RISK FACTORS

This offering involves a high degree of risk. You should carefully consider the following risks together with the other information in this prospectus before deciding to invest in our ordinary shares. If any of the following risks actually occur, our business, financial condition and results of operations could be materially and adversely affected. In that case, the trading price of our ordinary shares could decline, and you may lose all or part of your investment. The risks described below are not necessarily in order of degree or magnitude of risk.

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

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

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

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

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

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

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

- 6 -

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

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

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

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

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

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

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

- 7 -

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

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

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

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

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

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

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

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

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

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

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

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

- 8 -

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

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

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

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

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

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

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

- 9 -

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

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

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

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

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

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

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

- 10 -

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

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

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

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

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

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

increased collection risks;

trade restrictions;

export duties and tariffs;

uncertain political, regulatory and economic developments;

inability to protect our intellectual property rights;

very aggressive competitors;

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

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

currency issues.

- 11 -

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

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

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

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

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

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

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

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

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

widely used digital signature information technology security systems;

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

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

- 12 -

transportation applications using cards as method of payment; and

access control in such fields as education and health care.

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

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

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

customers’ perception of the benefits of smart card solutions;

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

public perceptions regarding the confidentiality of private information;

customers’ satisfaction with our products and services; and

marketing efforts and publicity regarding our products and services.

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

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

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

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

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

- 13 -

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

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

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

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

long customer sales cycles;

reduced demand for our products and services;

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

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

contract cancellations, delays or amendments by customers;

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

unforeseen legal expenses, including litigation costs;

expenses related to acquisitions;

other non-recurring financial charges;

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

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

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.

- 14 -

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

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

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

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

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

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

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

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

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

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

- 15 -

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

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

Our ability to manage our growth effectively will require us:

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

to train, motivate and manage our employees; and

as required, to install new management information systems.

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

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

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

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

We are incorporated under Israeli law and our manufacturing facility and research and development facility will continue to be located in Israel. Political, economic and military conditions in Israel will, accordingly, directly affect our operations. Since the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors and a state of hostility, varying in degree and intensity, has led to security and economic problems for Israel. Despite negotiations to effect peace between Israel and its Arab neighbors, the future of these peace efforts is uncertain. Since October 2000, there has been a significant increase in violence primarily in the West Bank and Gaza Strip, negotiations between Israel and the Palestinian Authority have ceased from time to time and there has been increased military activity characterized by some as war. More recently, violence has spread to Jerusalem and areas near Tel Aviv. Furthermore, several countries still restrict trade with Israeli companies, which may limit our ability to make sales in, or purchase components from, those countries. Any future armed conflict, political instability, continued violence in the region or restrictions could have a material adverse effect on our business, operating results and financial condition.

- 16 -

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

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

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

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

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

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

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

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

- 17 -

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

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

We are unlikely to pay dividends for the foreseeable future.

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

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

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

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

As of August 31, 2005, 18,346,140 ordinary shares were outstanding. In addition, there were a total of 3,632,199 ordinary shares issuable upon exercise or conversion of outstanding options. We have issued options to acquire ordinary shares to our employees and certain other persons at various prices, some of which have exercise prices below the current market price for our ordinary shares. As of August 31, 2005, our existing stock option plan had 1,000,000 ordinary shares available for future issuance. In December 2004, we filed a Registration Statement on Form S-8 with the U.S. Securities and Exchange Commission (the “SEC”) registering (a) 1,000,000 ordinary shares available for issuance upon exercise of stock options reserved for grant under the Option Plan, (b) 3,494,315 ordinary shares issued or issuable upon exercise of options previously granted under the Option Plan, and (c) 643,595 ordinary shares issued or issuable upon exercise of options previously granted under the 1999 Option Plan. We have also issued 2,562,298 warrants to acquire ordinary shares to investors and consultants, at various prices, which expire between 2009 to 2010. As of August 31, 2005 warrants to acquire only 1,144,853 ordinary shares had been exercised. The registration statement of which this prospectus forms a part registers up to 6,341,713 ordinary shares, which include ordinary shares issuable upon exercise of our outstanding warrants.

- 18 -

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

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

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

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

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

Being a foreign private issuer exempts us from certain SEC requirements.

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

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

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

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

- 19 -

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

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

- 20 -

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in “Summary” and under the captions “Risk Factors,”“Management’s Discussion and Analysis of Financial Condition and Results of Operations,”“Business” and elsewhere in this prospectus constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Words such as “anticipate,”“estimate,”“expects,”“may,”“projects,”“intends,”“plans,”“believes,”“would,”“could” and words and terms of similar substance used in connection with any discussion of future operating or financial performance may identify forward-looking statements. All forward-looking statements are management’s present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. These factors include, but are not limited to, (a) the factors discussed below under “Risk Factors;” (b) our beliefs regarding our core strengths; (c) our plans to achieve our strategic objectives and goals; (d) our expectations on the effects of competitive pricing on our margins, sales and market share; (e) our expectations on the effect of our legal proceedings on our results of operations, sales and operating performance, including our beliefs about the merit of the Ukrainian Department of Resources claim against us; (f) our beliefs regarding the fluctuations of our operating results, including our beliefs about the effects of inflation and the fluctuation of the NIS/dollar exchange rate on our operating results; (g) our expectations regarding the lack of future revenues from the Ukraine ID Project; (h) our beliefs about our competitive position; (i) our expectations about the effects of seasonality on our revenues and operating results; (j) our plans for research and development and future products; (k) our beliefs about the markets in which we compete and our competitive position within those markets, including our beliefs about the role the governmental and commercial markets will play in our short and long-term performance; (l) our expected revenues from our customer contracts; (m) our expectations regarding the effectiveness of our marketing programs and generation of business from those programs, including our beliefs about the role customer services plays in our sales and marketing programs; (n) our expectations regarding trends affecting our revenues and our statements regarding the impact of such trends on our operating results and products, including, without limitation, our statements regarding the concentration of revenues in a small number of customers and the mix of our sources of revenues; (o) our expectations regarding our recurring revenues and backlog; (p) our expectation that our relocation to our new facility in Kadima may result in a write-off of certain assets; and (q) our beliefs about the effects of adopting certain new accounting pronouncements on our financial position and operating results. Investors are cautioned not to place undue reliance on the forward-looking statements, which speak only of the date of this prospectus. 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. For purposes of this “Risk Factors” section, when we state that a risk, uncertainty or problem may, could or would have “a material adverse effect on our business” or words to that effect, we mean that the risk, uncertainty or problem may, could or would have a “material adverse effect on the business, result of operations, financial condition, cash flow or prospects of our company.”

USE OF PROCEEDS

We will not receive any proceeds from the sale of the ordinary shares by the selling shareholders.

DIVIDEND POLICY

We have not distributed a dividend since August 27, 1997 and we do not anticipate any dividend distribution in the foreseeable future. Dividends may only be paid out of our profits legally available for distribution (the “Profits Criteria”) under the Israeli Companies Law, 5759-1999 (the “Companies Law”), and provided that there is no reasonable concern that such payment will prevent us from satisfying our existing and foreseeable obligations as they become due. In addition, a competent court may approve, as per a motion to be filed by a company in accordance with the Companies Law requirements, a payment which does not meet the Profit Criteria, provided that the court was convinced that there is no reasonable concern that such payment will prevent the company from satisfying its existing and foreseeable obligations as they become due.

- 21 -

In accordance with our articles of association, a dividend shall be proposed by the board of directors and shall be payable only after the same has been approved by ordinary resolution of the shareholders meeting, but no such resolution shall provide for the payment of an amount exceeding the amount proposed by the board of directors.

Subject to the rights of the holders of shares as to dividends, any dividend paid by us shall be allocated among the members entitled thereto in proportion to the sum paid up or credited as paid up on account of the nominal value of their respective holding of the shares in respect of which such dividend is being paid, without taking into account the premium paid up for the shares.

EXCHANGE RATE INFORMATION

For a discussion of the impact of exchange rate fluctuations on our business, financial condition and results of operations, see “Risk Factors—Fluctuations in the exchange rate between the United States dollar and foreign currencies may affect our operating results” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Currency and Exchange Rates

We incur expenses for our operations in Israel in New Israeli Shekels (“NIS”) and translate these amounts into United States dollars for purposes of reporting consolidated results. On August 31, 2005, the exchange rate between the NIS and the dollar was NIS 4.545= $1. The following table shows for the periods and dates indicated, certain information concerning the representative $ exchange rate for translating NIS as determined by the Bank of Israel for the years ended December 31, 2000 through 2004.

Year	Exchange Rate At End of Period		Average Rate (1)		High		Low
2000		4.040		4.068		4.200		3.970
2001		4.416		4.220		4.416		4.041
2002		4.737		4.736		4.991		4.437
2003		4.379		4.512		4.924		4.283
2004		4.308		4.483		4.634		4.308

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

The following table shows for the periods and dates indicated, certain information concerning the representative $ exchange rate for translating NIS as determined by the Bank of Israel for the periods indicated:

Period	Exchange Rate At End of Period		Average Rate (1)		High		Low
Three (3) Months Ended June 30, 2005		4.574		4.367		4.414		4.299
Six (6) Months Ended June 30, 2005		4.574		4.410		4.574		4.299

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

- 22 -

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

Period	High		Low

March 2005		4.379		4.299
April 2005		4.395		4.360
May 2005		4.416		4.348
June 2005		4.574		4.405
July 2005		4.61		4.525
August 2005		4.559		4.475

CURRENT OUTSTANDING SHARE CAPITAL

Our capital stock consists of 40,000,000 ordinary shares, NIS 0.01 par value per share authorized. As of August 31, 2005, we had 18,346,140 ordinary shares outstanding, which are all fully paid. We also have outstanding warrants to purchase an aggregate of 1,167,445 ordinary shares and outstanding options to purchase an aggregate of 3,632,199 ordinary shares, 2,021,699 of which exercisable as of August 31, 2005.

CAPITALIZATION

The table below sets forth our total indebtedness in US dollars and capitalization as of December 31, 2004, and June 30, 2005. You should read this table in conjunction with the audited consolidated financial statements and accompanying notes included in this prospectus.

