Commission File No.
1-8201

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# SECURITIES AND
EXCHANGE COMMISSION 
WASHINGTON, D.C. 20549

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# FORM 20-F

ANNUAL REPORT PURSUANT
TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2002

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BVR TECHNOLOGIES
LIMITED (Exact name of Registrant as specified in its charter and translation of Registrants name
into English)

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Israel 

(Jurisdiction of incorporation or organization) 2 Azrieli Center, Tel Aviv 67021 Israel(Address of principal executive offices)

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

|Title of each class | Name of each exchange on which registered
|------------------- | -----------------------------------------
|N/A                 | N/A                                      

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

Ordinary Shares, nominal value 0.50 New Israeli Shekels per share (Title of Class)

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

None (Title of Class)

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


9,837,701


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

Yes x No o


Indicate
by check mark which financial statements the registrant has elected to follow:

Item 17
x Item 18 o




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This annual report on Form 20-F
includes certain forward-looking statements within the meaning of Section 21E
of the Securities Exchange Act of 1934. The use of the words projects,
expects, may, plans or intends, or words
of similar import, identifies a statement as forward-looking. There can be no
assurance, however, that actual results will not differ materially from our expectations
or projections. Factors that could cause actual results to differ from our expectations or
projections include the risks and uncertainties relating to our business described in this
report at Item 3 titled Risk Factors. Any forward-looking statements contained
in this annual report speak only as of the date of this report, and we caution investors
and potential investors not to place undue reliance on these statements. We undertake no
obligation to update or revise any forward-looking statements. All subsequent written or
oral forward-looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the Risk Factors.

# PART 1

# Item 1. Identity of
Directors, Senior Management and Advisers.

Not Applicable.

# Item 2. Offer Statistics
and Expected Timetable.

Not Applicable.

# Item 3. Key Information

# Selected Financial Data

The selected financial data is
incorporated by reference to Item 5 of this annual report.

# Risk Factors

This annual report and statements
that we may make from time to time may contain forward-looking information. Our actual
results may differ materially from our expectations, statements or projections. Factors
that could cause actual results to differ from our expectations, statements or projections
include the risks and uncertainties relating to our business described below.

Risks Relating To Our
Company

We are realizing our
assets and distributing them to shareholders.

We have taken a series of actions in
the past two years aimed at realizing our assets and distributing the proceeds to our
shareholders. We have distributed to our shareholders the shares we held in two of our
five affiliates which are public companies, VIZRT Ltd. and Nexus Telocation Systems Ltd.
We have also distributed approximately $1,500,000 as a cash dividend to our shareholders.
As a result of the distribution of our cash reserves, we do not have any ability to make
additional investments in our affiliates. Our audit committee and board of directors have
approved an agreement pursuant to which we are to sell all of the shares of another of our
affiliates, Unisfair Inc., and an agreement to sell our certain intellectual property
assets. Another of our affiliates, BrightCom Technologies Ltd., has entered into an
agreement to sell all of its assets. We expect that BrightCom will distribute the proceeds
of this sale to us and to its other shareholders, but we cannot assess the amount of these
proceeds. See Item 4. Information on the Company. History and Development of the
Company for more information regarding all of the actions and agreements described
above. We have also dismissed all of our salaried employees. See Item 6. Directors,
Senior Management And Employees. for more information.



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We intend to complete the process of
realizing our assets, if possible, within the period permitted by the tax authorities, in
order to make it possible for our shareholders to enjoy the benefits of the tax ruling we
have obtained from the Israeli Tax Authorities. See Item 10. Tax Ruling for
additional information. Following the distribution of our assets we will probably not
continue our business.

We may not complete the
distribution of our assets within the period permitted by our tax ruling.

In order to enable us to continue to
distribute certain of our assets to our shareholders, we requested a tax ruling from the
Israeli Income Tax Authority which would permit us to make such distributions under a
special arrangement for us and for our shareholders. We reached an arrangement with the
Israeli Income Tax Authority, which was approved by our shareholders on April 2, 2002.

