option/SAR Grants during the Year
Ended December 31, 2011



On August
9, 2011, we issued fully vested options to purchase up to 150,000 of our ordinary shares to Ron Peer, a former Chief Executive
Officer as part of his employment agreement. The options (the fair value of which was estimated to be $6,000 based upon the Black-Scholes
option pricing model) have an exercise price of $0.11 per share, and will expire five years from the date of grant. Also, 300,000
ordinary shares were issued as consideration to settle liability to the said former Chief Executive Officer.



On August
11, 2011, we issued fully vested options to purchase up to 300,000 of our ordinary shares to a former officer as part of the Creditor
Arrangement (see also Item 4.A). The options (the fair value of which was estimated to be $36,000, based upon the market price
of our shares on the date when the extinguishment was determined) have an exercise price of $0.00 and will expire on December 31,
2012.



On August
24, 2011, we issued options to purchase up to 100,000 of our ordinary shares to an officer. The options (the fair value of which
was estimated to be $5,000 based upon the Black-Scholes option pricing model) have an exercise price of $0.20, 40,000 of them vested
on January 1, 2012, and the remaining 60,000 will vest on January 1, 2013. The options have a term of ten years from the date of
grant.



As part
of the Creditor Arrangement (see also Item 4.A), certain former officers agreed to a partial forgiveness of the debts due to them,
in the aggregate amount of $245,000, and agreed to repayment of the remainder of the debt by the issuance by the Company to them
of warrants to purchase 1,083,071 of our ordinary shares, with an exercise price of $0.00, expiring on December 31, 2012.



Please
refer to the Section captioned “Share Option Plan” under Item 6.E below for a description of our Share Options Plan.



| | 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       |  | Date of Expiration of Current Term (if applicable)
|--------------- |  | ------------------------------ |  | ----------------------------- |  | --------------------------------------------------
|Arie Trabelsi   |  | Director Chairman of the Board |  | November 1, 2011 – present(*) |  | Next annual general meeting                       
|Avi Ayash       |  | External Director              |  | December 8, 2011 - present    |  | December 8, 2014                                  
|Shlomo Benjamin |  | External Director              |  | September 17, 2009 – present  |  | September 17, 2012                                
|David Mimon     |  | Director                       |  | July 25, 2010 – present       |  | Next annual general meeting                       
|Menachem Mirski |  | Director                       |  | July 25, 2010 – present       |  | Next annual general meeting                       



(*) On December 12, 2011,
Mrs. Tsviya Trablesi resigned from the Board of Directors.



Our Articles of Association
provide that the number of directors may be determined from time to time by the Board of Directors, and unless otherwise determined,
the number of directors comprising the Board of Directors will be between four and ten. The Board of Directors is presently comprised
of five members, two of whom were elected as external directors under the provisions of the Israeli Companies Law (discussed below).
Our Articles of Association provide further that the majority of the directors appointed to the Board of Directors will be independent
directors. Mr. Benjamin, Mr. Ayash and Mr. Mirski satisfy the applicable requirements for independence under our Articles of Association.



53







All directors hold office
until their successors are elected at the next annual general meeting of shareholders, except for our external directors Shlomo
Benjamin, who shall hold office until September 2012, and Mr. Ayash, who shall hold office until December 2014.



Under the Israeli Companies Law, companies
incorporated under the laws of Israel whose shares have been offered to the public in or outside of Israel are required to appoint
at least two individuals as external directors. External directors are required to possess professional qualifications as set out
in regulations promulgated under the Israeli Companies Law. Any individual who is eligible to be appointed as a director may be
appointed as an external director, provided that such person, such person’s relative, partner, employer or any entity under
the person’s control does not have at the date of appointment, or has not had during the two years preceding the date of
appointment, any affiliation with:



| | · | the company;
| | - | ------------

| | · | a controlling shareholder of the company or a relative thereof; or
| | - | ------------------------------------------------------------------

| | · | any entity controlled by the company or by its controlling shareholder on the date of the appointment or during the two years
preceding such date.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------



The term affiliation means any of:



| | · | an employment relationship;
| | - | ---------------------------

| | · | a business or professional relationship that is not negligible;
| | - | ---------------------------------------------------------------

| | · | control; and
| | - | ------------

| | · | service as an office holder.
| | - | ----------------------------



No person may serve as an external director
if the person’s position or other business creates or may create a conflict of interest with the person’s responsibilities
as an external director, or if it may adversely affect his ability to serve as a director. Until the lapse of two years from termination
of office, a company or its controlling shareholder may not employ or give any direct or indirect benefit to the former external
director. 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 the Israeli 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 expertise” and the other external directors are required to have “professional
skills,” as such terms are defined in regulations recently promulgated under the Israeli 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-half
of the shareholders who are not controlling shareholders or interested parties, who are present and voting, or that the non-controlling
shareholders and interested parties who vote against the election hold two percent or less of the voting power of the company.



Under
the Israeli Companies Law,the initial term of an external director
is three years, and such term may be extended for up to two additional three-year terms. In addition, the service of an external
director may be extended for additional terms of up to three years each, if both the audit committee and the board of directors
confirm that, in light of the expertise and contribution of the external director, the extension of such external director's term
would be in the interest of the company. Reelection of an external director may be effected through one of the following mechanisms:
(1) the board of directors proposed the reelection of the nominee and the election was approved by the shareholders by the majority
required to appoint external directors for their initial term; or (2) a shareholder holding 1% or more of the voting rights proposed
the reelection of the nominee, and the reelection is approved by a majority of the votes cast by the shareholders of the company,
excluding the votes of controlling shareholders and those who have a personal interest in the matter as a result of their relations
with the controlling shareholders, provided that the aggregate votes cast in favor of the reelection by such non-excluded shareholders
constitute more than 2% of the voting rights in the company. External directors may be removed only in a general meeting, by the
same percentage of shareholders as is required for their election, or by a court, and in both cases only if the external directors
cease to meet the statutory qualifications for their appointment or if they violate their duty of loyalty to us. Each committee
of a company’s board of directors that is authorized to exercise powers of the board of directors is required to include
at least one external director, and all external directors must be members of the company’s audit committee.



54







Audit Committee



The Israeli Companies
Law requires public companies to appoint an audit committee. The responsibilities of the audit committee include identifying flaws
in the management of the company’s business and approving related party transactions as required by law, approving the terms
of compensation of company officers, classifying company transactions as extraordinary transactions or non-extraordinary transactions
and as material or non-material actions in which an officer has an interest (which will have the effect of determining the kind
of corporate approvals required for such transaction), assessing the proper function of the company’s internal audit regime
and determining whether its internal auditor has the requisite tools and resources required to perform his role, reviewing the
scope of work of the company’s independent accountants and their fees, and implementing a whistleblower policy with respect
to employee complaints of business irregularities. An audit committee must be comprised of at least three directors, including
all of the external directors, and a majority of the members of the audit committee must be independent or external directors.



The Israeli Companies
Law 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, the controlling shareholder or any relative of the controlling shareholder of such
company and any director who derives his salary primarily from a controlling shareholder may not be members of the audit committee
of the company.



Mr. Benjamin,
Mr. Ayash and Mr. Mirski are the members of the Audit Committee.



ManagementEmployment
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, 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.



Internal Auditor



Under the Israeli Companies Law, the Board
of Directors must appoint an internal auditor, proposed by the Audit Committee. The role of the internal auditor is to examine,
among other matters, whether the company’s activities comply with the law and orderly business procedure. Under the Israeli
Companies Law, the internal auditor may not be an interested party or office holder, or a relative of any interested party or office
holder, and may not be a member of the company’s independent accounting firm, or its representative. On January 5, 2012 our
Board of Directors appointed Shmuel Naiberg, who is a partner at Shiff Hazenfratz & Co., as our internal auditor.



| | D. | Employees
| | -- | ---------



As of December 31,
2011, 2010 and 2009, we had 14, 17 and 37 full-time employees, respectively (not including service providers). The following table
describes our employees and the employees of our subsidiaries by department.



|                                      |  | Dec. 31, 2011 |    |  | Dec. 31, 2010 |  |    | Dec. 31, 2009 | 
|------------------------------------- |  | ------------- | -- |  | ------------- |  | -- | ------------- | 
|                                      |  |               |    |  |               |  |    |               | 
|Research, Development & Manufacturing |  |               | 7  |  |               |  | 9  |               | 
|Marketing and Sales                   |  |               | 2  |  |               |  | 3  |               | 
|Administration                        |  |               | 5  |  |               |  | 5  |               | 
|                                      |  |               |    |  |               |  |    |               | 
|Total                                 |  |               | 14 |  |               |  | 17 |               | 



55







Over the past three years, the number of
our employees by geographic area was as follows:



|              |  | Dec. 31, 2011 |    |  | Dec. 31, 2010 |  |    | Dec. 31, 2009 | 
|------------- |  | ------------- | -- |  | ------------- |  | -- | ------------- | 
|              |  |               |    |  |               |  |    |               | 
|Israel        |  |               | 10 |  |               |  | 11 |               | 
|United states |  |               | 4  |  |               |  | 6  |               | 
|Total         |  |               | 14 |  |               |  | 17 |               | 



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.



Vuance’s
Israeli employees are not part of a collective bargaining agreement and
none of them are represented by labor unions. However, in Israel we are subject to certain labor statutes and national labor court
precedent rulings, as well as to certain provisions of collective bargaining agreements between the Histadrut, which is
the General Federation of Labor in Israel, and the Coordinating Bureau of Economic Organizations, including the Industrialists’
Association. These provisions of collective bargaining agreements are applicable to our employees by virtue of expansion orders
issued in accordance with relevant labor laws by the Israeli Ministry of Labor and Welfare and which apply such agreement provisions
to our employees even though they are not directly part of a union that has signed a collective bargaining agreement.



The
labor statutes and labor court rulings that apply to our employees principally concern the minimum wage laws , procedures for dismissing
employees, determination of severance pay, leaves of absence (such as annual vacation or maternity leave), sick pay and other conditions
for employment. The expansion orders which apply to our employees principally concern the requirement for mandatory pension schemes,
transportation allowance, annual recreation allowance, the lengths of the workday and workweek, and periodic automatic adjustment
of wages relative to increases in the Consumer Price Index in Israel. We provide our employees with benefits and working conditions
that comply with the required minimums. Israeli employees and employers
are also required to pay pre-determined sums which include a contribution to national health insurance to the Israel National Insurance
Institute, which provides a range of social security benefits.



Generally, all nonexempt adult male citizens
and permanent residents of Israel, under the age of 40, or older for reserves officers or citizens with certain occupations, as
well as certain female 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. 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.



Most 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 we have never experienced a general strike or work
stoppage.



| | E. | Share Ownership
| | -- | ---------------



The
following table sets forth the ordinary shares beneficially owned by each of our directors who beneficially owned more than 1%
of our issued ordinary shares as of April 15, 2012. None of our officers beneficially owned more than 1% of our issued ordinary
shares as of that date.As of April 15, 2012, we had 21,129,672 ordinary shares outstanding.



|Name                                                             |  | Ordinary Shares beneficially held |     |  | % of Outstanding Ordinary Shares as of April 15, 2012 |   |  | Number of outstanding convertible securities |     |  | Exercise price |  | Expiration date                                                                                                                             
|---------------------------------------------------------------- |  | --------------------------------- | --- |  | ----------------------------------------------------- | - |  | -------------------------------------------- | --- |  | -------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Arie Trabelsi (1)                                                |  | 9,128,995                         | (2) |  | 41.81                                                 | % |  | 705,114                                      |     |  | 3.00           |  | Convertible Bond: No later than repayment of the debt under the Sigma Convertible Bond                                                      
|Menachem Mirski                                                  |  | 692,660                           | (3) |  | 3.28                                                  | % |  | -                                            |     |  | -              |  | -                                                                                                                                           
|Directors and Named Executive Officers as a Group (8 persons)(4) |  | 9,865,155                         |     |  | 45.09                                                 | % |  | 748,614                                      | (3) |  | 0.20 – 4.64    |  | Options: December 2017 – August 2021.
        Convertible Bond: no later than repayment of the debt
        under the Sigma Convertible Bond



56







(1) Consists of securities held by Sigma Wave Ltd., or Sigma.
Sigma is controlled by family members of Mr. Arie Trabelsi, our Chairman of the Board. Mr. Trabelsi is the sole director of Sigma.
As such, Mr. Trabelsi may be deemed to beneficially own the shares held by Sigma.



(2) Includes (i) a convertible bond held by Sigma in the principal
amount of approximately $2,115,000, which may be converted into 705,114 ordinary shares as of April 15, 2012, (ii) 398,881 ordinary
shares held by Sigma, and (iii) 8,025,000 ordinary shares held by Mr. David Mimon as trustee for Sigma. Mr. Mimon is one of our
directors and the brother-in-law of Mr. Arie Trabelsi. Mr. Arie Trabelsi is the brother of Mr. Eliyahu Trabelsi and disclaims beneficial
ownership of Mr. Eliyahu Trabelsi’s shares. If Sigma participates in the Creditor Arrangement, its convertible bond would
be converted into a significant number of our ordinary shares.



(3) Consist of 692,660 ordinary shares held by Homeland Security
Capital Corporation (“HSCC”), which granted an irrevocable power of attorney to our Chairman of the Board to exercise
all voting rights relating to our ordinary shares until the sale or transfer of such shares by HSCC to an unaffiliated third party
in an arm’s-length transaction, which, according to our Board resolution from March 29, 2011, were transferred to Mr. Menachem
Mirski.



(4) Includes options to purchase 43,500 ordinary shares which
are currently exercisable and convertible bonds which may be converted into 705,114 ordinary shares.



(5) See notes 1 and 2 for the beneficial ownership of Mr. Arie
Trabelsi, our Chairman of the Board and Note 3 for the beneficial ownership of Mr. Menachem Mirski,
our director. Each of the directors and executive officers not separately identified in the above
table beneficially owns less than 1% of our outstanding ordinary shares (including options held by each such party, and which areexercisable) and has therefore not been separately disclosed.



All of our ordinary shares have identical voting rights.



Share Option Plans



In 2003, we adopted the Vuance Ltd. 2003
Israeli Share Option Plan, a new stock option plan under which we now issue stock options (the “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. The Option Plan is subject to the provisions of the Israeli Companies Law, administered
by the Audit Committee, and is designed: (i) to comply with Section 102 of the Israeli Tax Ordinance or any provision which may
amend or replace it and the rules promulgated thereunder and to enable us and grantees thereunder to benefit from Section 102 of
the Israeli 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 Israeli Tax Ordinance. Options granted under the Option Plan will become exercisable ratably over
a period of three to five years or immediately in certain circumstances, 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. As of December 31, 2011, options exercisable for 2,163,857 ordinary shares were outstanding.



As
a result of an amendment to Section 102 of the IsraeliTax 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
issued 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%. However, as a result of this election, we will no longer be allowed to claim as an expense
for tax purposes the amounts credited to such employees as a benefit when the related capital gains tax is payable by them, as
we had previously been entitled to do under Section 102.



On June 27, 2007, our
Compensation Committee and the board of directors approved a new option plan under which we may grant stock options to our
U.S. employees and our subsidiaries. Under this new option plan, we may grant both qualified (for preferential tax treatment)
and non-qualified stock options. On August 15, 2007, the new option plan was approved by our shareholders at the general shareholders
meeting.



57







On August
9, 2011, we issued fully vested options to purchase up to 150,000 of our ordinary shares to Ron Peer, a former Chief Executive
Officer as part of his employment agreement. The options (the fair value of which was estimated to be $6,000 based upon the Black-Scholes
option pricing model) have an exercise price of $0.11 per share, and will expire five years from the date of grant. Also, 300,000
ordinary shares were issued to Mr. Peer as consideration to settle liability to the said former Chief Executive Officer.



On August 11, 2011, we issued fully
vested options to purchase up to 300,000 of our ordinary shares to a former officer as part of the Creditor Arrangement (see also
Item 4.A). The options (the fair market value of which was estimated to be $36,000, based upon the market price of our shares
onthe date when the extinguishmentwas determined) have an exercise price of $0.00 and will
expire on December 31, 2012.



On August 24, 2011,
we issued options to purchase up to 385,000 of our ordinary shares to our certain employees.
The options (the fair value of which was estimated to be $18,000 based upon the Black-Scholes option pricing model) have an exercise
price of $0.20, 155,000 of them vested on January 1, 2012, and the remaining 230,000 will vest on January 1, 2013. The options
have a term of ten years from the date of grant.



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



|                                 |  | Year ended December 31 |          
|-------------------------------- |  | ---------------------- | ---------
|                                 |  | 2011                   |          
|                                 |  | Number of options      |          
|Outstanding at beginning of year |  |                        | 1,404,219
|Granted                          |  |                        | 835,000  
|Exercised                        |  |                        | (10,007  
|Canceled and forfeited           |  |                        | (65,355  
|Outstanding at end of year       |  |                        | 2,163,857
|Exercisable at end of year       |  |                        | 1,778,857



The weighted average fair value of options granted
during the reported periods (excluding options exercisable for 300,000 of our ordinary shares granted in 2011 as part of the extinguishment
of liabilities) was $0.05 and $0.43, per option, for the years ended December 31, 2011, 2009, respectively. No options were granted
in 2010.



In 2011, the fair value
of these options was estimated on the date of grant using theBlack-Scholesoption pricing model.
In 2009, the fair value of 125,142 options was calculated using theBlack-Scholes option pricing
model. For all other options granted in 2009, the fair value of the options issued (as a partial payment of payroll liability)
was based on the fair value of the shares on the date of the related payroll, which equals the related payroll liability, since
the exercise price was close to nil. The following weighted average assumptions were used for the 2011 and 2009 grants: risk-free
rate of 0.76% and 0.75%, respectively, dividend yield of 0%, expected volatility factor of 176.54% and 193.27%, respectively and
expected term of 4.64 and 2.08 years, respectively.



The expected volatility was based on the historical
volatility of our stock. The expected term was based on the historical experience and based on management estimate.



We recognized compensation expenses related to share-based
employee compensation awards of $10,000, $14,000 and $483,000 for the years ended December 31, 2011, 2010 and 2009, respectively.



58







The following
table summarizes the allocation of the stock-based compensation charge in thousands of US dollars:



|                                    |  | Year ended December 31, |   
|----------------------------------- |  | ----------------------- | --
|                                    |  | 2011                    |   
|                                    |  |                         |   
|Cost of revenues                    |  | $                       | 2 
|Research and development expenses   |  |                         | 5 
|Selling and marketing expenses      |  |                         | - 
|General and administrative expenses |  |                         | 3 
|                                    |  |                         |   
|                                    |  | $                       | 10



The options outstanding
and exercisable as of December 31, 2011, have been separated into ranges of exercise prices as follows:



|Range of exercise price |               | Options outstanding  as of December 31,
2011 |           |           | Weighted
average remaining contractual life
(years) |  |  | Weighted
average exercise
price |  |   | Aggregate
intrinsic
value |       |  | Options exercisable  as of December
31, 2011 |   |        | Weighted average exercise
price |  |           | Aggregate intrinsic value | 
|----------------------- | ------------- | -------------------------------------------- | --------- | --------- | --------------------------------------------------- |  |  | ------------------------------- |  | - | ------------------------- | ----- |  | -------------------------------------------- | - | ------ | ------------------------------- |  | --------- | ------------------------- | 
|                        |               |                                              |           |           |                                                     |  |  |                                 |  |   |                           |       |  |                                              |   |        |                                 |  |           |                           | 
|$                       | 0.00 - $ 0.20 |                                              |           | 1,520,464 |                                                     |  |  | 6.46                            |  |   |                           | 0.07  |  |                                              | $ | 30,000 |                                 |  |           | 1,135,464                 | 
|$                       | 1.10 - $ 1.88 |                                              |           | 449,817   |                                                     |  |  | 2.89                            |  |   |                           | 1.29  |  |                                              |   | -      |                                 |  |           | 449,817                   | 
|$                       | 2.47 - $ 3.38 |                                              |           | 31,076    |                                                     |  |  | 1.99                            |  |   |                           | 2.99  |  |                                              |   | -      |                                 |  |           | 31,076                    | 
|$                       | 4.12 - $ 4.64 |                                              |           | 79,900    |                                                     |  |  | 5.07                            |  |   |                           | 4.31  |  |                                              |   | -      |                                 |  |           | 79,900                    | 
|$                       | 5.00 - $ 5.24 |                                              |           | 65,600    |                                                     |  |  | 2.99                            |  |   |                           | 5.07  |  |                                              |   | -      |                                 |  |           | 65,600                    | 
|$                       | 14.82         |                                              |           | 17,000    |                                                     |  |  | 2.85                            |  |   |                           | 14.82 |  |                                              |   | -      |                                 |  |           | 17,000                    | 
|                        |               |                                              |           |           |                                                     |  |  |                                 |  |   |                           |       |  |                                              |   |        |                                 |  |           |                           | 
|                        |               |                                              | 2,163,857 |           |                                                     |  |  |                                 |  | $ | 0.79                      |       |  |                                              |   |        |                                 |  | 1,778,857 |                           | 



The aggregate
intrinsic value of the above table represents the total intrinsic value, based on our stock price of $0.09 as of December 31, 2011,
less the weighted average exercise price per range. This represents the potential amount received by the option holders had all
option holders exercised their options as of that date.



The total intrinsic
value of options exercised during the years ended December 31, 2011, 2010 and 2009 was $1,000, $1,000 and $36,000, respectively,
based on our average stock price of $0.10, $0.14 and $0.4, during the years ended on those dates respectively.



A summary of
the status of our non-vested options granted to employees as of December 31, 2011 and changes during the year ended December
31, 2011 is presented below:



|                                           |  | Options |         |  | Weighted– average grant- date fair value |  
|------------------------------------------ |  | ------- | ------- |  | ---------------------------------------- | -
|                                           |  |         |         |  |                                          |  
|Non-vested at January 1, 2011              |  |         | -       |  |                                          |  
|Granted                                    |  |         | 385,000 |  |                                          | $
|Vested (including cancelled and exercised) |  |         | -       |  |                                          |  
|Forfeited                                  |  |         | -       |  |                                          |  
|Non-vested at December 31, 2011            |  |         | 385,000 |  |                                          | $



As of December 31, 2011,
there was $8,000 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the
stock option plans.



ITEM 7.    Major
Shareholders and Related Party Transactions.



| | A. | Major shareholders
| | -- | ------------------



The following table lists
the beneficial ownership of our securities as of April 15, 2012 by each person known by us to be the beneficial owner of 5% or
more of the outstanding shares of any class of our securities. As of April 15, 2012, 21,129,672 of our ordinary shares were outstanding.



59







Beneficial ownership is determined in accordance
with the rules of the SEC and generally includes voting or investment power with respect to securities. All information with respect
to the beneficial ownership of any principal shareholder has been furnished by such shareholder or is based on the most recent
Schedule 13D or 13G filed with the SEC. 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 convertible
bonds, options and warrants exercisable within 60 days of April 15, 2012, and deemed to be outstanding and beneficially owned by
the person holding those bonds, 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 | 
|------------------------ |  | ----------------------------------- | --------- |  | -------------------------------- | 
|                         |  |                                     |           |  |                                  | 
|Sigma Wave Ltd. (1)      |  |                                     | 9,128,995 |  |                                  | 
|Yitzchak Babayov (2)     |  |                                     | 1,773,426 |  |                                  | 
|Eliyahu Trabelsi(3)      |  |                                     | 1,726,967 |  |                                  | 
|Eli Rozen (4)            |  |                                     | 1,458,919 |  |                                  | 
|Ori Mimon                |  |                                     | 1,111,111 |  |                                  | 
|Aviad Kamara             |  |                                     | 1,111,111 |  |                                  | 





---

| | (1) | Sigma is controlled by family members of Mr. Arie Trabelsi, our Chairman of the Board. Mr. Trabelsi is the sole director of
Sigma. As such, Mr. Trabelsi may be deemed to beneficially own the shares held by Sigma. Includes (i) a convertible bond held by
Sigma in the principal amount of approximately $2,115,000, which may be converted into 705,114 ordinary shares as of April 15,
2012, (ii) 398,881 ordinary shares held by Sigma, and (iii) 8,025,000 ordinary shares held by Mr. David Mimon as trustee for Sigma.
Mr. Mimon is one of our directors and the brother-in-law of Mr. Arie Trabelsi. Mr. Arie Trabelsi is the brother of Mr. Eliyahu
Trabelsi and disclaims beneficial ownership of Mr. Eliyahu Trabelsi’s shares. If Sigma participates in the Creditor Arrangement,
its convertible bond would be converted into a significant number of our ordinary shares.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes (a) 1,139,580 ordinary shares held by Yitzchak Babayov, and (b) warrants to purchase 633,846
ordinary shares, which are currently exercisable or exercisable within 60 days of April 15, 2012.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Includes (a) 1,591,622 ordinary shares, and (b) a convertible bond which may be converted into 135,345
ordinary shares, which is immediately exercisable/convertible or exercisable within 60 days of April 15, 2012. Mr. Eliyahu Trabelsi
is the brother of Mr. Arie Trabelsi and is disclaiming beneficial ownership of Mr. Arie Trabelsi’s shares. If Mr. Eliyahu
Trabelsi participates in the Creditor Arrangement, his convertible bond would be converted into a significant number of our ordinary
shares.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Includes (a) 412,312 shares held directly by Eli Rozen, (b) options to purchase 553,273 ordinary shares
which are currently exercisable or exercisable within 60 days of April 15, 2012, of which 376,462 options to purchase ordinary
shares are held by Finel Architecture & Engineering Ltd., a wholly owned company of Mr. Rozen, and (c) warrants to purchase
493,334 ordinary shares which are currently exercisable or exercisable within 60 days of April 15, 2012.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On April 2, 2012, we issued 8,025,000 ordinary
shares to Sigma’s trustee, Mr. David Mimon, and 1,069,400 ordinary shares issued to Mr. Eliyahu Trabelsi as part of the Creditor
Arrangement (see Items 4A and 5B). On August 11, 2011 we issued 4,444,444 ordinary shares to Sigma as part of the Creditor Arrangement
(see Items 4A and 5B).



The conversion of our debt into ordinary
shares pursuant to the Creditor Arrangement resulted in the dilution of the ownership percentage of most of our holders of ordinary
shares. To our knowledge, this dilution resulted in Messrs. Avi Landman, Jack Hassan and HSCC no longer beneficially holding 5%
or more of our outstanding ordinary shares.



As
of April 15, 2012, based on the information available to us, we had in the United States approximately 23 registered holders of
our ordinary shares, representing approximately 64% of our total ordinary shares registered at that date.



To the best of our knowledge based on the
information currently available to us, there are no existing arrangements that may at a future date result in a change of control
of Vuance.



60









| | 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,
we entered into a consulting agreement with a company owned by a former Chairman of our Board of Directors who was one of our
co-founders. In consideration of these consulting services, we have undertaken to pay $10,500 per month plus motor vehicle expenses.
In addition, we were required to pay $1,500 per month as a director’s fee. (Regarding the partial payment in options during
2009 and regarding debt extinguishment during 2010, see below)



On July 8, 2010, the
Board of Directors accepted the resignation from the board of directors of the Chairman of the Board of Directors, effective July
25, 2010. We recorded during 2010 an expense of $75,000 related to the former consulting agreement. In addition, on July 8, 2010,
we entered into a Services Agreement with the former Chairman of the Board of Directors and as of that date one of our major shareholders
(the “Service Provider”), effective immediately, pursuant to which the parties terminated the former consulting agreement
and agreed that the Service Provider will provide us with ongoing consulting services as may be reasonably required by us, for
a consideration of 2% of our gross receipts from a major customer and reimbursement of reasonable costs and expenses incurred
by the Service Provider.



During 2011 and 2010,
we recorded an expense of $130,000 and $83,000, respectively, in accordance with the above noted Services Agreement.