	As of
	December 31, 2004			June 30, 2005
	(Audited)			(Unaudited)
Liabilities:
Total bank debt, including current portion		1,022			1,136
Warrants		-			-
Shareholders’ equity:
Ordinary shares, NIS 0.01 per share, 26,500,000 authorized, 17,703,199 outstanding on December 31, 2004, and 18,346,140 outstanding on June 30, 2005 (actual		51			53
Additional paid-in capital		29,094			29,539
Accumulated deficit		(20,114	)		(22,249	)
Deferred compensation		(59	)		(21	)
Receipt on account of shares		143			14
Deficit
Total shareholders’ equity	$	9,115		$	7,336

- 23 -

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Overview

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

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

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

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

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

- 27 -

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

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

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

Revenues

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

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

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

Operating Expenses

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

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

Net Income

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

- 28 -

Critical Accounting Policies and Estimates

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

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

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

Revenue recognition

Allowance for doubtful accounts

Inventory valuation

Impairment of long-lived assets

Contingencies

Stock-based compensation

Revenue Recognition and Allowance for Doubtful Accounts

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

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

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

- 29 -

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

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

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

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

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

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

Inventories Valuation

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

Impairment of Long-Lived Assets

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

- 30 -

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

Contingencies

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

Stock-Based Compensation

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

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

Warranties

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

- 31 -

Results of Operations

The following table sets forth selected consolidated income statement data for SuperCom for each of the three years ended December 31, 2002, 2003 and 2004 and each of the six months and three months ended June 30, 2004 and 2005 expressed as a percentage of total revenues.

	Year ended December 31,									Quarter ended June 30,			Quarter ended June 30,			Six months ended June 30,			Six months ended June 30,
	2002			2003			2004			2004			2005			2004			2005
Revenues		100	%		100	%		100	%		100	%		100	%		100	%		100	%
Cost of revenues		22.8			42.8			50.8			63.0			56.0			63.0			51.4
Gross profit		77.2			57.2			49.2			37.0			44.0			37.0			48.6
Operating expenses:
Research and development		16.6			12.7			11.5			15.6			17.5			15.1			15.1
Selling and marketing, net		35.2			41.8			33.3			48.7			36.0			45.4			36.3
General and administrative		24.8			25.2			26.6			37.6			39.7			38.0			31.3
Restructuring Expenses		-			-			-			-			23.0			-			10.4
Total operating expenses		76.6			79.7			71.4			101.9			116.2			98.5			93.1
Operating income (loss)		(0.6	)		(22.5	)		(22.2	)		(64.9	)		(72.2	)		(61.5	)		(44.5	)
Financial income (expenses), net		(0.4	)		(3.2	)		(2.9	)		(5.9	)		1.0			(3.1	)		0.1
Other income (expenses), net		77.3			(1.1	)		(0.3	)		(4.1	)		(0.3	)		(2.1	)		(0.1	)
Income (loss) before income taxes		77.5			(26.8	)		(25.5	)		(74.9	)		(71.5	)		(66.7	)		(44.5	)
Equity in losses of affiliates and impairment, net of taxes		(0.5	)		(0.7	)		—			—			—			—			—
Net income (loss) from continuing operations		77.0			(27.5	)		(25.5	)		(74.9	)		(71.5	)		(66.7	)		(44.5	)
Loss from discontinued operations		5.3			—			—			—			—			—			—
Net income (loss)		71.7			(27.5	)		(25.5	)		(74.9	)		(71.5	)		(66.7	)		(44.5	)

Operating Results

Three Months Ended June 30, 2005 Compared to Three Months Ended June 30, 2004

Revenues

Our revenues in the second quarter of 2005 were $2,160,000 compared to $1,173,000 in the second quarter of 2004, an increase of 84%. The increase is primarily due to revenues attributable to our agreement with an African governmental agency to provide an end-to-end national identification system valued at $2.5 million. In addition, our revenues from existing customers increased in the second quarter of 2005 compared to the second quarter of 2004.

Gross Profit

Our gross profits in the second quarter of 2005 were $949,000 compared to gross profits of $435,000 in the second quarter of 2004, an increase of 118%. The gross profit margin for the three months ended June 30, 2005 increased by 7% as compared to 37% in the second quarter of 2004. The increase in our second quarter of 2005 gross profit was primarily due to different mix of product sold, which carry higher margins as compared to that sold during the second quarter of 2004. We increased the volume of sales of our ID solutions and contactless smart cards for governmental markets, which carry higher margins as compared to sales of our commercial applications.

- 32 -

Expenses

Our operating expenses in the second quarter of 2005 were $2,511,000 compared to $1,196,000 in the second quarter of 2004, an increase of 110%. The increase in operating expenses was due to the increase in sales and marketing expenses, general and administrative expenses, research and development expenses and restructuring expenses of $496,000 relating to cost-cutting measures that we implemented during the second quarter of 2005.

Selling and marketing expenses consist primarily of salaries and commission earned by sales and marketing personnel, trade show and promotional expenses, allocated rent and supplies and travel and entertainment costs. Our selling and marketing expenses in the second quarter of 2005 were $779,000 compared to $572,000 in the second quarter of 2004, an increase of 36%. The increase in the sales and marketing expenses was due to the increase in labor expenses and promotion expenses related to the quarterly revenues.

General and administrative expenses consist primarily of salaries, benefits, allocated rent and supplies, and related costs for our executive, finance, legal, human resource, information technology and administrative personnel, and professional service fees, including legal counsel insurance and audit fees. Our general and administrative expenses in the second quarter of 2005 were $858,000 compared to $441,000 in the second quarter of 2004, an increase of 94.5%. The increase in the general and administrative expenses was primarily due to expenses related to the registration of our ordinary shares under the Exchange Act, the commencement of trading of our shares in the United States on the OTC Bulletin Board, and increases in our legal expenses related to our ID solutions for governmental markets activity.

Research and development expenses consist primarily of salaries, benefits, allocated rent expense, supplies and equipment for software developers and architects, hardware engineers and program managers, as well as legal fees associated with our intellectual property. Our research and development expenses in the second quarter of 2005 were $378,000 compared to $183,000 in the second quarter of 2004, an increase of 106%. The increase in the research and development expenses was primarily due to research and development expenses associated with our ID solutions for governmental markets and to new products development including SmartSMDS, E-Passport and Vend-EZ applications.

Restructuring Expenses contains certain financial measures related to one-time expenses totaling $496,000 that are associated with cost-cutting measures implemented by the Company.

Net Income

As a result of the factors described above, our net loss in the second quarter of 2005 was $1,545,000 compared to a net loss of $880,000 in the second quarter of 2004, an increase of 75.5%.

Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004

Revenues

Our revenues for the six months ended June 30, 2005 were $4,788,000 compared to $2,484,000 during the six months ended June 30, 2004, an increase of 92.7%. The increase is primarily due to revenues attributable to our agreement with an African governmental agency to provide an end-to-end national identification system valued at $2.5 million. In addition our revenues from existing customers has been increased during the six months ended June 30, 2005 compared to the six months ended June 30, 2004.

- 33 -

Gross Profit

Our gross profits for the six months ended June 30, 2005 were $2,326,000 compared to gross profits of $920,000 during the six months ended June 30, 2004, an increase of 153%. The gross profit margin for the six months ended June 30, 2005 increased by 11.6% as compared to 37% during the six months ended June 30, 2004. The increase in our gross profit for the six months ended June 30, 2005 was primarily due to different mix of product sold, which carry higher margins as compared to that sold during the six months ended June 30, 2004. We increased the volume of sales of our ID solutions and contactless smart cards for governmental markets, which carry higher margins as compared to sales of our commercial applications.

Expenses

Our operating expenses for the six months ended June 30, 2005 were $4,461,000 compared to $2,450,000 during the six months ended June 30, 2004, an increase of 82%. The increase in operating expenses was due to the increase in sales and marketing expenses, general and administrative expenses, research and development expenses and restructuring expenses of $496,000 relating to cost-cutting measures that we implemented during the six months ended June 30, 2005.

Selling and marketing expenses consist primarily of salaries and commission earned by sales and marketing personnel, trade show and promotional expenses, allocated rent and supplies and travel and entertainment costs. Our selling and marketing expenses for the six months ended June 30, 2005 were $1,739,000 compared to $1,129,000 during the six months ended June 30, 2004, an increase of 54%. The increase in the sales and marketing expenses was due to the increase in labor expenses and promotion expenses related to the six months revenues.

General and administrative expenses consist primarily of salaries, benefits, allocated rent and supplies, and related costs for our executive, finance, legal, human resource, information technology and administrative personnel, and professional service fees, including legal counsel insurance and audit fees. Our general and administrative expenses for the six months ended June 30, 2005 were $1,500,000 compared to $944,000 during the six months ended June 30, 2004, an increase of 59%. The increase in the general and administrative expenses was primarily due to expenses related to the registration of our ordinary shares under the Exchange Act, the commencement of trading of our shares in the United States on the OTC Bulletin Board, and increases in our legal expenses related to our ID solutions for governmental markets activity.

Research and development expenses consist primarily of salaries, benefits, allocated rent expense, supplies and equipment for software developers and architects, hardware engineers and program managers, as well as legal fees associated with our intellectual property. Our research and development expenses for the six months ended June 30, 2005 were $726,000 compared to $377,000 during the six months ended June 30, 2004, an increase of 92.5%. The increase in the research and development expenses was primarily due to research and development expenses associated with our ID solutions for governmental markets and to new products development including SmartSMDS, E-Passport and Vend-EZ applications.

Restructuring Expenses contains certain financial measures related to one-time expenses totaling $496,000 that are associated with cost-cutting measures implemented by the Company during the six months ended June 30, 2005.

Net Income

As a result of the factors described above, our net loss for the six months ended June 30, 2005 was $2,135,000 compared to a net loss of $1,660,000 during the six months ended June 30, 2004, an increase of 28.6%.

- 34 -

Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

Revenues

Our revenues in 2004 were $7,344,000 compared to $7,244,000 in 2003, an increase of 2%. Our revenues for the twelve months ended December 31, 2003 included $1,970,000 in revenues attributable to our agreement with the Ukraine Ministry of Internal Affairs for a national passport and ID smart card project (the “Ukraine ID Project”). Due to the arbitration proceeding with the Ukraine Chamber of Commerce relating to the Ukraine ID Project we did not recognize any revenues from this project for the twelve months ended December 31, 2004. During 2004, we classified the cost of goods that were sold to the Ukraine Ministry of Internal Affairs from trade receivables to inventory. In connection with the arbitration relating to the Ukraine ID Project, we might write off the inventory relating to the Ukraine ID Project in the amount of approximately $860,000, which could result in a material and adverse effect on our income and net worth. Additionally, we increased the allowance for doubtful accounts in an aggregate amount of $2,133,000 for the debt the Ukrainian government owes to us in connection with the Ukraine ID Project. Our revenues in the fourth quarter of 2003 included $536,000 of revenue related to the sale of a production line to a customer in the United States, which is to be paid to us over a period of four years. Our revenues in the fourth quarter of 2004 included $1,208,000 of revenue related to the sale of a production line to a customer in Europe. Our revenues from the government market for 2004 and 2003 totaled $6,330,000 and $5,621,000, respectively. In comparison our revenues from the commercial market for 2004 and 2003 totaled $1,014,000 and $1,623,000, respectively. We anticipate that our mix of revenues from the government and commercial markets for the twelve months ended December 31, 2005 will be consistent with our mix of revenues in 2004. Although we believe that the government market is critical to our success in the short-term, we believe that both the government and commercial markets will be critical to our long-term future success.