The tax ruling grants a special
concession to us, allowing us to set off losses from the distribution of securities of
publicly-traded companies against capital gains from the sale of securities in
privately-held companies. In addition, the ruling accords beneficial treatment to our
shareholders. The Tax Ruling is discussed further in Item 10. Additional Information
 Taxation  Tax Ruling, which is incorporated here by reference.

If we do not complete the
distribution of our assets within the period of time determined by the tax ruling, and if
the tax authorities do not extend the period of time allowing us to complete this
distribution, our shareholders may lose the beneficial treatment allowed by the tax
ruling.

We may not have operating
income or net income in the future.

During the fiscal year ended December
31, 2002, we had an operating loss of approximately $0.955 million and net loss of
approximately $5.083 million. We may not have operating income or net income in the
future.

Our quarterly results
have fluctuated widely, often causing our share price to decline.

Our operating results and the
operating results of our affiliates have fluctuated widely on a quarterly basis during the
last several years, and we expect to experience significant fluctuation in future
quarterly operating results. Many factors, some of which are beyond our control and the
control of our affiliates, have contributed to these quarterly fluctuations in the past
and may continue to do so. Such factors include:

- demand for products and services;
- timing of sales of assets;
- market acceptance of new products and services;
- general economic conditions.

We believe that period-to-period
comparisons of our results of operations will not necessarily be meaningful and should not
be relied upon as indicative of our future performance. It is also possible that in some
fiscal quarters our operating results will be below the expectations of securities
analysts and investors. In such circumstances, the price of our ordinary shares may
decline.

We are affected by
volatility in the securities markets.

Due to the continuing downturn in the
world economy, the securities markets have experienced significant volatility over the
last fiscal year that has particularly deleteriously affected the securities of many
high-technology companies, including companies that have a significant presence in Israel.
Although this volatility has often been unrelated to the operating performance of these
companies, they, and particularly those in the fields of communications, software and the
Internet, may experience difficulties in raising additional financing required to
effectively operate their businesses. As a management holding company, our financial
results are directly impacted by our ability to conclude profitable exit
transactions in certain of our affiliates. If worldwide market conditions in the
technology industry do not permit us to conclude these types of transactions, we will not
be able to successfully exit from our investments.

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Our ordinary share price
has been volatile in the past and may be volatile in the future, resulting in lower thanexpected
market prices for our shares.

Our ordinary shares have experienced
significant market price and volume fluctuations in the past and may experience
significant market price and volume fluctuations in the future for reasons related or
unrelated to our performance. This volatility may result in market prices for our ordinary
shares that are below their value, and you may not be able to resell your shares for more
than you paid for them.

Market sales of large
amounts of our ordinary shares eligible for future sale may lower the price of our
ordinary shares.

As of June 18, 2003 we had 9,837,701
ordinary shares outstanding. All of our outstanding shares are freely tradable. We are
unable to predict the effect that sales made under rule 144 or other exempt sales may have
on the then-prevailing market price of our ordinary shares. In addition, the potential for
those sales even if they do not actually occur, is likely to lower the market price of our
ordinary shares.

Due to the continued
realization and distribution of our assets, we expect our shares to be imminently
delisted fromthe Nasdaq SmallCap Market, and thus more difficult to sell.

Our ordinary shares are currently
quoted on the Nasdaq SmallCap Market. Due to the low market price of our stock, primarily
caused by the spin-off of two of our portfolio companies and our cash dividend
distributions, and the low trading volume in our stock, all of which will be exacerbated
by the continued realization of our assets, our ordinary shares are expected be delisted
from the Nasdaq SmallCap Market and be relisted on the over-the-counter bulletin board
which is a more limited trading market. Our shareholders may find that our ordinary shares
may lack liquidity and are difficult to sell on the over-the-counter bulletin board. The
activity of only a few shares could affect the market and may result in wide swings in
price and volume.

If we are characterized
as a passive foreign investment company for United States federal income tax purposes, ourUnited
States shareholders may suffer adverse tax consequences, including higher tax rates.