On October 1, 2001,
we entered into a consulting agreement with a company owned by a former member of our Board of Directors, who was also one of
our co-founders and a principal shareholder. On January 13 2005, the General Shareholders Meeting approved the following amendments
to the consulting agreement:



| | · | As
                                                                                                     of the date of the approval
                                                                                                     of the General Shareholders
                                                                                                     Meeting, the consideration
                                                                                                     shall be to an amount of
                                                                                                     $7,000 per month.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Upon
                                                                                                     the termination of the car
                                                                                                     lease agreement, to increase
                                                                                                     the car lease, to a price
                                                                                                     of up to NIS 4,200 (approximately
                                                                                                     $ 1,100 as of December 31,
                                                                                                     2011), (excluding tax) per
                                                                                                     month.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition, we were
required to pay $1,500 per month as a director’s fee. (Regarding the partial payment in options during 2009 and regarding
debt extinguishment during 2010 see below)



On July 8, 2010, the Board of Directors
accepted the resignation from the board of directors of the member of our Board of Directors, effective immediately. We recorded
during 2010 an expense of $53,000 related to the former consulting agreement. In addition, on July 8, 2010, we entered into a
Services Agreement with the former member of the Board of Directors and as of that date one of our major shareholders (the “Service
Provider”), effective immediately, pursuant to which the parties terminated the former consulting agreement and agreed that
the Service Provider will provide us with management services with respect to our certain project for a consideration of (i) a
monthly fee of $3,000, (ii) reimbursement of reasonable costs and expenses incurred by the Service Provider, and (iii) we will
provide the Service Provider with a cellular phone and an automobile. We shall also grant the Service Provider options to purchase
up to 50,000 of our ordinary shares according to terms to be determined by the Board of Directors, which terms have not been yet
determined by the date of filing of this Annual Report.



During 2011 and 2010, we recorded an expense
of $63,000 and $38,000, respectively, in accordance with the above noted Services Agreement.



On October 1, 2001,
we entered into a consulting agreement with a company owned by one of our co-founders. In consideration for these services, we
were required to pay $4,600 per month plus motor vehicle expenses. (Regarding the partial payment in options during 2009 and regarding
debt extinguishment during 2010 see below). We recorded during 2010 an expense of $37,000 related to the former consulting agreement.
On July 8, 2010, we entered into a Services Agreement with our co-founder and as of that date one of our major shareholders (the
“Service Provider”), effective immediately, pursuant to which the parties terminated the former consulting agreement
and agreed that the Service Provider will provide us with ongoing consulting services as may be reasonably required by us for
a consideration of a monthly fee of $3,000 and reimbursement of reasonable costs and expenses incurred by the Service Provider
in connection with the services. We shall also grant the Service Provider options to purchase up to 100,000 of our ordinary shares
according to terms that will be determined by the Board of Directors, which terms have not been yet determined by the date of
filing of this Annual Report.



61







During 2011 and 2010, we recorded an expense
of $39,000 and $21,000, respectively, in accordance with the above noted Services Agreement.



On December 21, 2008,
the Special General Shareholders Meeting approved that as part of a cost cutting plan, all of our non-external directors will
join a temporary arrangement pursuant to which the remuneration payable to them shall be paid in fully vested options to purchase
our shares instead of in cash, effective October 1, 2008, for a minimum period of three months, with an option to us to extend
it from time to time for additional consecutive periods of up to twelve (12) months in the aggregate.



During the year 2009,
according to the board resolution on October 27, 2008 and the Special General Meeting dated December 21, 2008, we granted to (a)
our Chairman of the Board of Directors, (b) a member of our Board of Directors who is also one of our co-founders, (c) one of
the co-founders, and (d) another member of our Board of Directors options to purchase up to 256,456, 179,966, 126,944 and 42,121
shares, respectively. The options have an exercise price of 0.0582235 NIS per share, vesting immediately, and will expire after
ten years. The options were granted as apartial payment for certain liabilities with respect
to the terms of their appointment with us.



As part of our debts
extinguishments plan (see also Note 1d to the financial reports) and in accordance with their Services Agreement, the abovementioned
Service Providers agreed to a partial forgiveness of the debts due to them under the former consulting agreements accrued from
October 1, 2009 until July 8, 2010 which total amount was $245,000 and agreed to repayment in 1,083,071 warrants to purchase our
ordinary shares as consideration for the entire debts due. The fair value of the warrants was estimated as $130,000. The difference
between the carrying amount of the amounts due and the fair value of the warrants was recognized as a capital gain.



On July 25, 2010, our
Board of directors elected Mrs. Tsviya Trabelsi to serve as the Chairman of the Board of Directors. Mrs. Trabelsi is a controlling
shareholder of Sigma, which is our controlling shareholder and the major holder of a principal amount of convertible bonds; and
is also the wife of our current Chairman of the Board and the sister of Mr. David Mimon, one of our directors. On May 12, 2011,
the special general meeting approved the Service Agreement of Mrs. Trabelsi whereby, her monthly fee would be calculated at 60%
of our chief executive officer’s monthly cost (approximately $8,000). In addition to the above consideration, we agreed
to bear all reasonable costs and expenses incurred by Mrs. Trabelsi in connection with her services and provide her with an automobile.
On December 12, 2011, Mrs. Trabelsi resigned from the board of directors and our board of directors approved the appointment
of her husband, Mr. Arie Trabelsi, as its new Chairman, effective December 12, 2011. Mr. Trabelsi served as our chief executive
officer until November 1, 2011, and has served as a member of our board of directors since November 1, 2011. Mr. Arie Trabelsi
is a director at Sigma, which is our controlling shareholder and the major holder of a principal amount of Convertible Bonds (see
Note 12 to the financial reports), and is the brother of Mr. Eliyahu Trabelsi, who holds the other Convertible Bonds and is our
shareholder. Following the recommendation of our Audit Committee, our Board of Directors approved the compensation terms of Mr.
Arie Trabelsi, which will be substantially the same as those of Mrs. Trabelsi. These compensation terms are subject to the approval
of our shareholders, which we expect to request that they approve at our next general meeting of shareholders.



As of December 31, 2011,
we accrued $279,000 as expenses arising from related party transactions providing consulting services.



As of December 31, 2011,
we accrued $135,000 as other liability arising from a short term loan that we received from Mrs. Trabelsi. $90,000 of this loan
was repaid during January 2012.



On April 29, 2012, our
board of directors approved the recording of a floating charge on all of our assets in favor of Mrs. Tsviya Trabelsi and Mr. Arie
Trabelsi, unlimited in amount, in order to secure personal guarantees granted by them in favor of us, such as to a bank (see Item
4.A. under the caption “Recent Developments”) and in order to secure short-term loans that are given by them from
time to time to us.



Regarding transactions
with a convertible bond holder, Sigma, see Items 4A and 5B



| | C. | Interests of Experts and Counsel
| | -- | --------------------------------



Not applicable.



62







ITEM 8.    Financial Information.



| | A. | Consolidated Statements and Other Financial Information
| | -- | -------------------------------------------------------



See Item 18.



Export Sales



Sales in Israel during each of the years
2011, 2010 and 2009 was $80,000, $83,000 and $72,000, respectively. Export sales during each of the years 2011, 2010 and 2009
was $7,842,000 (99% of the total sales volume), $7,306,000 (99% of the total sales volume) and $9,232,000 (99% of the total sales
volume), respectively.



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 cannot 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 or cash flows for any quarterly or annual
period.



(A) At the annual general meeting of our
shareholders held on September 12, 2010, our shareholders resolved to afford certain of our major creditors with the opportunity
to convert the amounts owed to them into our ordinary shares, by means of a set off against the then total outstanding debt to
such creditor, at a price of $0.09 per ordinary share, subject to forgiveness of 60% of our total outstanding debt to such creditor.
Our board of directors was authorized to set all other terms of the Creditor Arrangement, including, inter alia, its timetable.



On November 3, 2010, we petitioned the
court, for the court approval of a Creditor Arrangement in accordance with Section 350 of the Israeli Companies Law. We requested
that the court apply the Creditor Arrangement approved by our shareholders to all of our creditors as of August 10, 2010, or the
Determining Date, and who were still creditors as of December 17, 2010 and who had submitted a claim of debt no later than January
6, 2011. We requested that pursuant to the proposed arrangement all such creditors (whether secured, preferential (by statute)
and unsecured) shall be considered to have released us from our debt obligations towards them as of such date in exchange for
the allotment to all such creditors of our ordinary shares or warrants to purchase our ordinary shares (that are immediately exercisable
in a cashless transaction and with an expiration date of December 31, 2012) at a price of $0.09 per ordinary share, valued at
40% of our total outstanding debt to our creditors and in consideration for which the creditors would forgive the remaining 60%
of the outstanding debt. In May 2011, our shareholders subsequently approved the inclusion of additional creditors to be included
under the Creditor Arrangement.



Although the Creditor Arrangement is supported
by a resolution of our shareholders and was presented at the meeting of our creditors, on July 18, 2011 the court decided not
to approve our application, mainly due to an objection to the proposed arrangement which was filed by one of our secured creditors,
Special Situations Funds ("SSF"). On November 8, 2011, SSF sold, assigned and transferred to Mr. Eliyahu Trabelsi all
of its rights under the Convertible Bonds and warrants. For more information on the Convertible Bonds see Item 5 – Liquidity
and Capital Resources. In February 2012, our Board of Directors determined to proceed with the Creditor Arrangement without
the involvement of the court. On December 5, 2011 we received from the Execution Office in Israel a foreclosure order in accordance
with Section 44 to the Execution Law Records, vol. 1967, in respect of convertible bonds held by Sigma, up to an amount of NIS
3,903,866 (approximately $1,022,000, based on the exchange rate between the U.S. dollar and the NIS published by the Bank of Israel
on December 31, 2011) in favor of a third party. We followed the order’s instructions and recorded the said foreclosure.
As of April 15, 2012, following the forgiveness or conversion of debt pursuant to the Creditor Arrangement in the aggregate amount
of $3,640,000 since December 31, 2010, additional debt of approximately $3,286,000 (computed as of December 31, 2011) remains
to be forgiven or converted pursuant thereto. However, the completion of the Creditor Arrangement has been delayed, which we believe
is, as a result of a dispute over the ownership of approximately $1,022,000 (computed as of December 31, 2011) of our convertible
bonds held by Sigma. There is no certainty that the Creditor Arrangement will be completed in a timely manner or at all.



63







For more information on the Creditor
Arrangement please see Item 4.A "History of the Company" under "Recent Developments".



(B) In April 2004, the Department for Resources
Supply of the Ministry of Ukraine (the “Department”) filed with the International Commercial Arbitration Court at
the Ukrainian Chamber of Commerce and Industry (the “Arbitration Court”) a claim to declare Contract No. 10/82 (the
“Contract”), dated April 9, 2002, between us and the Ministry of Internal Affairs of Ukraine (the “Ministry”)
void due to defects in the proceedings by which we were awarded the Contract. In July, 2004, the Arbitration Court declared the
Contract void. On April 27, 2005, we appealed the decision in the High Commercial Court of Ukraine. In May, 2005, the Department
filed with the Arbitration Court a new statement of claim for restitution of $1,047,740, paid to us by the Department under the
Contract. On September 27, 2005, we received a negative award issued by the Arbitration Court in the second claim (the “Award”).
On December 12, 2005, we were informed that the Supreme Court of Ukraine had dismissed our appeal regarding the July, 2004 decision.
On June 29, 2006, the Supreme Court of Ukraine held that the Arbitration Court award was valid and legal under applicable law.



On September 28, 2008, the Department filed
a petition (the “Petition”) in the Central District Court of Israel (the “Court”), under which the Department
requested the approval of the Award as a valid foreign arbitral award under the laws of the State of Israel.



During November 2008, we filed with the
Court an objection to the Petition and a petition to declare the Award null and void. Our objection and petition rely on what
we believe to be well-based evidence that we have against the manner under which the arbitration proceedings were conducted by
the Arbitration Court and against their validness and legality. We believe that the arbitration proceedings were conducted partially
and jeopardized our basic rights. Our claims are also corroborated by a contrary legal opinion written in the arbitration decision
by one of the arbitrators (“Arbitrator”).



On February 16, 2009 the Department filed
its response to our claims (the “Response”). The Department raised in its Response procedural and other claims, including
a claim that we filed in Ukraine a monetary claim which is based on the Award and the filing of such claim basically affirms our
acknowledgment that the Award is valid. On March 25, 2009, we filed a response to the Department’s response and a requisition
to order the Arbitrator to testify in the scope of the Petition proceedings.



On June 6, 2009, a preliminary court session
was held regarding the Petition. During the session, the Department’s counsel claimed that one of the two machines that
we previously supplied pursuant to the Contract (which machine is priced higher than the amount of the Department’s claim),
was not supplied to the Department and was transferred by us to another Ukrainian governmental authority. It is noted that we
have documents that evidence that, contrary to the Department’s claim, we supplied both of the machines directly to the
Department.



At a hearing held on September 23, 2009,
the Court accepted our application to summon the Arbitrator as a witness. At the hearings which took place on November 29 and
November 30, 2010, the Arbitrator testified in Court. In his testimony the Arbitrator described procedural flaws which occurred,
in his view, during the arbitration and also related to threats which were made against him by the Secretary of the Ukrainian
Chamber of Commerce and Industry in the course of the arbitration session.



Following the testimony of the Arbitrator,
the Department asked the Court to summon the other two Ukrainian arbitrators as witnesses. The Court accepted the request and
scheduled hearings for their testimonies in 2011. However, the Department’s witnesses (including the other two Ukrainian
arbitrators) did not appear in court at the times scheduled for their testimonies. In light thereof, the Court ordered that summations
be submitted in writing without having the witnesses of the Department testify.



On December 5, 2011 we submitted a summation
in writing. However, the Department has not submitted its summation and its counsel even notified the Court that his appointment
as the Department’s counsel had been cancelled. In these circumstances we filed a petition for judgment due to the absence
of summations by the Department. On February 26, 2012, the Court ruled that it accepts our petition to give judgment due to the
lack of summations on behalf of the Department and that the file will be assigned for writing a judgment on the basis of the evidence
that had been presented to the Court in the course of the proceeding.



On April 15, 2012, the Court dismissed
the Department’s Petition and also declared the Award null and void.



(C) On
October 30, 2003, SuperCom Slovakia, a subsidiary (66%) of Vuance Ltd., received an award from the International Arbitral Centre
of the Austrian Federal Economic Chamber (“IAC”), in a case against the Ministry of Interior of the Slovak Republic
relating 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
$3,438,000 as of December 31, 2011) 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 $55,000 as of December 31, 2011)
and SuperCom Slovakia’s legal fees in the amount of EUR 63,611 (approximately $82,000 as of December 31, 2011). We have
begun an enforcement proceeding to collect the arbitral award. The Ministry of 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. On October 21, 2005, the Ministry of the Interior
of the Slovak Republic filed an appeal. On August 25, 2006, the Austrian Appellate Court rejected the appeal and ordered the Ministry
to reimburse Supercom Slovakia ́s costs of the appellate proceeding in the amount of EUR 6,688 within 14 days. On October
3, 2006, we were informed that the Ministry had decided not to file an extraordinary appeal to the Austrian Supreme Court’s
decision rejecting its appeal. To date, our efforts to enforce the Commercial Court’s decision have been unsuccessful.



64







(D) On December 16, 1999, Secu-Systems
Ltd. (“Secu-systems”) filed a lawsuit with the District Court in Tel-Aviv-Jaffa jointly and severally against us and
InkSure Ltd. (“InkSure”) (our former subsidiary, which became a subsidiary of InkSure Technologies, Inc.) seeking
a permanent injunction and damages arising from the printing method applied to certain products developed by Inksure. In its lawsuit,
Secu-systems asserted claims of breach of a confidentiality agreement between Secu-systems and us, unjust enrichment by us and
InkSure, breach of fiduciary duties owed to Secu-systems by us and InkSure, misappropriation of trade secrets by us and InkSure,
and damage to Secu-systems’ property. On March 15, 2006, the Court denied the breach of contract claim, but upheld the claim
for misappropriation of trade secrets and ordered InkSure and us to cease all activity involving the use of the confidential knowledge
and/or confidential information of Secu-systems. In addition, the Court ordered us and Inksure to provide a report certified by
an accountant setting forth in full the income and/or benefit received by InkSure and us as a result of the misappropriation activity
through the date of the judgment, and ordered us and Inksure, jointly and severally, to pay to Secu-systems compensation in the
sum of NIS 100,000 ($26,000 as of December 31, 2011) and legal expenses as well as attorney’s fees in the sum of NIS 30,000
($8,000 as of December 31, 2011). Secu-systems has filed an appeal, and we and InkSure filed a counter-appeal, on the ruling above.



During the years thereafter several Court
sessions were held, judgments were made and appeals were filed by each of the parties.



On December 15, 2009, the Court suggested
that the parties attempt to resolve this dispute through mediation. All of the parties agreed to mediate the matter.



In the course of the mediation process,
during 2010, an agreement in principle was reached, according to which the mediator will be authorized to determine the sum, within
the range between NIS 750,000 (approximately $196,000 as of December 31, 2011) and NIS 1,000,000 (approximately $262,000 as of
December 31, 2011), which we shall pay to Secu-Systems. Pursuant to such agreement in principle, the amount determined by the
mediator will be paid by us during 2011 in 10 equal, consecutive monthly installments.



Following the said agreement in principle,
a binding mediation agreement was signed by the parties, and on September 1, 2010, a mediation session was held. On November 30,
2010, the mediator determined that the sum we will have to pay to Secu-System is NIS 893,000 (approximately $234,000 as of December
31, 2011). On January 30, 2012, the parties submitted to the Court a request to approve the mediation agreement. The mediation
agreement was approved by the Court on February 5, 2012. During 2011 we paid NIS 535,800 (approximately $140,000 as of December
31, 2011). As of December 31, 2011 there is an allowance in the amount of $94,000 related to this litigation.



(E) On May 7, 2012, a supplier of us filed
a lawsuit with the Magistrate Court in Tel Aviv in the amount of NIS 360,199 (approximately $94,000 as of December 31, 2011) claiming
mainly for payments of products which were supplied during 2011 and for payments for products which were purchased by the supplier
but were refused to be received by us due to our dissatisfaction in respect of the supplied products. We are denying the supplier’s
claims and have our own claims against the supplier in respect of the quality of the products supplied by him. We are right now
in the process of evaluating the lawsuit with our legal advisor. The balance of accounts payable with respect to the supplier
as of December 31, 2011 is approximately $46,000, which represents the value of the supplied products during 2011. No additional
provision has been recognized with respect to the supplier's claim.



Dividend Policy



We have not distributed a cash dividend
since August 27, 1997 and we do not anticipate any dividend distribution in the foreseeable future. Under
the Israeli Companies Law, dividends may only be paid out of profits legally available for distribution (the
“Profits Criteria”)and provided that there is no reasonable concern that such payment will prevent us from
satisfying our existing and foreseeable obligations as they become due. In addition, a competent court may approve, as per a motion
to be filed by a company in accordance with the Israeli 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,
our Board of Directors may from time to time declare and cause the Company to pay to the shareholders such interim or final dividends
as the Board of Directors deems appropriate considering the profits of the Company and in compliance with the provisions of the
Israeli Companies Law.



65







Subject to the rights of the holders of
shares as to dividends, and to the provisions of our Articles of Association, dividends, whether in cash or in bonus shares, shall
be paid or distributed, as the case may be, to shareholders pro rata to the amount paid up or credited as paid up on account of
their shares, without taking into consideration any premium paid thereon.



B.    Significant
Changes



There are no significant changes that occurred
since December 31, 2011, except as otherwise disclosed in this Annual Report and in the annual consolidated financial statements
included in this Annual Report.



ITEM 9.    The Offer And Listing.



A.     Offer
and Listing Details



The
tables included below set forth information regarding the price history of the ordinary shares on the Euronext Brussels stock
market and the OTC Bulletin Board/NASDAQ/Pink OTC Market for
the periods indicated.



We commenced trading on the NASDAQ Europe
stock market 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 where we traded under the symbol “VUNC.” We applied for delisting
of our shares from the Euronext Brussels stock market, and our application was approved on May 6, 2008, effective August 4, 2008.



Our ordinary shares were quoted on the
OTC Bulletin Board Market under the symbol “VUNC.OB,” from November 5, 2004 until August 22, 2007.



Our ordinary shares were approved for listing
on the NASDAQ Capital Market and began trading effective August 23, 2007. The shares were traded on NASDQ Capital Market under
the symbol “VUNC.”



On September 29, 2009 we received
a NASDAQ Staff Determination letter indicating that we failed to comply with the minimum stockholders’ equity requirement
of $2.5 million as set forth in Listing Rule 5550(b) (formerly Marketplace Rule 4310(c)(3)). As a result, our securities
were delisted from The Nasdaq Stock Market and trading in our shares was suspended effective at the open of business on October
1, 2009.



Following the delisting from the NASDAQ,
as of the open of business on October 1, 2009, we had been advised by Pink OTC Markets Inc., which operates an electronic quotation
service for securities traded over-the-counter, that our securities were immediately eligible for quotation in the Pink Sheets.
Our ordinary shares are currently quoted under the ticker symbol “VUNCF”.



The following table shows, for the periods
indicated, the high and low closing prices of our ordinary shares in U.S. dollars as reported on the NASDAQ Europe stock market
or the Euronext Brussels stock market, as applicable until August 4, 2008 (conversion to U.S. dollars is based on the exchange
rate published by the Bank of Israel). The following table also shows, for the periods indicated, the high and low closing prices
of our ordinary shares on the Pink OTC Market or OTC Bulletin Board Market or NASDAQ, as applicable.



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



66







|Period                 |  | European Market |      |     | US Market     | 
|---------------------- |  | --------------- | ---- | --- | ------------- | 
|                       |  | Per share ($)   |      |     | Per share ($) | 
|                       |  | High            |      |     | Low           | 
|Annual                 |  |                 |      |     |               | 
|2007                   |  |                 | 5.28 |     |               | 
|2008                   |  |                 | 3.90 | (1) |               | 
|2009                   |  |                 | N/A  |     |               | 
|2010                   |  |                 | N/A  |     |               | 
|2011                   |  |                 | N/A  |     |               | 
|Financial quarters     |  |                 |      |     |               | 
|2010                   |  |                 |      |     |               | 
|First quarter          |  |                 | N/A  |     |               | 
|Second quarter         |  |                 | N/A  |     |               | 
|Third quarter          |  |                 | N/A  |     |               | 
|Fourth quarter         |  |                 | N/A  |     |               | 
|2011                   |  |                 |      |     |               | 
|First quarter          |  |                 | N/A  |     |               | 
|Second quarter         |  |                 | N/A  |     |               | 
|Third quarter          |  |                 | N/A  |     |               | 
|Fourth quarter         |  |                 | N/A  |     |               | 
|2012                   |  |                 |      |     |               | 
|First quarter          |  |                 | N/A  |     |               | 
|Most recent six months |  |                 |      |     |               | 
|April 2012             |  |                 | N/A  |     |               | 
|March 2012             |  |                 | N/A  |     |               | 
|February 2012          |  |                 | N/A  |     |               | 
|January 2012           |  |                 | N/A  |     |               | 
|December 2011          |  |                 | N/A  |     |               | 
|November 2011          |  |                 | N/A  |     |               | 



On May 8, 2012, the
last reported sale price of our ordinary shares on Pink Sheets was $0.11 per share.



Lack of Liquidity



The delisting of our
ordinary shares from the NASDAQ market, significantly affects the ability of investors to trade our securities and negatively
affects the liquidity of our ordinary shares. In addition, trading in our ordinary shares may become subject to the "penny
stock" regulations adopted by theSEC. 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, such
as if the issuer of the security has net tangible assets in excess of $2,000,000. The market price of our ordinary shares is currently
less than $5.00 per share and our net tangible assets as of December 31, 2011 were approximately $2,455,000 .While
we believe that our ordinary shares are currently exempt from the definition of penny stock, there is no assurance that they
will continue to be exempt from such definition. If our ordinary shares become subject to the “penny stock” rules
of the SEC, it will make transactions in our ordinary shares cumbersome and may reduce the value of our shares. This is because
for any transaction involving a penny stock, unless exempt, Rule 15g-9 generally requires:



| | · | that a broker or dealer
                                                                                                     approve a person's account
                                                                                                     for transactions in penny
                                                                                                     stocks; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the broker or dealer
                                                                                                     receive from the investor
                                                                                                     a written agreement to the
                                                                                                     transaction, setting forth
                                                                                                     the identity and quantity
                                                                                                     of the penny stock to be
                                                                                                     purchased.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In order to approve a person's account
for transactions in penny stocks, the broker or dealer must:

| | · | obtain financial information
                                                                                                     and investment experience
                                                                                                     objectives of the person;
                                                                                                     and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | make a reasonable determination
                                                                                                     that the transactions in
                                                                                                     penny stocks are suitable
                                                                                                     for that person and the person
                                                                                                     has sufficient knowledge
                                                                                                     and experience in financial
                                                                                                     matters to be capable of
                                                                                                     evaluating the risks of transactions
                                                                                                     in penny stocks.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The broker or dealer must also deliver,
prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which,
in highlight form:



67







| | · | sets forth the basis
                                                                                                     on which the broker or dealer
                                                                                                     made the suitability determination;
                                                                                                     and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | that the broker or dealer
                                                                                                     received a signed, written
                                                                                                     statement from the investor
                                                                                                     prior to the transaction.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Disclosure also has to be made by the
broker or dealer about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the
rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to
be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny
stocks.



Generally, brokers may be less willing
to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors
to dispose of our ordinary shares and cause a decline in our market value if we were to become subject to the said "penny
stock" rules.



B.    Plan
of Distribution



Not applicable.



C.    Markets



Our ordinary shares were listed for trade
on the Euronext Brussels stock market, from October 23, 2003 under the symbol “SUP,” which became “VUNC”
after our corporate name change on May 14, 2007. We applied for delisting of our shares from the Euronext Brussels stock market,
and our application was approved on May 6, 2008, effective August 4, 2008.



Since November 5, 2004, our ordinary shares
have also traded on the OTC Bulletin Board under the symbol "SPCBF.OB," which, following our recent name change became
“VUNCF.OB.” Since August 23, 2007, our ordinary shares were approved for trading on NASDAQ under the symbol “VUNC”
and the trade on the OTC Bulletin Board ceased. On October 1, 2009 our ordinary shares started being quoted under the ticker symbol
“VUNCF” on the Pink OTC Market.



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



Our Memorandum of Association and Articles
of Association are attached hereto as noted in Item 19.



We are a public company organized in the
State of Israel under the Israeli Companies Law. We are registered with the Registrar of Companies of the State of Israel as a
publicly traded corporation and we have been assigned public company number 52-00-4407-4. Set forth below is a summary of certain
provisions of our Memorandum of Association (the "Memorandum"), the Articles of Association (the "Articles")
and the Israeli Companies Law as it applies to the Company. This description does not purport to be complete and is qualified
in its entirety by reference to the full text of the Memorandum and Articles and by Israeli law. The Memorandum and the Articles
are filed as exhibits to this Annual Report.



68







OBJECTS OF THE COMPANY



Pursuant to Section 2 of the Memorandum,
the principal object for which we were established is to engage in the development, manufacture, implementation and marketing
of computerized systems in general and computerized systems for producing tags, computerized photograph databases for the purpose
of identification and for issuing various certificates in particular; consultation in the above fields; development, manufacture,
implementation and marketing of any product based on the knowledge and expertise of the parties; and the purchase, sale, import,
export and implementation of any action required to realize the above objectives.



We are authorized to issue 52,000,000 ordinary
shares par value NIS 0.00588235 per share, of which 21,129,672 ordinary shares were outstanding as of April 15, 2012.