Gross Profit

Our gross profits in 2004 were $3,614,000 compared to gross profits of $4,142,000 in 2003, a decrease of 12.7%. The gross profit margin for the year 2004 decreased by 8% as compared to a 57% in 2003. The decrease in our 2004 gross profit was primarily due to different mix of product, which carry lower margins. We increased the volume of sales of our commercial applications, which carry lower margins as compared to sales of our ID solutions and contactless smart cards for governmental markets.

Expenses

Our operating expenses in 2004 were $5,245,000 compared to $5,773,000 in 2003, a decrease of 9%. The decrease in operating expenses was primarily due to the reduction in sales and marketing expenses.

Selling and marketing expenses consist primarily of salaries and commission earned by sales and marketing personnel, trade show and promotional expenses, allocated rent and supplies and travel and entertainment costs. Our selling and marketing expenses in 2004 were $2,445,000 compared to $3,026,000 in 2003, a decrease of 19%. The decrease in the sales and marketing expenses was due to a reduction in sales and marketing expenses related to our Ukraine ID Project.

General and administrative expenses consist primarily of salaries, benefits, allocated rent and supplies, and related costs for our executive, finance, legal, human resource, information technology and administrative personnel, and professional service fees, including legal counsel insurance and audit fees. Our general and administrative expenses in 2004 were $1,955,000 compared to $1,829,000 in 2003, an increase of 7%. The increase in the general and administrative expenses was primarily due to expenses related to the registration of our ordinary shares under the Exchange Act, and the commencement of trading of our shares in the United States on the OTC Bulletin Board.

Research and development expenses consist primarily of salaries, benefits, allocated rent expense, supplies and equipment for software developers and architects, hardware engineers and program managers, as well as legal fees associated with our intellectual property. Our research and development expenses in 2004 were $845,000 compared to $918,000 in 2003, a decrease of 8%. We expect, however, that our research and development expenses will increase in 2005 due to research and development expenses associated with our SmartSMDS, E-Passport and Vend-EZ applications. .

- 35 -

Financial Interest Expense, net

Financial interest expense for the twelve months ended December 31, 2003, and 2004, was $135,000 and $166,000, respectively. Interest expense during 2004 and 2003 consisted of interest accrued from bank loans net of bank deposit.

Other Income (Expenses), Net

Other income (expenses), net for the twelve months ended December 31, 2003, and 2004, was $ 83,000 and $27,000, respectively. Other expenses primarily consisted of a decline in market value of held-to-maturity securities for the twelve months ended December 31, 2003, and 2004, $ 52,000 and $ 7,000, respectively.

Net Income (Loss)

As a result of the factors described above, our net loss in 2004 was $1,872,000 compared to a net loss of $1,995,000 in 2003, a decrease of 6%.

Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

Revenues

Our revenues in 2003 were $7,244,000 compared to $8,027,000 in 2002, a decrease of 9%. The decrease was primarily due to the inclusion of $1,884,000 of InkSure’s revenues in the 2002 results of operations. Excluding InkSure’s results of operations for 2002, our revenues would have increased to $7,244,000 from $6,143,000, representing an increase of 18%. This increase was primarily due to the implementation of a new five-year governmental project in Africa by 2008, plus the expansion in the commercial markets systems and their implementation during 2003. The primary increase in commercial revenues has come from the United States, Asia Pacific and the Israeli commercial markets by the sale of our automatic production line, SmartGate, EduGate and DynaGate systems. Our revenues in the fourth quarter of 2003 included $536,000 of revenue related to the sale of a production line to a customer, who is also a distributor of our products in the United States, which is to be paid to us over a period of four years.

Gross Profit

Our gross profits in 2003 were $4,142,000 compared to gross profits of $6,197,000 in 2002, a decrease of 33%. The gross profit margin for the twelve months ended December 31, 2003 decreased by 20% to 57% as compared to a gross profit margin of 77% for the twelve months ended December 31, 2002. The decrease in our 2003 gross profit was primarily due to the inclusion of $1,613,000 of InkSure’s gross profit in the 2002 results of operations. Excluding InkSure’s results of operations from our results of operations for 2002, gross profit would have decreased to $4,142,000 from $4,584,000, representing a decrease of 9%. This decrease was primarily due to an increase in the volume of commercial systems, which carries lower margins.

Expenses

Our operating expenses in 2003 were $5,773,000 compared to $6,150,000 in 2002, a decrease of 6%. The decrease in operating expenses was primarily due to decreases in operating expenses in connection with the divesting of InkSure’s shares during 2002. Excluding InkSure’s results of operations in our results of operations for 2002, operating expenses would have otherwise increase to $5,773,000 from $4,843,000, representing an increase of 19%. This increase was primarily due to the increase in selling and marketing expenses discussed below.

- 36 -

Our selling and marketing expenses in 2003 were $3,026,000 compared to $2,828,000 in 2002, an increase of 7%. The increase in the selling and marketing expenses was due to increases in selling and marketing expenses attributable to Inksure’s operations. Excluding InkSure’s results of operations for 2002, selling and marketing expenses would have increased to $3,026,000 from $2,040,000, representing an increase of 48%. The increase was primarily due to net selling and marketing expenses of $700,000 for the implementation of the Ukraine ID Project resulting from the aggregate amount of $2,133,000 owed to us by the Ukraine government net of $1,433,000 representing the commissions that we would have paid to the consultants that mediated the Ukraine ID Project had it not been void. The increase was also attributable to our expansion of marketing activities for our commercial applications in the US and the Israeli markets.

Our general and administrative expenses in 2003 were $1,829,000 compared to $1,988,000 in 2002, a decrease of 8%. The decrease in the general and administrative expenses was primarily due to decreases in general and administrative expenses in connection with the divesting of InkSure’s shares during 2002. Excluding InkSure’s results of operations for 2002, general and administrative expenses would have increased to $1,829,000 from $1,799,000, representing an increase of 2%.

Our research and development expenses in 2003 were $918,000 compared to $1,334,000 in 2002, a decrease of 31%. The decrease in the research and development expenses was primarily due to the elimination of InkSure’s research and development expenses, which accounted for $330,000 of research and development expense in 2002. Excluding InkSure’s, research and development expenses, would have resulted in a decrease to $918,000 in research and development expenses for 2003 from $1,004,000 in 2002, representing a decrease of 9%.

Net Income

Our net loss in 2003 was $1,995,000 compared to net income of $5,750,000 in 2002 resulting from $6,203,000 booked as other income in 2002 from the divestment of the InkSure shares and net income in 2002 of InkSure’s activities in the amount of $294,000. Our net loss in 2003 was primarily due to a decrease in gross profit margins and an increase in our sales and marketing expenses in the United States and Israeli markets, as well as in the international governmental project market. Excluding Inksure’s net income of $294,000 in 2002 and $6,203,000 booked as other income in 2002 from the divestment of the InkSure shares, our net loss in 2003 would have increased to $1,995,000 from $747,000, representing an increase of 167%. This increase in our net loss was primarily due to a decrease in gross profit margins and an increase in our sales and marketing expenses in the United States and Israeli markets as well as our management’s decision to increase our doubtful accounts by $700,000. Such net provision of $700,000 for doubtful accounts results from the aggregate amount of $2,133,000 owed by the Ukraine government net of $1,433,000 in commissions that we would have had to pay to the consultants that mediated the Ukraine ID Project had it not been void.

Year Ended December 31, 2002 Compared to Year Ended December 31, 2001

Our revenues in 2002 were $8,027,000 compared to $6,889,000 in 2001, an increase of 17%. The increase was primarily due to a growth in international governmental projects. The delivery of the first phase of the Ukraine ID project was a major element of this growth. We also launched a new series of commercial access control products, including the SmartGate 2400 system. This was part of our new commercial marketing strategy to supplement our on-going governmental projects.

Gross Profit

Our gross profits in 2002 were $6,197,000 compared to gross profits of $4,315,000 in 2001, an increase of 44%. The gross profit margin for the year 2002 increased by 14% as compared to 63% in 2001. The increase in our 2002 gross profit was primarily due to high gross profits resulting from the delivery of the first phase of the Ukraine ID project and from a one-time increase of raw materials sales with high gross margins sold in 2002 compared to 2001.

Net Income

Our net income in 2002 was $5,750,000 compared to a net loss of $6,548,000 in 2001. This increase was primarily due to our divestment of InkSure for an aggregate consideration of $6,600,000. Commencing with the quarter ended June 30, 2002, the financial results of InkSure are not included in our financial statements. For the fiscal years 2002, 2001 and 2000, InkSure's operations generated revenues of $1,880,000, $1,760,000 and $140,000, respectively.

- 37 -

Expenses

Our research and development expenses in 2002 were $1,334,000 compared to $1,225,000 in 2001, an increase of 9%. The increase in the research and development expenses was mainly due to the intensive research and development activities pursued by InkSure.

Our selling and marketing expenses in 2002 were $2,828,000 compared to $4,628,000 in 2001, a decrease of 39%. The decrease in the selling and marketing expenses was primarily as a result of InkSure and another of our subsidiary's, SuperCom SmartCards Inc. reduced expenses in connection with its efforts to penetrate new markets in the United States and Europe which have been cut back since the fourth quarter of 2001.

Our general and administrative expenses in 2002 were $1,988,000 compared to $3,604,000 in 2001, a decrease of 45%. The decrease in the general and administrative expenses was due to our cost-cutting plan that resulted in increased efficiency.

Our operating expenses in 2002 were $6,150,000 compared to $9,457,000 in 2001, a decrease of 35%. The decrease in operating expenses was primarily due to our reduction of general and administrative expenses and the exclusion of InkSure's financial results from our financial reports. The decrease in general and administrative expenses was due to a cost-cutting plan that resulted in increased efficiency.

Discontinued Operations

As part of our reorganization plan, we have made a decision to focus on our core business and to shut down all operations not included in our core business that result in losses. As a result, we closed SuperCom SmartCards Inc., Genodus Inc. and its subsidiary; and Kromotec Inc. and its subsidiary. Loss from discontinued operations for 2002 totaled $427,000, compared to $1,288,000 for 2001.

Impact of Inflation and Currency Fluctuations

Because the majority of our revenue is paid in or linked to the dollar, we believe that inflation and fluctuation in the NIS/dollar exchange rate has no material effect on our results of operations. However, a portion of the cost of our Israeli operations, mainly personnel, is incurred in NIS. Because some of our costs are in NIS, inflation in Israel/dollar exchange rate fluctuations do have some impact on expenses and, as a result, on net income. Our NIS costs, as expressed in dollars, are influenced by the extent to which any increase in the rate of inflation in Israel is not offset, or is offset on a delayed basis, by a devaluation of the NIS in relation to the dollar.