Generally, if for any taxable year
75% or more of our gross income is passive income, or at least 50% of our assets are held
for the production of, or produce, passive income, we may be characterized as a passive
foreign investment company for United States federal income tax purposes. If we are
characterized as a passive foreign investment company, our United States shareholders may
suffer adverse tax consequences, including having gains realized on the sale of our shares
treated as ordinary income, rather than capital gains. Because the determination of
whether we are a PFIC is based upon the composition of our income and assets from time to
time, shareholders are urged to consult their tax advisors regarding whether we are a PFIC
for any taxable year.

The value we are able to
obtain and distribute to our shareholders is dependent on the financial results of our affiliates.

The value we are able to obtain and
distribute to our shareholders are directly impacted by the results of operations of our
affiliates. Our affiliates financial results may be adversely affected by the
following parameters:

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- Inability to raise future financing. The distribution of our assets to our shareholders
means that we will not be able to make any additional investments in our affiliates. Our
affiliates may require additional capital to fund their operating costs. If these
companies are unable to obtain financing, their continued operations will be at risk. This
may affect the value we are able to realize for our assets.
- Rapid technological change in their respective markets. Our affiliates may not be able to
adequately adapt each of their products and services or to introduce or acquire new
products and services that can compete successfully with the products of their
competitors.
- Risks relating to international sales. As our affiliates generated much of their revenue
from sales outside of Israel, they are subject to the may risks inherent in international
business activities.
- Inability to protect their intellectual property rights. Our affiliates efforts to
protect their proprietary intellectual property may not be successful, or may cause them
to incur significant legal costs.
- Infringement of intellectual property rights of others. Our affiliates may be subject to
infringement claims by third parties.

Our affiliates have
experienced operating losses resulting, for two of them, in a deficit equity position.

BrightCom, Coresma and Unisfair have
experienced operating losses over the past years, resulting with respect to Coresma and
Unisfair in a deficit equity position. Their financial position and operating results
raise very substantial doubts about their ability to continue operating as going concerns.
However, we note that BrightCom has executed an agreement for the sale of all of its
assets, and that we have executed an agreement providing for the sale of all of our
securities of Unisfair. See Item 4. Information on the Company. History and
Development of the Company for more information.

We have been and may
continue to be negatively affected by the aftermath of September 11 events.

On September 11, 2001, the United
States was subject to terrorist attacks at the World Trade Center buildings in New York
City and at the Pentagon in Washington, D.C. In response to these terrorist attacks a
United States-led coalition of nations commenced a series of retaliatory military strikes
in Afghanistan upon strategic installations of the Taliban regime, and governmental
intelligence authorities issue from time to time warnings of the imminent threat of
further attacks against civilian and military installations. In addition, the U.S. and the
United Kingdom have lead a coalition of nations in a military campaign to topple the
regime of Saddam Hussein in Iraq. These events have had, and we expect will continue for
the unforeseeable future to have, an adverse effect on the global economy and could result
in a disruption of our business or that of our affiliates.

Corporate governance
scandals and new legislation could increase the cost of our operations.

As a result of recent corporate
governance scandals and the legislative and litigation environment resulting from those
scandals, the costs of being a public company in general are expected to increase in the
near future. New legislation, such as the recently enacted Sarbanes-Oxley Act of 2002,
will have the effect of increasing the burdens and potential liabilities of being a public
reporting company. This and other proposed legislation may increase the fees of our
professional advisors and our insurance premiums.

Risk Relating to Our
Location in Israel

Hostilities in Israel
could harm our operations and those of our affiliates.

We are incorporated under Israeli law
and our principal offices, and a portion of our affiliates manufacturing and
research and development facilities, are located in Israel. Political, economic and
military conditions in Israel directly affect our operations.

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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. We could be adversely affected by any major
hostilities involving Israel, the interruption or curtailment of trade between Israel and
its trading partners, a significant increase in inflation, or a significant downturn in
the economic or financial condition of Israel. Although Israel has entered into various
agreements with certain Arab countries and the Palestinian Authority, there has been an
increase in unrest and terrorist activity which began in September 2000 and which has
continued with varying levels of severity into 2003. In addition, several Arab countries
still restrict business with Israeli companies. The ability of our affiliates to develop
and market their products could be adversely affected by restrictive laws or policies
directed towards Israel or Israeli businesses.