DIRECTORS



Our Articles provide that the number of
directors may be determined from time to time by the Board of Directors, and unless otherwise determined, the number of directors
comprising the Board of Directors will be between four and ten. With the exception of our external directors, who are elected
for three year terms in accordance with the Israeli Companies Law, our directors are elected for a one year term ending at the
following annual general meeting of shareholders. However, if no directors are elected at an annual meeting, then the persons
who served as directors immediately prior to the annual meeting shall be deemed reelected at the same meeting. The general meeting
may resolve that a director be elected for a period not longer than the third next annual meeting. Directors may resign or in
certain circumstances be removed by our general meeting prior to the expiration of his term.



The board may appoint additional directors
(whether to fill a vacancy or create a new directorship) to serve until the next annual shareholders meeting. In case an office
of a director has been vacated, the remaining directors may continue to act in every matter so long as the number of its members
is not less than the quorum required at the time for meetings of the board. If the number of members of the board decreases below
said quorum, the board will not be entitled to act except in case of emergency or for appointing additional directors in order
to fill vacant positions on the board or to call a general meeting of the shareholders. The Board of Directors elects one of its
members to serve as the Chairman.



The Board of Directors may meet and adjourn
its meetings as it deems fit, provided, however, that the board must meet at least once in every three months period. A meeting
of the board may be called at the request of each director. The quorum required for a meeting of the board is not less than 30%
of the number of directors and in any event not less than two directors. Issues arising at any Board of Directors’ meeting
are decided by a majority of votes cast at the meeting. In lieu of a board meeting a resolution may be adopted in writing if signed
by all directors or to which all of the directors have agreed in writing or by telephone or facsimile, and a meeting may also
be held through telephone conference or other communications means, provided however that all participants may hear each other
simultaneously. A resolution in writing signed by all of the Directors, shall be as valid and effective for all purposes as if
passed at a meeting of the Board of Directors duly convened and held, and for the purpose of this Article "Director"
shall include, if duly appointed therefore, a Substitute Director.



FIDUCIARY DUTIES OF OFFICERS



The Israeli Companies Law codifies the
fiduciary duties that "office holders," including directors and executive officers, owe to a company. An office holder's
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of loyalty includes avoiding any conflict of interest
between the office holder's position in the company and his personal affairs, avoiding any competition with the company, avoiding
exploiting any business opportunity of the company in order to receive personal advantage for himself or others, and revealing
to the company any information or documents relating to the company's affairs which the office holder has received due to his
position as an office holder.



APPROVAL OF CERTAIN TRANSACTIONS



Transactions with Office Holders; Extraordinary
Transactions



Under the Israeli
Companies Law, all arrangements as to compensation of office holders who are not directors or controlling parties require approval
of the audit committee or a compensation committee to the extent that it complies with the statutory requirements which apply
to the audit committee, and the Board of Directors. Arrangements regarding the terms of employment and compensation of directors
require approval by the audit committee, the Board of Directors and the shareholders.



69







The Israeli
Companies Law requires that an office holder of the company promptly disclose any personal interest that he or she may have and
all related material information known to him or her, in connection with any existing or proposed transaction by the company.
In addition, if the transaction is an extraordinary transaction as defined under Israeli law, the office holder must also disclose
any personal interest held by the office holder's spouse, siblings, parents, grandparents, descendants, spouse's descendants,
siblings and parents of the office holder's spouse,and the spouses of any of the foregoing.
In addition, the office holder must also disclose any interest held by any corporation in which the office holder is a 5% or greater
shareholder, director or general manager or in which he or she has the right to appoint at least one director or the general manager.
An extraordinary transaction is defined as a transaction other than in the ordinary course of business, otherwise than on market
terms, or that is likely to have a material impact on the company's profitability, assets or liabilities.



In the case of a transaction which is not
an extraordinary transaction, after the office holder complies with the above disclosure requirement, only board approval is required
unless the articles of association of the company provide otherwise. The transaction must not be adverse to the company's interest.
Furthermore, if the transaction is an extraordinary transaction, then, in addition to any approval stipulated by the articles
of association, it also must be approved by the company's audit committee and then by the Board of Directors, and, under certain
circumstances, by a meeting of the shareholders of the company.



An individual who has a personal interest
in a matter that is considered at a meeting of the Board of Directors or the audit committee may not be present at the deliberations
or vote on this matter. However,with respect to an office holder, he/she may be present at the meeting
discussions if the chairman determines that the office holder has to present the matter. If a majority of the directors
has a personal interest in a transaction with us, such directors may be present at the deliberations and vote in this matter,
and shareholder approval of the transaction is required.



Under the Israeli Companies Law and as
long as our Articles are not amended to determine otherwise, certain resolutions, such as resolutions regarding liquidation, require
approval of the holders of 75% of the shares represented at the meeting and voting thereon.



Disclosure of Personal Interests of
a Controlling Shareholder; Approval of Transactions with Controlling Shareholders



The Israeli
Companies Law applies the same disclosure requirements to a controlling shareholder of a public company, which includes a shareholder
that holds 25% or more of the voting rights if no other shareholder owns more than 50% of the voting rights in the company. Extraordinary
transactions with a controlling shareholder or in which a controlling shareholder has a personal interest, and the terms of compensation
of a controlling shareholder who is an office holder (including theprovision of services to the company),
require the approval of the audit committee, the Board of Directors and the shareholders of the company by simple majority, provided
that either such majority vote must include at least one-half of the shareholders who have no
personal interest in the transaction and are present at the meeting (without taking into account the votes of the abstaining shareholders),
or that the total shareholdings of those who have no personal interest in the transaction who vote against the transaction represent
no more than two percent of the voting rights in the company.



Agreements and extraordinary
transactions with a term exceeding three years are subject to re-approval once every three years by the audit committee, board
of directors and the shareholders of the company. Certain types of extraordinary transactions may be approved in advance for a
period exceeding three years if the audit committee determines such approval reasonable under the circumstances.



The Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a special tender offer if as a result of the acquisition
the purchaser would the control 25% or greater of the company's voting rights. This rule does not apply if there is already another
such shareholder which controls 25% or greater of the company's voting rights. Similarly, the Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a special tender offer if as a result of the acquisition
the purchaser would hold greater than a 45% voting rights in the company, unless there is another shareholder holding more than
a 45% voting rights in the company. These requirements do not apply to: (i) the acquisition of shares in a private placement,
provided that such private placement was approved by the general meeting of the company’s shareholders as a private placement
purporting to confer to the offeree the control of 25% or greater of the company's voting rights if the there is no other holder
of such a block of shares, or purporting to confer to the offeree 45% of the voting rights in the company if there is no other
person holding forty-five percent of the voting rights in the company; (ii) was from a shareholder which controls 25% or greater
of the company's voting rights which resulted in the acquirer becoming a a shareholder of the company shareholder which controls
25% or greater of the company's voting rights, or (iii) was from a shareholder holding a 45% of the voting in the company which
resulted in the acquirer becoming a holder of a 45% of the voting rights in the company. A special tender offer will only be considered
accepted if: (i) the number of shares tendered in the offer exceeds the number of shares whose holders objected to the offer (excluding
the shares of controlling shareholders of the offeror and excluding the holders of a 25% or more block of the voting rights in
the company); and (ii) at least 5% of the voting rights in the company are purchased in the tender offer.



70







If, as a result of
an acquisition of shares, the acquirer will hold more than 90% of a public company’s outstanding shares or a class of shares,
the acquisition must be made by means of a tender offer for all of the outstanding shares or a class of shares. If less than 5%
of the outstanding shares are not tendered in the tender offer, and more than half of the shareholders
without a personal interest in accepting the offer tendered their shares, thenall the shares that the acquirer offered
to purchase will be transferred to the acquirer. The Israeli Companies Law provides for appraisal rights if any shareholder files
a request in court within six months following the consummation of a full tender offer, but the acquirer will be entitled to stipulate
that tendering shareholders forfeit their appraisal rights. If more than 5% of the outstanding
shares are not tendered in the tender offer, then the acquirer may not acquire shares in the tender offer that will cause his
shareholding to exceed 90% of the outstanding shares; provided, however, that if the dissenting shareholders
constitute less than 2% of the issued and outstanding share capital of the company then the full tender will be accepted and all
of the shares that the acquirer offered to purchase will be transferred to the acquirer by operation of law.



DUTIES OF SHAREHOLDERS



Under the Israeli Companies Law, a shareholder
has a duty to act in good faith and in a customary way towards the company and other shareholders and to refrain from abusing
his or her power in the company including, among other things, when voting in a general meeting of shareholders on the following
matters:



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

| | · | an increase of the company's
                                                                                                     authorized share capital;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a merger; or
| | - | ------------

| | · | approval of interested
                                                                                                     party transactions which
                                                                                                     require shareholder approval.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Furthermore, the Israeli Companies Law
requires that a shareholder refrain from acting in a discriminatory manner towards other shareholders.



The Israeli Companies Law does not describe
the substance of the aforementioned duties of shareholders, but provides that laws applicable to a breach of contract, adjusted
according to the circumstances shall apply to a breach of such duties. With respect to the obligation to refrain from acting discriminatorily,
a shareholder that is discriminated against can petition the court to instruct the company to remove or prevent the discrimination,
as well as provide instructions with respect to future actions.



In addition, the Israeli Companies Law
dictates that any controlling shareholder, any shareholder who knows that it possesses power to determine the outcome of a shareholder
vote and any shareholder who, pursuant to the provisions of a company's articles of association, has the power to appoint or prevent
the appointment of an office holder in the company, is under a duty to act with fairness towards the company.



The Israeli Companies Law does not describe
the substance of the aforementioned duty to act with fairness but provides that laws applicable to a breach of contract, adjusted
according to the circumstances and taking into account the status within the company of such shareholder, shall apply to a breach
of such duty.



EXEMPTION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS



Exemption of Office Holders



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



71







Office Holder Insurance



Our Articles provide that, subject to the
provisions of the Israeli Companies Law, we may enter into a contract for the insurance of the liability of any of our office
holders for any act done by him or her by virtue of being an office holder, in respect of any of the following:



| | · | a breach of duty of care
                                                                                                     towards us or any other person,
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a breach of fiduciary
                                                                                                     obligations towards us, provided
                                                                                                     that the office holder acted
                                                                                                     in good faith and had reasonable
                                                                                                     grounds to assume that his
                                                                                                     or her act would not be to
                                                                                                     our detriment,
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a financial liability
                                                                                                     imposed on him or her in
                                                                                                     favor of another person,
                                                                                                     or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | any other event for which
                                                                                                     insurance of an office holder
                                                                                                     is or may be permitted.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Indemnification of Office Holders



Our Articles provide that we may indemnify
an office holder for the following cases of liability and expenses incurred by him or her as a result of an act done by him or
her by virtue of being an office holder:



| | · | financial liability imposed
                                                                                                     upon said office holder in
                                                                                                     favor of another person by
                                                                                                     virtue of a decision by a
                                                                                                     court of law, including a
                                                                                                     decision by way of settlement
                                                                                                     or a decision in arbitration
                                                                                                     which has been confirmed
                                                                                                     by a court of law;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | reasonable expenses of
                                                                                                     the proceedings, including
                                                                                                     lawyers’ fees, expended
                                                                                                     by the office holder or imposed
                                                                                                     on him by the court for:
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(1) proceedings issued against
him by or on behalf of the Company or by a third party;

(2) criminal proceedings in
which the office holder was acquitted; or

(3) criminal proceedings in
which he was convicted in an offense, which did not require proof of criminal intent; or

| | · | any other liability or
                                                                                                     expense for which the indemnification
                                                                                                     of an officer holder is not
                                                                                                     precluded by law.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have obtained directors and officers
liability insurance for the benefit of our office holders. In addition, we have sometimes granted indemnification letters to our
office holders.



Limitations on Exemption, Insurance and Indemnification



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



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

| | · | a breach by the office
                                                                                                     holder of his or her duty
                                                                                                     of care if the breach was
                                                                                                     done intentionally or recklessly;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | · | any fine levied against
                                                                                                     the office holder.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------



Required Approvals



In addition, under the Israeli Companies
Law, any exemption of, indemnification of, or procurement of insurance coverage for, our office holders must be approved by our
audit committee and our Board of Directors and, if the beneficiary is a director, an additional approval by our shareholders is
required.



RIGHTS OF ORDINARY SHARES



Our ordinary shares confer upon our shareholders
the right to receive notices of, and to attend, shareholder meetings, the right to one vote per ordinary share at all shareholders'
meetings for all purposes, and to share equally, on a per share basis, in such dividends as may be declared by our Board of Directors;
and upon liquidation or dissolution, the right to participate in the distribution of any surplus assets of the Company legally
available for distribution to shareholders after payment of all debts and other liabilities of the Company. All ordinary shares
rank pari passu in all respects with each other.



MEETINGS OF SHAREHOLDERS



An annual general meeting of our shareholders
will be held at least once in every calendar year, not later than 15 months after the last annual general meeting at such time
and at such place either within or without the State of Israel as may be determined by our Board of Directors.



72







Our Board of Directors may, whenever it
deems fit, convene a special general meeting. Special general meetings may also be convened upon requisition in accordance with
the Israeli Companies Law. Our Board is obligated to convene a special general meeting if it receives a written request from any
of (a) two Directors or 25% of the total number of Directors; (b) one or more Shareholders, holding at least 5% of our outstanding
share capital and at least 1% of the shareholders’ voting power; or (c) one or more shareholders holding no less than 5%
of the our outstanding voting shares.



MERGERS



A merger of the Company shall require resolution
adopted by a simple majority vote cast at a general meeting, not taking into account abstentions provided,
however, that if the transaction is an extraordinary transaction with a controlling shareholder or in which a controlling shareholder
has an interest, then the approvals required will be the corporate approvals under theIsraeli Companies
Law for such extraordinary transaction.



C.    Material
Contracts



Except for the material contracts described
in Item 4 – Recent Developments, in Item 5 – Liquidity and Capital Resources and in Item 6 - Compensation, 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 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. 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
AND HOLDERS OF OUR SHARES 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 Vuance’s ordinary shares
applicable to non-Israeli shareholders, including U.S. shareholders.



General Corporate Tax Structure



Israeli
companies are generally subject corporate tax on their taxable income at the rate of 24% for the 2011 tax year and 25%
for the 2012 tax year. Following an amendment to the Israeli Income Tax Ordinance, 1961 (the "Tax Ordinance"), which
came into effect on January 1, 2012, the corporate tax rate is scheduled to remain at the rate of 25% for future tax years.



73







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:



Commencing in January 1, 2012, a real capital
gain deriving to an individual will be taxed at a rate of 25%, 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 30% 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.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Companies:



The real capital gain on the sale of securities
by a company will be taxed at the corporate tax rate applicable during the year of sale (25% for the 2012 tax year onwards).



Non-Israeli residents:



In general, Non-residents
of Israel will be exempt from capital gain tax in relation to the sale of ordinary shares traded on a recognized stock exchange
as long as (a) the capital gain is not in his permanent establishment in Israel, (b) the ordinary shares in relation to which
the capital gains are derived were acquired by the nonresident after the initial listing of the ordinary shares and (c) neither
the shareholder nor the capital gain is subject to certain sections of the Israeli income tax ordinance.



However,
non-Israeli corporations will not be entitled to such exemption if Israeli residents (i) have a controlling interest of 25% or
more in such non-Israeli corporation, or (ii) are the beneficiaries or are 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 U.S. (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 U.S. 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 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 our shareholders may be liable to Israeli tax on the sale of their ordinary shares, the payment of the consideration
may be subject to the withholding of Israeli tax at the source. However, under the Tax Treaty, such 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 Tax Treaty does not relate to U.S. state or local
taxes.



74







Tax on Dividends



Non-residents
of Israel are subject to income tax on income accrued or derived from sources in Israel. These sources of income include passive
income such as dividends. On distributions of dividends other than bonus shares, or stock dividends, income tax is applicable
at the rate of 25%, or 30% for a shareholder that is considered a significant shareholder at any time during the 12-month period
preceding such distribution. A different rate may be provided in a treaty between Israel and the shareholder’s country of
residence. Under the Tax Treaty, the maximum tax on dividends paid to a holder of our ordinary shares who is a US resident is
25%; however if not more than 25% of our gross income consists of interest or dividends, then the maximum tax is 12.5% for a shareholder
who is a US corporation holding at least 10% of our issued voting power during the part of the taxable year preceding the date
of payment of the dividend and during the whole of the prior taxable year (and additional conditions under the Tax Treaty are
met).



U.S. Federal Income Taxation



General



The following
is a summary of the material U.S. federal income tax consequences of the ownership and disposition of our ordinary shares and
warrants. The following discussion is not exhaustive of all possible tax considerations. This summary is based upon the Internal
Revenue Code of 1986, as amended (the “Code”), regulations promulgated under the Code by the U.S. Treasury Department
(including proposed and temporary regulations), rulings, current administrative interpretations and official pronouncements of
the Internal Revenue Service (the “IRS”), and judicial decisions, all as currently in effect and all of which are
subject to differing interpretations or to change, possibly with retroactive effect. Such change could materially and adversely
affect the tax consequences described below. No assurance can be given that the IRS would not assert, or that a court would not
sustain, a position contrary to any of the tax consequences described below.



This
discussion does not address state, local, or foreign tax consequences of the ownership and disposition of ordinary shares and
warrants (see “Israeli Taxation” above).



This
summary is for general information only and does not address all aspects of the U.S. federal income taxation that may be important
to a particular holder in light of its investment or tax circumstances or to holders subject to special tax rules, such as: banks;
financial institutions; insurance companies; dealers in stocks, securities, or currencies; traders in securities that elect to
use a mark-to-market method of accounting for their securities holdings; tax-exempt organizations; real estate investment trusts;
regulated investment companies; qualified retirement plans, individual retirement accounts, and other tax-deferred accounts; expatriates
of the U.S.; persons subject to the alternative minimum tax; persons holding ordinary shares or warrants as part of a straddle,
hedge, conversion transaction, or other integrated transaction; persons who acquired ordinary shares or warrants pursuant to the
exercise of any employee stock option or otherwise as compensation for services; persons actually or constructively holding 10%
or more of our voting stock; and U.S. Holders (as defined below) whose functional currency is other than the U.S. dollar.



This
discussion is not a comprehensive description of all of the U.S. federal tax consequences that may be relevant with respect to
the ownership and disposition of our ordinary shares and warrants. We urge you to consult your own tax advisor regarding your
particular circumstances and the U.S. federal income and estate tax consequences to you of owning and disposing of our ordinary
shares and warrants, as well as any tax consequences arising under the laws of any state, local, or foreign or other tax jurisdiction
and the possible effects of changes in U.S. federal or other tax laws.



This
summary only addresses ordinary shares and warrants that are held as capital assets within the meaning of Section 1221 of the
Code, which generally means as property held for investment, and were acquired upon original issuance at their initial public
offering price. For purposes of this discussion, the term “U.S. Holder” means a beneficial owner of our ordinary shares
and warrants that is any of the following:



| | · | a
                                                                                                                          citizen
                                                                                                                          or resident
                                                                                                                          of the
                                                                                                                          U.S.
                                                                                                                          or someone
                                                                                                                          treated
                                                                                                                          as a
                                                                                                                          U.S.
                                                                                                                          citizen
                                                                                                                          or resident
                                                                                                                          for
                                                                                                                          U.S.
                                                                                                                          federal
                                                                                                                          income
                                                                                                                          tax
                                                                                                                          purposes;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | a
                                                                                                                          corporation
                                                                                                                          (or
                                                                                                                          other
                                                                                                                          entity
                                                                                                                          taxable
                                                                                                                          as a
                                                                                                                          corporation
                                                                                                                          for
                                                                                                                          U.S.
                                                                                                                          federal
                                                                                                                          income
                                                                                                                          tax
                                                                                                                          purposes)
                                                                                                                          created
                                                                                                                          or organized
                                                                                                                          in or
                                                                                                                          under
                                                                                                                          the
                                                                                                                          laws
                                                                                                                          of the
                                                                                                                          U.S.,
                                                                                                                          any
                                                                                                                          state
                                                                                                                          thereof,
                                                                                                                          or the
                                                                                                                          District
                                                                                                                          of Columbia;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | · | a
                                                                                                                          trust
                                                                                                                          if a
                                                                                                                          U.S.
                                                                                                                          court
                                                                                                                          can
                                                                                                                          exercise
                                                                                                                          primary
                                                                                                                          supervision
                                                                                                                          over
                                                                                                                          the
                                                                                                                          trust’s
                                                                                                                          administration
                                                                                                                          and
                                                                                                                          one
                                                                                                                          or more
                                                                                                                          U.S.
                                                                                                                          persons
                                                                                                                          are
                                                                                                                          authorized
                                                                                                                          to control
                                                                                                                          all
                                                                                                                          substantial
                                                                                                                          decisions
                                                                                                                          of the
                                                                                                                          trust;
                                                                                                                          or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





75







| | · | a
                                                                                                                          trust
                                                                                                                          in existence
                                                                                                                          on August
                                                                                                                          20,
                                                                                                                          1996
                                                                                                                          that
                                                                                                                          has
                                                                                                                          a valid
                                                                                                                          election
                                                                                                                          in effect
                                                                                                                          under
                                                                                                                          applicable
                                                                                                                          Treasury
                                                                                                                          Regulations
                                                                                                                          to be
                                                                                                                          treated
                                                                                                                          as a
                                                                                                                          U.S.
                                                                                                                          person.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The term
“Non-U.S. Holder” means a beneficial owner of our ordinary shares and warrants that is not a U.S. Holder. As described
in “Taxation of Non-U.S. Holders” below, the tax consequences to a Non-U.S. Holder may differ substantially from the
tax consequences to a U.S. Holder.



If a
partnership (including for this purpose any entity treated as a partnership for U.S. federal income tax purposes) is a beneficial
owner of our ordinary shares and warrants, the U.S. federal income tax consequences to a partner in the partnership will generally
depend on the status of the partner and the activities of the partnership. A holder of our ordinary shares and warrants that is
a partnership and the partners in such partnership should consult their own tax advisors regarding the U.S. federal income tax
consequences of the ownership and disposition of our ordinary shares and warrants.



Taxation of U.S. Holders



The discussion
in “Distributions on Ordinary Shares” and “Dispositions of Ordinary Shares or Warrants” below assumes
that we will not be treated as a passive foreign investment company (“PFIC”) for U.S. federal income tax purposes.
For a discussion of the rules that apply if we are treated as a PFIC, see the discussion in “Passive Foreign Investment
Company” below.



Distributions on Ordinary Shares



General.Subject to the discussion in “Passive Foreign Investment Company” below, if you actually or constructively receive
a distribution on ordinary shares, you must include the distribution in gross income as a taxable dividend on the date of your
receipt of the distribution, but only to the extent of our current or accumulated earnings and profits, as calculated under U.S.
federal income tax principles. Such amount must be included without reduction for any Israeli tax withheld. Dividends paid by
us generally will not be eligible for the dividends received deduction allowed to corporations with respect to dividends received
from certain U.S. corporations. Dividends paid by us may or may not be eligible for preferential rates applicable to qualified
dividend income, as described below.



To the
extent a distribution exceeds our current and accumulated earnings and profits, it will be treated first as a non-taxable return
of capital to the extent of your adjusted tax basis in the ordinary shares, and thereafter as capital gain. Preferential tax rates
for long-term capital gain may be applicable to non-corporate U.S. Holders.



We do
not intend to calculate our earnings and profits under U.S. federal income tax principles. Therefore, you should expect that a
distribution will generally be reported as a dividend even if that distribution would otherwise be treated as a non-taxable return
of capital or as capital gain under the rules described above.



Qualified
Dividend Income. With respect to non-corporate U.S. Holders (i.e., individuals, trusts, and estates), for taxable years beginning
on or before December 31, 2012, dividends that are treated as qualified dividend income (“QDI”) are taxable at a maximum
tax rate of 15%. Among other requirements, dividends generally will be treated as QDI if either (i) our ordinary shares are readily
tradable on an established securities market in the U.S., or (ii) we are eligible for the benefits of a comprehensive income tax
treaty with the U.S. which includes an information exchange program and which is determined to be satisfactory by the U.S. Treasury.
For example, it is expected that our ordinary shares will be “readily tradable” if as a result of being listed on
The NASDAQ Capital Market.



In
addition, for dividends to be treated as QDI, we must not be a PFIC (as discussed below) for either the taxable year in which
the dividend was paid or the preceding taxable year. We do not believe that we will be a PFIC for our current taxable year.
However, please see the discussion under “Passive Foreign Investment Company” below.
Additionally, in order to qualify for QDI treatment, you generally must have held the ordinary shares for more than 60 days during
the 121-day period beginning 60 days prior to the ex-dividend date. However, your holding period will be reduced for any period
during which the risk of loss is diminished.



Moreover,
a dividend will not be treated as QDI to the extent you are under an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to positions in substantially similar or related property. Since the QDI rules are complex,
you should consult your own tax advisor regarding the availability of the preferential tax rates for dividends paid on ordinary
shares.



76







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.



Dispositions of Ordinary Shares or Warrants



Subject
to the discussion in “Passive Foreign Investment Company” below, you generally will recognize taxable gain or loss
realized on the sale or other taxable disposition of ordinary shares or warrants equal to the difference between the U.S. dollar
value of (i) the amount realized on the disposition (i.e., the amount of cash plus the fair market value of any property received),
and (ii) your adjusted tax basis in the ordinary shares or warrants. Such gain or loss will be capital gain or loss.



If you
have held the ordinary shares or warrants for more than one year at the time of disposition, such capital gain or loss will be
long-term capital gain or loss. Preferential tax rates for long-term capital gain (currently, with a maximum rate of 15% for taxable
years beginning before December 31, 2012) will apply to non-corporate U.S. Holders. If you have held the ordinary shares or warrants
for one year or less, such capital gain or loss will be short-term capital gain or loss taxable as ordinary income at your marginal
income tax rate. The deductibility of capital losses is subject to limitations.



Passive Foreign Investment Company



We generally
will be a PFIC under Section 1297 of the Code if, for a taxable year, either (a) 75% or more of our gross income for such taxable
year is passive income (the “income test”) or (b) 50% or more of the average quarterly percentage, generally determined
by fair market value, of our assets either produce passive income or are held for the production of “passive income (the
“asset test”). Passive income includes, for example, dividends, interest, certain rents and royalties, certain gains
from the sale of stock and securities, and certain gains from commodities transactions.



Certain
“look through” rules apply for purposes of the income and asset tests described above. If we own, directly or indirectly,
25% or more of the total value of the outstanding shares of another foreign corporation, we will be treated as if we (a) held
directly a proportionate share of the other corporation’s assets, and (b) received directly a proportionate share of the
other corporation’s income. In addition, passive income does not include any interest, dividends, rents, or royalties that
are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent
such items are properly allocable to income of such related person that is not passive income.



Under
the income and asset tests, whether or not we are a PFIC will be determined annually based upon the composition of our income
and the composition and valuation of our assets, all of which are subject to change. In determining that we are not a PFIC, we
are relying on our projected revenues and projected capital expenditures. If our actual revenues and capital expenditures do not
match our projections, we may become a PFIC. For example, if we do not spend enough of the cash (a passive asset) we raise from
any financing transactions we may undertake, the relative percentage of our passive assets will increase. In addition, our determination
is based on a current valuation of our assets, including goodwill, if it exists. In calculating goodwill, we should value our
total assets based on our market capitalization, determined using the market price of our ordinary shares. Such market price may
fluctuate. If our market capitalization is less than anticipated or subsequently declines, this will decrease the value of our
goodwill and we may become a PFIC. Furthermore, we may make a number of assumptions regarding the amount of value allocable to
goodwill. However, it is possible that the IRS will challenge such valuation of goodwill, which may result in our being a PFIC.



We do
not believe that we are currently a PFIC. However, because the PFIC determination is highly fact intensive and made at the end
of each taxable year, there can be no assurance that we will not be a PFIC for the current or any future taxable year or that
the IRS will not challenge our determination concerning our PFIC status. If we determine that we are a PFIC, we will take reasonable
steps to notify you.