In 2004, the rate of evaluation of the NIS against the U.S. dollar was 1.6% and the rate of inflation was 1.2%. It is unclear what the devaluation/evaluation rate will be in the future, and we may be materially adversely affected if inflation in Israel exceeds the devaluation of the NIS against the U.S. dollar, or if the timing of the devaluation lags behind increases in inflation in Israel.

We do not engage in any hedging or other transactions intended to manage risks relating to foreign currency exchange rate or interest rate fluctuations. At December 31, 2004, we did not own any market risk sensitive instruments except for our revolving line of credit. However, we may in the future undertake hedging or other similar transactions or invest in market risk sensitive instruments if management determines that it is necessary or advisable to offset these risks.

- 38 -

Seasonality

Our quarterly operations are subject to fluctuations due to several factors, including the factors discussed under the section captioned “Risk Factors—The time from our initial contact with a customer to a sale is long and subject to delays which could result in the postponement of our receipt of revenues from one accounting period to the next, increasing the variability of our results of operations and causing significant fluctuations in our revenue from quarter to quarter.” and the section captioned “Business — Seasonality.” It is our experience that, as a general matter, a majority of our sales are made during the latter half of the calendar year consistent with the budgetary, approval and order processes of our governmental customers. Additionally, the period between our initial contact with a potential customer and the purchase of our products and services is often long and subject to delays associated with the budgeting, approval and competitive evaluation processes that frequently accompany significant capital expenditures, particularly for government organizations. A lengthy sales cycle may have an impact on the timing of our revenue, which may cause our quarterly operating results to fall below investor expectations. We believe that a customer’s decision to purchase our products and services is discretionary, involves a significant commitment of resources, and is influenced by customer budgetary cycles. To successfully sell our products and services, we generally must educate our potential customers regarding their use and benefits, which can require significant time and resources. This significant expenditure of time and resources may not result in actual sales of our products and services, which could have an adverse effect on our results of operations.

New Accounting Pronouncements

In March 2004, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and investments accounted for under the cost method or the equity method.

In September 2004, the FASB delayed the accounting provisions of EITF 03-01, but the disclosure requirements remained effective. During the period of the delay, the current authoritative literature should be applied regarding “other than temporary” impairments.

We do not expect the adoption of recognition and measurement guidance of EITF 03-01 in future periods to have material impact on its results of operations or financial condition.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility expenses, freight, handling costs, and wasted material (spoilage). SFAS 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal”. In addition, it requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted. We believe that SFAS 151, when adopted, will not have a significant impact on its financial position or results of operations.

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R), a revision of SFAS No. 123, “Accounting for Stock Based Compensation (SFAS 123). Among other items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of accounting, and requires companies to recognize in their financial statements, the cost of employee services received in exchange for awards of equity instruments, based on the fair value of those awards at the grant date. The effective date of SFAS 123R is the first reporting fiscal year period beginning after June 15, 2005, which is the first quarter 2006 for calendar year companies. Early adoption of SFAS 123R is encouraged. SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but it also permits entities to restate financial statements of previous periods based on pro forma disclosures made in accordance with SFAS 123.

We expect to adopt SFAS 123R effective January 1, 2006.

- 39 -

However, the adoption of SFAS 123R could have a material impact on the amount of earnings the Company reports in fiscal 2006. We have not yet determined the specific impact that adoption of this standard will have on our financial position or results of operations.

In December 2004, the FASB issued SFAS 153, “Exchanges of Nonmonetary Assets - An Amendment of APB Opinion No. 29”. SFAS 153 amends APB opinion No. 29, “Accounting for nonmonetary Transactions”. SFAS 153 eliminates the APB 29 exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions in SFAS 153 are effective for nonmonetary asset exchanges accruing in fiscal periods beginning after June 15, 2005 (which is third quarter of 2005 for the Company), and the provisions of this statement shall be applied prospectively. Earlier application is permitted. We do not expect the adoption of SFAS 153 to have a material effect on the Company’s financial statements or its results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” which addresses significant issue regarding the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 requires that costs associated with exit or disposal activities be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is effective for all exit or disposal activities initiated after December 31, 2002. We do not expect the adoption of SFAS No. 146 to have a material impact on our results of operations or financial position.

In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34” (“FIN No. 45”). FIN No. 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued.

FIN No. 45 also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. FIN No. 45 does not prescribe a specific approach for subsequently measuring the guarantor’s recognized liability over the term of the related guarantee. It also incorporates, without change, the guidance in FASB Interpretation No. 34, “Disclosure of Indirect Guarantees of Indebtedness of Others,” which is being superseded. The disclosure provisions of FIN No. 45 are effective for financial statements of interim or annual periods that end after December 15, 2002 and the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. We do not expect the adoption of FIN No. 45 to have a material impact on our results of operations or financial position.

In November 2002, the Emerging Issues Task Force (“EITF”) of the FASB reached a consensus on EITF issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Element Deliverables.” The issue addresses how to account for arrangements that may involve multiple revenue-generating activities, i.e., the delivery or performance of multiple products, services, and/or rights to use assets. In applying this guidance, separate contracts with the same party, entered into at or near the same time, will be presumed to be a package, and the consideration will be measured and allocated to the separate units based on their relative fair values. This consensus guidance will be applicable to agreements entered into in quarters beginning after June 15, 2003.

The adoption of EITF issue No. 00-21 did not have a material impact on our result of operations or financial position.

In December 2003, the FASB issued additional guidance clarifying the provisions of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51 (“FIN 46-R”). FIN 46-R provides a deferral of FIN 46 for certain entities until after March 15, 2004. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. We do not expect the adoption of FIN 46 to have a material impact on our consolidated financial statements.

- 40 -

Liquidity and Capital Resources

Net cash used in operating activities from continuing operations for the three months ended June 30, 2005 was $946,000 compared to $803,000 used during the three months ended June 30, 2004, an increase of $143,000 or 17.8%. This increase was primarily a result of an increase in loss from operating activities, in addition to a decrease in tradepayables. On the other hand, our other accounts receivable and prepaid expenses decreased $325,000 in the three months ended June 30, 2005, compared to an increase of $314,000 in the three months ended June 30, 2004.

Net cash provided by investing activities during the three months ended June 30, 2005 was $197,000 compared to $415,000 provided by investing activities during the three months ended June 30, 2004, a decrease of $218,000. This decrease was primarily due to an investment of $281,000 in short term bank deposits during the three months ended June 30, 2005, compared to $541,000 during the three months ended June 30, 2004 a decrease of $260,000.

Net cash used in financing activities during the three months ended June 30, 2005 was $343,000 compared to $844,000 provided during the three months ended June 30, 2004, a decrease of $1,187,000. This decrease was primarily due to $ 400,000 in proceeds from a long-term loan during the three months ended June 30, 2004 and to $ 775,000 in proceeds from payables on account of shares during the three months ended June 30, 2004.

Net cash used in operating activities from continuing operations for the six months ended June 30, 2005 was $2,018,000 compared to $1,433,000 used during the six months ended June 30, 2004, an increase of $585,000 or 41%. This increase was primarily as a result of an increase in loss from operational activities, in addition to a decrease in trade payble. On the other hand, our other accounts receivable and prepaid expenses decreased by $365,000 in the six months ended June 30, 2005, compared to an increase of $199,000 in the six months ended June 30, 2004.

Net cash provided by investing activities during the six months ended June 30, 2005 was $159,000 compared to $667,000 provided by investing activities during the six months ended June 30, 2004, a decrease of $508,000. This decrease was primarily due to an investment of $412,000 in short term bank deposits during the six months ended June 30, 2005, compared to $842,000 during the six months ended June 30, 2004 a decrease of $430,000.

Net cash provided by financing activities during the six months ended June 30, 2005 was $309,000 compared to $382,000 provided during the six months ended June 30, 2004, a decrease of $73,000. This decrease was primarily due to a decrease in short-term bank credit and on the other hand due to proceed from payable on account of shares during the six months ended June 30, 2004.

Net cash used in operating activities from continuing operations for the twelve months ended December 31, 2004 was $609,000 compared to $2,107,000 during the period ended December 31, 2003, a decrease of $1,498,000 or 71%. This decrease was primarily a result of an increase in accrued expenses and other liabilities especially due to an increase of $996,000 in advance payments from customers. In addition, our inventory in 2004 decreased by $814,000 compared to an increase of $92,000 in 2003, primarily due to a sale of an automatic production line to a customer. On the other hand, our accounts receivable and prepaid expenses increased in 2004 by $403,000 compared to an increase in 2003 of $239,000 due to deferred expenses relating to projects from which we had not yet recognized revenues.

Net cash used in investing activities during the period ended December 31, 2004 was $531,000 compared to $1,501,000 during the period ended December 31, 2003, a decrease of $970,000. This decrease was primarily due to proceeds of $578,000 in short term bank deposits during the period ended December 31, 2004 compared to an investment of $1,741,000 during the period ended December 31, 2003, and to purchase in the amount of $1,088,000 of property and equipment compared to $87,000 during the year 2003.

Net cash provided by financing activities during the period ended December 31, 2004 was $2,305,000 compared to $1,036,000 during the period ended December 31, 2003, an increase of $1,269,000. This increase was primarily due to gross proceeds from a private placement in the amount of $3,517,000 during the year ended December 31, 2004 and to a decrease in short term bank credit of $1,122,000 in 2004 compared to an increase of $1,196,000 in short term bank credit during 2003.

- 41 -

As of December 31, 2004, our cash and cash equivalents and short-term deposits totaled $3,247,000, compared to $2,426,000 as of December 31, 2003. All marketable debt securities were matured by January 15, 2004. Restricted cash totaled $1,129,000 as of December 31, 2004 compared to $1,363,000 as of December 31, 2003. Restricted cash is invested in certificates of deposits, which mature within one year, and is used to secure agreements with a customer or a bank.

We have accumulated net losses of approximately $20,114,000 from our inception through December 31, 2004, and we have continued to accumulate net losses since December 31, 2004. Since May 1999, we have funded operations primarily through cash generated from our initial public offering on Nasdaq Europe in April 1999, which resulted in total net proceeds of approximately $23,600,000 (before offering expenses), our sale of shares of our former subsidiary, InkSure, and, to a lesser extent, borrowings from financial institutions and, in 2004, private placements of our ordinary shares and warrants to purchase our ordinary shares. As of December 31, 2004, our principal source of liquidity was $3,247,000 of cash, cash equivalents and marketable securities. As of December 31, 2004, we had $1,022,000 of debt outstanding relating to obligations under our credit facility and an obligation for severance pay to Israeli employees of $564,000 of which $428,000 is provided by monthly deposits with severance pay funds, insurance policies and by an accrual.