If a substantial number
of our or our affiliates officers and directors were called for military duty, our
operationscould be compromised.

All non-exempt male adult permanent
residents of Israel, under the age of 48, as a general rule, are obligated to perform
military reserve duty and may be called to active duty under emergency circumstances.
Recently, there has been a significant call up of military reservists, and it is possible
that there will be additional call-ups in the future. While our affiliates have operated
effectively despite these conditions in the past, we cannot assess what impact these
conditions may have in the future, particularly if emergency circumstances arise.

Currency fluctuations and
the rate of inflation may have a negative effect on our financial results.

Because a substantial portion of our
affiliates revenues are generated in United States dollars or are linked to the
United States dollar while a portion of our affiliates expenses are incurred in New
Israeli Shekels, our results of operations would be adversely affected if inflation in
Israel is not offset on a timely basis by a devaluation of the New Israeli Shekel against
the United States dollar. A portion of our expenses, principally salaries and the related
personnel expenses, are in New Israeli Shekels. As a result, we are exposed to the risk
that the rate of inflation in Israel will exceed the rate of devaluation of the NIS in
relation to the dollar or that the timing of this devaluation lags behind inflation in
Israel. This would have the effect of increasing the dollar cost of our operations. If the
dollar cost of our affiliates operations in Israel increases, our dollar-measured
results of operations will be adversely affected. Similarly, if the value of the dollar
relative to the NIS increases, the dollar value of assets denominated in NIS (including,
for example, accounts receivable or bank accounts in Israel that are denominated in NIS
unlinked to the dollar) will decline.

The government grants that our
affiliates have received for research and development expenditures restrict ability to
manufacture products and transfer technologies outside of Israel and require them to
satisfy specified conditions that they may fail to satisfy. If they fail to satisfy these
conditions, they may be required to refund grants previously received.

Two of our affiliates received grants
from the government of Israel through the Office of the Chief Scientist of the Ministry of
Industry and Trade, commonly referred to as the Chief Scientist, for the financing of a
significant portion of such of their research and development expenditures in Israel. The
terms of the Chief Scientist grants restrict their ability to manufacture products, or
transfer technologies, developed using Chief Scientist grants outside of Israel. This
restriction may impair their ability to enter into agreements or arrangements for those
products or technologies. In addition, should they fail to comply with any of the
conditions imposed by the Chief Scientist, they may be required to refund any payments
previously received by them, together with interest and penalties.

Israeli courts might not
enforce judgments rendered outside of Israel.

We are incorporated in Israel. Our
executive officers and directors and the Israeli experts named in this annual report are
nonresidents of the United States, and a substantial portion of our assets and the assets
of these persons are located outside the United States. Therefore, it may be difficult for
an investor, or any other person or entity, to enforce a United States court judgment
based upon the civil liability provisions of the United States federal securities laws in
an Israeli court against us or any of those persons or to effect service of process upon
those persons in the United States. Additionally, it may be difficult for an investor, or
any other persons or entity, to enforce civil liabilities under United States federal
securities laws in original actions instituted in Israel.

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# Item 4. Information on
the Company

History and Development
of the Company

Our legal and commercial name is BVR
Technologies Ltd. We were founded on October 8, 1986 and commenced operations in 1987. We
were organized pursuant to the Israeli Companies Law, and we operate under Israeli law and
legislation. Our principal executive offices are located at 2 Azrieli Center, 45th Floor,
Tel Aviv 67021 Israel. Our telephone number is 972-3-696-6060.

Beginning with our inception in 1986,
we engaged in the development, manufacture and marketing of advanced training and
computer-based simulation systems for military applications. In 1998, we completed a
spin-off of our defense-related activities to BVR Systems (1998) Ltd. (NASDAQ: BVRS), and,
consequently, we became a management company with commercial portfolio companies. Our
shareholders received one new BVR Systems share for each share of our shares then
outstanding. Upon such distribution, our shares continued to be included for trading in
the NASDAQ Small Cap Market under the symbol BVRT. The ordinary shares of BVR Systems
commenced trading under the symbol BVRS on October 23, 1998, and are traded on
the NASDAQ Small Cap Market. For purposes of this annual report, unless the context
otherwise indicates, all references to BVR Systems assume that BVR Systems has owned and
operated the defense-related businesses formerly owned by us, to the same extent that we
had, since the commencement of our ownership and operation thereof. We have been granted
access to any current and future technological developments of BVR Systems, on a
perpetual, royalty-free, non-compete basis. As of May 2003, we entered into an agreement
to sell all of our patent rights to BVR Systems, in consideration for the payment of
$12,000 plus value added tax. The consummation of such sale is subject to its approval by
BVR Systems audit committee and board of directors.