Default
PFIC Rules under Section 1291 of the Code. If we are a PFIC, the U.S. federal income tax consequences to a U.S. Holder of
the ownership and disposition of ordinary shares and warrants will depend on whether such U.S. Holder makes an election to treat
us as a qualified electing fund (“QEF”) under Section 1295 of the Code (a “QEF Election”) or a mark-to-market
election under Section 1296 of the Code (a “Mark-to-Market Election”). A U.S. Holder owning ordinary shares and warrants
while we were or are a PFIC that has not made either a QEF Election or a Mark-to-Market Election will be referred to in this summary
as a “Non-Electing U.S. Holder.”



77







If you
are a Non-Electing U.S. Holder, you will be subject to the default tax rules of Section 1291 of the Code with respect to:



| | · | any
                                                                                                                          “excess
                                                                                                                          distribution”
                                                                                                                          paid
                                                                                                                          on ordinary
                                                                                                                          shares
                                                                                                                          and
                                                                                                                          warrants,
                                                                                                                          which
                                                                                                                          means
                                                                                                                          any
                                                                                                                          distribution
                                                                                                                          received
                                                                                                                          by you
                                                                                                                          which,
                                                                                                                          together
                                                                                                                          with
                                                                                                                          all
                                                                                                                          other
                                                                                                                          distributions
                                                                                                                          received
                                                                                                                          in the
                                                                                                                          current
                                                                                                                          taxable
                                                                                                                          year,
                                                                                                                          exceeds
                                                                                                                          125%
                                                                                                                          of the
                                                                                                                          average
                                                                                                                          distributions
                                                                                                                          received
                                                                                                                          by you
                                                                                                                          during
                                                                                                                          the
                                                                                                                          three
                                                                                                                          preceding
                                                                                                                          taxable
                                                                                                                          years
                                                                                                                          (or
                                                                                                                          during
                                                                                                                          your
                                                                                                                          holding
                                                                                                                          period
                                                                                                                          for
                                                                                                                          the
                                                                                                                          ordinary
                                                                                                                          shares
                                                                                                                          and
                                                                                                                          warrants,
                                                                                                                          if shorter);
                                                                                                                          and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | any
                                                                                                                          gain
                                                                                                                          recognized
                                                                                                                          on the
                                                                                                                          sale
                                                                                                                          or other
                                                                                                                          taxable
                                                                                                                          disposition
                                                                                                                          (including
                                                                                                                          a pledge)
                                                                                                                          of ordinary
                                                                                                                          shares
                                                                                                                          and
                                                                                                                          warrants.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under these default tax rules:



| | · | any
                                                                                                                          excess
                                                                                                                          distribution
                                                                                                                          or gain
                                                                                                                          will
                                                                                                                          be allocated
                                                                                                                          ratably
                                                                                                                          over
                                                                                                                          your
                                                                                                                          holding
                                                                                                                          period
                                                                                                                          for
                                                                                                                          the
                                                                                                                          ordinary
                                                                                                                          shares
                                                                                                                          and
                                                                                                                          warrants;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                          amount
                                                                                                                          allocated
                                                                                                                          to the
                                                                                                                          current
                                                                                                                          taxable
                                                                                                                          year
                                                                                                                          and
                                                                                                                          any
                                                                                                                          period
                                                                                                                          prior
                                                                                                                          to the
                                                                                                                          first
                                                                                                                          day
                                                                                                                          of the
                                                                                                                          first
                                                                                                                          taxable
                                                                                                                          year
                                                                                                                          in which
                                                                                                                          we were
                                                                                                                          a PFIC
                                                                                                                          will
                                                                                                                          be treated
                                                                                                                          as ordinary
                                                                                                                          income
                                                                                                                          in the
                                                                                                                          current
                                                                                                                          year;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                          amount
                                                                                                                          allocated
                                                                                                                          to each
                                                                                                                          of the
                                                                                                                          other
                                                                                                                          years
                                                                                                                          will
                                                                                                                          be treated
                                                                                                                          as ordinary
                                                                                                                          income
                                                                                                                          and
                                                                                                                          taxed
                                                                                                                          at the
                                                                                                                          highest
                                                                                                                          applicable
                                                                                                                          tax
                                                                                                                          rate
                                                                                                                          in effect
                                                                                                                          for
                                                                                                                          that
                                                                                                                          year;
                                                                                                                          and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | the
                                                                                                                          resulting
                                                                                                                          tax
                                                                                                                          liability
                                                                                                                          from
                                                                                                                          any
                                                                                                                          such
                                                                                                                          prior
                                                                                                                          years
                                                                                                                          will
                                                                                                                          be subject
                                                                                                                          to the
                                                                                                                          interest
                                                                                                                          charge
                                                                                                                          applicable
                                                                                                                          to underpayments
                                                                                                                          of tax.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition,
notwithstanding any election you may make, dividends that you receive from us will not be eligible for the preferential tax rates
applicable to QDI (as discussed above in “Distributions on Ordinary Shares”) if we are a PFIC either in the taxable
year of the distribution or the preceding taxable year, but will instead be taxable at rates applicable to ordinary income.



Special
rules for Non-Electing U.S. Holders will apply to determine U.S. foreign tax credits with respect to withholding taxes imposed
on distributions on ordinary shares.



If we
are a PFIC for any taxable year during which you hold ordinary shares or warrants, we will continue to be treated as a PFIC with
respect to you for all succeeding years during which you hold ordinary shares or warrants, regardless of whether we actually continue
to be a PFIC. You may terminate this deemed PFIC status by electing to recognize gain (which will be taxed under the default tax
rules of Section 1291 of the Code discussed above) as if your ordinary shares or warrants had been sold on the last day of the
last taxable year for which we were a PFIC.



If we
are a PFIC in any year with respect to you, you will be required to file an annual return on IRS Form 8621 regarding distributions
received on ordinary shares and any gain realized on the disposition of ordinary shares or warrants.



QEF
Election. If you make a QEF Election, you generally will not be subject to the default rules of Section 1291 of the Code discussed
above. Instead, you will be subject to current U.S. federal income tax on your pro rata share of our ordinary earnings and net
capital gain, regardless of whether such amounts are actually distributed to you by us. However, you can make a QEF Election only
if we agree to furnish you annually with certain tax information, and we currently do not intend to prepare or provide such information.



Mark-to-Market
Election. U.S. Holders may make a Mark-to-Market Election, but only if the ordinary shares are marketable stock. The ordinary
shares will be “marketable stock” as long as they listed on NASDAQ, and are regularly traded. Stock is “regularly
traded” for any calendar year during which it is traded (other than in de minimis quantities) on at least fifteen days during
each calendar quarter. There can be no assurances, however, that our ordinary shares will be treated, or continue to be treated,
as regularly traded.



If the
ordinary shares are marketable stock and you make a Mark-to-Market Election, you generally will not be subject to the default
rules of Section 1291 of the Code discussed above. Rather, you generally will be required to recognize ordinary income for any
increase in the fair market value of the ordinary shares and warrants for each taxable year that we are a PFIC. You will also
be allowed to deduct as an ordinary loss any decrease in the fair market value to the extent of net marked-to-market gain previously
included in prior years. Your adjusted tax basis in the ordinary shares and warrants will be adjusted to reflect the amount included
or deducted.



78







The Mark-to-Market
Election will be effective for the taxable year for which the election is made and all subsequent taxable years, unless the ordinary
shares and warrants cease to be marketable stock or the IRS consents to the revocation of the election. You should consult your
own tax advisor regarding the availability of, and procedure for making, a Mark-to-Market Election.



Since
the PFIC rules are complex, you should consult your own tax advisor regarding them and how they may affect the U.S. federal income
tax consequences of the ownership and disposition of ordinary shares and warrants.



Information Reporting and Backup Withholding



Generally,
information reporting requirements will apply to distributions on ordinary shares or proceeds on the disposition of ordinary shares
and warrants paid within the U.S. (and, in certain cases, outside the U.S.) to U.S. Holders other than certain exempt recipients,
such as corporations. Furthermore, backup withholding (currently at 28%) may apply to such amounts if the U.S. Holder fails to
(i) provide a correct taxpayer identification number, (ii) report interest and dividends required to be shown on its U.S. federal
income tax return, or (iii) make other appropriate certifications in the required manner. U.S. Holders who are required to establish
their exempt status generally must provide such certification on IRS Form W-9.



Backup
withholding is not an additional tax. Amounts withheld as backup withholding from a payment to you may be credited against your
U.S. federal income tax liability and you may obtain a refund of any excess amounts withheld by filing the appropriate claim for
refund with the IRS and furnishing any required information in a timely manner.



Taxation of Non-U.S. Holders



Distributions on Ordinary Shares



Subject
to the discussion in “Information Reporting and Backup Withholding” below, as a Non-U.S. Holder, you generally will
not be subject to U.S. federal income tax, including withholding tax, on distributions received on ordinary shares, unless the
distributions are effectively connected with a trade or business that you conduct in the U.S. and (if an applicable income tax
treaty so requires) attributable to a permanent establishment that you maintain in the U.S.



If distributions
are effectively connected with a U.S. trade or business and (if applicable) attributable to a U.S. permanent establishment, you
generally will be subject to tax on such distributions in the same manner as a U.S. Holder, as described in “Taxation of
U.S. Holders – Distributions on Ordinary Shares” above. In addition, any such distributions received by a corporate
Non-U.S. Holder may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate
or such lower rate as may be specified by an applicable income tax treaty.



Dispositions of Ordinary Shares and Warrants



Subject
to the discussion in “Information Reporting and Backup Withholding” below, as a Non-U.S. Holder, you generally will
not be subject to U.S. federal income tax, including withholding tax, on any gain recognized on a sale or other taxable disposition
of ordinary shares and warrants, unless (i) the gain is effectively connected with a trade or business that you conduct in the
U.S. and (if an applicable income tax treaty so requires) attributable to a permanent establishment that you maintain in the U.S.,
or (ii) you are an individual and are present in the U.S. for at least 183 days in the taxable year of the disposition, and certain
other conditions are present.



If you
meet the test in clause (i) above, you generally will be subject to tax on any gain that is effectively connected with your conduct
of a trade or business in the U.S. in the same manner as a U.S. Holder, as described in “Taxation of U.S. Holders –
Dispositions of Ordinary Shares and Warrants” above. Effectively connected gain realized by a corporate Non-U.S. Holder
may also, under certain circumstances, be subject to an additional “branch profits tax” at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty.



If you
meet the test in clause (ii) above, you generally will be subject to tax at a 30% rate on the amount by which your U.S. source
capital gain exceeds your U.S. source capital loss.



Information Reporting and Backup Withholding



Payments
to Non-U.S. Holders of distributions on, or proceeds from the disposition of, ordinary shares and warrants are generally exempt
from information reporting and backup withholding. However, a Non-U.S. Holder may be required to establish that exemption by providing
certification of non-U.S. status on an appropriate IRS Form W-8.



79







Backup
withholding is not an additional tax. Amounts withheld as backup withholding from a payment to you may be credited against your
U.S. federal income tax liability and you may obtain a refund of any excess amounts withheld by filing the appropriate claim for
refund with the IRS and furnishing any required information in a timely manner.



Medicare Tax



In addition to the taxes
on dividends and dispositions of our shares or warrants described above, recently enacted legislation requires certain U.S. Holders
that are individuals, estates or trusts to pay up to an additional 3.8% tax on net investment income, which may include dividends
and capital gains, for taxable years beginning after December 31, 2012.



F.    Dividends
and Paying Agent



Not applicable.



G.    Statements
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 U.S. companies whose securities are registered under the Exchange Act. However, we will file with the SEC, commencing with
the fiscal year ending December 31, 2011 within four months after the end of each fiscal year, an annual report on Form 20-F containing
financial statements audited by an independent accounting firm. We also expect to furnish quarterly reports on Form 6-K containing
unaudited interim financial information for the first three quarters of each fiscal year, within 90 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, if any, 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 may maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including U.S. dollars, NIS bank deposits, money market funds and government
and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on
such funds fluctuates with the prevailing interest rate.



Our financial market risk includes risks
related to international operations and related foreign currencies. We anticipate that sales outside of North America will continue
to account for a significant portion of our consolidated revenue in 2012. To date, most of our sales have been valued in dollars.
In future periods, we expect our sales to continue to be principally valued in dollars, narrowing foreign currency exchange risk.



80







We value part of our expenses in some of
our international operations, such as Israel, in each country's local currency, and therefore are subject to foreign currency
exchange risk. However, through December 31, 2011, we have not experienced any significant negative impact on our operations as
a result of fluctuations in foreign currency exchange rates; we have incurred an income of $5,000 in the year ended December 31,
2011 due to fluctuations in foreign exchange rates. We do not use financial instruments to hedge operating expenses in Israel
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, 2011, 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.



Foreign currency risk



Most of our sales are denominated in U.S.
dollars, and we incur most of our expenses in U.S. dollars and Israeli Shekels. According to the salient economic factors indicated
in ASC Topic 830, “Foreign Currency Matters,” our cash flow, sale price, sales market, expense, financing and inter-company
transactions and arrangement indicators are predominantly denominated in U.S. dollars. In addition, the U.S. dollar is the primary
currency of the economic environment in which we operate, and thus the U.S. dollar is our functional and reporting currency.



In our balance sheet, we remeasure into
U.S. dollars all monetary accounts (principally cash and cash equivalents and liabilities) that are maintained in other currencies.
For this remeasurement we use the foreign exchange rate at the balance sheet date. Any gain or loss that results from this remeasurement
is reflected in the statement of income as financial income or financial expense, as appropriate.



We measure
and record non-monetary accounts in our balance sheet (principally fixed assets, prepaid expenses and share capital) in U.S. dollars.
For this measurement we use the U.S. dollar value in effect at the date that the asset or liability was initially recorded in
our balance sheet (the date of the transaction).



Interest Rate Risk



Our cash borrowing from Israeli bank is
subject to interest rate changes, and therefore our interest expenses are sensitive to changes in interest rates. The interest
rate on our borrowing is linked to LIBOR, which fluctuates. However, the amount of borrowings that we have that is linked to LIBOR
is not material to us as a whole, and therefore our exposure to fluctuations in LIBOR rate is not material as well.



ITEM 12. Description of Securities Other than
Equity Securities.



Not applicable.



PART II



ITEM 13. Defaults, Dividend Arrearages and Delinquencies.



| | A. | As of the filing date of this Annual Report, we were not in compliance
                                                      with the covenants under the amended Convertible Bonds (see also Item 4.A
                                                      under the caption “Recent Developments” and Item 5.B under the
                                                      caption “Liquidity and Capital Resources”). In 2011, we experienced
                                                      an increase in financial expenses with respect to our Convertible Bonds
                                                      caused by an increase in the interest rate of the bonds and due to our breach
                                                      of the covenants under the Convertible Bonds, as amended, which required
                                                      us to incur additional interest of 3% per month on unpaid amounts. The additional
                                                      interest expenses amounted to $271,000 during the year ended December 31,
                                                      2011.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | B. | None.
| | -- | -----





81







ITEM 14. Material Modifications to the Rights of Security
Holders and Use of Proceeds.



None.



ITEM 15. Controls and Procedures.



Disclosure Controls and Procedures



Our management has evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of December 31, 2011.
Our disclosure controls and procedures include components of our internal control over financial reporting. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as of December
31, 2011, were not effective due solely to the material weakness in our internal control over financial reporting as described
below in “Management’s Report on Internal Control over Financial Reporting”.



Disclosure
controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the
time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure.



In light of this material weakness, we
performed additional analysis as deemed necessary to ensure that the consolidated financial statements were prepared in accordance
with U.S. generally accepted accounting principles. Accordingly, management believes that the consolidated financial statements
included in this report present fairly, in all material respects, our financial position, results of operations and cash flows
for the period presented.



Management's Report on Internal Control over Financial Reporting



Our management is responsible for establishing
and maintaining adequate internal control over our financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) to provide
reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. GAAP, and includes policies and procedures that:



| | · | pertain to the maintenance
                                                                                                     of records that in reasonable
                                                                                                     detail accurately and fairly
                                                                                                     reflect our transactions
                                                                                                     and asset dispositions;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | provide reasonable assurance
                                                                                                     that transactions are recorded
                                                                                                     as necessary to permit the
                                                                                                     preparation of our financial
                                                                                                     statements in accordance
                                                                                                     with generally accepted accounting
                                                                                                     principles;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | provide reasonable assurance
                                                                                                     that receipts and expenditures
                                                                                                     are made only in accordance
                                                                                                     with authorizations of our
                                                                                                     management and Board of Directors
                                                                                                     (as appropriate); and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | provide reasonable assurance
                                                                                                     regarding the prevention
                                                                                                     or timely detection of unauthorized
                                                                                                     acquisition, use or disposition
                                                                                                     of assets that could have
                                                                                                     a material effect on our
                                                                                                     financial statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our management assessed the effectiveness
of internal control over financial reporting as of December 31, 2011, the end of our fiscal year. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in the report entitled
“Internal Control – Integrated Framework.”



Based on that assessment, our Chief Executive
Officer and Chief Financial Officer have concluded that we did not maintain effective internal control over financial reporting
as a result of insufficient resources and personnel to properly segregate duties in our finance department, resulting in a material
weakness in the financial statement closing process.



Inherent limitations on effectiveness
of controls.



Internal control over financial reporting
has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance
and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also
can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements
will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce,
though not eliminate, this risk.



82







Attestation
Report of Registered Public Accounting Firm



Not
applicable.



Changes in Internal Controls over Financial Reporting



During the period covered by this Annual
Report, no changes in our internal control over financial reporting have occurred that materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.



ITEM 16A.Audit
Committee Financial Expert



Our Board of Directors has determined that
Messrs. Avi Ayash and Shlomo Benjamin, both members of our audit committee, are audit committee financial experts, as defined
under the Exchange Act Rules, and are independent in accordance with applicable Exchange Act rules. The relevant experience
of each of them is summarized in Item 6A-"Directors and Senior Management".



ITEM 16B.Code of Ethics



Our Board of Directors adopted a code of
ethics that applies to our chief executive officer, chief financial officer (if any), director of finance, controller, and other
persons performing similar functions a copy of which is previously filed and incorporated by reference 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: Nolton
House, 14 Shenkar Street P.O.B 12190, Hertzliya Pituach 46725 Israel.



ITEM 16C.Principal Accountant
Fees and Services



Fahn, Kanne & Co., a member of Grant
Thornton, serves as our principal independent registered public accounting firm. The following table presents the fees to our
external auditors for professional services rendered in the years ended December 31, 2011 and 2010:



|                   |  | 2011 |        |  | 2010 | 
|------------------ |  | ---- | ------ |  | ---- | 
|Audit Fees         |  |      | 61,000 |  |      | 
|Audit-Related Fees |  |      | -      |  |      | 
|Tax Fees           |  |      | 5,000  |  |      | 
|Total              |  |      | 66,000 |  |      | 



“Audit Fees” are the
aggregate fees billed for the audit of our annual financial statements. This category also includes services that generally the
independent registered public accounting firm provides, such as statutory audits including audits required by Israeli government
institutes, consents and assistance with and review of documents filed with the SEC.



“Tax Fees” are the aggregate
fees billed for professional services rendered for tax compliance and tax advice, other than in connection with the audit. Tax
compliance involves preparation of original and amended tax returns, tax planning and tax advice.



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.



83







ITEM 16D. Exemptions from the Listing Standards for Audit
Committees



None.



ITEM 16E.Purchases of Equity Securities by the Issuer
and Affiliated Purchasers



None.



ITEM 16F. Change in Registrant’s Certifying Accountant



Not applicable.



ITEM 16G.Corporate Governance



Not applicable.



ITEM 16H.Mine Safety Disclosure



Not applicable.



PART III

ITEM 17. Financial Statements.



Not applicable.



ITEM 18. Financial Statements.



VUANCE LTD.

2011 ANNUAL REPORT



INDEX TO THE FINANCIAL STATEMENTS



|                                                                |  | Page      
|--------------------------------------------------------------- |  | ----------
|                                                                |  |           
|REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
    FIRM     |  | F- 2      
|CONSOLIDATED FINANCIAL STATEMENTS:                              |  |           
|Consolidated balance sheets                                     |  | F-3 - F-4 
|Consolidated statements of operations                           |  | F-5       
|Consolidated statements of changes
    in shareholders’ deficit |  | F-6       
|Consolidated statements of cash
    flows                       |  | F-7 - F-8 
|Notes to consolidated financial statements                      |  | F-9 - F-46



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



84









VUANCE LTD. AND SUBSIDIARIES



CONSOLIDATED FINANCIAL STATEMENTS



AS OF DECEMBER 31, 2011



IN U.S. DOLLARS



INDEX



|                                                        |  | Page      
|------------------------------------------------------- |  | ----------
|                                                        |  |           
|Report of Independent Registered Public Accounting Firm |  | F-2       
|                                                        |  |           
|Consolidated Balance Sheets                             |  | F-3 – F-4 
|                                                        |  |           
|Consolidated Statements of Operations                   |  | F-5       
|                                                        |  |           
|Statements of Changes in Shareholders' Deficit          |  | F-6       
|                                                        |  |           
|Consolidated Statements of Cash Flows                   |  | F-7 – F-8 
|                                                        |  |           
|Notes to Consolidated Financial Statements              |  | F-9 – F-46












F-1



















|REPORT OF INDEPENDENT             | Fahn Kanne & Co.      
|--------------------------------- | ----------------------
|REGISTERED PUBLIC ACCOUNTING FIRM | Head Office           
|TO THE SHAREHOLDERS OF            | Levinstein Tower      
|VUANCE LTD.                       | 23 Menachem Begin Road
|                                  | Tel-Aviv 66184, ISRAEL
|                                  | P.O.B. 36172, 61361   
|                                  |                       
|                                  | T +972 3 7106666      
|                                  | F +972 3 7106660      
|                                  | www.gtfk.co.il        







We have audited the accompanying consolidated
balance sheets of Vuance Ltd. and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related
consolidated statements of operations, changes in shareholders’ deficit and cash flows for each of the three years in the
period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.



We conducted our audits 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 audit 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 provide a reasonable
basis for our opinion.



In our opinion, based on our audits, the
consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position
of Vuance Ltd. and subsidiaries as of December 31, 2011 and 2010, and the results of their operations, and their cash flows
for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted
in the United States of America.



The accompanying consolidated financial
statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 1f to the financial
statements, the Company has incurred substantial recurring losses and negative cash flows from operations and, as of December 31,
2011, the Company had a working capital deficit and total shareholders' deficit. These conditions, along with other matters as
set forth in Note 1f, raise substantial doubt about the Company's ability to continue as a going concern. Management’s plans
in regards to these matters are also described in Note 1f. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.



/s/ Fahn Kanne & Co. Grant Thornton Israel

May 9, 2012





|Certified Public Accountants
        Fahn Kanne & Co. is the Israeli member firm of Grant
        Thornton International Ltd
|----------------------------------------------------------------------------------------------------------------------------







F-2











VUANCE LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS








U.S. dollars in thousands



|                                                                                                                               |  | December 31, |      
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------ | -----
|                                                                                                                               |  | 2011         |      
|ASSETS                                                                                                                         |  |              |      
|                                                                                                                               |  |              |      
|CURRENT ASSETS:                                                                                                                |  |              |      
|Cash and cash equivalents                                                                                                      |  | $            | 215  
|Restricted cash deposits                                                                                                       |  |              | -    
|Trade receivables (net of allowance for doubtful accounts of $ 134 and $ 1,553 as of December 31, 2011 and 2010, respectively) |  |              | 1,542
|Other accounts receivable and prepaid expenses                                                                                 |  |              | 105  
|Inventories, net                                                                                                               |  |              | 269  
|                                                                                                                               |  |              |      
|Total current assets                                                                                                           |  |              | 2,131
|                                                                                                                               |  |              |      
|SEVERANCE PAY FUND                                                                                                             |  |              | 228  
|                                                                                                                               |  |              |      
|PROPERTY AND EQUIPMENT, NET                                                                                                    |  |              | 96   
|                                                                                                                               |  |              |      
|Total assets                                                                                                                   |  | $            | 2,455



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





F-3









VUANCE LTD. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS








U.S. dollars in thousands, except share data



|                                                                                                       |  | December 31, |        
|------------------------------------------------------------------------------------------------------ |  | ------------ | -------
|                                                                                                       |  | 2011         |        
|LIABILITIES AND SHAREHOLDERS' DEFICIT                                                                  |  |              |        
|                                                                                                       |  |              |        
|CURRENT LIABILITIES:                                                                                   |  |              |        
|Short-term bank credit                                                                                 |  | $            | 112    
|Trade payables                                                                                         |  |              | 2,439  
|Employees and payroll accruals                                                                         |  |              | 139    
|Advances from customer                                                                                 |  |              | -      
|Accrued expenses and other liabilities                                                                 |  |              | 2,164  
|Convertible bonds                                                                                      |  |              | 2,519  
|Short-term loan and others                                                                             |  |              | 456    
|                                                                                                       |  |              |        
|Total current liabilities                                                                              |  |              | 7,829  
|                                                                                                       |  |              |        
|LONG-TERM LIABILITIES:                                                                                 |  |              |        
|Convertible bonds                                                                                      |  |              | -      
|Long-term loan and others                                                                              |  |              | -      
|Accrued severance pay                                                                                  |  |              | 227    
|                                                                                                       |  |              |        
|Total long-term liabilities                                                                            |  |              | 227    
|                                                                                                       |  |              |        
|COMMITMENTS AND CONTINGENT LIABILITIES                                                                 |  |              |        
|                                                                                                       |  |              |        
|SHAREHOLDERS' DEFICIT:                                                                                 |  |              |        
|Share capital:                                                                                         |  |              |        
|Ordinary shares of NIS 0.0588235 par value -                                                           |  |              |        
|Authorized 52,000,000 shares as of December 31, 2011 and 2010;                                         |  |              |        
|Issued and outstanding: 12,035,272 and 7,280,821 shares as of December 31, 2011 and 2010, respectively |  |              | 192    
|Additional paid-in capital                                                                             |  |              | 41,713 
|Amount of liability extinguished on account of shares                                                  |  |              | 819    
|Accumulated deficit                                                                                    |  |              | (48,325
|                                                                                                       |  |              |        
|Total shareholders' deficit                                                                            |  |              | (5,601 
|                                                                                                       |  |              |        
|Total liabilities and shareholders' deficit                                                            |  | $            | 2,455  



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





F-4









VUANCE LTD. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS






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



|                                                                                               |  | Year ended December 31, |           
|---------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                               |  | 2011                    |           
|                                                                                               |  |                         |           
|Revenues                                                                                       |  | $                       | 7,922     
|Cost of revenues                                                                               |  |                         | 3,306     
|Gross profit                                                                                   |  |                         | 4,616     
|                                                                                               |  |                         |           
|Operating expenses:                                                                            |  |                         |           
|Research and development                                                                       |  |                         | 462       
|Selling and marketing                                                                          |  |                         | 3,505     
|General and administrative                                                                     |  |                         | 732       
|Other (income) expenses                                                                        |  |                         | (137      
|Total operating expenses                                                                       |  |                         | 4,562     
|                                                                                               |  |                         |           
|Operating (loss) income                                                                        |  |                         | 54        
|Financial (expenses) income, net                                                               |  |                         | 990       
|                                                                                               |  |                         |           
|Income (loss) before income tax                                                                |  |                         | 1,044     
|Income tax                                                                                     |  |                         | (25       
|                                                                                               |  |                         |           
|Net income (loss) from continuing operations                                                   |  |                         | 1,019     
|Loss from discontinued operations                                                              |  |                         | -         
|                                                                                               |  |                         |           
|Net income (loss)                                                                              |  | $                       | 1,019     
|                                                                                               |  |                         |           
|Earnings (loss) per share from continuing operations:                                          |  |                         |           
|Basic                                                                                          |  | $                       | 0.11      
|Diluted                                                                                        |  | $                       | 0.09      
|                                                                                               |  |                         |           
|Loss per share from discontinued operations basic and diluted:                                 |  |                         | -         
|                                                                                               |  |                         |           
|Net earnings (loss) per share:                                                                 |  |                         |           
|Basic                                                                                          |  | $                       | 0.11      
|Diluted                                                                                        |  | $                       | 0.09      
|                                                                                               |  |                         |           
|Weighted average number of ordinary shares used in computing basic  earnings (loss) per share  |  |                         | 9,126,327 
|                                                                                               |  |                         |           
|Weighted average number of ordinary shares used in computing diluted earnings (loss) per share |  |                         | 11,710,254