In April 1999, we entered into an underwriting agreement to sell 2,526,316 ordinary shares plus an additional 631,579 ordinary shares offered by selling shareholders at an offering price of $10.00 per share for gross proceeds to us of approximately $25,300,000. The gross proceeds were offset by underwriting fees of $1,700,000 and offering expenses of $1,250,000 so that we received net proceeds of $22,350,000 from this public offering.

During June and July, 2004, we received aggregate gross proceeds of $1,225,000 from a private placement of 1,558,826 ordinary shares and five-year warrants to purchase 623,535 ordinary shares at an exercise price of $1.10 per share. In connection with the private placement, our placement advisors received warrants to purchase 77,941 ordinary shares at an exercise price of $1.10 per share.

In August and September 2004, we received gross proceeds of $2,200,000 from a private placement to accredited investors of 2,470,589 ordinary shares and five-year warrants to purchase 988,234 ordinary shares at an exercise price of $1.10 per share. In connection with the private placement, our placement agent received warrants to purchase 177,882 ordinary shares at an exercise price of $1.10 per share and 444,706 ordinary shares at an exercise price of $0.85 per share. All of such warrants issued in this private placement, except 444,706 warrants with an exercise price of $0.85, were called by us at a redemption price of $.01 per warrant pursuant to our right to do so if the closing price (or closing bid price) of our ordinary shares on an U.S. stock exchange, Nasdaq or the OTC Bulletin Board was equal to or greater than $2.50 per share for 10 out of any 15 consecutive trading days. The investors exercised warrants to purchase an aggregate of 1,144,853 ordinary shares. During the fourth quarter of 2004, 706,912 warrants were exercised for an aggregate amount of approximately $778,000, and approximately $130,000 was received in respect of shares to be allotted in 2005.

Our budget relies on our existing projects and estimated revenues from sales of our ID and smart card applications and commercial applications.

As of December 31, 2004, we had credit lines from several banks in the aggregate amount of $1,238,000 (including current maturities of long-term loans credit lines in the amount of $454,000 of which $454,000 was used), of which $751,000 is denominated in NIS and bears interest at the rate of Prime, the monthly prime rate of interest of the Bank of Israel in the range of +1% to +2.5%, and $ 487,000 is denominated in dollars and bears interest at the rate of LIBOR in the range of +2.5% to +3.2%. The weighted average interest rate on the credit lines as of December 31, 2003 and 2004 was approximately 6.8% and 5.7%, respectively.

We had an unused credit facility in the amount of approximately $16,000 as of December 31, 2004. There is no fee for the unused portion of the credit facility.

- 42 -

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

We believe that our existing capital resources together with revenue from operations and amounts available under our credit facility will be sufficient to fund our planned operations through at least the next twelve months. We will be required to raise additional funds to meet our long-term planned goals. We intend to consider other alternatives for financing, which may include public or private equity financings. There can be no assurance that such additional financing, if at all available, can be obtained on terms acceptable to us. If we are unable to obtain such additional financing, future operations will need to be scaled back further or discontinued.

Research and Development

Our past research and development efforts have helped us to achieve our goal of offering our customers a complete line of products and solutions. As a result of our past efforts, we reduced the number of employees in our research and development activities to 28 people as of December 31, 2004. We spent $1.3 million, $0.9 million and $0.8 on research and development in 2002, 2003 and 2004, respectively. These amounts were spent on the development or improvement of our technologies and products, primarily in the areas of an automatic contactless smart card production line, data capture, management software, population registry software packages, security printing, contactless smart cards and document authentication. We will continue to research and develop new security and identification features through laser printing and pre-printing, create new personalization methods for contactless smart cards, develop a range o f smart card applications and continue to develop our automatic contactless smart card production line. There can be no assurance that we can achieve any or all of our research and development goals.

Trend Information

Industry Trends

The increased demand for better security systems and services has positively affected trends within the industry. Access and asset control are now leading security concerns in commercial and governmental enterprises. This has created an increasing demand, both for physical security access to buildings and logical security access to corporate networks. Our contactless smart cards provide an optimal solution to these problems as they deliver stronger authentication of network users and they store personal data for highly secure physical access control.

Another major trend is the widespread deployment of smart credentials and travel documents. From among the three main credentials (e-passport, ID card, drivers’ license) in use on a governmental level, the electronic smart passport is posed to be the frontrunner and leads the way for the others. As a global credential, it is the only one based on international standards and will therefore most likely serve as the base from which the standards of other credentials on national, local and commercial levels will be derived.

Market and Operational Trends

Our quarterly operations results may be subject to significant fluctuations due to several factors. Some of these factors are based primarily on the timing of large orders, which represent a significant percentage of our revenues, customer budget cycles and impact on the timing for buying decisions, competitive pressures, the ability of our partners, distributors and system integrators to become effective in selling and marketing our products, as well as other factors.

- 43 -

During the twelve months ended December 31, 2004, we observed a slight increase in our production. We have also observed a considerable increase in marketing leads from our growing partnerships, distributions and systems integration network, and a particular interest by government customers in electronic passports (e-passports). We expect to continue to benefit from marketing programs and leads generated by this network, as well as sales opportunities identified by them. We intend to expand our marketing and implementation capacity through these third parties, including vendors of complementary products and providers of service applications. By employing third parties in the marketing and implementation process, we expect to enhance sales by taking advantage of their market presence.A significant portion of our 2004 revenues have been derived from our governmental projects and the remainder have been derived from commercial products. Historically, our revenues have been concentrated in a few large orders and in a relatively small number of customers, a trend that has been increasing over time and a trend that we expect to continue to influence our revenues.

Due to the arbitration proceeding with the Ukraine Chamber of Commerce relating to our agreement with the Ukraine Ministry of Internal Affairs, we are not anticipating any revenues from this project during the year 2004 or beyond. During 2003, we generated an aggregate of $1,970,000 in revenues from this project. If we are not able to replace this revenue with revenue from other projects, we expect our overall revenues to decrease and our net loss to increase in 2005. See “Risk Factors — We derive a substantial portion of our revenue from a small number of customers, and the reduction of sales to any one of those customers could adversely impact our operating results by causing a drop in revenues.”

We have observed an increase in orders for access control networks in 2004 compared with 2003. Since the end of 2003, the selling prices of our commercial products have been slightly increased. Commercial product inventory has been reduced without replenishing the stock, while other inventory levels have remained the same.

Our revenues from the government market for 2004 and 2003 totaled $6,330,000 and $5,621,000, respectively. In comparison our revenues from the commercial market for 2004 and 2003 totaled $1,014,000 and $1,623,000, respectively. We anticipate that our mix of revenues from government and commercial markets for 2005 will be consistent with our mix of revenues in 2004.

For more information about our expectations regarding future cost of revenues, future operating expenses and liquidity and capital resources, please refer to the sections captioned “Risk Factors,”“Management’s Discussion and Analysis of Financial Condition and Results of Operations — Results of Operations” and “— Liquidity and Capital Resources.”

Our development and marketing efforts for the solution and product platforms are aimed at addressing several systems and service trends that we see developing in the industry:

In 2003, the ICAO mandated the inclusion of biometric authentication technology in passports. We believe that the e-passport trend, from our point of view, should have an apparent impact on our income from operations during the next few years. As we have developed a flexible end-to-end solution for electronic passports, we believe that this trend will significantly affect our business forecast, as well as influence vertical markets in the smart card industry. Our combined experience in passport application projects worldwide and our position as a leading smart card inlay manufacturer provides us with what we believe is an advantage. We are aggressively bidding on a number of large projects and expect to achieve fair results.

As a result of these trends and combined with our core strengths, we are focusing on products and solutions that we believe will be significantly influential in the present and future markets. As of the date of this prospectus, we expect that our 2005 revenues will be primarily derived from:

Smart passport technologies;

High security solution integration;

Expertise in multi-application smart cards, integration know-how; and

Extensive experience with the government ID market.

- 44 -

Recent Developments and Outlook

We expect revenues to continue to be derived from one-time sales and recurring fees, sales of high-end solutions, sales of products, consumables and technology. Sales are expected to continue through OEM partnerships and continual upgrades, maintenance and support will continue to be provided to customers.

Due to the Ukraine ID Project litigation, we did not recognize any revenues from this project during the year 2004. During 2003, we generated an aggregate of $1,970,000 in revenues from this project. If we are not able to replace this revenue with revenue from other projects, we expect our revenues to decrease and our net loss to increase in 2005. See, “Risk Factors — We derive a substantial portion of our revenue from a small number of customers, and the reduction of sales to any one of those customers could adversely impact our operating results by causing a drop in revenues.” During 2004, we classified the cost of goods that were sold to the Ukraine Ministry of Internal Affairs from trade receivables to inventory. Negative developments in the Ukraine ID project litigation may cause us to write off the inventory in the amount of approximately $860,000 with respect to the Ukraine ID Project pursuant to our contract with the Ministry of Internal Affairs of Ukraine and that any such write off could have a material adverse effect on our net worth and income and the trading price for our ordinary shares. Moreover, even if we do not take such a write off or reserve, there is no assurance that we will ultimately collect the amounts due under our contract with the Ministry of Internal Affairs of Ukraine.

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

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

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

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

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

We recently entered into a lease agreement for a new office in Kadima, Israel, which will replace our current office in Ra’anana, Israel. As a result of this relocation, we might be required to write off certain assets.

- 45 -

Off Balance Sheet Arrangements

We do not have any off-balance sheet transactions that have or are reasonably likely to have a material effect on our current or future financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Contractual Obligations

The following table summarizes our contractual obligations and commitments as of December 31, 2004 that will require significant cash outlays in the future:

	Total		2005		2006		2007		2008		2009 and Beyond
Long-term debt obligations	$	187,000	$	187,000		—		—		—		—
Capital (finance) lease obligations		—		—		—		—		—		—
Operating lease obligations	$	337,000	$	270,000	$	67,000		—		—		—
Unconditional purchase obligations		—		—		—		—		—		—
Total contractual cash obligations	$	524,000	$	457,000	$	67,000		—		—		—

Long-term debt consists of amounts due to loans from banks, which is described in Note 8 to the financial statements included in this prospectus. Operating lease obligations represent commitments under several lease agreements for our facilities and the facilities of certain subsidiaries. Total contractual cash obligations represent outstanding commitments for loans from banks and lease agreement for facilities. We are not a party to any capital leases.

Quantitative and Qualitative Information about Market Risk

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from investments without significantly increasing risk. Some of the securities in which we may invest may be subject to market risk. This means that a change in prevailing interest rates and foreign currency rates against the NIS may cause the value of the investment to fluctuate. For example, if we purchase a security that was issued with a fixed interest rate and the prevailing interest rate later rises, the value of our investment will probably decline. To minimize this risk, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including U.S. dollars, NIS bank deposits, money market funds and government and non-government debt securities. In general, money market funds are not subject to market risk because the interest paid on such funds fluctuates with the prevailing interest rate.