We are a high-technology holding
company. To date, we have made five investments in high-technology companies. We
distributed the shares of our two publicly traded portfolio companies pro-rata among our
shareholders. We distributed the shares of Nexus Telocation Systems Ltd. (OTC Bulletin:
NXUS) in July 2001 and the shares of VIZRT Ltd. (Frankfurt Market: VIZ) in April 2002. In
September 2002 we distributed additional shares of Nexus Telocation Systems Ltd. that we
withheld in anticipation of a withholding tax obligation, pursuant to the receipt of a tax
ruling that allowed such distribution. See Item 10. Tax Ruling for additional
information.

Following the distribution of the
shares of Nexus and VIZRT, we remained invested in three companies: Coresma Ltd., which
operates in the field of broadband access technology, BrightCom Technologies Ltd., which
operates in the field of integrated silicon and software Bluetooth solutions
for smart networking, and Unisfair Inc., which operates in the field of online fair and
exhibition through Unisfair Inc.

As of July 13, 2003, we hold 32.48%
of BrightCom and 41.33% of Unisfair. As of July 13, 2003, through our wholly-owned
subsidiary, E.V.R. Entertainment Application of Virtual Reality (1994) Ltd.
(EVR), we hold 37% of Coresma.

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As of January 9, 2003, our audit
committee and board approved an agreement to sell all of the securities that we hold of
Unisfair to BCS Growth Fund (Israel) L.P., to an affiliate of Clal Industries &
Investments Ltd., and to Yaron Sheinman. The consideration we will receive for the sale of
our Unisfair securities is $25,000. The consummation of the sale is contingent upon two
conditions: the receipt of a waiver of right of first refusal from other Unisfair
shareholders and the approval of the sale by our shareholders. We intend to bring the sale
before our shareholders for approval at our upcoming shareholders meeting, which should
take place around July 2003. Shareholder approval of the sale is required as Clal
Industries and Investments Ltd. and Yaron Sheinman are considered to be controlling
shareholders of the Company and interested parties. Following such sale we will no longer
hold any securities of Unisfair, and will no longer operate in the field of technological
platforms to manage and support all aspects of online interactive events.

As of June 15, 2003, our affiliate
BrightCom Technologies Ltd. entered into an agreement to sell substantially all of its
assets. In consideration for BrightComs assets, the buyer will assume certain of
BrightComs liabilities and will pay BrightCom, through a combination of an initial
payment of $50,000 and earn-out payments on sales of BrightComs products over time,
an amount which can be as little as $50,000 or as much as $15,000,000. We cannot assess
the amount of earn-out payments which BrightCom will receive. The consummation of the
asset sale is contingent upon a few conditions. Once the asset sale is consummated, we
will no longer operate in the field of highly integrated silicon and software solutions
for the Bluetooth appliance markets.

In January 2003, we distributed
approximately $1,500,000 to our shareholders as cash dividend.

A description of our principal
capital expenditures and divestitures for the last three fiscal years and currently in
progress is hereby incorporated by reference to Item 5 of this annual report included
herein.

A description of our recent capital
expenditures and divestitures is hereby incorporated by reference to Note 5 of the
Appendix to our Consolidated Financial Statements, attached as Item 17.

# BUSINESS OVERVIEW

BVR Technologies Ltd. (BVR) is a
high-technology management company with three affiliated companies:

- Coresma Ltd., a 37% owned affiliate.
- BrightCom  Technologies  Ltd.,  a 32% owned  affiliate.  Bright Com is selling all of its  assets.  See "Item 4.
         History and Development of the Company" for more information.
- Unisfair  Inc., a 41% owned  affiliate.  We are selling all of the Unisfair  securities  that we hold. See "Item
         4. History and Development of the Company" for more information.