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





F-5









VUANCE LTD. AND SUBSIDIARIES



STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT








U.S. dollars in thousands, except share data





|                                                                                                                 |  | Ordinary shares  |            |  |               |   |     |                            |  |   |                                                       |  |  |                     |     |  |                                       |  
|---------------------------------------------------------------------------------------------------------------- |  | ---------------- | ---------- |  | ------------- | - | --- | -------------------------- |  | - | ----------------------------------------------------- |  |  | ------------------- | --- |  | ------------------------------------- | -
|                                                                                                                 |  | Number of Shares |            |  | Share capital |   |     | Additional paid-in capital |  |   | Amount of
liability
extinguished
on account of
shares |  |  | Accumulated deficit |     |  | Total comprehensive income
    (loss) |  
|                                                                                                                 |  |                  |            |  |               |   |     |                            |  |   |                                                       |  |  |                     |     |  |                                       |  
|Balance as of January 1, 2009                                                                                    |  |                  | 5,259,874  |  |               | $ | 82  |                            |  | $ | 40,345                                                |  |  | $                   | -   |  |                                       | $
|Issuance of shares in
    connection with acquisition of Intelli-Site (see Note 1a)                              |  |                  | 202,626    |  |               |   | 3   |                            |  |   | 68                                                    |  |  |                     | -   |  |                                       |  
|Issuance of shares (see Note 13c)                                                                                |  |                  | 168,865    |  |               |   | 3   |                            |  |   | 60                                                    |  |  |                     | -   |  |                                       |  
|                                                                                                                 |  |                  |            |  |               |   |     |                            |  |   |                                                       |  |  |                     |     |  |                                       |  
|Exercise of options                                                                                              |  |                  | 93,056     |  |               |   | 1   |                            |  |   | -                                                     |  |  |                     | -   |  |                                       |  
|                                                                                                                 |  |                  |            |  |               |   |     |                            |  |   |                                                       |  |  |                     |     |  |                                       |  
|Beneficial conversion feature on convertible bond terms                                                          |  |                  | -          |  |               |   | -   |                            |  |   | 24                                                    |  |  |                     | -   |  |                                       |  
|Stock- based compensation                                                                                        |  |                  | -          |  |               |   | -   |                            |  |   | 522                                                   |  |  |                     | -   |  |                                       |  
|Net loss                                                                                                         |  |                  | -          |  |               |   | -   |                            |  |   | -                                                     |  |  |                     | -   |  |                                       |  
|Total comprehensive loss                                                                                         |  |                  |            |  |               |   |     |                            |  |   |                                                       |  |  |                     |     |  |                                       |  
|Balance as of December 31, 2009                                                                                  |  |                  | 5,724,421  |  |               | $ | 89  |                            |  | $ | 41,019                                                |  |  | $                   | -   |  |                                       | $
|Issuance of shares in
    connection with acquisition of Intelli-Site (see Note 1a)                              |  |                  | 6,932      |  |               |   | -   | *                          |  |   | -                                                     |  |  |                     | -   |  |                                       |  
|Issuance of shares (see Note 13f)                                                                                |  |                  | 1,538,461  |  |               |   | 24  |                            |  |   | 176                                                   |  |  |                     | -   |  |                                       |  
|Exercise of options                                                                                              |  |                  | 11,007     |  |               |   | -   | *                          |  |   | -                                                     |  |  |                     | -   |  |                                       |  
|Warrants issued in connection
    with extinguishments of liabilities (see Note 1d)                              |  |                  | -          |  |               |   | -   |                            |  |   | 147                                                   |  |  |                     | -   |  |                                       |  
|Stock- based compensation                                                                                        |  |                  | -          |  |               |   | -   |                            |  |   | 18                                                    |  |  |                     | -   |  |                                       |  
|Net loss                                                                                                         |  |                  | -          |  |               |   | -   |                            |  |   | -                                                     |  |  |                     | -   |  |                                       |  
|Total comprehensive loss                                                                                         |  |                  |            |  |               |   |     |                            |  |   |                                                       |  |  |                     |     |  |                                       |  
|Balance as of December 31, 2010                                                                                  |  |                  | 7,280,821  |  |               | $ | 113 |                            |  | $ | 41,360                                                |  |  | $                   | -   |  |                                       | $
|Exercise of options                                                                                              |  |                  | 10,007     |  |               |   | -   | *                          |  |   | -                                                     |  |  |                     | -   |  |                                       |  
|Shares, options and warrants
    issued in connection with extinguishments of liabilities (see Notes 1d and 13d) |  |                  | 4,744,444  |  |               |   | 79  |                            |  |   | 343                                                   |  |  |                     | 819 |  |                                       |  
|Stock- based compensation                                                                                        |  |                  | -          |  |               |   | -   |                            |  |   | 10                                                    |  |  |                     | -   |  |                                       |  
|Net income                                                                                                       |  |                  | -          |  |               |   | -   |                            |  |   | -                                                     |  |  |                     | -   |  |                                       |  
|Total comprehensive income                                                                                       |  |                  |            |  |               |   |     |                            |  |   |                                                       |  |  |                     |     |  |                                       |  
|Balance as of December 31, 2011                                                                                  |  |                  | 12,035,272 |  |               | $ | 192 |                            |  | $ | 41,713                                                |  |  | $                   | 819 |  |                                       | $







*Less than $1.



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





F-6







VUANCE LTD. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS








U.S. dollars in thousands





|                                                                                     |  | Year ended December 31, |       
|------------------------------------------------------------------------------------ |  | ----------------------- | ------
|                                                                                     |  | 2011                    |       
|Cash flows from operating activities:                                                |  |                         |       
|Net income (loss)                                                                    |  | $                       | 1,019 
|                                                                                     |  |                         |       
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                         |       
|Depreciation and amortization                                                        |  |                         | 28    
|Impairment loss                                                                      |  |                         | -     
|Accrued severance pay                                                                |  |                         | (27   
|Stock-based compensation                                                             |  |                         | 10    
|Amortization of discount on convertible bonds                                        |  |                         | -     
|Capital loss on disposal of property and equipment                                   |  |                         | 6     
|Capital gain on sale of subsidiary (Appendix C)                                      |  |                         | -     
|Capital gain on extinguishments of liabilities                                       |  |                         | (2,149
|Decrease (increase) in trade receivables                                             |  |                         | (790  
|Decrease (increase) in other accounts receivable and prepaid expenses                |  |                         | 283   
|Decrease (increase) in inventories, net                                              |  |                         | (72   
|Increase (decrease) in trade payables                                                |  |                         | 1,466 
|Increase (decrease) in employees and payroll accruals                                |  |                         | 3     
|Increase (decrease) in advances from customer                                        |  |                         | (1,010
|Increase in accrued expenses and other liabilities                                   |  |                         | 1,044 
|                                                                                     |  |                         |       
|Net cash used in operating activities                                                |  |                         | (189  
|                                                                                     |  |                         |       
|Cash flows from investing activities:                                                |  |                         |       
|Purchase of property and equipment                                                   |  |                         | (23   
|Proceeds from sale of property and equipment                                         |  |                         | 3     
|Acquisition of operation net of cash acquired (Appendix A)                           |  |                         | -     
|Proceeds from sale of operations net of cash sold (Appendix B)                       |  |                         | -     
|Sale of subsidiary net of cash sold (Appendix C)                                     |  |                         | -     
|Decrease in severance pay fund                                                       |  |                         | 6     
|Restricted cash deposits, net                                                        |  |                         | 130   
|                                                                                     |  |                         |       
|Net cash provided by investing activities                                            |  |                         | 116   
|                                                                                     |  |                         |       
|Cash flows from financing activities:                                                |  |                         |       
|Short-term bank credit, net                                                          |  |                         | 112   
|Principle repayment of convertible bonds                                             |  |                         | (21   
|Issuance of share capital, net of issuance costs                                     |  |                         | -     
|Proceeds from exercise of options and warrants, net                                  |  |                         | -     
|Payment of liability to a former owner of an acquiree                                |  |                         | -     
|                                                                                     |  |                         |       
|Net cash (used in) provided by financing activities                                  |  |                         | 91    
|                                                                                     |  |                         |       
|Increase (decrease) in cash and cash equivalents                                     |  |                         | 18    
|Cash and cash equivalents at the beginning of the year                               |  |                         | 197   
|                                                                                     |  |                         |       
|Cash and cash equivalents at the end of the year                                     |  | $                       | 215   



*Less than $1.



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





F-7







VUANCE LTD. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Cont.)








U.S. dollars in thousands



|                                                                 |  | Year ended December 31, |  
|---------------------------------------------------------------- |  | ----------------------- | -
|                                                                 |  | 2011                    |  
|Supplemental disclosure of cash flows information:               |  |                         |  
|                                                                 |  |                         |  
|Appendix A:                                                      |  |                         |  
|Acquisition of operation net of cash acquired:                   |  |                         |  
|                                                                 |  |                         |  
|Assets and liabilities of the operation, as of date of purchase: |  |                         |  
|Working capital (excluding cash and cash equivalents)            |  |                         | -
|Property and equipment                                           |  |                         | -
|Intangible assets                                                |  |                         | -
|Shares issued                                                    |  |                         | -
|Liabilities to former owner of the acquiree (*)                  |  |                         | -
|                                                                 |  |                         |  
|                                                                 |  | $                       | -



(*) Including $68 which represents the acquisition date fair
value of contingent consideration to the former owners.



|Appendix B:                                                   |  |   |   |  |  |   |      |   |  |   |   | 
|------------------------------------------------------------- |  | - | - |  |  | - | ---- | - |  | - | - | 
|Sale of operations net of cash sold:                          |  |   |   |  |  |   |      |   |  |   |   | 
|                                                              |  |   |   |  |  |   |      |   |  |   |   | 
|Assets and liabilities of the operations, as of date of sale: |  |   |   |  |  |   |      |   |  |   |   | 
|Working capital (excluding cash and cash equivalents)         |  |   | - |  |  | $ | (208 | ) |  |   | - | 
|Property and equipment, net                                   |  |   | - |  |  |   | 88   |   |  |   | - | 
|Intangible assets, net                                        |  |   | - |  |  |   | 517  |   |  |   | - | 
|                                                              |  |   |   |  |  |   |      |   |  |   |   | 
|                                                              |  | $ | - |  |  | $ | 397  |   |  | $ | - | 



|Appendix C:                                                   |  |   |   |  |  |   |      |   |  |   |   | 
|------------------------------------------------------------- |  | - | - |  |  | - | ---- | - |  | - | - | 
|Sale of subsidiary net of cash sold:                          |  |   |   |  |  |   |      |   |  |   |   | 
|                                                              |  |   |   |  |  |   |      |   |  |   |   | 
|Assets and liabilities of the subsidiary, as of date of sale: |  |   |   |  |  |   |      |   |  |   |   | 
|Working capital (excluding cash and cash equivalents)         |  |   | - |  |  | $ | (276 | ) |  |   | - | 
|Property and equipment, net                                   |  |   | - |  |  |   | 4    |   |  |   | - | 
|Long-term liability                                           |  |   | - |  |  |   | (3   | ) |  |   | - | 
|Capital gain on sale of subsidiary                            |  |   | - |  |  |   | 272  |   |  |   | - | 
|                                                              |  |   |   |  |  |   |      |   |  |   |   | 
|                                                              |  | $ | - |  |  | $ | (3   | ) |  | $ | - | 



|Cash paid during the year for: |  |   |    |  |  |   |    |  |  |   |     | 
|------------------------------ |  | - | -- |  |  | - | -- |  |  | - | --- | 
|Interest                       |  | $ | 6  |  |  | $ | -  |  |  | $ | 109 | 
|Income taxes, net              |  | $ | 25 |  |  | $ | 50 |  |  | $ | 31  | 





|Supplemental disclosure of non-cash investing and financing activities:        |  |   |       |  |  |   |     |  |  |   |    | 
|------------------------------------------------------------------------------ |  | - | ----- |  |  | - | --- |  |  | - | -- | 
|                                                                               |  |   |       |  |  |   |     |  |  |   |    | 
|Extinguishments of liabilities credited to shareholder’s deficit (see Note 1d) |  | $ | 1,220 |  |  | $ | 147 |  |  |   | -  | 
|Issuance of shares to service providers and officer                            |  | $ | 21    |  |  | $ | -   |  |  | $ | 63 | 



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





F-8









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS






U.S. dollars in thousands (except per share data)



| | NOTE 1:- | GENERAL
| | -------- | -------





| | a. | Vuance Ltd. (the “Company") was incorporated in 1988 in Israel. The Company’s
ordinary shares have been listed for trade on the Pink OTC Markets Inc ., which operates an electronic quotation service for securities
traded over-the-counter, since October 1, 2009, under the ticker symbol “VUNCF”..
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Until
January 2010 (the date of the sale of the activities as described below in Note 1b), the Company developed and marketed security
solutions for viewing, tracking, locating, credentialing, and managing essential assets and personnel, which encompassed electronic
access control, urban security, and critical situation management systems as well as long-range Active RFID for public safety,
commercial, and government sectors. Following the sale of certain activities in January 2010, the Company is focusing on its wireless
ID products and solutions, e-ID projects and solutions.



The Company is headquartered
in Israel.



The
Company sells its products through centralized marketing office in U.S and Israel.



The Company's
subsidiaries includes: Vuance Inc. incorporated in the United States (see b2 below regarding the presentation of certain activity
of Vuance Inc as discontinued operations), Vuance RFID Inc., (incorporated in Delaware) (see b1 below regarding the presentation
of certain activity of Vuance RFID as discontinued operations), S.B.C. Aviation Ltd., (incorporated in Israel) which began operations
in 2007, and focused until 2009 on executing perimeter security and a border control project at a European International Airport,
PureRFid, Inc. (incorporated in Delaware) which focuses on the marketing and selling of the Company’s active RFID solutions
and until October 21, 2010 SuperCom Asia Pacific Limited incorporated in Hong Kong which focused on marketing (see c below). As
of December 31, 2011, all the Company’s activities were concentrated mainly through Vuance Ltd. and PureRFid, Inc.



Regarding
the sale of certain assets and liabilities of Vuance Inc in January 2010, see b2 below.



On March 25, 2009, the Company,
through its subsidiary, Vuance Inc., completed the acquisition of certain assets and liabilities of Intelli-Site, Inc. (“Intelli-Site”).
The purchase price was $262 payable in cash and in shares of the Company (which were subject to a certain lock up mechanism) and
included a contingent consideration of up to $600 based upon certain conditions.



The results
of operations of Intelli-Site were included in the consolidated financial statements of the Company commencing April, 2009. However,
during the first quarter of 2010, this activity (including the contingent consideration related to it) was sold, see b2 below.





F-9









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 1:- | GENERAL (Cont.)
| | -------- | ---------------





| | b. | Discontinued operations
| | -- | -----------------------
| |    |                        

| | 1. | During the fourth quarter of 2008, the Company ceased the operations of distribution of locks (which
commenced during 2008). The assets attributed to this discontinued operations, mainly inventory, were sold during 2009.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The results of the discontinued
operation for the year ended December 31, 2009, is presented below:



|                      |  | Year ended
December 31, 2009 |     
|--------------------- |  | ---------------------------- | ----
|                      |  |                              |     
|Revenues              |  | $                            | 156 
|Cost of revenues      |  | $                            | (196
|Selling and marketing |  | $                            | (25 
|Net loss              |  | $                            | (65 





| | 2. | On January 28, 2010 (the “Closing Date”),
the Company and its subsidiary Vuance, Inc. completed the sale of certain of the assets (including certain accounts receivable
and inventory) and certain of the liabilities (including certain accounts payable) of Vuance Inc. (the “Sale”) related
to the Company's electronic access control market (the “Vuance EAC Business”), pursuant to a certain Agreement for
Purchase and Sale of Business Assets (the “Purchase Agreement”), dated as of January 9, 2010 between Vuance Inc. and
OLTIS Security Systems International, LLC (“OSSI”). On the Closing Date, as consideration for the Sale of the Vuance
EAC Business, OSSI paid Vuance Inc. $147 in cash. In addition, OSSI paid off (the “Bridge Bank Payment”) a certain
Business Financing Agreement (the “Loan”) between Vuance Inc. and Bridge Bank, National Association in an amount of
$290. Further to the Bridge Bank Payment, the Loan was released, and the Company and Vuance Inc. no longer have any liabilities
associated with the Loan. The Purchase Agreement includes an indemnification clause pursuant to which, Vuance Inc. agrees to indemnify
and hold OSSI harmless from and against any claim or liability of Vuance Inc. or the Company, which may be asserted against OSSI,
excepting only to the extent of any business debts and other liabilities which OSSI expressly agrees to pay or assume at the closing
date.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-10









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 1:- | GENERAL (Cont.)
| | -------- | ---------------





| | b. | Discontinued operations (cont.)
| | -- | -------------------------------



2. (cont.)



On January 29, 2010 (the “Closing
Date”), the Company and its subsidiary, Vuance, Inc., completed the sale of certain of the assets and certain of the liabilities
of Vuance Inc. (the “Sale”) related to the Company's Government Services Division (the “Vuance CSMS Business”),
pursuant to a certain asset purchase agreement (the “Purchase Agreement”) dated January 29, 2010 between the Company,
Vuance Inc., WidePoint Corporation (“WidePoint”) and Advance Response Concepts Corporation.



On the
Closing Date, as consideration for the Sale, WidePoint paid Vuance Inc. $250. In addition, WidePoint agreed to pay Vuance
Inc. a maximum earn out of $1,500 over the course of the calendar years 2010, 2011, and 2012, subject to the performance of certain
financial requirements of the Vuance CSMS Business during each of those years. The Purchase Agreement includes an indemnification
clause pursuant to which, each of the parties shall indemnify and hold harmless the other party in the event of the existence of
certain circumstances stipulated in the Purchase Agreement.



Each
of the activities sold meets the definition of a component under ASC Topic 205-20 - “Discontinued Operation”,
and accordingly, the results of operations of these components were presented as discontinued operations.



Following
the sale of the activities, the Company does not have any involvement with respect to the activities sold.



The results of the discontinued
operations are as follows:



|                                                   |  | Year ended December 31, |     
|-------------------------------------------------- |  | ----------------------- | ----
|                                                   |  | 2010                    |     
|Revenues                                           |  | $                       | 541 
|Cost of revenues                                   |  |                         | (497
|Research and development                           |  |                         | (96 
|Selling and marketing                              |  |                         | (105
|General and administrative                         |  |                         | (28 
|Financial expenses                                 |  |                         | (4  
|Impairment of goodwill and other intangible assets |  |                         | -   
|Net loss                                           |  | $                       | (189



| | c. | Sale of subsidiary:
| | -- | -------------------



During October 2010, the Company
sold its entire equity interest in its wholly owned Hong Kong subsidiary, SuperCom Asia Pacific Limited (the “Subsidiary”), for
no consideration. As part of this sale, the Company assigned to the purchaser certain outstanding loans due to the Company
by the Subsidiary in the amount of $1,400. As result of the sale of the Subsidiary, the Company realized a capital gain of $272
in the fourth quarter of 2010.





F-11







VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 1:- | GENERAL (Cont.)
| | -------- | ---------------





| | d. | Extinguishment of liabilities
| | -- | -----------------------------



On November 3, 2010, the Company
submitted to the District Court in Petach-Tikva, Israel, a request to summon meetings of creditors of the Company, in order to
approve a proposed arrangement between the Company and its creditors (including convertible bond holders) in accordance with Section
350 of the Israeli Companies Law 5759-1999. The proposed arrangement involved an allotment of ordinary shares or warrants to purchase
ordinary shares of the Company to certain of its creditors, at a price of $0.09 per ordinary share against 40% of the total outstanding
debt to the creditors, to the effect of total satisfaction of the entire debt owed to the Company’s creditors (thus forgiving
and waiving 60% of the total outstanding debt of the Company). The proposed arrangement was based on the one which was approved
by the general meeting of the shareholders dated September 12, 2010. The Company convened the meetings of its creditors to approve
the proposed debt arrangement during February and March 2011. On March 15, 2011, the Company filed an application with the Petach-Tikva
District Court, in Israel, for the approval of the creditor arrangement.



On July 18, 2011, the Discrict
Court decided not to approve the Company’s application, mainly due to an objection to the proposed arrangement filed by one
of the Company’s secured creditors, Special Situations Funds ("SSF"), which later assigned its bond on November
8, 2011 to Mr. Eliyahu Trabelsi (see also Notes 12 and 14f). In February 2012, following the approval of the board of directors,
the Company decided to proceed with the arrangement which was approved by its general meeting without further proceeding in the
District Court subject to its creditors agreements.



As
of December 31, 2010, certain creditors with a total outstanding debt of $271 had accepted the Company's debt arrangement proposal.
The Company allotted for those certain creditors a total of 1,206,142 warrants to purchase ordinary shares of the Company (see
also Note 13f2). In accordance withASC Topic 470-50-40, the Company recorded an amount of
$124 as a gain from extinguishment of debts based on the difference between the carrying amount of the liabilities extinguished
($271) and the fair value of the warrants allotted ($147), which was credited directly to additional paid-in capital.



In
June, 2011 certain creditors with a total outstanding debt of $322 had accepted the Company's debt arrangement proposal. The Company
allotted for those certain creditors a total of 1,081,871 warrants and 300,000 options (with exercise price of nil) to purchase
ordinary shares of the Company. In accordance withASC Topic 470-50-40, the Company recorded
an amount of $143 as a gain on extinguishment of debtsbased on the difference between the carrying amount of the liabilities extinguished
($322) and the fair value of the warrants and options allotted ($179), which was credited directly to additional paid-in capital
(see also Note 13).



In
a certain arrangement that was subject to the approval of the board of directors, following such approval, on August 4, 2011, Sigma
Wave Ltd (“Sigma”), a convertible bond holder, had accepted the Company's debt arrangement proposal for an amount of
$1,000 of its outstanding debt. The Company allotted to Sigma a total of 4,444,444 ordinary shares of the Company (see also Note
12). In accordance withASC Topic 470-50-40, the Company recorded an amount of $778 as a gain
on extinguishment of debts based on the difference between the carrying amount of the liability extinguished ($1,000) and the fair
value of the ordinary shares granted ($222), which was credited directly to share capital ($74) and additional paid-in capital
($148).





F-12









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 1:- | GENERAL (Cont.)
| | -------- | ---------------



| | d. | Extinguishment of liabilities (cont.)
| | -- | -------------------------------------



On
December 31, 2011 Sigma and Mr. Eliyahu Trabelsi had accepted the Company's debt arrangement proposal for an amount of $2,047
of the outstanding convertible debt amount. The arrangement was not subject to any further approvals or other conditions. The
Company committed to issue Sigma and Mr. Eliyahu Trabelsi an aggregated number of 9,094,400 of its ordinary shares as full repayment
of such amount. In accordance withASC Topic 470-50-40, the Company recorded an amount of
$1,228 as a gain on extinguishment of debt based on the difference between the carrying amounts of the liabilities extinguished
($2,047) and the fair value of the ordinary shares that the Company was committed to issue ($819). In addition an amount of $819
was credited directly to equity as “amount of liability extinguished on account of shares”. The actual allotment of
8,025,000 ordinary shares to a trustee of Sigma and 1,069,400 ordinary shares to Mr. Eliyahu Trabelsi was completed in April,
2012 (see Note 12).



The fair value of the equity
instruments (shares, warrants and options with exercise price of nil) that were issued in connection with the extinguishment of
debts and liabilities, were measured based on a quotation of the Company’s ordinary shares, on the date that the agreement
with the respective creditor became effective.



The Company proposed the same
arrangement to a certain other creditor in an amount of $311 and in respect of the Convertible Bonds which total debt amount is
approximately $2,975 as of December 31, 2011.



| | e. | Concentration of risk that may have a significant impact
on the Company:
| | -- | ------------------------------------------------------------------------



Throughout the reporting periods
the Company derived most of its revenues from one major customer. See also Note 15c.



The Company purchases certain
services and products used by it to generate revenues in its projects and sales from several sole suppliers. Although there are
only a limited number of manufacturers of those particular services and products, management believe that other suppliers could
provide similar services and products on comparable terms without affecting operating results.



| | f. | The Company has incurred substantial losses and negative cash flows from operations since its inception.
The Company had an operating cash flow deficit in each of the years in the three year period ended December 31, 2011. As of December 31,
2011, the Company had an accumulated deficit of approximately $48,325, working capital deficit of $2,723 (excluding the Convertible
Bonds which total debt is approximately $2,975 as of December 31, 2011) and the total shareholders' deficit amounted to $5,601.
The Company incurred net income of approximately $1,019 in the year ended December 31, 2011 (which includes a capital gain of $2,149
as a result of extinguishment of debt in 2011) and incurred net losses of approximately $1,965 and $5,085 in the years ended December
31, 2010 and 2009, respectively. The Company may continue to have an annual losses and operating negative cash flows for the near
future, and expects to spend significant amounts of capital to enhance its products and services, develop further sales and operations
and fund expansion. As a result, the Company will need to generate significant revenues to sustain profitability. The Company may
not be able to sustain or increase profitability on a quarterly or annual basis. Continuation of the Company's current operations
after utilizing its current cash reserves and other current assets is dependent upon the generation of additional financial resources.
As described in Note 1d, the Company wishes to complete the creditors’ arrangement and also is seeking to raise funds either
by equity issuances or by receiving banking credit lines. These matters raise substantial doubt about the Company's ability to
continue as a going concern. The financial statements have been prepared assuming the Company will continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-13













VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)





| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES
| | -------- | -------------------------------



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



| | a. | Use of estimates:
| | -- | -----------------



The preparation
of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
As applicable to these consolidated financial statements, the most significant estimates and assumptions relate to allowance for
doubtful account, contingencies and going concern assumptions.



| | 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 U.S. dollars. Therefore, 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.



Monetary
accounts maintained in currencies other than the U.S. dollar are re-measured into U.S. dollars in accordance with the standards
of the Financial Accounting Standards Board ("FASB"). All transaction gains and losses from the re-measurement of monetary
balance sheet items are reflected in the statements of operations as financial income or financial expenses as appropriate.



| | c. | Principles of consolidation:
| | -- | ----------------------------



The consolidated
financial statements include the accounts of the Company and its subsidiaries (unless the non-controlling shareholders have certain
approval or veto rights) in Israel, the United States and Hong-Kong (see Note 1c). Material intercompany transactions and balances
were eliminated upon consolidation. Material profits from intercompany sales, not yet realized outside the group, were also eliminated.



| | d. | Cash and cash equivalents:
| | -- | --------------------------



The Company
considers unrestricted short-term highly liquid investments originally purchased with maturities of three months or less to be
cash and cash equivalents.



| | e. | Restricted cash deposits:
| | -- | -------------------------



Restricted
cash includes a deposit which is used to secure agreement with account payable.



| | f. | 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 regarding such customers.



| | g. | 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:



F-14















VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)









| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------





| | g. | Inventories (cont.):
| | -- | --------------------



Raw materials, parts and supplies
- using the “moving average cost" method or the “first in first out” method.



Finished products - on the
basis of direct manufacturing costs.



| | h. | Investment in a majority-owned company:
| | -- | ---------------------------------------



The investment in a majority-owned
company is presented using the equity method of accounting in accordance with ASC Topic 323 -"Investments - Equity Method
and Joint Ventures", due to substantive participation rights held by the non-controlling shareholders, which impact the
Company’s ability to exert control over the investee. See Note 5.



| | i. | Property and equipment:
| | -- | -----------------------



Property
and equipment are stated at cost, net of accumulated depreciation.