Our financial market risk includes risks related to international operations and related foreign currencies. We anticipate that sales outside of North America will continue to account for a significant portion of our consolidated revenue in 2005. To date, most of our sales have been valued in dollars. In future periods, we expect our sales to be principally valued in dollars, eliminating foreign currency exchange risk.

We value expenses of some of our international operations, such as Israel and Hong Kong, in each country’s local currency and therefore are subject to foreign currency exchange risk. However, through December 31, 2004, we have not experienced any significant negative impact on our operations as a result of fluctuations in foreign currency exchange rates, although we have incurred a loss of $98,000 in the year ended December 31, 2004 due to fluctuations in foreign exchange rates. We do not use financial instruments to hedge operating expenses in Israel or Hong Kong that are valued in local currency. We intend to continue to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis.

We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure to offset the effects of changes in foreign exchange rates.

- 46 -

Our exposure to market risks for changes in interest rates relates primarily to our credit facility. At December 31, 2004, our financial market risk related to this debt was immaterial. Our general policy is to limit the risk of principal loss and ensure the safety of invested funds by limiting market and credit risk.

- 47 -

BUSINESS

History and Development of the Corporation

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

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

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

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

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

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

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

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

- 48 -

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

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

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

Business Overview

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

We believe that our core strengths are as follows:

Smart card technology integration know-how;

High security solution integration;

Proprietary smart card technologies and products;

Expertise in multi-application smart cards; and

Extensive experience with the government ID market.

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

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

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

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

- 49 -

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

Recent Developments

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

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

We have introduced the following new products since December 2004:

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

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

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

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

- 50 -

Our Market

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

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

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

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

Security, Cost Reduction and Smart Cards

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

Technological Developments

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

- 51 -

Political Developments

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

Authentication and Security of Documents

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

Our Strategy

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

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

Extending Technological Recognition

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

Leveraging Technology/Know-How Into Complementary Markets

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

Expansion of the Contactless Smart Card Business

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

- 52 -

Leveraging Public Sector Expertise Into Commercial Applications

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

Penetrating New Markets

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

Seeking Partnerships With Other Relevant Companies

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

Research and Development

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

Products and New Technology

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

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

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

- 53 -

Contactless Smart Cards

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

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

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

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

Contactless Smart Card Reader/Writer - 5600 Series

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

Smart Card 8500 Series

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

- 54 -

Security Printing

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

Transfer Process Printing

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

Teslin Printing

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

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

Software Packages

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

- 55 -

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

Raw Materials

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

Electronic Passport Technology

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

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

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

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

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

Biometrics Visa

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

- 56 -

EduGate

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

DynaGate

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

SmartGate 2400

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

Smart Disaster Site Management System - SmartDSMS

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

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

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

Vend-EZ

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

- 57 -

New Technologies

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

Customers and Projects

Passports and ID Card—Africa

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

Passports and Id Smart Cards—Ukraine

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

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

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

- 58 -

National Documentation—Moldova

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

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

Passports—Hong Kong

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

Hong Kong - China Re-Entry Cards

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

Passports—United Kingdom

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

- 59 -

United States Government Printing Office

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

Biometric Visa system to European Government

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

National ID card deal with African Governmental Agency

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

Automated Smart Card Production System to a European Government

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

- 60 -

Contracts for Commercial Applications-Generally

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

Sales and Marketing

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

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

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

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

Sales Analysis

The following table provides a breakdown of total revenue by geographic market:

	Year ended December 31,
	2002		2003		2004
Geographic market:	(in thousands of U.S. dollars)
Europe	$	5,237	$	3,308	$	3,218
Asia Pacific		1,942		2,067		2,433
Africa		—		536		899
United States		581		828		386
Israel		229		460		320
Other		38		45		88
	$	8,027	$	7,244	$	7,344

The following table provides a breakdown of total revenue by product category:

	Year ended December 31,
	2002		2003		2004
Product category:	(in thousands of U.S. dollars)
Raw materials and equipment	$	4,879	$	4,196	$	5,552
SPPL 1000		2,080		2,471		1,210
License fee		446		—		—
Maintenance		622		577		582
	$	8,027	$	7,244	$	7,344

- 61 -

Customer Service

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

Manufacturing and Availability of Raw Materials

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

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

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

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

Competition

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

- 62 -

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

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

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

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

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

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

Intellectual Property

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

- 63 -

Patents

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

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

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

Licenses

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

Government Regulation

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

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

We are subject to certain labor statutes and to certain provisions of collective bargaining agreements between the Histadrut, the General Federation of Labor in Israel, and the Coordinating Bureau of Economic Organizations, including the Industrialists’ Association, with respect to our Israeli employees. In addition, our Israeli employees are also subject to minimum mandatory military service requirements. See “— Employees.”

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.

- 64 -

Legal Proceedings

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

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

On October 30, 2003 , SuperCom Slovakia, a subsidiary (66%) of SuperCom Ltd., received an award by the International Arbitral Centre of the Austrian Federal Economic Chamber (“IAC”), in the case against the Ministry of Interior of the Slovak Republic which refers to the agreement on delivery of Technology, Cooperation and Services signed on March 17, 1998. Upon the Arbitral Award, the Ministry of Interior of the Slovak Republic has been ordered to pay SuperCom Slovakia the amount of SKK 80,000,000 (approximately $2,800,000 million as of December 31, 2004) plus interest accruing from March, 1999. In addition, the Ministry of Interior of the Slovak Republic has been ordered to pay the costs of arbitration in the amount of EUR 42,716 (approximately $58,000 as of December 31, 2004) and SuperCom Slovakia’s legal fees in the amount of EUR 63,611 (approximately $87,000 as of December 31, 2004). The Ministry of Interior of the Slovak Republic has the right to appeal in the Austrian Courts within 3 months from the date of this award on only legal procedures. We have begun the enforcement procedure of the arbitral award. The Ministry of the Interior of the Slovak Republic filed a claim with the Commercial Court in Vienna, Austria on February 10, 2004, whereby it challenged and requested to set aside the arbitral award.

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

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

- 65 -

Employees

As of December 31, 2004 and December 31, 2003, we had 67 and 59 full-time employees, respectively. The following table describes our employees and the employees of our subsidiaries by department.

	As of December 31,
	2002		2003		2004
Research, Development & Manufacturing		25		21		28
Marketing and Sales		15		27		27
Administration		11		11		12
Total		51		59		67

From time to time, we have engaged temporary employees to fill open positions. These temporary employees, however, historically have not comprised a material number of our employees.

As of December 31, 2004 all but 18 of our employees are located at our Ra’anana, Israel location.

SuperCom’s Israeli employees are not part of a collective bargaining agreement. However, in Israel we are subject to certain labor statutes, and to certain provisions of collective bargaining agreements between the Histadrut, the General Federation of Labor in Israel, and the Coordinating Bureau of Economic Organizations, including the Industrialists’ Association. These are applicable to our employees by virtue of expansion orders of the Israeli Ministry of Labor and Welfare. These statutes and provisions principally concern the length of the workday, minimum daily wages for professional workers, procedures for dismissing employees, determination of severance pay, annual and other vacations, sick pay and other conditions for employment. In addition, by virtue of such expansion order all employees in Israel are entitled to automatic adjustment of wages relative to increases in the Consumer Price Index in Israel. The amount and frequency of these adjustments are modified from time to time. We provide our employees with benefits and working conditions that comply with the required minimum.

Generally, all male adult citizens and permanent residents of Israel under the age of 45 are, unless exempt, obligated to perform up to 30 days of military reserve duty annually. Additionally, all such residents are subject to being called to active duty at any time under emergency circumstances. Some of our officers and employees are obligated to perform annual reserve duty. While we have operated effectively under these requirements since we began operations, no assessment can be made as to the full impact of such requirements on our workforce or business if conditions should change, and no prediction can be made as to the effect on us of any expansion of such obligations.

All of our employees have entered into confidentiality agreements. We have also granted certain employees options to purchase shares of our ordinary shares under our option plan. We consider our relationship with our employees to be good and have never experienced a strike or work stoppage.

- 66 -

Seasonality

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

Organizational Structure

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

Israel	3674	52-0849948
(State or other jurisdiction of	(Primary Standard Industrial	( IRS employer
incorporation or organization)	Classification Code Number)	Identification number)

Ordinary shares which may be sold by selling shareholders		6,341,713 ordinary shares, including 2,312,298 ordinary shares issuable upon exercise of warrants.

Ordinary shares to be outstanding after the offering		19,513,585 ordinary shares. (1)

Use of proceeds		We will not receive any proceeds from the sales described in this prospectus. We will bear the expenses related to the registration of the ordinary shares.

OTC Bulletin Board Symbol		SPCBF.OB

Euronext Brussels Symbol		SUP

	Year Ended December 31,
	2002			2003			2004
Summary Of Statement Of Operations:	(in thousands of U.S. dollars)
Revenues	$	8,027		$	7,244		$	7,344
Cost of Revenues		1,830			3,102			3,730
Gross Profit		6,197			4,142			3,614

Operating Expenses:
Research and Development		1,334			918			845
Selling and Marketing		2,828			3,026			2,445
General and Administrative		1,988			1,829			1,955
Total Operating Expenses		6,150			5,773			5,245
Operating Income (Loss)		47			(1,631	)		(1,631	)
Financial Expenses, Net		(35	)		(233	)		(214	)
Other Income (Expenses), Net		6,203			(83	)		(27	)
Income (Loss) before Income taxes		6,215			(1,947	)		(1,872	)

Share in Loss of an Affiliated Company and impairment, Net of taxes		(38	)		(48	)		—
Net Income (Loss) from continuing operations		6,177			(1,995	)		(1,872	)

Loss from discontinued operations		(427	)		—			—
Net income (loss)	$	5,750		$	(1,995	)	$	(1,872	)

Per Share Data:
Basic and Diluted earning (loss) from continuing operations.	$	0.49		$	(0.15	)	$	(0.13	)

Basic and Diluted loss from discontinued operations	$	(0.04	)	$	—		$	—
Basic and Diluted earning (loss) per share	$	0.45		$	(0.15	)	$	(0.13	)
Summary Of Balance Sheet Data:
Cash and Cash Equivalents	$	4,567		$	1,729		$	2,894
Short term deposit and restricted cash deposits		53			2,060			1,482
Marketable debt securities		609			117			—
Trade receivables (net of allowance for doubtful accounts of $3,333 and $3,347 as of December 31, 2003 and 2004, respectively)		2,202			1,808			1,463
Inventories		3,144			3,236			2,165
Total Current Assets		11,092			9,881			9,254
Total Assets		13,756			12,685			13,938
Total Current Liabilities		3,468			4,450			4,259
Accrued Severance Pay		362			436			564