A business overview of each of these
affiliates is set forth separately below.

As of April 23, 2002, we distributed all
of the shares that we owned in another affiliate, VIZRT Ltd., pro-rata among our
shareholders. We no longer own any of the shares of VIZRT.

# Business Overview:
Coresma

Coresma Ltd., formally named Netgame
Ltd., was founded in 1995 in Israel. Coresma Inc., the U.S. subsidiary is located in Palo
Alto, California. Coresmas shareholders include Intel Capital, BVR Technologies,
Creative Technologies, Technoplus, Clal Ventures, and STI Ventures.

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Coresma aims to be the leading
provider of broadband over cable technology for the multiple dwelling unit
(MDU), small and mid size cable operator markets. It shipped its first
generation broadband over cable systems in 1998. Coresma designs broadband access systems,
which consist of a subscriber devices (or CPE for consumer premise equipment),
a headend device (or CMTS for cable modem termination systems), and management
software that monitors broadband networks. The company sells these access systems to cable
operators, real estate investment trust companies, Internet Service Providers, and systems
integrators serving the MDU markets. The primary end user locations for the companys
products include apartments, residential communities, hotels, municipalities,
universities, and hospitals. By 2004, estimates are that there will be 25.1 million
subscribers passed for broadband access in the United States MDU market alone.

Coresma designs subscriber devices,
headend systems, and management software technology specifically for the MDU market. The
company has established a reputation for designing innovative technology across all of its
product categories. In October of 2001, Coresma has announced its second-generation CPE
platform, the Phazer PCI Cable Modem. The Phazer PCI is the industrys first to
market host-based cable modem, which provides unique architecture and design
advantages to achieve a lower cost of delivering broadband access. To date, the company
has shipped over 200,000 cable modems. 
Coresma designs and sells a line of
low cost, scalable CMTS technology designed for broadband over cable. The company is
currently shipping both a proprietary headend, NeMo, and a DOCSIS based headend,
Quarterback to address unique customer requirements. In 2002, the company began shipping
beta versions of its next generation headend, the CC8000. The CC8000 is based on the
DOCSIS and EuroDocsis standard, and offers a low cost hardware design that can be field
upgraded over time. Coresma CMTS product line features special and unique implementations
which lies within the DOCSIS implementations. These features increase the service level
and customer implementations. 
Coresma has developed management software for both the cable
operators/MDU and Hotel market segments. Coresmas Flexible Operation and Control
System (FOCS) is a software application that manages the traffic between the headend and
the subscriber devices. FOCS architecture is based on a scalable open interface and
featuring modules such as DOCSIS provisioning, quality of service, billing, subscriber
access, network monitoring, alarms and devices mediators. Coresmas NetHotel software
application provides in room guest broadband connectivity and integrates into an existing
hotel premise management system (PMS), The NetHotel providies features such as in-room
billing via the PMS, dynamic network address translation to allow seamless laptop
connectivity, and connecting to a hotels business center for dynamic print or fax
capability.

Coresma Sales and
Marketing

Coresmas sales and marketing
division is organized into two primary geographic regions, the Americas and International.
Headquarters for the Americas are located in Palo Alto, California through Coresmas
United States subsidiary. The international sales and marketing are headquartered in Rosh
Haayin, Israel.

The existing sales channels are via a
network of distributors, value-added resellers and Internet service providers in 40
countries. With respect to the Coresma products, Coresma is expanding its marketing
efforts to include original equipment manufacturers, including personal computer
manufacturers, set-top box manufacturers, Internet appliance companies, broadband solution
providers, home networking enablers and network infrastructure companies.

Coresmas marketing strategy is
focused on building market awareness and acceptance of current and future products. The
marketing activities include advertising in print and Internet media, participating in
industry tradeshows and conducting channel marketing support programs and direct mail
campaigns, road shows and seminars.