Depreciation
is computed using the straight-line method, over the estimated useful lives, at the following annual rates:



|                                   |  | %                                                                 
|---------------------------------- |  | ------------------------------------------------------------------
|                                   |  |                                                                   
|Computers and peripheral equipment |  | 33                                                                
|Office furniture and equipment     |  | 6 - 20                                                            
|Leasehold improvements             |  | Over the shorter of the term of
the lease or the life of the asset



| | j. | Impairment of long-lived assets and intangible assets:
| | -- | ------------------------------------------------------



The Company's
long-lived assets and certain identifiable intangible assets are reviewed for impairment 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.



| | k. | Convertible Bonds:
| | -- | ------------------



| | 1. | Beneficial conversion feature:
| | -- | ------------------------------



| |  | The Company has considered the provisions of ASC Topic 815-40, "Derivatives and Hedging
- Contracts in Entity's Own Equity", and determined that the embedded conversion feature of the convertible bonds should
not be separated from the host instrument because it qualifies for equity classification. Furthermore, the Company applied ASC
Topic 470-20, "Debt - Debt with Conversion and Other Options" which clarifies the accounting for instruments with
beneficial conversion features or contingency adjustable conversion ratios.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | The beneficial conversion feature has been calculated by allocating the proceeds received in financing
transactions to the convertible instrument and to any detachable warrants included in the transaction, and by measuring the intrinsic
value of the convertible instrument based on the effective conversion price as a result of the allocated proceeds.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





F-15









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------





| | k. | Convertible Bonds (cont.):
| | -- | --------------------------



| | 1. | Beneficial conversion feature (cont.):
| | -- | --------------------------------------



| |  | The amount of the beneficial conversion feature with respect to convertible bonds was recorded
as a discount on the convertible bonds with a corresponding amount credited directly to equity as additional paid-in capital. After
the initial recognition, the discount on the convertible bonds is amortized as interest expenses over the term of the bonds.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Issuance costs of convertible bonds – deferred charges:
| | -- | -------------------------------------------------------



| |  | Costs incurred in respect of obtaining financing through issuance of convertible bonds were deferred
and expensed as financing expenses over the contractual term of the bonds.
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Modification (or exchange) of a convertible bonds
| | -- | -------------------------------------------------



| |  | The Company applied the provisions of ASC Topic 470 - 50, "Debt - Modifications and Extinguishments",
with respect to the modification of terms of convertible debt instruments. According to ASC Topic 470-50, the Company concluded
that the modification that occurred in June 2008, August 2009 and November 2009 was determined to be a debt extinguishment. See
Note 12.
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | Refinance on a long-term basis
| | -- | ------------------------------



| |  | The Company applied the provisions of ASC Topic 470 – 10 – 45 “Debt – Other
Presentation Matters” with respect to a financing agreement signed after December 31, 2010 but before the issuance of the
2010 financial statements and accordingly, presented as of December 31, 2010, certain convertible bonds in a total amount of $4,262,
as a long term liability.
| |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | l. | Accrued severance pay and severance pay fund:
| | -- | ---------------------------------------------



The liabilities
of the Company for severance pay of its Israeli employees are calculated pursuant to Israel's Severance Pay Law. Employees are
entitled to one month's salary for each year of employment, or portion thereof. The Company's liability for all its employees is
presented under "accrued severance pay". The Company deposits on a monthly basis to severance pay funds and insurance
policies. The value of these policies is presented as an asset on 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
Company’s obligation pursuant to Israel's Severance Pay Law or labor agreements.



Severance
expenses for the years ended December 31, 2011, 2010 and 2009 amounted to $15, $57 and $22, respectively.



| | m. | Goodwill and Intangible assets:
| | -- | -------------------------------



Intangible
assets are amortized over their useful lives using the straight line 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 ASC Topic 350, "Intangibles
- Goodwill and Other".





F-16









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------



| | m. | Goodwill and Intangible assets (cont.):
| | -- | ---------------------------------------



Goodwill represents the excess
of the aggregate purchase price over the fair value of the net assets acquired in a purchase business combination. Goodwill is
not amortized, but rather is tested for impairment at least annually or between annual tests, if certain events or indications
of impairment occur. Goodwill is tested for impairment at the reporting unit level. As required by ASC Topic 350, the Company compares
the fair value of each reporting unit to its carrying value ("step 1"). If the fair value exceeds the carrying value
of the reporting unit’s net assets, goodwill is considered not to be impaired, and no further testing is required. If the
carrying value exceeds the fair value of the reporting unit, then the implied fair value of goodwill is determined by subtracting
the fair value of all the identifiable net assets from the fair value of the reporting unit. An impairment loss is recorded for
the excess, if any, of the carrying value of the goodwill allocated to the reporting unit over its implied fair value ("step
2").



Due to the sale of activities
in January 2010 (see Note 1b2), the Company recorded in 2009 an impairment loss of the entire remaining balance of the goodwill
which was attributed to the components sold in an amount of $685 and certain other intangible assets in an amount of $434.



| | n. | Revenue recognition:
| | -- | --------------------



The Company
and its subsidiaries generate their revenues from the sale of products, maintenance, royalties and long term contracts (including
training and installation).



Product sales
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 reasonably assured, 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
is not obligated to accept returned products or issue credit for returned products, unless a product return has been approved by
the Company in advance and according to specific terms and conditions. As of December 31, 2011, the Company had an allowance for
customer returns in an amount of $13.



The Company
recognized certain long-term contract revenues in accordance with ASC Topic 605-35, "Construction-Type and Production-Type
Contracts". Pursuant to ASC Topic 605-35, revenues from these contracts are recognized under the percentage of completion
method. The Company measures the percentage of completion based on output or input criteria, such as contract milestones, percentage
of engineering completion or number of units shipped, as applicable to 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, 2011, no such estimated losses were identified.



The Company
believes that the use of the percentage of completion method is appropriate, since the Company has the ability, using also an independent
subcontractor's evaluation, to make reasonably dependable estimates of the extent of progress made 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.





F-17









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------



| | n. | Revenue recognition (cont.):
| | -- | ----------------------------



In contracts
that do not meet all the conditions mentioned above, the Company utilized zero estimates of profits; equal amounts of revenue and
cost are recognized until results can be estimated with sufficient accuracy.



Revenues
and costs recognized pursuant to ASC Topic 605-35 on contracts in progress are subject to management estimates. Actual results
could differ from these estimates.



As of December 31, 2010 and
2011, all the long-term contracts were completed and their related revenues were recognized in full.



Revenues for maintenance services
are recognized over the term of the contracts.



The warranty period is usually
12 months. Based primarily on historical experience, the Company does not provide for warranty costs when revenue is recognized,
since such costs are not material.



Deferred
revenues and customer advances include amounts received from customers for which revenues have not been recognized.



The Company
is entitled to royalties upon the issuance of certificates. Such royalties are recognized when the sales are reported to the Company
(usually on a monthly basis).



| | o. | Shipping and handling costs:
| | -- | ----------------------------



Shipping and
handling fees billed to customers are reflected as revenues while the related shipping and handling costs are included in cost
of revenues. To date, shipping and handling costs have not been material.



| | p. | Research and development costs:
| | -- | -------------------------------



Research
and development costs (other than software) are expensed as incurred.



| | q. | Income taxes:
| | -- | -------------



The Company
and its subsidiaries account for income taxes in accordance with ASC Topic 740,"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.



The Company accounts for uncertain
tax positions in accordance with ASC Topic 740-10, which prescribes detailed guidance for the financial statement recognition,
measurement and disclosure of uncertain tax positions recognized in an enterprise’s financial statements. According to ASC
Topic 740-10, tax positions must meet a more-likely-than-not recognition and measurement threshold. The Company’s accounting
policy is to classify interest and penalties relating to uncertain tax positions under income taxes, however the Company did not
recognize such items in its fiscal 2011, 2010 and 2009 financial statements.





F-18









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------



| | r. | 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 and trade receivables. The Company's trade receivables are derived from sales to limited number of customers located primarily
in Eastern Europe, the United States and Israel. The Company performs ongoing credit evaluations of its customers' financial condition.
The allowance for doubtful accounts is determined with respect to specific debts that the Company has determined to be doubtful
of collection. See Note 2f.



Cash and
cash equivalents and restricted cash deposits are deposited with major banks in Israel and the United States. Management believes
that such financial institutions are financially sound and, accordingly, minimal credit risk exists with respect to these financial
instruments.



The Company
has no significant off-balance-sheet concentration of credit risk, such as foreign exchange contracts, option contracts or other
foreign hedging arrangements.



| | s. | Basic and diluted earnings (loss) per share:
| | -- | --------------------------------------------



Basic
earnings (loss) per share are computed based on the weighted average number of ordinary shares outstanding during each year. Diluted
earnings (loss) per share are computed based on the weighted average number of ordinary shares outstanding during each year, plus
the dilutive potential of stock options and warrants outstanding during the year using the treasury stock method and the dilutive
potential, if any, of convertible bonds using the “if-converted method”.



The net
earnings (loss) and the weighted average number of shares used in computing basic and diluted earnings (loss) per share for the
reported periods are as follows:



|                                                                                          |  | Year ended December 31, |      
|----------------------------------------------------------------------------------------- |  | ----------------------- | -----
|                                                                                          |  | 2011                    |      
|Net income (loss) used for the computation of basic and diluted earnings (loss) per share |  |                         | 1,019



|                                                                                               |  | Year ended December 31, |           
|---------------------------------------------------------------------------------------------- |  | ----------------------- | ----------
|                                                                                               |  | 2011                    |           
|Weighted average number of shares used in the computation of basic earnings (loss) per share   |  |                         | 9,126,327 
|Weighted average number of shares used in the computation of diluted earnings (loss) per share |  |                         | 11,710,254





All outstanding
stock options, warrants and convertible bonds have been excluded from the calculation of the diluted net loss per share for the
years ended December 2010 and 2009, since the effect of the shares issuable with respect of these instruments was anti-dilutive.
The calculation of the diluted net earnings per share for the year ended December 31, 2011 included 3,273,477 options and warrants,
the effect of which was dilutive.



The number
of potential shares from the conversion of convertible bonds, options and warrants that have been excluded from the calculation
were 2,733,688, 4,557,840 and 3,189,071 for the years ended December 31, 2011, 2010 and 2009, respectively.



The potential
shares that would have been issued by the Company as a result of the acceptance of the proposal of the Company to its creditor
(as described in Note 1d.) were excluded from the calculations as their effect was anti-dilutive. The weighted average number of
such potential shares for the year ended December 31, 2011 was approximately 23,652,296.



F-19









VUANCE LTD. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------



| | t. | Fair value of financial instruments:
| | -- | ------------------------------------



The following
methods and assumptions were used by the Company and its subsidiaries in determining the fair value disclosures for financial instruments:



At December
31, 2011 and 2010, the carrying amounts of cash and cash equivalents, restricted cash deposits, current trade receivables, other
accounts receivable, trade payables and other accounts payable (which are not included in the proposed arrangement described in
Note 1d) approximate their fair value due to the short-term maturity of such financial instruments.



As of December
31, 2011 and 2010, the Company is unable to assess the fair value of the remaining balance of convertible bonds and other liabilities
subject to the proposed arrangement due to the uncertainties involved with respect to the completion of the arrangement. The terms
of the proposed arrangement are described in Note 1d.



| | u. | Accounting for stock-based compensation:
| | -- | ----------------------------------------



Share-based compensation, including
grants of stock options, is recognized in the consolidated statement of operations as an operating expense, based on the fair value
of the award on the date of grant. The fair value of stock-based compensation is estimated using an option-pricing model.



The value of the portion of
the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s
consolidated statement of operations.



The Company estimates the fair
value of employee stock options using a Black-Scholes valuation model. The Company amortizes compensation costs using the graded
vesting attribution method over the vesting period, net of estimated forfeitures.



| | v. | Advertising costs:
| | -- | ------------------



The Company
expenses advertising costs as incurred. Advertising expenses for the years ended December 31, 2011, 2010 and 2009, were approximately
$10, $15 and $12, respectively.



| | w. | Comprehensive Income:
| | -- | ---------------------



The Company
has no comprehensive income components other than net income (loss) in the reporting periods.



| | x. | Reclassifications:
| | -- | ------------------



Certain comparative
figures have been reclassified to conform to the current period presentation. The changes did not affect net income, cash flow
or shareholders' deficit.



| | y. | Fair value measurements:
| | -- | ------------------------



The Company applies ASC Topic
820-10, "Fair Value – Measurement and Disclosure" which defines fair value, establishes a three-level valuation
hierarchy for disclosures of fair value measurement and requires disclosures for fair value measures.



In accordance with ASC Topic
820-10, the Company measures and discloses fair value measurements for certain financial and nonfinancial assets and liabilities.
Fair value is an exit price, representing the amount that would be received to sell an asset or the amount that would be paid to
transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based
measurement that is required to be determined based on the assumptions that market participants would use to determine the price
of an asset or a liability.





F-20













VUANCE LTD. AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)





| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------



| | y. | Fair value measurements (cont.):
| | -- | --------------------------------

As a basis for considering
such assumptions, the fair value accounting standard establishes the following fair value hierarchy, which prioritizes the inputs
used in the valuation methodologies in measuring fair value:



Level 1 - Quoted prices (unadjusted)
in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest
priority to Level 1 inputs.



Level 2 - Observable prices
that are based on inputs not quoted on active markets, but corroborated by market data.



Level 3 - Unobservable inputs
are used when little or no market data is available. Level 3 inputs are considered as the lowest priority under the fair value
hierarchy.



In determining fair value,
companies are required to utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable
inputs to the extent possible as well as to consider counterparty credit risk in the assessment of fair value.



| | z. | Discontinued operations:
| | -- | ------------------------



The Company applies ASC Topic
205-20, "Presentation of Financial Statements - Discontinued Operation". According to ASC Topic 205-20, when a
component of an entity, as defined in this standard, has been disposed of or is classified as held for sale, the results of its
operations, including the gain or loss on the disposed component, required to be classified as discontinued operations and the
assets and liabilities of such component should be classified as assets and liabilities attributed to discontinued operations if
both of the following conditions are met: a) the operations and cash flows of the component have been (or will be) eliminated from
the ongoing operations of the company as a result of the disposal transaction, and b) the entity will not have any significant
continuing involvement in the operations of the component after the disposal transaction. (See also Note 1b).



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



| | 1. | Accounting pronouncements adopted in 2011
| | -- | -----------------------------------------



| | A. | ASC Topic 605 - 25 “Revenue Recognition - Multiple-Element Arrangements”
| | -- | ------------------------------------------------------------------------



In October 2009, the FASB
issued Accounting Standards Update (ASU) 2009-13, Multiple-Deliverable Revenue Arrangements – a consensus of the
FASB Emerging Issues Task Force. The amended guidance modified the criteria for recognizing revenue in multiple element arrangements
and requires companies to develop a best estimate of the selling price to separate deliverables and allocate arrangement consideration
using the relative selling price method. In addition, the amendments eliminated the residual method for allocating arrangement
considerations.



The amended guidance became
effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010 (fiscal year 2011 for the Company). The adoption of the new guidance did not have a material impact on the Company’s
financial position, results of operations or cash flows.





F-21









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------



| | aa. | Recently issued accounting pronouncements (cont.):
| | --- | --------------------------------------------------



| | 2. | Accounting pronouncements adopted in 2011 (cont.)
| | -- | -------------------------------------------------



| | B. | ASC Topic 985 - 605, "Software - Revenue Recognition" (cont.)
| | -- | -------------------------------------------------------------



In October 2009, the FASB
issued Accounting Standards Update (ASU) 2009-14, “Certain Revenue Arrangements That Include Software Elements –
a consensus of the FASB Emerging Issues Task Force”,to amend the scope of arrangements under ASC 985, Software, 605,
“Revenue Recognition” to exclude tangible products containing software components and non-software components that
function together to deliver a product’s essential functionality. Such components shall be subject to ASC Topic 605 - 25
“Revenue Recognition - Multiple-Element Arrangements”.



The amended guidance became
effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010 (fiscal year 2011 for the Company). The adoption of the new guidance did not have a material impact on the Company’s
financial position, results of operations or cash flows.



| | 3. | Accounting pronouncements not yet effective:
| | -- | --------------------------------------------



| | A. | ASC Topic 220, “Comprehensive Income”
| | -- | -------------------------------------



In June 2011, the FASB issued
Accounting Standard Update (ASU) 2011-05, “Comprehensive Income (Topic 220) - Presentation of Comprehensive Income”
(ASU 2011-05). ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement
of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components
of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive
statements.



ASU 2011-05 will be effective
for fiscal years, and interim periods within those years, beginning after December 15, 2011 (fiscal year 2012 for the Company)
and should be applied retrospectively.



In December 2011, the FASB
issued Accounting Standard Update (ASU) 2011-12, which defers certain provisions contained in ASU 2011-05 requiring the requirement
to present components of reclassifications of other comprehensive income on the face of the income statement or in the notes to
the financial statements. However, this deferral does not impact the other requirements contained in the new standard on comprehensive
income as described above. ASU 2011-12 is effective during interim and annual periods beginning after December 15, 2011 (fiscal
year 2012 for the Company).



The adoption of ASU 2011-05
and ASU 2011-12 is not expected to have a material impact on the Company’s financial condition, results of operations or
cash flows.





F-22









VUANCE LTD. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)








U.S. dollars in thousands (except per share data)



| | NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (cont.)
| | -------- | ---------------------------------------



| | 3. | Accounting pronouncements not yet effective (cont.):
| | -- | ----------------------------------------------------



| | B. | ASC Topic 210, “Balance Sheet”
| | -- | ------------------------------



In December 2011, the FASB
issued Accounting Standard Update (ASU) 2011-11, “Balance Sheet (Topic 210) - Disclosures about Offsetting Assets and
Liabilities” (ASU 2011-11).ASU 2011-11, enhance disclosures about financial instruments and derivative instruments
that are either offset in accordance with the Accounting Standards Codification or are subject to an enforceable master netting
arrangement or similar agreement.



The amended guidance will
be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods
(fiscal year 2013 for the Company) and should be applied retrospectively to all comparative periods presented.



The Company is currently evaluating
the impact that the adoption of ASU 2011-11 would have on its consolidated financial statements, if any.



| | NOTE 3:- | OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES
| | -------- | ----------------------------------------------



|                             |  | December 31, |    
|---------------------------- |  | ------------ | ---
|                             |  | 2011         |    
|                             |  |              |    
|Prepaid expenses             |  | $            | 21 
|Government institutions      |  |              | 56 
|Advance payment to suppliers |  |              | -  
|Others                       |  |              | 28 
|                             |  |              |    
|                             |  | $            | 105



| | NOTE 4:- | INVENTORIES, NET
| | -------- | ----------------



|                                  |  | December 31, |    
|--------------------------------- |  | ------------ | ---
|                                  |  | 2011         |    
|                                  |  |              |    
|Raw materials, parts and supplies |  | $            | 216
|Finished products                 |  |              | 53 
|                                  |  |              |    
|                                  |  | $            | 269



As
of December 31, 2011 and 2010, the inventory is presented net of allowance for slow inventory in the amount of approximately $74
and $108 respectively.





F-23

















VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 5:- | INVESTMENT IN A MAJORITY-OWNED COMPANY
| | -------- | --------------------------------------



In December
1997, the Company set up SuperCom Slovakia, owned equally with another third-party 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 SuperComSlovakia, at a nominal value of $1, and granted
such third-party investor a loan in an amount of $275, bearing interest of 0.7% per month, for any amounts outstanding. Interest
is compounded on the outstanding principal balance of the loan and is to be repaid under the same conditions as the outstanding
principal balance.



The third-party
investor has an option to buy back 16% of the shares, for $1, upon repayment of the loan to the Company.



The Company
currently owns 66% of SuperCom Slovakia's outstanding shares and accounts for the investment using the equity method of accounting,
due to the substantive participation rights held by the non-controlling interest holder, which impact the Company’s ability
to exert control over the investee.



During 2006,
the Company wrote down the entire loan balance due to litigation developments regarding this issue and due to low probability of
collection of the loan. See Note 10c2. During all the reported periods, the subsidiary had no operating activity.



| | NOTE 6:- | PROPERTY AND EQUIPMENT, NET
| | -------- | ---------------------------



|                                   |  | December 31, |    
|---------------------------------- |  | ------------ | ---
|                                   |  | 2011         |    
|Cost:                              |  |              |    
|Computers and peripheral equipment |  | $            | 254
|Office furniture and equipment     |  |              | 194
|Leasehold improvements             |  |              | 24 
|                                   |  |              | 472
|Accumulated depreciation:          |  |              |    
|Computers and peripheral equipment |  |              | 246
|Office furniture and equipment     |  |              | 128
|Leasehold improvements             |  |              | 2  
|                                   |  |              | 376
|Depreciated cost                   |  | $            | 96 



Depreciation
expenses for the years ended December 31, 2011, 2010 and 2009, were $28, $47 and $77, respectively.



| | NOTE 7:- | OTHER ASSETS, NET
| | -------- | -----------------



During 2009,
the Company recognized an impairment of the remaining outstanding balance of goodwill and other intangible assets which attributed
to the components (as described in ASC 360) that have been classified as of December 31, 2009 as discontinued operations. As a
result, the impairment loss was classified in the statements of operations for 2009 within the loss from discontinued operations
in an amount of $1,119. See Note 2m.

F-24





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 8:- | BANK CREDIT
| | -------- | -----------



| | a. | As of December 31, 2010, the Company did not have any credit line from banking institutions.
| | -- | --------------------------------------------------------------------------------------------



On February
10, 2011 the Company received from an Israeli bank a credit line in an amount of $100. As of December 31, 2011, the entire amount
was utilized. The credit line is secured by the personal guarantee of the Company’s current and former chairmen of the board
of directors.



| | b. | Regarding guarantees and liens - see Note 10b.
| | -- | ----------------------------------------------



| | NOTE 9:- | ACCRUED EXPENSES AND OTHER LIABILITIES
| | -------- | --------------------------------------



|                                                                                          |  | December 31, |      
|----------------------------------------------------------------------------------------- |  | ------------ | -----
|                                                                                          |  | 2011         |      
|Accrued marketing expenses                                                                |  | $            | 541  
|Subcontractors of long-term contract                                                      |  |              | 252  
|Litigation provision                                                                      |  |              | 147  
|Related parties                                                                           |  |              | 414  
|Legal service providers                                                                   |  |              | 365  
|Withholding tax provision in respect of Convertible Bonds held by controlling shareholder |  |              | 177  
|Other accrued expenses                                                                    |  |              | 268  
|                                                                                          |  |              |      
|                                                                                          |  | $            | 2,164



| | 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 2013 - 2015.



In October, 2011, the Company
signed lease agreements for new offices in Hertzliya, (Israel), for a period of two years commencing on October 1, 2011. The monthly
lease amount, including management fees of the leased property, is approximately $15.



The Company's subsidiary in
the USA leases a facility in Peachtree City, GA. The average monthly fee of the facility is approximately $3. The lease commenced
on March 1, 2008 and is scheduled to expire onFebruary 28, 2013.Vuance, Inc. also leases a facility in Oak Creek, Wisconsin. The
average monthly lease amount for the facilities is approximately $5. The lease commenced on April 1, 2010 and is scheduled to expire
on March 31, 2015.



Future minimum lease commitments
under non-cancelable operating leases for the years ended December 31, are as follows:



|2012 |  | $ | 280 | 
|---- |  | - | --- | 
|2013 |  |   | 204 | 
|2014 |  |   | 65  | 
|2015 |  |   | 16  | 
|     |  | $ | 565 | 



Rent expenses, net of rent
income from subleases, for the years ended December 31, 2011, 2010 and 2009, were approximately $176, $121 and $331, respectively.



F-25





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 10:- | COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
| | --------- | ----------------------------------------------



| | b. | Guarantees, indemnity and liens:
| | -- | --------------------------------



| | 1. | The Company issued a Letter of Credit, with a balance of $130 as of December 31, 2010 to a supplier,
related to a certain project of the Company with a European country. As a condition of this Letter of Credit, as of December 31,
2010, the Company deposited $130, which is presented as restricted cash deposits. The Letter of Credit expired on December 31,
2010 and the remaining restricted deposit of $130 was released during January 2011.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | The Company issued on October 17, 2011 a bank guarantee to the services company of its new offices
in Herzliya (see a above), in an amount of up to NIS62,662 ($16 as of December 31, 2011).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | Pursuant to the Amendment Agreements with the convertible bonds holders (see also Note 12),
in exchange for security in certain assets of the Company, the Company and the investors agreed to waive compliance and amend certain
provisions of the Bond.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | On April 29, 2012, the Company’s board of directors approved the recording of a floating
charge on all of the Company’s assets in favor of the Company’s current and former chairmen of the board of directors,
unlimited in amount, in order to secure personal guarantees granted by them in favor of the Company, such as to a bank (see Note
8a) and in order to secure short-term loans that are given by them from time to time to the Company (see Note 14h).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 5. | See also Note 1b2.
| | -- | ------------------



| | c. | Litigation:
| | -- | -----------



| | 1. | In April 2004, the Department for Resources Supply of the Ministry
of Ukraine (the "Department") filed a claim with the International Commercial Arbitration Court at the Ukrainian Chamber
of Commerce and Industry (the “Arbitration Court”) to declare Contract No. 10/82 (the “Contract”), dated
April 9, 2002, between the Company and the Ministry of Internal Affairs of the Ukraine (the "Ministry"), as void due
to defects in the proceedings by which the Company was awarded the Contract. In July, 2004, the Arbitration Court declared the
Contract as void. On April 27, 2005, the Company appealed the decision to the High Commercial Court of the Ukraine. In May 2005,
the Department filed a new statement of claim with the Arbitration Court for restitution of $1,048 paid to the Company by the Department
under the Contract. On September 27, 2005, the Company received a negative award issued by the Arbitration Court in the second
claim (the "Award"). On December 12, 2005, the Company was informed that the Ukrainian Supreme Court had dismissed its
appeal regarding the July 2004 decision. On June 29, 2006, the Ukrainian Supreme Court held that the Arbitration Court award was
valid and legal under applicable law.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On September 28, 2008, the
Department filed a petition (the "Petition") in the Central District Court of Israel (the "Court"), under which
the Department requested the approval of the Award as a valid foreign arbitral award under the laws of the State of Israel.



During November 2008, the Company
filed with the Court an objection to the Petition and a petition to declare the Award null and void. The Company's objection and
petition rely on what the Company believes to be well-based evidence which the Company has against the manner under which the arbitration
proceedings were conducted by the Arbitration Court and against their validness and legality. The Company believes that the arbitration
proceedings were conducted partially and jeopardized its basic rights. The Company's claims are also corroborated by a contrary
legal opinion written in the scope arbitration decision by one of the arbitrators ("Arbitrator").



F-26





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 10:- | COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
| | --------- | ----------------------------------------------



| | c. | Litigation (cont.):
| | -- | -------------------



| | 1. | (cont.)
| | -- | -------



On February 16, 2009, the Department
filed its response to the Company's claims (the "Response"). The Department raised procedural and other claims in its
Response, including a monetary claim that the Company filed which is based on the Award and the filing of such claim basically
affirms the Company’s acknowledgment that the Award is valid. On March 25, 2009, the Company filed a response to the Department's
response and a requisition to order the Arbitrator to testify in the scope of the Petition proceedings.



On June 6, 2009, a preliminary
court session was held regarding the Petition. During the session, the Department's counsel claimed that one of the two machines
that the Company previously supplied pursuant to the Contract (which machine was priced higher than the amount of the Department's
claim) was not supplied to the Department and was transferred by the Company to another Ukrainian governmental authority. It is
noted that the Company has documents that evidence that, contrary to the Department's claim, the Company supplied both of the machines
directly to the Department.