Total Shareholders’ Equity	$	9,497		$	7,612		$	9,115

SUMMARY OF CONSOLIDATED FINANCIAL DATA	THREE MONTHS						SIX MONTHS
	ENDED JUNE 30,						ENDED JUNE 30,
	Unaudited						Unaudited
	(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE DATA)

	2004			2005			2004			2005
SUMMARY OF STATEMENT OF OPERATIONS:

Revenues		1,173			2,160			2,484			4,788
Cost of Revenues		738			1,211			1,564			2,462
Gross Profit		435			949			920			2,326

Operating Expenses:
Research and Development		183			378			377			726
Selling and Marketing		572			779			1,129			1,739
General and Administrative		441			858			944			1,500
Restructuring Expenses		--			496			--			496
Total Operating Expenses		1,196			2,511			2,450			4,461


Operating Loss		(761	)		(1,562	)		(1,530	)		(2,135	)
Financial Income (Expenses), Net		(70	)		23			(77	)		6
OTHER EXPENSES, NET		(49	)		(6	)		(53	)		(6	)

Net loss	$	(880	)	$	(1,545	)	$	(1,660	)	$	(2,135	)

PER SHARE DATA:
Basic and Diluted loss per share	$	(0.07	)	$	(0.08	)	$	(0.13	)	$	(0.12	)

SUMMARY OF BALANCE SHEET DATA:
Cash and Cash Equivalents		1,528			1,344			1,528			1,344
Bank deposit		601			1,070			601			1,070

Trade receivables		1,798			1,435			1,798			1,435
Inventories		2,836			2,359			2,836			2,359
Total Current Assets		8,076			7,093			8,076			7,093
TOTAL ASSETS		11,032			11,363			11,032			11,363
Total Current Liabilities		3,626			3,144			3,626			3,144
Accrued Severance Pay		465			606			465			606
TOTAL SHAREHOLDERS' EQUITY		6,756			7,336			6,756			7,336

	NasdaqEurope/Euronext				OTC-BB
	High		Low		High		Low

December 31, 2004	$	2.62	$	1.94	$	2.65	$	2.14
December 31, 2003	$	0.75	$	0.28		-		-
December 31, 2002	$	0.56	$	0.10		-		-
December 31, 2001	$	1.60	$	0.25		-		-
December 31, 2000	$	6.95	$	1.80		-		-

Prospectus Summary	1
Risk Factors	6
Cautionary Note Regarding Forward-Looking Statements	21
Use Of Proceeds	21
Dividend Policy	21
Exchange Rate Information	22
Current Outstanding Share Capital	23
Capitalization	23
Price Range Of Ordinary Shares	24
Selected Consolidated Financial Data	25
Management’s Discussion And Analysis Of Financial Condition And Results Of Operations	27
Business	48
Management	69
Certain Relationships And Related Party Transactions	80
Principal Shareholders	81
Description Of Share Capital	82
Selling Shareholders	85
Plan Of Distribution	88
Memorandum And Articles Of Association	89
Description Of Ordinary Shares	93
Shares Eligible For Future Sale	97
Conditions In Israel	99
Taxation	101
Enforceability Of Civil Liabilities	106
Legal Matters	107
Experts	107
Where You Can Find More Information	107
Index	F-1

	NasdaqEurope/Euronext				OTC-BB
Quarter ended:	High		Low		High		Low
Second quarter 2005	$	2.22	$	0.75	$	2.25	$	0.65
First quarter 2005	$	2.79	$	1.92	$	2.56	$	2.20
Fourth quarter 2004	$	2.66	$	0.82	$	2.65	$	2.14
Third quarter 2004	$	1.04	$	0.79		-		-
Second quarter 2004	$	1.20	$	0.62		-		-
First quarter 2004	$	0.73	$	0.54		-		-
Fourth quarter 2003	$	0.75	$	0.28		-		-
Third quarter 2003	$	0.66	$	0.29		-		-
Second quarter 2003	$	0.52	$	0.30		-		-
First quarter 2003	$	0.68	$	0.38		-		-

	December 31,
	2003		2004
Cost:	(In thousands of U.S. dollars)
Computers and peripheral equipment	$	2,281	$	4,380
Office furniture and equipment		408		471
Leasehold improvements		1,107		1,147
		3,796		5,998
Accumulated depreciation:
Computers and peripheral equipment		1,412		1,547
Office furniture and equipment		192		218
Leasehold improvements		516		592
		2,120		2,357
Depreciated cost	$	1,676	$	3,641

Name	Age	Position
Eli Rozen	51	Director, Chairman of the Board
Avi Landman	51	Director
Menachem Meron	76	Director retired on June 19, 2005
Avi Elkind	51	External Director
Michal Brikman	35	External Director
Daniel Spira	51	Director

Name	Options to Purchase Ordinary Shares Awarded during Year Ended December 31, 2004		Exercise Price		Expiration Date
Avi Schechter		150,000 310,000 300,000	$ $ $	0.42 0.85 2.52		March 27, 2014 October 3, 2014 November 6, 2014
Eyal Tuchman		75,000 125,000 150,000	$ $ $	0.42 0.85 2.52		March 27, 2014 October 3, 2004 November 6, 2014
Eli Basson		75,000 120,000 100,000	$ $ $	0.52 0.85 2.52		March 27, 2014 October 3, 2014 November 6, 2014
Moshe Wolfson		50,000 75,000 75,000	$ $ $	0.42 0.85 2.52		March 27, 2014 October 3, 2014 November 6, 2014

Name and Position	Securities Acquired on Exercise (#)		Aggregate Value Realized ($)		Unexercised Options/SARs at FY-End (#) Exercisable/ Unexercisable		Value of Unexercised in-the-money Options/SARs at FY-End ($)Exercisable/ Unexercisable (1)
Avi Schechter—President, Chief Executive Officer		—		—		900,000	$	922,700
Eyal Tuchman—Vice President, Chief Financial Officer		—		—		400,000	$	386,250
Eli Basson—Vice President, Research and Development and Chief Operating Officer		—		—		300,922	$	294,523
Moshe Wolfson—Vice President Sales		—		—		200,000	$	187,750

Name	Ordinary Shares held directly and beneficially			% of Outstanding Ordinary Shares as of August 31, 2005			Options outstanding as of August 31, 2005			Exercise Price		Expiration date
Eli Rozen		3,171,340 (1	)		16.6	%		645,981 (10 300,000 (10	) )	$ $	0.42 0.85		January 27, 2013 January 11, 2015
Avi Landman		2,412,431 (2	)		13.1	%		50,000 50,000		$ $	0.42 0.85		January 27, 2013 January 11, 2015
Menachem Meron		61,667 (3	)		*			45,000 50,000		$ $	0.42 0.85		September 19, 2005 September 19, 2005
Avi Elkind		50,000 (4	)		*			50,000		$	0.42		June 30, 2013
Avi Schechter		373,333 (5	)		1.99			70,000 150,000 310,000 300,000		$ $ $ $	0.42 0.42 0.85 2.52		March 17, 2012 April 25, 2014 October 3, 2014 November 6, 2014
Eyal Tuchman		171,667 (6	)		*			30,000 75,000 125,000 150,000		$ $ $ $	0.42 0.42 0.85 2.52		June 20, 2012 April 25, 2014 October 3, 2014 November 6, 2014
Eli Basson		120,922 (7	)		*			5,922 75,000 120,000 100,000		$ $ $ $	0.42 0.52 0.85 2.52		March 17, 2012 April 25, 2014 October 3, 2014 November 6, 2014
Moshe Wolfson		43,333 (8	)		*			35,000 75,000 75,000		$ $ $	0.42 0.85 2.52		March 27, 2014 October 3, 2014 November 6, 2014
Michal Brikman		—			—			—			—		—
Daniel Spira		—			—			—			—		—
Gali Gana		—			—			—			—		—
Directors and Named Executive Officers as a group		6,404,693 (9	)		32.1	%		—			—		—

	Year ended December 31
	2002					2003					2004
	Number of options			Weighted average exercise price		Number of options			Weighted average exercise price		Number of options			Weighted average exercise price
Outstanding at beginning of year		543,495		$	5.19		880,712		$	2.88		1,534,514		$	1.17
Granted		443,081		$	0.42		1,005,981		$	0.42		2,030,000		$	1.23
Exercised		—			—		(200,533	)	$	0.42		—		$	—
Canceled and forfeited		(105,864	)	$	4.41		(151,646	)	$	0.72		(212,137	)	$	5.03
Outstanding at end of year		880,712		$	2.88		1,534,514		$	1.17		3,352,377		$	0.97
Exercisable at end of year		462,655		$	4.32		1,113,580		$	1.44		1,681,360		$	0.58

Exercise price	Options outstanding as of December 31, 2004		Weighted average remaining contractual life (years)		Weighted average exercise price		Options exercisable as of December 31, 2004		Weighted average exercise price
$ 0.42 - $ 1		2,692,115		8.75	$	0.55		1,650,343	$	0.50
$ 2 - $ 2.52		640,000		9.02	$	2.50		12,000	$	2.00
$ 4.00 - $ 5.62		13,690		3.45	$	4.89		12,445	$	4.98
$ 9.64		6,572		1.14	$	9.64		6,572	$	9.64
		3,352,377		8.76	$	0.97		1,681,360	$	0.58

Name of Beneficial Owner	Number of Shares Beneficially Owned			% of Shares Outstanding
Jacob Hassan (1)		2,346,358			12.79	%
Eli Rozen		3,171,340(2	)		16.6	%
Avi Landman		2,412,431 (3	)		13.1	%
Menachem Meron		61,667 (4	)		*
Avi Elkind		50,000 (5	)		*
Avi Schechter		373,333 (6	)		1.99	%
Eyal Tuchman		171,667 (7	)		*
Eli Basson		120,922 (8	)		*
Moshe Wolfson		43,333 (9	)		*
Michal Brikman		—			—
Daniel Spira		—			—
Gali Gana		—			—
Directors and Named Executive Officers as a group		8,751,051 (10	)		43.8	%

Name of Selling Shareholder	Shares Beneficially Owned Before The offering			Shares offered			Shares Beneficially Owned After The offering