In 2001, Coresma signed a $4.7
million strategic licensing agreement with Conexant. In 2002, Coresma signed a $1.55
million strategic licensing agreement with STMicro Electronics. Under these agreements,
Coresma is licensing the DOCSIS 1.1 host based software in exchange for licensing fees,
royalties and access to both companies silicon for future Coresma products. These
agreements will enable the next generation chip for host-based communication.

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A substantial amount of
Coresmas sales in the past have been to one customer. In April 2002 Coresma received
a notice from this customer that it intends to purchase substantially less than what it
had purchased in the past, and substantially less than Coresmas expectations. This
reduction has had an immediate material adverse affect on Coresmas results, and is
expected to continue to adversely affect Coresmas results.

In addition, the continuing downturn
in the world economy and in the telecommunications industry as a whole have affected
Coresmas results. The operating losses Coresma has experienced as a result of these
events have resulted in a deficit equity position.

The following is a breakdown of
Coresmas sales by geographic market:

|Year ending 
December 31,
|-------------------------
|                         
|2002                     
|2001                     
|2000                     

Coresmas Research
and Development

Coresmas research and
development efforts are directed towards the development and application of new products
as well as the enhancement of its existing products. Coresma continues to research and
develop its core technologies. The development and testing of new products and solutions
and the degree to which they will be accepted by the market are inherently unpredictable.

In 1998 and 1997, the Office of the
Chief Scientist of the Ministry of Industry and Trade of the State of Israel
(OCS) provided Coresma with grants of approximately $210,000 and $309,000,
respectively, for the development of its NeMo cable modem. In connection with the grant,
Coresma has undertaken to pay royalties of 3%-5% of the income resulting from the research
funded by the grant. Coresma has also undertaken that the know-how and manufacturing
rights of the projects funded by the grant will remain in Israel and will not be
transferred to another entity without the Chief Scientists consent. This restriction
does not affect sales of Coresmas products outside of Israel. Coresmas grant
program with the OCS ended in 1998, and Coresma elected not to renew the program for 1999.
As a result, Coresma did not receive grants from the Office of the Chief Scientist from
1999 onwards.

In September 2002, Coresma and
BrightCom ceased a joint research and development project. Following the termination of
such project, Coresma sold all of its rights to any intellectual property developed during
the project to BrightCom, in return for the waiver of a $700,000 debt by BrightCom.

Coresmas
Manufacturing and Suppliers

Coresma contracts for the manufacture
of cable modems and integrated circuit boards on a turnkey basis. Several components and
subassemblies included in Coresmas products and solutions are presently obtainable
from a single source or a limited group of suppliers and subcontractors. Quality assurance
and testing operations are performed in Israel and abroad. A shortage of a single source
component or an inability to develop an alternative source on a timely basis, if required,
would have a material adverse effect on Coresmas operating results. Also, there are
a number of risks associated with Coresmas dependence on third-party manufacturers;
any manufacturing disruption could impair Coresmas ability to fulfill orders.

9

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Coresmas Competition

The markets for Coresmas
products are very competitive and Coresma expects that competition will increase in the
future, both with respect to products which Coresma is currently offering, and products
which Coresma is developing. Coresmas current and potential competitors include
providers of asymmetric cable modems, other types of cable modems and other broadband CMTS
access products. The principal competitors in the data-over-cable market include,
Motorola, Inc., Cisco Systems, Inc., Scientific Atlanta Inc., Com21, Inc., Terayon
Communication Systems, Inc., Arris and ADC, as well as a number of smaller, more
specialized companies. Competitors that compete with Coresma in the hotel in-room access
market include CAIS Internet, Inc., and Wayport, Inc.

Coresmas
Intellectual Property Rights and Product Protection

Coresma relies primarily upon a
combination of patent, contractual rights, trademarks, trade secrets, copyrights,
non-disclosure agreements and technical measures to establish and protect its proprietary
rights in its products and technologies. In addition, Coresma typically enters into
nondisclosure and confidentiality agreements with its employees and with suppliers and
customers who have access to sensitive information.