At a hearing held on September
23, 2009, the Court accepted the Company's application to summon the Arbitrator as a witness. At the hearings which took place
on November 29 and November 30, 2010, the Arbitrator testified in Court. In his testimony, the Arbitrator described procedural
flaws which occurred, in his view, during the arbitration and also related to threats which were made against him by the Secretary
of the Ukrainian Chamber of Commerce and Industry in the course of the arbitration session.



Following the testimony of
the Arbitrator, the Department asked the Court to summon the other two Ukrainian arbitrators as witnesses. The Court accepted the
request and scheduled hearings for their testimonies in 2011. However, the Department’s witnesses (including the other two
Ukrainian arbitrators) did not appear in court at the times scheduled for their testimonies. In light thereof, the court ordered
that summations be submitted in writing without having the witnesses of the Department testify.



On December 5, 2011 the Company
submitted a summation in writing. However, the Department has not submitted its summation and its counsel even notified the Court
that his appointment as the Department’s counsel had been cancelled. In these circumstances the Company filed a petition
for judgment due to the absence of summations by the Department. On February 26, 2012, the Court ruled that it accepts the Company’s
petition to give judgment due to the lack of summations on behalf of the Department and that the file will be assigned for writing
a judgment on the basis of the evidence that had been presented to the Court in the course of the proceeding.



On
April 15, 2012, the Court gave its judgment, pursuant to the Court dismissed the Department’s Petition and also declared
the Award null and void.



F-27





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 10:- | COMMITMENTS AND CONTINGENT LIABILITIES (cont.)
| | --------- | ----------------------------------------------



| | c. | Litigation (cont.):
| | -- | -------------------



| | 2. | On October 30, 2003, SuperCom Slovakia, a subsidiary (66%) of
Vuance Ltd., received an award from the International Arbitral Center of the Austrian Federal Economic Chamber, in a case against
the Ministry of Interior of the Slovak Republic (“the Ministry”) relating 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 $3,438 as of December 31, 2011) 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 $55 as of December 31, 2011) and SuperCom Slovakia’s legal fees in the amount of EUR
63,611 (approximately $82 as of December 31, 2011). The Company has begun an enforcement proceeding to collect the arbitral awards.
The Ministry of 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. On October 21, 2005, the Ministry of the Interior of the Slovak Republic filed an appeal. On August 25, 2006, the Austrian
Appellate Court rejected the appeal and ordered the Ministry to reimburse Supercom Slovakia ́s costs of the appellate proceeding
in the amount of EUR 6,688 within 14 days. On October 3, 2006, the Company was informed that the Ministry had decided not to file
an extraordinary appeal to the Austrian Supreme Court’s decision rejecting its appeal. To date, the Company’s efforts
to enforce the Commercial Court’s decision have been unsuccessful.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 3. | On December 16, 1999, Secu-Systems Ltd. filed a lawsuit with
the District Court in Tel-Aviv-Jaffa jointly and severally against the Company and its former subsidiary, InkSure Ltd. (“InkSure”),
seeking a permanent injunction and damages arising from the printing method applied to certain products developed by InkSure. In
its lawsuit, Secu-Systems asserted claims of breach of a confidentiality agreement between Secu-Systems and the Company, unjust
enrichment of the Company and InkSure, breach of fiduciary duties owed to Secu-Systems by the Company and InkSure and misappropriation
of trade secrets and damage to Secu-Systems’ property. On March 15, 2006, the Court denied the breach of contract claim,
but upheld the claim for misappropriation of trade secrets and ordered InkSure and the Company to cease all activity involving
the use of the confidential knowledge and/or confidential information of Secu-Systems. In addition, the court ordered the Company
and Inksure to provide a report certified by an accountant setting forth in full the income and/or benefit received by InkSure
and the Company as a result of the infringing activity through the date of the judgment, and ordered the Company and Inksure, jointly
and severally, to pay to Secu-Systems compensation in the amount of NIS 100,000 ($26 as of December 31, 2011) and legal expenses
as well as attorney’s fees in the amount of NIS 30,000 ($8 as of December 31, 2011) (which was paid during 2006). Secu-Systems
has filed an appeal, and the Company and InkSure filed a counter-appeal, on the above ruling.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



During the years thereafter
several court sessions were held, judgments were made and appeals were filed by each of the parties.



On December 15, 2009, the court
suggested that the parties try a mediation process in order to endeavor to come to an agreement. All the parties agreed to the
suggestion.

F-28





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 10:- | COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)
| | --------- | ----------------------------------------------



| | c. | Litigation (cont.):
| | -- | -------------------



| | 3. | (cont.)
| | -- | -------



In the course of the mediation
process, during 2010, an agreement in principle was reached, according to which the mediator will be authorized to determine the
sum, within the range between NIS 750,000 (approximately $196 as of December 31, 2011) and NIS 1,000,000 (approximately $262 as
of December 31, 2011), which the Company shall pay to Secu-Systems. Pursuant to such agreement in principle, the amount determined
by the mediator will be paid by the Company during 2011 in 10 equal, consecutive monthly installments.



Following the said agreement
in principle, a binding mediation agreement was signed by the parties, and on September 1, 2010, a mediation session was held.
On November 30, 2010, the mediator determined that the sum the Company will have to pay to Secu-System is NIS 893,000 (approximately
$234 as of December 31, 2011). On January 30, 2012, the parties submitted to the court a request to approve the mediation agreement.
The mediation agreement was approved by the court on February 5, 2012.



During 2011 the Company paid
NIS 535,800 (approximately $140 as of December 31, 2011). As of December 31, 2011 there is a liability in the amount of $94 related
to this litigation.



| | 4. | On May 7, 2012, a supplier of the Company filed a lawsuit with the Magistrate Court in Tel Aviv
in the amount of NIS360,199 (approximately $94 as of December 31, 2011) claiming mainly for payments of products which were supplied
during 2011 and for payments for products which were purchased by the supplier but were refused to be received by the Company due
to dissatisfaction of the Company in respect of the supplied products. The Company is denying the supplier’s claims and has
its own claims against the supplier in respect of the quality of the products supplied by him. The Company is right now in the
process of evaluating the lawsuit with its legal advisor. The balance of accounts payable with respect to the supplier as of December
31, 2011 is approximately $46, which represents the value of the supplied products during 2011. No additional provision has been
recognized with respect to the supplier's claim.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | In a certain transactions, the Company is obligated to pay a certain
percentage of the revenues to third parties.
| | -- | -----------------------------------------------------------------------------------------------------------------



| | e. | The Company is obligated, under certain contracts with one of its manufacturers, to purchase certain
blanket orders from such manufacturer, subject to certain terms and conditions.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-29





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 11:- | INCOME TAX
| | --------- | ----------



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



Until December 31, 2007, the
results of operations for tax purposes in Israel were measured in terms of earnings in NIS after adjustments for changes in Israel's
Consumer Price Index ("CPI"). Commencing January 1, 2008, this law is void and in its place there are transition provisions,
whereby the results of operations for tax purposes are to be measured on a nominal basis. 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 income before taxes shown in the financial statements. In accordance
with paragraph 25-3f of ASC TOPIC 740-10-25, Income Taxes, the Company has not provided for deferred income taxes on the
above difference between the functional currency and the tax bases of assets and liabilities.



| | b. | Changes in the Israeli 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 as follows: in 2009 - 26% and in 2010 and thereafter - 25%.



On July 23, 2009, as part of
the Arrangements Law for the period 2009-2010, article 126 of the Income Tax Ordinance (New Version) – 1961 was amended,
whereby the corporate tax rate would be gradually reduced commencing in the 2011 tax year and thereafter, as follows: 2011 –
24%, 2012 – 23%, 2013 – 22%, 2014 – 21%, 2015 – 20% and 2016 and thereafter – 18%.



On December 6, 2011, the
Law for the Change in the Tax Burden (Legislative Amendments) – 2011 was publicized.  As part of the law, among other
things, the Economic Efficiency Law (Legislative Amendments for the Implementation of the Economic Plan for 2009 and 2010) –
2009 and the Income Tax Ordinance (New Version) – 1961 were amended whereby, commencing in 2012, the blueprint for the reduction
in the corporate tax rates will be cancelled and the corporate tax rate will be 25%.



| | c. | Non-Israeli subsidiaries:
| | -- | -------------------------



Non-Israeli subsidiaries are taxed according to
the tax laws of the countries in which they are located.



F-30





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 11:- | INCOME TAX (cont.)
| | --------- | ------------------



| | d. | 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, |        
|-------------------------------------------------- |  | ------------ | -------
|                                                   |  | 2011         |        
|                                                   |  |              |        
|Operating loss carryforward                        |  | $            | 11,128 
|Reserves and allowances                            |  |              | 601    
|                                                   |  |              |        
|Net deferred tax assets before valuation allowance |  |              | 11,729 
|Valuation allowance                                |  |              | (11,729
|                                                   |  |              |        
|Net deferred tax assets                            |  | $            | -      
|                                                   |  |              |        
|Deferred income taxes consist of the following:    |  |              |        
|Domestic                                           |  | $            | 6,892  
|Valuation allowance                                |  |              | (6,892 
|                                                   |  |              |        
|Foreign                                            |  |              | 4,837  
|Valuation allowance                                |  |              | (4,837 
|                                                   |  |              |        
|                                                   |  | $            | -      



As of December 31, 2011, the
Company and its subsidiaries have provided a valuation allowance in a total amount of $11,729 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.



| | e. | Carryforward tax losses:
| | -- | ------------------------



Vuance Ltd. has accumulated
losses for tax purposes as of December 31, 2011, in an amount of approximately $25,226, which may be carried forward and offset
against taxable income in the future for an indefinite period. Vuance Ltd. also has a capital loss in an amount of approximately
$13,906 which may be carried forward and offset against capital gains for an indefinite period. Losses carryforwards in Israel
are measured in NIS.



As of December
31, 2011, Vuance's subsidiaries in the United States have estimated total available carryforward tax losses of approximately $14,182.
In the U.S., tax losses can be carried forward for 20 years. However, 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. These annual limitations may result in the expiration of net operating losses before utilization. An
amount of $3,413 of the carryforward tax losses of the Company's subsidiary in the U.S, is subject to such limitation, due to the
Security Holding Corp. acquisition in 2007.



F-31





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 11:- | INCOME TAX (cont.)
| | --------- | ------------------



| | f. | Vuance Ltd has assessments which are considered as final until the tax year ended December 31,
2007.
| | -- | ----------------------------------------------------------------------------------------------------



Vuance’s subsidiaries
in the United States and Israel have not received final assessments since their incorporation.



| | g. | Income (loss) before income tax consists of the following:
| | -- | ----------------------------------------------------------



|         |  | Year ended December 31, |      
|-------- |  | ----------------------- | -----
|         |  | 2011                    |      
|         |  |                         |      
|Domestic |  | $                       | 1,359
|Foreign  |  |                         | (315 
|         |  |                         |      
|         |  | $                       | 1,044



| | h. | Reconciliation of the theoretical tax benefit to the actual tax 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, |      
|---------------------------------------------------------------------------------------------- |  | ----------------------- | -----
|                                                                                               |  | 2011                    |      
|Income (loss) before income tax, as reported in the consolidated statements of operations      |  | $                       | 1,044
|                                                                                               |  |                         |      
|Statutory tax rate in Israel                                                                   |  |                         | 24   
|                                                                                               |  |                         |      
|Theoretical tax (benefit) expense                                                              |  | $                       | 251  
|Carryforward losses and other deferred taxes for which a full valuation allowance was recorded |  |                         | (253 
|Tax expenses related to withholding tax at source                                              |  |                         | 22   
|Differences in taxes resulting from rate applicable to foreign subsidiary and others           |  |                         | 5    
|Actual income tax                                                                              |  | $                       | 25   



F-32





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 12:- | CONVERTIBLE BONDS
| | --------- | -----------------



In November
2006, the Company raised $3,156.5 through the issuance of Units consisting of Convertible Bonds and Warrants. Units valued at $2,500
were issued to Brevan Howard Master Fund Limited (“BH”), and Units valued at $656.5 were issued to Special Situation
Funds (“SSF”), based on the participation rights provided in a private placement during 2005, which were existing shareholders
of the Company. According to their original terms, the Convertible Bonds mature three years from the date of issuance and bear
interest at an annual rate of 8% (which was updated as described below). Any withholding and other taxes payable with respect to
the interest will be grossed up and paid by the Company (approximately 3% of the principal of the bonds), payment of interest will
be net of any tax. Subject to certain redemption provisions, as described below, the Convertible Bonds may be converted at any
time, at the option of the investors, into the Company's ordinary shares at an original conversion price of $5 per share (see amendment
below). The investors were also granted warrants entitling them to acquire a total of 134,154 ordinary shares at an original exercise
price of $5 per share during the next five years (see amendments below). In respect of this transaction, the Company paid approximately
$215 cash as issuance expenses and granted an option to acquire up to 25,000 shares of the Company to a third party, exercisable
at an original $5 per share. The fair market value of this grant option was $40.



If the Company
fails to fulfill certain conditions, the investors may accelerate repayment of the principal amount of $3,156.5 of the Convertible
Bonds, in which case all interest payable until maturity date will immediately become due and payable.



The Company has determined that
the embedded conversion feature should not be separated from the host instrument because it qualifies for equity classification.
Therefore the transaction was accounted for in accordance with ASC Topic 470 - 20, "Debt - Debt with Conversion and Other
Options”.



In November
2007, due to a breach of certain conditions of the convertible bonds, the investors had the right to accelerate the repayment of
the principal amount of the bonds with all the interest payable until the maturity date of the bonds. However, the Company signed
an amendment to the agreement with the investors under which the Company was required to pay to one of the investors the abovementioned
interest amount ($276) (with any withholding and other taxes payable with respect to the interest (approximately 3% of the principal
of the bonds)) and in respect of the other investors, the Company changed the conversion ratio of the bonds to $4.25. In consideration,
the investors waived their right to accelerate the repayment of the bonds. The Company accounted for this amendment as a modification
of the bonds.



In June 2008,
following a breach of the amended terms of the convertible bonds, the Company reached an agreement with BH (with a principal amount
of $2,500), under which, among other things, the investor waived the Company's compliance with certain covenants under its Convertible
Bonds, in exchange for:



| | a. | Increasing the interest rate to 10% starting March 31, 2008. Any withholding and other taxes payable
with respect to the interest will be grossed up and paid by the Company (approximately 3% of the principal of the bonds).
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b. | Reducing the exercise price of the bond and the warrants to $3 and $2.8, respectively.
| | -- | --------------------------------------------------------------------------------------



| | c. | The Company undertook to place a fixed charge on all income and/or rights in connection with a
certain European Airport Project. This charge shall be senior to any indebtedness and/or other pledge and encumbrance, but shall,
however, be subject to certain rights of the Company to use part of the income.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-33





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 12:- | CONVERTIBLE BONDS (Cont.)
| | --------- | -------------------------



| | d. | Certain anti-dilution rights with respect to the warrants held by the investor.
| | -- | -------------------------------------------------------------------------------



In addition,
under certain circumstances, the investor might have the right to demand early payment of partial or full amount of the Convertible
Bonds (up to the $2,500 as mentioned above). The Company accounted for the amendment as an extinguishment of the Bonds.



Due to the breach of certain
convertible bond covenants, the Company had to recognize, in 2008, financial expenses in the amount of $553, to accelerate deferred
expenses in the amount of $138 and to accelerate the remaining discount amounts (attributed to warrants and the beneficial conversion
feature) in the amount of $724. In addition, as of December 31, 2008, the Convertible Bond was classified as a current liability



On August 12, 2009, the Company
entered into a bond Amendment Agreement (the “Amendment Agreement”) with BH, with principal amount of $2,500, pursuant
to the Amendment Agreement, in exchange for security in certain assets of the Company, inter alia all incomes and/or rights in
connection therewith to which the Company and its Subsidiaries are and shall be entitled as a result of the Slovakian Project Arbitral
Award, and on all amounts in connection with the project related to the arbitration, the Company and the investor agreed to waive
compliance and amend certain provisions of the Bond to, among other things, (i) increase the applicable rate of interest to 12%
and by 0.5% every 180 days afterward, (ii) release the Company from certain payments upon the completion of certain payments of
principal and interest due under the Bond, (iii) make monthly payments of $41 against the total amount due under the Bond over
an eight (8) year period, and (iv) increase the number of warrants granted to 159,375 and amend their exercise price to $0.40 per
share . The modification was determined to be a debt extinguishment.



On November 9, 2009, the Company
entered into an Amendment Agreement (the “Amendment Agreement”) with SSF, the other investor (with a principal amount
of $624), pursuant to the Amendment Agreement, in exchange for security in certain assets of the Company, the Company and SSF agreed
to waive compliance and amend certain provisions of the Bond to, among other things, (i) increase the applicable rate of interest
to 12% and by 0.5% every 180 days afterward, (ii) release the Company from certain payments upon the completion of certain payments
of principal and interest due under the Bond, (iii) make monthly payments of $10 against the total amount due under the Bond over
an eight (8) year period, (iv) reducing the exercise price of the bond and the warrants to $3 and $0.40, respectively and, (v)
increase the number of warrants granted to 31,238. The modification was determined to be a debt extinguishment.



As of December 31, 2009, in
light of the above amendments, total principal amount of $430 was presented among current liabilities and a total principal amount
of $2,624 was presented among long-term liabilities. In addition, an amount of $1,693 (including interest and penalties that it
was agreed to be paid after the principal amount is paid), was presented among long-term loan and others.



In January
2010, the Company received the investors' consent to sell its EAC and CSMS businesses (as described in Note 1b.). In addition,
the Company created a specific (fixed) charge in favor of the investors on the intellectual property rights belonging to the remaining
RFID business of the Company.



F-34





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 12:- | CONVERTIBLE BONDS (Cont.)
| | --------- | -------------------------



On August
24, 2010, BH entered into an Absolute Assignment and Transfer of Bond and Warrant (“Assignment”) with Sigma Wave Ltd.
(“Sigma”), an Israeli company and a major shareholder of the Company. Pursuant to the Assignment, BH absolutely transfers,
assigns and makes over unto Sigma all of its rights, title, obligations and interest in the Convertible Bonds and warrants accruing
or growing due and outstanding as at the Closing Date (which later was determined as September 16, 2010) to BH, and BH effective
as of and from the Closing Date further assigns and transfers unto Sigma all of its rights and interests in the Company pledged
rights and/or assets, and BH effective as of and from the Closing Date further assigns and transfers unto Sigma all of its rights
and interests in deeds, documents, writings, papers, books of account and other books relating to or being records of the Convertible
Bonds and warrants or by which the Convertible Bonds and warrants are or may hereafter be secured, evidenced, acknowledged or made
payable.



The Company
gave its consent to the Assignment on July 28, 2010.



The Assignment
had no impact on the Company’s assets or liabilities or its financial results.



On March 30,
2011, the Company entered into a financing agreement with Sigma that entitles the Company to refinance the short-term obligations
under the Convertible Bonds held by Sigma on a long-term basis. Pursuant to the agreement, and subject to certain conditions and
covenants, Sigma postponed all mature amounts relating to principal and interest as of December 31, 2010, to January 1, 2012. In
addition, the agreement required that interest amounts with respect to fiscal 2011 will become due during July 2011 and thereafter.
As a consequence of the financing agreement, as of December 31, 2010, the Company’s total outstanding debt to Sigma under
the Convertible Bonds was $4,262, of which $2,453 was presented among convertible bonds (long-term balance) and $1,810 was presented
among long-term loan and others. As of December 31, 2010, the Company was in compliance with the covenants under the amended Convertible
Bonds agreements with respect to bonds held by SSF.



With respect
to an arrangement that was subject to the approval of the board of directors, following such an approval, on August 4, 2011,Sigma
had accepted the Company's debt arrangement proposal for an amount of $1,000 debt under the Convertible Bonds in accordance with
the proposed arrangement of the extinguishment of liabilities (see Note 1d). The Company allotted Sigma a total of 4,444,444 ordinary
shares of the Company (which number was determined on June 30, 2011) and recorded an amount of $778 as a gain on extinguishment
of debts based on the difference between the carrying amount of the liability extinguished ($1,000) and the fair value of the ordinary
shares granted ($222), which was credited directly to share capital ($74) and additional paid-in capital ($148).



On November
8, 2011, SSF sold, assigned and transferred to Mr. Eliyahu Trabelsi (see Note 14f) all of their rights under the Convertible Bonds
and warrants.



On
December 5, 2011, the Company received from the Head of the Execution Office in Israel a foreclosure order
in accordance with section 44 to the Israeli Execution Law Records, vol. 1967, in respect of convertible bonds held by Sigma, up
to an amount of NIS3,903,866 (approximately $1,022 as of December 31, 2011). The Company acted in accordance with the order’s
instructions and recorded the said foreclosure.



On December
31, 2011, Sigma had accepted the Company's debt arrangement proposal for an amount of $1,806 of the outstanding debt amount in
accordance to the proposed arrangement of the extinguishment of liabilities (see Note 1d). The Company committed to issue Sigma
8,025,000 of its ordinary shares as full repayment of such amount. In accordance with ASC Topic 470-50-40, the Company recorded
an amount of $1,083 as a gain on extinguishment of debts based on the difference between the carrying amounts of the liabilities
extinguished ($1,806) and the fair value of the ordinary shares granted ($723), which was credited directly to “amount of
liability extinguished on account of shares”. The actual allotment of 8,025,000 ordinary shares to a trustee of Sigma was
completed in April 2012.



F-35





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 12:- | CONVERTIBLE BONDS (Cont.)
| | --------- | -------------------------



On
December 31, 2011, Mr. Eliyahu Trabelsi had accepted the Company's debt arrangement proposal for an amount of $241 of the outstanding
debt amount in accordance with the proposed arrangement of the extinguishment of liabilities (see Note 1d). The Company committed
to issue Mr. Eliyahu Trabelsi 1,069,400 of its ordinary shares as full repayment of such amount. In accordance withASC
Topic 470-50-40, the Company recorded an amount of $145 as a gain on extinguishment of debts based
on the difference between the carrying amounts of the liabilities extinguished ($241) and the fair value of the ordinary shares
granted ($96), which was credited directly to “amount of liability extinguished on account of shares”. The actual allotment
of 1,069,400 ordinary shares to Mr. Eliyahu Trabelsi was completed in April 2012.



As of December
31, 2011 and the filing date of these financial statements, the Company was not in compliance with the covenants under the amended
Convertible Bonds and as a result the remaining balance of the Convertible Bonds were classified as a current liability. Due to
the breach of the covenants under the amended Convertible Bonds, the Company had to recognize additional monthly 3% interest on
payments that were not paid according to the amended Convertible Bonds. The additional interest expenses amounted to $271 during
the year ended December 31, 2011.



| | NOTE 13:- | SHARE CAPITAL
| | --------- | -------------



| | a. | The Company's common stock is quoted under the ticker symbol “VUNCF” on the Pink OTC Markets Inc., which operates
an electronic quotation service for securities traded over-the-counter.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On May, 14
2007 a 1 for 5.88235 reverse split of the Company’s ordinary shares became effective for trading purposes. Pursuant to this
reverse share split, each 5.88235 ordinary shares of NIS 0.01 par value became 1 ordinary share of NIS 0.0588235 par value.



| | b. | During 2010, the Company increased its authorized share capital to 52,000,000 ordinary shares.
| | -- | ----------------------------------------------------------------------------------------------



| | c. | During 2009 and 2011, 168,865 and 300,000 ordinary shares, respectively, were issued as consideration
to settle liabilities to an officer and other payables in an aggregate amount of $63 and $51, respectively. Regarding ordinary
shares that were issued during 2010 under a private placement, see Note 13f4. Regarding ordinary shares that were issued during
2011 and after the balance sheet date, as a part of an extinguishment of liabilities, see Notes 12 and 18.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | d. | 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.



F-36





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 13:- | SHARE CAPITAL (Cont.)
| | --------- | ---------------------



| | e. | Stock options:
| | -- | --------------



| | 1. | In 2003, the Company adopted a stock option plan under which the Company issues stock options (the
“Option Plan”). The Option Plan is intended to provide incentives to the Company’s employees, officers, directors
and/or consultants by providing them with the opportunity to purchase ordinary shares of the Company. Subject to the provisions
of the Israeli Companies Law, the Option Plan is administered by the Compensation Committee, and is designed: (i) to comply with
Section 102 of the Israeli Tax Ordinance or any provision which may amend or replace it and the rules promulgated thereunder and
to enable the Company and grantees thereunder to benefit from Section 102 of the Israeli 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 Israeli Tax Ordinance.
Options granted under the Option Plan will become exercisable ratably over a period of three to five years or immediately in certain
circumstances, 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.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As
a result of an amendment to Section 102 of the Israeli 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 issued 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%. 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
June 27, 2007, the Compensation Committee and board of directors of the Company approved a new option plan under which
the Company may grant stock options to the U.S. employees of the Company and its subsidiaries. Under this new option plan,
the Company may grant both qualified (for preferential tax treatment) and non-qualified stock options. On August 15, 2007, the
new option plan was approved by the shareholders of the Company at the general shareholders meeting.



| | 2. | On January 9, 2009, according to the board resolution on October 27, 2008 and the Special General
Meeting dated December 21, 2008, the Company issued to: a) the Chairman of the Board of Directors; b) a member of the Company's
Board of Directors who is also one of the co-founders; c) one of the co-founders of the Company and d) another member of the Company's
Board of Directors options to purchase up to: 256,456, 179,966, 126,944 and 42,121 shares of the Company, respectively. The options
have an exercise price of NIS 0.0582235 per share, vested immediately and will expire after ten years. The options (the fair value
of which was estimated to $266) were issued as a partial payment for certain liabilities to the terms of their appointment with
the Company.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



On March
12, 2009, the Company issued options to purchase up to 161,718 shares to several employees and ex-employees as a partial payment
of their payroll. The options (the fair value of which was estimated to $67) have an exercise price of NIS 0.0582235, vested immediately
and will expire after ten years.



During 2010
no options were granted.

F-37





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 13:- | SHARE CAPITAL (Cont.)
| | --------- | ---------------------



| | e. | Stock options (cont.):
| | -- | ----------------------



| | 2. | (cont.)
| | -- | -------



On August
9, 2011, the Company issued options to purchase up to 150,000 shares to a former officer of the Company as part of his employment
agreement. The options (the fair value of which was estimated at $6) have an exercise price of $0.11, vested immediately and will
expire after five years.



On August
11, 2011, the Company issued options to purchase up to 300,000 shares to a former officer of the Company as part of the extinguishment
of liabilities (see Note 1d). The options (the fair value of which was estimated at $36, based on the Company’s share market
price at the date the extinguishment was determined) have an exercise price of $0.00, vested immediately and will expire on December
31, 2012.



On August
24, 2011, the Company issued options to purchase up to 385,000 shares to several employees of the Company. The options (the fair
value of which was estimated at $18) have an exercise price of $0.20, 155,000 of them vested on January 1, 2012, and the remaining
230,000 will vest on January 1, 2013. The options will expire after ten years.



| | 3. | A summary of the Company's stock option activity and related information is as follows:
| | -- | ---------------------------------------------------------------------------------------



|                                 |  | Year ended December 31 |          
|-------------------------------- |  | ---------------------- | ---------
|                                 |  | 2011                   |          
|                                 |  | Number of options      |          
|Outstanding at beginning of year |  |                        | 1,404,219
|Granted                          |  |                        | 835,000  
|Exercised                        |  |                        | (10,007  
|Canceled and forfeited           |  |                        | (65,355  
|Outstanding at end of year       |  |                        | 2,163,857
|Exercisable at end of year       |  |                        | 1,778,857





The weighted average fair value
of options granted during the reported periods (excluding 300,000 options granted in 2011 as part of the extinguishment of liabilities)
was $0.05 and $0.43, per option, for the years ended December 31, 2011 and 2009, respectively. In 2010 no options were granted.