Jeffrey Carter 6906 Ontario st. Springlield VA 22152		58,824			58,824			—
Donald Zoltan 1081 E Circle DR Whitefish Bay KI 53217		58,824			58,824			—
Daniel and Clare Lange 20800 Hunters Run Brookfield WI 53045		58,824			58,824			—
Edwin Bindseil 333 FernwoodLN Erie PA 16505		117,647			117,647			—
Russell and Setsuko Trimble 2684 Timbers Edge Trace, Kingsport TN 37660		117,647			117,647			—
Charles Bradley E Main st., Brevard NC 28712		58,824			58,824			—
Ethan Benovitz 60 PaineAve., New Rochelle NY 10804		88,235			88,235			—
Selwyn Partners LP 315 Old Luy Way STE 302, Charlotteville VA 22903		117,647			117,647			—
Victor M. Dandridge III 2530 Pine LN, Charlotteville VA 22901		29,412			29,412			—
Tibo Markovitch 19 Brodetsky Tel Aviv, 61170, Israel		8,530			8,530			—
Meitav Gemel Ltd. 35 Yehuda Halevi st., Tel Aviv, 65546, Israel		182,352(1	)		182,352(1	)		—
Y.A.Z. Investments & Assets Ltd. 41 Nahalat Binyamin st., Tel Aviv, Israel		70,588(1	)		70,588(1	)		—
Adina Grinfeld 17 Hagedut Haevri, Ra`anana, Israel		41,177(3	)		41,177(3	)		—
Amotz Raz 6 Trumpeldorf, Givat Shmuel, Israel		31,177(3	)		31,177(3	)		—
Yehuda Biron 1 Belkino, Tel Aviv, Israel		41,177(3	)		41,177(3	)		—
Ester Orkovi 97 Sderot Ben Gurion, Azur, Isael		82,354(4	)		82,354(4	)		—
Abraham Peer 22 Hermon st., Hashmonaim, Israel		288,235(5	)		288,235(5	)		—
Meir Schonherz 1 Hashachar St. Saviun, Israel		11,765(6	)		11,765(6	)		—
Provident Fund of The Employees of The Hebrew University of Jerusalem I.N.T. MT Scopus, Jerusalem, 91905, Israel		82,354(4	)		82,354(4	)		—
Abrah am Grinfeld 13 Barley st., Kiryat Ono, Israel		82,354(4	)		82,354(4	)		—
Ester Dodkewitz 18 Harimon st., Hashmonaim, Israel		164,706(7	)		164,706(7	)		—
Meitav Gemel Ltd. 35 Yehuda Halevi st., Tel Aviv, 65546, Israel		94,118(6	)		94,118(6	)		—
Glomare BV 2 Zuidveldigerkeg 9334 TL Peest, Holand		82,354(4	)		82,354(4	)		—
Orkobi Avishai 97 Shderot Ben Gurion, Azur, 58017, Israel		82,354(4	)		82,354(4	)		—
Michael Rapp (8) (9) 805 Third Avenue, 15^th floor New York, NY, 10022		427,983(6	)		427,983(6	)		—
Philip Wagenheim (8) (9) 805 Third Avenue, 15^th floor New York, NY, 10022		104,283(6	)		104,283(6	)		—
Karl Brenza (8) (9) 805 Third Avenue, 15^th floor New York, NY, 10022		31,129(6	)		31,129(6	)		—
Broadband Capital Management LLC (9) (10) 805 Third Avenue, 15^th floor New York, NY, 10022		31,130(6	)		31,130(6	)		—

Jeffrey Meshel (8) (9) 805 Third Avenue, 15^th floor New York, NY, 10022	28,063(6	)	28,063(6	)	—
Goldhar Corporate Finance Ltd (11) 20 Linkolen St, Rubinshtein house, Tel-Aviv, Israel	12,500(6	)	12,500(6	)	—
Max Tech Ltd. (11) 5a Burgermeister Herb St. Borwang, Germany	2,941(6	)	2,941(6	)	—

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	F-2

CONSOLIDATED BALANCE SHEETS	F-4

CONSOLIDATED STATEMENTS OF OPERATIONS	F-6

STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY	F-7

CONSOLIDATED STATEMENTS OF CASH FLOWS	F-8

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	F-10

	Year ended December 31,
	2002			2003			2004

Revenues	$	8,027		$	7,244		$	7,344
Cost of revenues		1,830			3,102			3,730

Gross profit		6,197			4,142			3,614

Operating expenses:
Research and development		1,334			918			845
Selling and marketing		2,828			3,026			2,445
General and administrative		1,988			1,829			1,955

Total operating expenses		6,150			5,773			5,245

Operating income (loss)		47			(1,631	)		(1,631	)
Financial expenses, net		(35	)		(233	)		(214	)
Other income (expenses), net		6,203			(83	)		(27	)

Income (loss) before income taxes		6,215			(1,947	)		(1,872	)
Share in losses of affiliates and impairment of investment in an affiliated company, net of taxes		(38	)		(48	)		-

Net income (loss) from continuing operations		6,177			(1,995	)		(1,872	)

Loss from discontinued operations, net		(427	)		-			-

Net income (loss)	$	5,750		$	(1,995	)	$	(1,872	)

Net earnings (loss) per share:

Basic and diluted earnings (loss) from continuing operations	$	0.49		$	(0.15	)	$	(0.13	)

Basic and diluted loss from discontinued operations	$	(0.04	)	$	-		$	-

Basic and diluted net earnings (loss) per share	$	0.45		$	(0.15	)	$	(0.13	)

Weighted average number of Ordinary shares outstanding		12,706,339			12,718,426			14,590,346

	Ordinary shares
	Number of Shares		Share capital		Additional paid-in capital			Deferred stock compensation			Accumulated other comprehensive income (loss)			Accumulated Deficit			Receipt on account of shares		Total comprehensive income (loss)			Total shareholders’ equity
Balance as of January 1, 2002		12,706,339	$	40	$	25,949		$	(245	)	$	116		$	(21,997	)	$	-				$	3,863
Forfeiture of stock options held by Inksure’s employees		-		-		(219	)		219			-			-			-					-
Other comprehensive income:
Functional currency adjustment due to sale of Inksure		-		-		-			-			(116	)		-			-	$	(116	)		(116	)
Net income		-		-		-			-			-			5,750			-		5,750			5,750
Total comprehensive income																			$	5,634

Balance as of December 31, 2002		12,706,339		40		25,730			(26	)		-			(16,247	)		-					9,497
Exercise of stock options		200,533		*) -		84			-			-			-			-					84
Amortization of stock compensation		-		-		-			26			-			-			-					26
Net loss		-		-		-			-			-			(1,995	)		-	$	(1,995	)		(1,995	)
Total comprehensive loss																			$	(1,995	)
Balance as of December 31, 2003		12,906,872		40		25,814			-			-			(18,242	)		-					7,612

Deferred stock compensation		-		-		68			(68	)		-			-			-					-
Conversion of loan to ordinary shares, net		60,000		1		24			-			-			-			-					25
Issuance of shares in a private placement, net		4,029,415		9		2,451			-			-			-			-					2,460
Exercise of warrant		706,912		1		737			-			-			-			-					738
Receipt on account of share to be allotted		-		-		-			-			-			-			143					143
Amortization of stock compensation		-		-		-			9			-			-			-					9
Net loss		-		-		-			-			-			(1,872	)		-	$	(1,872	)		(1,872	)
Total comprehensive loss																			$	(1,872	)
Balance as of December 31, 2004		17,703,199	$	51	$	29,094		$	(59	)	$	-		$	(20,114	)	$	143				$	9,115

		%

Computers and peripheral equipment		33
Office furniture and equipment		6 - 15
Leasehold improvements		Over the shorter of the term of the lease or the life of the asset

	Amortized cost				Unrealized gains (losses)					Estimated fair value
	2003		2004		2003			2004		2003		2004

Corporate obligations	$	117	$	-	$	(12	)	$	-	$	105	$	-

Exercise price	Options outstanding as of December 31, 2004		Weighted average remaining contractual life (years)		Weighted average exercise price		Options exercisable as of December 31, 2004		Weighted average exercise price

$ 0.42 - $ 1		2,692,115		8.75	$	0.55		1,650,343	$	0.50
$ 2 - $ 2.52		640,000		9.02	$	2.50		12,000	$	2
$ 4.00 - $ 5.62		13,690		3.45	$	4.89		12,445	$	4.98
$ 9.64		6,572		1.14	$	9.64		6,572	$	9.64

		3,352,377		8.76	$	0.97		1,681,360	$	0.58


Loss on sale of property and equipment, net	$	(209	)	$	(5	)	$	(1	)
Decline in market value of held-to-maturity securities		-			(52	)		(7	)
Gain on issuance of subsidiary’s shares and sale of subsidiary’s shares		6,423			-			-


Other		(11	)		(26	)		(19	)

	$	6,203		$	(83	)	$	(27	)


	SUPERCOM LTD.

	By:	/s/ Avi Schechter
		Name: Avi Schechter
		Title: Chief Executive Officer and President

Name	Title	Date

/s/ Avi Schechter Avi Schechter	Chief Executive Officer and President (Principal Executive Officer)	September 12, 2005

/s/ Eyal Tuchman Eyal Tuchman	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	September 12, 2005

/s/ Eli Rozen* Eli Rozen	Chairman of the Board of Directors	September 12, 2005

/s/ Avi Landman* Avi Landman	Director	September 12, 2005

/s/ Avi Elkind* Avi Elkind	Director	September 12, 2005

/s/ Michael Brikman* Michael Brikman	Director	September 12, 2005

/s/ Daniel Spira Daniel Spira	Director	September 12, 2005

No.	Description	Incorporation by Reference

3.1	Memorandum of Association.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

3.2	Articles of Association.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

3.3	Amendment to Articles of Association.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

4	Forms of Stock Certificates Representing Ordinary Shares.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

5	Form of Opinion of Yossi Avraham & Co., Israeli counsel to the Registrant, as to the validity of the ordinary shares (including consent) (previously filed).	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.1	The SuperCom Ltd. 1999 Employee Stock Option Plan (As Amended and Restated in 2002).	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.1(a)	The SuperCom Ltd. 2003 Israeli Share Option Plan	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on December 14, 2004.

10.2	Service Agreement between SuperCom and Avi Schechter, dated July 1, 2002.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.3	Employment Agreement between SuperCom and Eyal Tuchman, dated July 1, 2002.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.4	Employment Agreement between SuperCom and Eli Basson, dated July 28, 1997.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.5	Service Agreement between SuperCom and Eli Rozen, dated October 1, 2001.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.6	Service Agreement between SuperCom and Avi Landman, dated October 1, 2001.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.7	Stock Purchase Agreement between SuperCom and Elad Ink, dated as of March 4,2002.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.8	Stock Purchase Agreement between SuperCom and ICTS BV, dated as of April 29, 2002.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

10.9	Stock Purchase Agreement between SuperCom and ICTS-USA, Inc., dated as of September 27, 2002.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F filed on July 29, 2004.

21	Subsidiaries of registrant.	Incorporated herein by reference from the company’s Registration Statement on Form 20-F for the fiscal year ended December 31, 2004.

23.1	Consent of Yossi Avraham & Co., Israeli counsel to the Registrant	Previously filed as an exhibit to, and incorporated herein by reference from the company’s Registration Statement on Form F-1 filed on November 2, 2004.

23.2	Consent of Fahn Kanne & Company

23.3	Consent of BDO McCabe Lo & Company

24	Powers of Attorney	Incorporated herein by reference from the company’s Registration Statement on Form F-1 filed on November 2, 2004.