The fair value of these options
was estimated on the date of grant using the Black & Scholes option pricing model. The following weighted average assumptions
were used for the 2011 and 2009 grants: risk-free rate of 0.76% and 0.75%, respectively, dividend yield of 0%, expected volatility
factor of 176.54% and 193.27%, respectively and expected term of 4.64 and 2.08 years, respectively. In 2009, the fair value of
125,142 options were calculated using the Black & Scholes option pricing model. For all other options granted in 2009, the
fair value of the options issued (as a partial payment of payroll liability) was based on the fair value of the shares on the date
of the related payroll, which equals the related payroll liability, since the exercise price was close to nil.



The expected volatility was
based on the historical volatility of the Company’s stock. The expected term was based on the historical experience and based
on Management estimate.



F-38





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 13:- | SHARE CAPITAL (Cont.)
| | --------- | ---------------------



| | e. | Stock options (cont.):
| | -- | ----------------------



| | 3. | A summary of the Company's stock option activity and related information is as follows (cont.):
| | -- | -----------------------------------------------------------------------------------------------



Compensation
expenses recognized by the Company related to its share-based employee compensation awards were $10, $14 and $483 for the years
ended December 31, 2011, 2010 and 2009, respectively.



The following
table summarizes the allocation of the stock-based compensation charge



|                                    |  | Year ended December 31, |   
|----------------------------------- |  | ----------------------- | --
|                                    |  | 2011                    |   
|                                    |  |                         |   
|Cost of revenues                    |  | $                       | 2 
|Research and development expenses   |  |                         | 5 
|Selling and marketing expenses      |  |                         | - 
|General and administrative expenses |  |                         | 3 
|                                    |  |                         |   
|                                    |  | $                       | 10



The options
outstanding and exercisable as of December 31, 2011, have been separated into ranges of exercise prices as follows:



|Range of exercise price |               |  | Options 
outstanding  as of December 31,
2011 |  |           | Weighted 
average remaining contractual life
(years) |  |  | Weighted average exercise price |  |  | Aggregate intrinsic value |       |  | Options exercisable  as of December 31, 2011 |   |    | Weighted average exercise price |  |  | Aggregate intrinsic value | 
|----------------------- | ------------- |  | --------------------------------------------- |  | --------- | ---------------------------------------------------- |  |  | ------------------------------- |  |  | ------------------------- | ----- |  | -------------------------------------------- | - | -- | ------------------------------- |  |  | ------------------------- | 
|                        |               |  |                                               |  |           |                                                      |  |  |                                 |  |  |                           |       |  |                                              |   |    |                                 |  |  |                           | 
|$                       | 0.00 - $ 0.20 |  |                                               |  | 1,520,464 |                                                      |  |  | 6.46                            |  |  |                           | 0.07  |  |                                              | $ | 30 |                                 |  |  | 1,135,464                 | 
|$                       | 1.10 - $ 1.88 |  |                                               |  | 449,817   |                                                      |  |  | 2.89                            |  |  |                           | 1.29  |  |                                              |   | -  |                                 |  |  | 449,817                   | 
|$                       | 2.47 - $ 3.38 |  |                                               |  | 31,076    |                                                      |  |  | 1.99                            |  |  |                           | 2.99  |  |                                              |   | -  |                                 |  |  | 31,076                    | 
|$                       | 4.12 - $ 4.64 |  |                                               |  | 79,900    |                                                      |  |  | 5.07                            |  |  |                           | 4.31  |  |                                              |   | -  |                                 |  |  | 79,900                    | 
|$                       | 5.00 - $ 5.24 |  |                                               |  | 65,600    |                                                      |  |  | 2.99                            |  |  |                           | 5.07  |  |                                              |   | -  |                                 |  |  | 65,600                    | 
|$                       | 14.82         |  |                                               |  | 17,000    |                                                      |  |  | 2.85                            |  |  |                           | 14.82 |  |                                              |   | -  |                                 |  |  | 17,000                    | 
|                        |               |  |                                               |  |           |                                                      |  |  |                                 |  |  |                           |       |  |                                              |   |    |                                 |  |  |                           | 
|                        |               |  |                                               |  |           |                                                      |  |  |                                 |  |  |                           |       |  |                                              |   |    |                                 |  |  |                           | 
|                        |               |  |                                               |  | 2,163,857 |                                                      |  |  |                                 |  |  |                           | 0.79  |  |                                              |   |    |                                 |  |  | 1,778,857                 | 



The aggregate
intrinsic value of the above table represents the total intrinsic value, based on the Company’s stock price of $0.09 as of
December 31, 2011, less the weighted average exercise price per range. This represents the potential amount received by the option
holders had all option holders exercised their options as of that date.



The total
intrinsic value of options exercised during the years ended December 31, 2011 2010 and 2009 was $1, $1 and $36, respectively, based
on the Company’s average stock price of $0.10, $0.14and $0.4, during the years ended on those dates respectively.

F-39





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 13:- | SHARE CAPITAL (Cont.)
| | --------- | ---------------------



| | e. | Stock options (cont.):
| | -- | ----------------------



| | 3. | A summary of the Company's stock option activity and related information is as follows (cont.):
| | -- | -----------------------------------------------------------------------------------------------



A summary
of the status of the Entity’s non-vested options granted to employees as of December 31, 2011 and changes during the
year ended December 31, 2011 is presented below:



|                                           |  | Options |         |  | Weighted– average grant- date fair value |  
|------------------------------------------ |  | ------- | ------- |  | ---------------------------------------- | -
|                                           |  |         |         |  |                                          |  
|Non-vested at January 1, 2011              |  |         | -       |  |                                          |  
|Granted                                    |  |         | 385,000 |  |                                          | $
|Vested (including cancelled and exercised) |  |         | -       |  |                                          |  
|Forfeited                                  |  |         | -       |  |                                          |  
|Non-vested at December 31, 2011            |  |         | 385,000 |  |                                          | $



As of December
31, 2011, there was $8 of unrecognized compensation cost related to non-vested share-based compensation arrangements granted under
the stock option plans.



| | f. | Private placements and warrants:
| | -- | --------------------------------



| | 1. | During 2009, no warrants were granted.
| | -- | --------------------------------------



During 2010,
warrants to acquire up to 1,759,988 shares were granted, of which 553,846, with an exercise price of $0.15 per share were granted
to an investor as a part of private placement (see 4 below) and 1,206,142 of which, with an exercise price of $0.00 per share were
granted to certain creditors as part of the extinguishments of liabilities (see Note 1d). The fair market value of the warrants
granted under the debt extinguishment is $147, based on the Company’s share market price at the date when the extinguishment
was determined.



During 2011,
warrants to purchase up to 1,081,871 shares with an exercise price of $0.00 per share were granted to certain creditors as part
of the extinguishments of liabilities (see Note 1d). The fair market value of the warrants granted is $143, based on the Company’s
share market price at the date when the extinguishment was determined.



F-40





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 13:- | SHARE CAPITAL (Cont.)
| | --------- | ---------------------



| | f. | Private placements and warrants (cont.):
| | -- | ----------------------------------------



| | 2. | A summary of the Company's warrants activity to consultants and investors (including warrants issued
in connection with convertible bonds and extinguishment of liabilities), and related information is as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                 |  | Year ended December 31, |          
|-------------------------------- |  | ----------------------- | ---------
|                                 |  | 2011                    |          
|                                 |  | Number of warrants      |          
|Outstanding at beginning of year |  |                         | 2,157,002
|Granted                          |  |                         | 1,081,871
|Exercised                        |  |                         | -        
|Canceled and forfeited           |  |                         | (236,014 
|Outstanding at end of year       |  |                         | 3,002,859
|Exercisable at end of year       |  |                         | 3,002,859



| | (*) | The Weighted average exercise price is after re-pricing of the exercise price related to the convertible
bond holders.
| | --- | ----------------------------------------------------------------------------------------------------------------------



The warrants
to consultants and investors (including warrants issued in connection with convertible bonds and extinguishment of liabilities),
outstanding and exercisable as of December 31, 2011, have been separated into ranges of exercise prices as follows:



|Range of exercise price |               |  | Warrants outstanding and exercisable as of December 31, 2011 |  |           | Weighted average remaining contractual life (years) |  |  | Weighted average exercise price |  |  | Aggregate intrinsic value |     
|----------------------- | ------------- |  | ------------------------------------------------------------ |  | --------- | --------------------------------------------------- |  |  | ------------------------------- |  |  | ------------------------- | ----
|                        |               |  |                                                              |  |           |                                                     |  |  |                                 |  |  |                           |     
|$                       | 0.00          |  |                                                              |  | 2,288,013 |                                                     |  |  | 1.00                            |  |  | $                         | 0.00
|$                       | 0.15 - $ 0.65 |  |                                                              |  | 633,846   |                                                     |  |  | 3.06                            |  |  | $                         | 0.21
|$                       | 2.50 - $ 3.53 |  |                                                              |  | 20,000    |                                                     |  |  | 1.39                            |  |  | $                         | 3.38
|$                       | 4.42 - $ 4.85 |  |                                                              |  | 61,000    |                                                     |  |  | 2.07                            |  |  | $                         | 4.72
|                        |               |  |                                                              |  |           |                                                     |  |  |                                 |  |  |                           |     
|                        |               |  |                                                              |  | 3,002,859 |                                                     |  |  |                                 |  |  | $                         | 0.16



| | 3. | The fair value of all the warrants granted as described above was measured based on the fair value
of the instruments issued on the date of grant, since, based on the opinion of Company Management, such measurement is more reliable
than the fair value of services.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 4. | On March 22, 2010, the Company entered into a Subscription Agreement with a private investor, Mr.
Yitzchak Babayov (the “Investor”), pursuant to which at a March 23, 2010 closing, the Company issued 1,538,461 ordinary
shares of the Company at a par value of  NIS 0.0588235 (the “Transaction Shares”) in consideration of a onetime
cash payment in the amount of $200.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-41





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 13:- | SHARE CAPITAL (Cont.)
| | --------- | ---------------------



| | f. | Private placements and warrants (cont.):
| | -- | ----------------------------------------



| | 4. | (cont.):
| | -- | --------



Concurrent
with the execution of the Subscription Agreement, the Company and the Investor entered into a Warrant Agreement pursuant to which
the Investor received a warrant (the “Warrant”) to purchase up to 553,846 ordinary shares of the Company for an exercise
price of $0.15 per share. The Warrant has a term of five (5) years and contains standard adjustments for stock dividends,
stock splits, reclassification and similar events. The Company’s shareholders approved and ratified at the annual general
meeting held on September 12, 2010, that the purpose of the private placement of the Transaction Shares and Warrant was to provide
the Investor with more than twenty five percent (25%) of the Company’s issued and outstanding shares as of the date of the
agreement in accordance with Israeli law, which exempts such an acquisition from Israeli tender offer requirements



The Transaction
Shares and the ordinary shares issuable upon the exercise of the Warrant have not been registered under the Securities Act and
may not be offered or sold except pursuant to an effective registration statement or an applicable exemption from the registration
requirements of the Securities Act.



| | g. | Dividends:
| | -- | ----------



No dividends
were declared in the reported periods. In the event that cash dividends are declared in the future, such dividends will be paid
in NIS. The Company does not intend to distribute cash dividends in the foreseeable future.



| | h. | Convertible bonds and warrants issued to the convertible bond holders – see Note 12.
| | -- | ------------------------------------------------------------------------------------



| | NOTE 14:- | RELATED PARTY TRANSACTIONS
| | --------- | --------------------------



| | a. | On October 1, 2001, the Company entered into a consulting agreement with a company owned by a former
Chairman of the Board of Directors, who also was one of the co-founders of the Company.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In consideration
of these consulting services, the Company has undertaken to pay $10.5 per month plus motor vehicle expenses. In addition the Company
was required to pay $1.5 per month as a director’s fee. During 2009 the Company paid in cash $32, pursuant to this agreement.
Regarding the partial payment in options during 2009, see Note 14d below and regarding debt extinguishment during 2010, see Note
14e below.



On July 8,
2010, the Board of Directors accepted the resignation from the board of directors of the Chairman of the Board of Directors, effective
July 25, 2010. The Company recorded during 2010 an expense of $75 related to the former consulting agreement. In addition, on July
8, 2010, the Company entered into a Services Agreement with the former Chairman of the Board of Directors and as of that date one
of the Company’s major shareholders (the “Service Provider”), effective immediately, pursuant to which the parties
terminated the former consulting agreement and agreed that the Service Provider will provide the Company with ongoing consulting
services as may be reasonably required by the Company, for a consideration of 2% of the Company’s gross receipts from a major
customer and indemnification of reasonable costs and expenses incurred by the Service Provider.



During 2011
and 2010, the Company recorded an expense of $130 and $83, respectively, in accordance with the Services Agreement.



F-42





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 14:- | RELATED PARTY TRANSACTIONS (Cont.)
| | --------- | ----------------------------------



| | b. | On October 1, 2001, the Company entered into a consulting agreement with a company owned by a former
member of the Company's Board of Directors, who was one of the Company's co-founders and a principal shareholder. On January 13
2005, the General Shareholders Meeting approved, inter-alia, the following amendments to the consulting agreement:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As of the date of the approval of the General Shareholders Meeting, the consideration shall be
an amount of $7 per month.
| | - | -------------------------------------------------------------------------------------------------------------------------



| | · | Upon the termination of the car lease agreement in March 2005, to increase the car lease, to a
price of up to NIS 4,200 (approximately $1.1 as of December 31, 2011), (excluding tax) per month.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In addition,
the Company was required to pay $1.5 per month as a director’s fee.



During 2009
the Company paid in cash $22 pursuant to this agreement. Regarding the partial payment in options during 2009, see below Note 14d
and regarding debt extinguishment during 2010 see Note 14e below.



On July 8,
2010, the Board of Directors accepted the resignation from the board of directors of the member of the Company's Board of Directors,
effective immediately. The Company recorded during 2010 an expense of $53 related to the former consulting agreement. In addition,
on July 8, 2010, the Company entered into a Services Agreement with the former member of the Board of Directors and as of that
date one of the Company’s major shareholders (the “Service Provider”), effective immediately, pursuant to which
the parties terminated the former consulting agreement and agreed that the Service Provider will provide the Company with management
services with respect to the Company’s certain project for a consideration of (i) a monthly fee of $3, (ii) indemnification
of reasonable costs and expenses incurred by the Service Provider, and (iii) the Company will provide the Service Provider with
a cellular phone and an automobile. The Company shall also grant the Service Provider options to purchase up to 50,000 ordinary
shares of the Company according to terms to be determined by the Board of Directors, which terms have not yet been determined by
the date of approval of the financial statements.



During 2011
and 2010, the Company recorded an expense of $63 and $38, respectively, in accordance with the Services 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 was required to pay $4.6 per month plus motor vehicle expenses. During 2009 the Company paid in
cash $15 pursuant to this agreement. Regarding the partial payment in options during 2009, see Note 14d below and regarding debt
extinguishment during 2010 see Note 14e below.



The Company
recorded during 2010 an expense of $37 related to the former consulting agreement. On July 8, 2010, the Company entered into a
Services Agreement with the co-founder of the Company and as of that date one of the Company’s major shareholders (the “Service
Provider”), effective immediately, pursuant to which the parties terminated the former consulting agreement and agreed that
the Service Provider will provide the Company with ongoing consulting services as may be reasonably required by the Company for
a consideration of a monthly fee of $3 and indemnification of reasonable costs and expenses incurred by the Service Provider in
connection with the services. The Company shall also grant the Service Provider options to purchase up to 100,000 ordinary shares
of the Company according to terms that will be determined by the Board of Directors, which terms have not yet been determined by
the date of approval of the financial statements.

F-43





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 14:- | RELATED PARTY TRANSACTIONS (Cont.)
| | --------- | ----------------------------------



| | c. | (cont.)
| | -- | -------



During 2011
and 2010, the Company recorded an expense of $39 and $21, respectively, in accordance with the Services Agreement.



| | d. | On December 21, 2008, the Special General Meeting of Shareholders approved that as part of a cost
cutting plan, all of the Company's non-external directors, will join a temporary arrangement pursuant to which the remuneration
payable to them shall be paid in fully vested options to purchase shares of the Company instead of in cash, effective October 1,
2008, for a minimum period of three months, with an option to the Company to extend it from time to time for additional consecutive
periods of up to twelve (12) months in the aggregate. During 2009, an aggregated number of options to purchase up to 478,543 of
the Company’s ordinary shares were granted to the Company’s non-external directors as part of the cost cutting plan.
The options have an exercise price of 0.0582235 NIS per share, vesting immediately, and will expire after ten years.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | e. | As part of the debt extinguishment plan of the Company (see also Note 1d) and in accordance with
their Services Agreement, the abovementioned Service Providers agreed to a partial forgiveness of the debts due to them under the
former consulting agreements accrued from October 1, 2009 until July 8, 2010 which total amount was $245 and agreed to repayment
in 1,083,071 warrants to purchase ordinary shares of the Company as consideration for the entire debts due. The fair value of the
warrants was estimated as $130. The difference between the carrying amount of the amounts due and the fair value of the warrants
was recognized as a capital gain.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | f. | On July 25, 2010, the Board of directors of the Company elected Mrs. Tsviya Trabelsi to serve as
the Chairman of the Board of Directors. Mrs. Trabelsi is an officer at Sigma Wave Ltd., which is the controlling shareholder of
the Company and the major holder of a principal amount of Convertible Bonds (see Note 12); and is also the wife of the Company’s
former chief executive officer and the sister of one of the members of the Company’s board of directors. On May 12, 2011,
the special general meeting approved the Service Agreement of the Company’s chairman of the board of directors whereby, her
monthly fee will be calculated every month at 60% of the Company’s chief executive officer’s monthly cost (approximately
$8). In addition to the above consideration, the Company shall bear all reasonable costs and expenses incurred by the chairman
in connection with her services and provide her with an automobile. On December 12, 2011, Mrs. Tsviya Trabelsi resigned from the
board effective immediately and the board of directors of the Company approved the appointment of Mr. Arie Trabelsi as its
new Chairman, effective December 12, 2011. Mr. Trabelsi served as the chief executive officer of the Company until November 1,
2011, and has served as a member of the Company’s board since November 1, 2011. Mr. Arie Trabelsi is the sole director of
Sigma Wave Ltd., which is the controlling shareholder of the Company and the major holder of a principal amount of Convertible
Bonds (see Note 12); and is the brother of Mr. Eliyahu Trabelsi who holds the other principal amount of Convertible Bonds and is
a shareholder of the Company. His management services fees are subjected to the approval of the next general meeting and are expected
to be the same as those paid to Mrs. Tsviya Trabelsi, the former chairman.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | g. | As of December 31, 2011, the Company accrued $279 as expenses arising from related parties providing
consulting services.
| | -- | -------------------------------------------------------------------------------------------------------------------------



| | h. | As of December 31, 2011, the Company accrued $135 as another liability arising from a short term
loan that the Company received from its former Chairman of the Board of Directors. $90 of this loan was repaid by the Company during
January, 2012.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | i. | Regarding a convertible bond held by a controlling shareholder see Note 12 and Note 9.
| | -- | --------------------------------------------------------------------------------------

F-44





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 15:- | SEGMENTS, MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION
| | --------- | ----------------------------------------------------



| | a. | Summary information about geographic areas:
| | -- | -------------------------------------------



The Company
manages its business on the basis of one reportable segment (see Note 1 for a brief description of the Company's business) and
follows the requirements of ASC Topic 280, "Segment Reporting".



The following
is a summary of revenues from external customers of the continued operations within geographic areas and data regarding property
and equipment, net:



|                          |  | Year ended December 31, |      
|------------------------- |  | ----------------------- | -----
|                          |  | 2011                    |      
|                          |  |                         |      
|                          |  | Total
Revenues          |      
|                          |  |                         |      
|East European country (*) |  | $                       | 7,498
|Hong Kong                 |  |                         | -    
|United States             |  |                         | 344  
|Israel                    |  |                         | 80   
|                          |  |                         |      
|                          |  | $                       | 7,922



| | - | Revenues were attributed to countries based on the customer’s location.
| | - | -----------------------------------------------------------------------



| | - | Property and equipment were classified based on geographic areas in which such property and equipment
items are held.
| | - | ---------------------------------------------------------------------------------------------------------------------



(*) Due
to a demand of the customer, the name of the specific country cannot be disclosed.



| | b. | Summary of revenues from external customers of the continued operations based on products and services:
| | -- | -------------------------------------------------------------------------------------------------------



|                                              |  | Year ended December 31, |      
|--------------------------------------------- |  | ----------------------- | -----
|                                              |  | 2011                    |      
|                                              |  |                         |      
|Raw materials and equipment                   |  | $                       | 5,822
|Maintenance, royalties and project management |  |                         | 2,100
|                                              |  |                         |      
|                                              |  | $                       | 7,922



| | c. | Major customer data as a percentage of total sales from external costumers of the continued operations:
| | -- | -------------------------------------------------------------------------------------------------------



|           |  | Year ended December 31, |   
|---------- |  | ----------------------- | --
|           |  | 2011                    |   
|           |  |                         |   
|Customer A |  |                         | 95
|           |  |                         |   
|Customer B |  |                         | - 



F-45





VUANCE LTD. AND SUBSIDIARIES



|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Cont.)
|--------------------------------------------------
|U.S. dollars in thousands (except per share data) 



| | NOTE 16:- | OTHER (INCOME) EXPENSES
| | --------- | -----------------------





|                                                   |  | Year ended December 31, |     
|-------------------------------------------------- |  | ----------------------- | ----
|                                                   |  | 2011                    |     
|                                                   |  |                         |     
|Litigation expenses                                |  |                         | -   
|Capital loss on disposal of property and equipment |  |                         | 6   
|Gain on extinguishment of debts (*)                |  |                         | (143
|Capital gain on sale of subsidiary                 |  |                         | -   
|Net total                                          |  | $                       | (137



(*)
Comprised of the capital gain on extinguishment of working capital related liabilities (employees, service providers etc.). See
also Note 1.



| | NOTE 17:- | FINANCIAL (EXPENSES) INCOME, NET
| | --------- | --------------------------------





|                                                              |  | Year ended December 31, |       
|------------------------------------------------------------- |  | ----------------------- | ------
|                                                              |  | 2011                    |       
|Financial expenses:                                           |  |                         |       
|                                                              |  |                         |       
|Interest, amortization of discount, bank charges and fees (*) |  | $                       | (1,021
|Exchange differences                                          |  |                         | -     
|                                                              |  |                         |       
|Total financial expenses                                      |  |                         | (1,021
|Financial income:                                             |  |                         |       
|                                                              |  |                         |       
|Gain on extinguishment of convertible bonds (**)              |  |                         | 2,006 
|Exchange differences                                          |  |                         | 5     
|Interest                                                      |  |                         | -     
|                                                              |  |                         |       
|Total financial income                                        |  |                         | 2,011 
|                                                              |  |                         |       
|Net total                                                     |  | $                       | 990   



| | (*) | In 2011, 2010 and 2009, includes expenses of $968, $586 and $565_related
to convertible bonds, respectively. (See Note 12 above).
| | --- | ---------------------------------------------------------------------------------------------------------------------------------

(**)
   See Note 1



| | NOTE 18:- | SUBSEQUENT EVENTS
| | --------- | -----------------



| | a) | On March 27, 2012, as required under an agreement between the Company, Sigma and Mr. Eliyahu Trabelsi,
entered into in December 2011, the board of directors of the Company approved the issuance of 9,094,400 ordinary shares in respect
of extinguishment of liabilities which took place on December 31, 2011 (see Note 12). The actual issuance took place on April 2,
2012 and as of that date the issued and outstanding ordinary shares amounted to 21,129,672 shares.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | b) | See Note 10b.4.
| | -- | ---------------












F-46









ITEM 19.    Exhibits.



|Exhibit
Number |  | Description                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|1.11           |  | Memorandum of Association of the Company.                                                                                                                                                                                                                                                                                                                                                                                                             
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|1.2            |  | Articles of Association of the Company.                                                                                                                                                                                                                                                                                                                                                                                                               
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|2.11           |  | Forms of Stock Certificates Representing ordinary shares.                                                                                                                                                                                                                                                                                                                                                                                             
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.11           |  | The Vuance Ltd. 1999 Employee Stock Option Plan (as Amended and Restated in 2002).                                                                                                                                                                                                                                                                                                                                                                    
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.2(a)         |  | The Vuance Ltd. 2003 Israeli Share Option Plan.                                                                                                                                                                                                                                                                                                                                                                                                       
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.2(b)         |  | The Vuance Ltd. 2007 U.S. Stock Option Plan                                                                                                                                                                                                                                                                                                                                                                                                           
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.33           |  | Asset Purchase Agreement by and among Intelli-Site, Inc., Integrated Security Systems, Inc., Vuance, Inc. and Vuance Ltd.
    dated as of March 6, 2009.                                                                                                                                                                                                                                                                                              
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.45           |  | Agreement for Purchase and Sale of Business Assets between Vuance, Inc. and OLTIS Security Systems International, LLC,
    dated as of January 9, 2010.                                                                                                                                                                                                                                                                                               
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.55           |  | Asset Purchase Agreement between Vuance Ltd., Vuance, Inc., WidePoint Corporation and Advance Response Concepts Corporation,
    dated as of January 29, 2010.                                                                                                                                                                                                                                                                                        
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.64           |  | Subscription Agreement and Warrant Agreement between Vuance Ltd. and Mr. Yitzchak Babayov, dated as of March 22, 2010.                                                                                                                                                                                                                                                                                                                                
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.76           |  | Share Purchase Agreement for the sale of SuperCom Asia Pacific Ltd. between Vuance Ltd. and Mr. Steven Slom, Adv. as trustee
    for an undisclosed purchaser, dated October 21, 2010.                                                                                                                                                                                                                                                                
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|4.86           |  | Financing Agreement between Vuance Ltd. and Sigma Wave Ltd., dated March 30, 2011.                                                                                                                                                                                                                                                                                                                                                                    
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|8              |  | List of Subsidiaries of Vuance Ltd.                                                                                                                                                                                                                                                                                                                                                                                                                   
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|11.12          |  | Code of Ethics.                                                                                                                                                                                                                                                                                                                                                                                                                                       
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|12.1           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|12.2           |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|13.1           |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|13.2           |  | Certification pursuant to Section 906 of the Sarbanes-Oxley Act.                                                                                                                                                                                                                                                                                                                                                                                      
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|15.1           |  | Consent of Fahn, Kanne & Co., a member of Grant Thornton, dated May 9, 2012.                                                                                                                                                                                                                                                                                                                                                                          
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|101            |  | The following materials from our Annual Report on Form 20-F for the year ended December 31, 2011 formatted in XBRL (eXtensible
    Business Reporting Language) are furnished herewith: (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements
    of Operations, and (iii) the Statements of Changes in Shareholders' Deficit, (iv) the Consolidated Statements of Cash Flows,
    and (v) Notes to Consolidated Financial Statements.





---



1Previously
filed as an exhibit to, and incorporated herein by reference from, the Company’s Annual Report on Form 20-F filed on September
14, 2004.



86







2Previously
filed as an exhibit to, and incorporated herein by reference from, the Company’s Annual Report on Form 20-F filed on June
30, 2008.

3Previously filed
as exhibits to, and incorporated herein by reference from, the Company’s Annual Report on Form 20-F filed on June 30, 2009.

4Previously filed
as exhibits to, and incorporated herein by reference from, Exhibit 10.1 and 10.2 to the Company’s report on Form 6-K submitted
on April 7, 2010.

5Previously filed
as an exhibit to, and incorporated herein by reference from, the Company’s Annual Report on Form 20-F filed on July 23,
2010.

6Previously filed
as exhibits to, and incorporated herein by reference from, the Company’s Annual Report on Form 20-F filed on June 13, 2011.



87







SIGNATURE



Vuance 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.



| | VUANCE LTD.
| | -----------
| |            
| | By:        
| | Name:      
| | Title:     



Date: May 9, 2012





88