Governmental Regulation
Affecting the Company

As a company which focuses on
research and development and which received grants in order to do so from the Government
of Israel, Coresma is affected by the terms of the grants we have received from the OCS.
Under the terms of these grants, we are responsible to pay royalties based on the net
sales of our products. In addition, manufacturing of products developed with these grants
should be performed in Israel (otherwise additional royalties are due, and the rate of
royalty payment is increased), and approval must be obtained to transfer technologies
developed through projects in which the government participates. A recent amendment to the
law governing the operations of the OCS has made clear that transfers of know-how to
non-Israeli entities are not possible. See Item 5. Research and development, patents
and licenses, etc.

Coresmas Employees

As of June 11, 2003, Coresma employed
30 full-time employees. Of its full-time employees, 15 were employed in research &
development and engineering, 5 in sales and marketing, 4 in administration and management,
and 6 in operations and support. Coresma also engaged contractors on a regular basis in
research and development.

Financing of Coresma

A description of Coresmas
recent financing transactions is hereby incorporated by reference to Note 5 of the
Appendix to our Consolidated Financial Statements, attached as Item 17.

In addition, in February 2002, a
convertible loan in the amount of $2.5 million granted to Coresma by its shareholders was
converted to 1,455,180 shares of Coresma, which were issued to certain of its shareholders
which had provided the loan. Issuance of these shares constituted full repayment of the
loan.

Coresma has experienced operating
losses over the past years, resulting in a deficit equity position. It is currently in
default relating to its indebtedness towards numerous suppliers, in an aggregate amount of
approximately $1,000,000. Its financial position and operating results raise very
substantial doubts about its ability to continue as a going concern.

10

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Management Services We
Provide to Coresma

Until July 31, 2002 we provided
Coresma with certain management services in consideration for a monthly fee of $10,000.
This arrangement is no longer in effect, and Coresma no longer pays us any fees. However,
Coresma still owes us certain fees for services granted in the past.

# Business Overview:
BrightCom

BrightCom has entered into an
agreement to sell all of its assets. We expect that BrightCom will distribute the proceeds
of this sale to us and to its other shareholders, but we cannot assess the amount of these
proceeds. See Item 4. Information on the Company. History and Development of the
Company for more information.

BrightCom is a fabless wireless
communications semiconductor company, founded in August 1998. BrightCom develops and
markets integrated silicon and software solutions, focusing on wireless personal area
networking over the Bluetooth standard. BrightCom is one of the pioneers of
Bluetooth Application Processors  integrated chip and software platforms
that help customers quickly introduce differentiated products for wireless communications.
During 2001, a Bluetooth market researcher from Frost and Sullivan commented that,
BrightCom expected to become a serious competitor in the Bluetooth Silicon
market. Brightcom demonstrated initial sales of development kits and chips during
2001, and has had product sales in the amount of approximately $200,000 in 2002, out of
which approximately 50% were sales in the Asian market, and approximately 50% were sales
in Europe and the United States.

BrightComs IntelliBLUETMproduct line combines a chip and software system offering, along with reference
designs targeted to increase performance and reduce the bill of materials cost of the
customer devices. BrightComs first Bluetooth Application Processor, the BIC2101, is
targeted for serial cable replacement. Its next generation BIC2102 to be sampled in the
second quarter of 2002 offers increased functionality and interfaces, such as USB device
and Host integration, low power, voice quality and more, making it a highly cost effective
solution for headsets, computer accessories and fully embedded products.

BrightComs
Technology and Products

BrightCom is targeting the Bluetooth
wireless appliances market with its comprehensive silicon and software solutions.
BrightCom bases its product line for the Bluetooth market on an architecture created by
BrightCom, which leverages between hardware machines implemented in VLSI and
software/firmware code. The architecture is designed to support scalability and embedded
applications. Advanced Application Programming Interfaces (APIs) at different levels allow
the product developer flexibility required for maximizing its cost performance.

The Application Processor is RF
agnostic, meaning that it can work with virtually any Bluetooth RF chip. This enables
BrightCom to offer its customers a choice of RF chip vendors for their product, as per the
product requirements (such as cost, power consumption, sensitivity, size and availability)

The IntelliBLUE product line of
Bluetooth application processors includes:

- BIC2101 - Bluetooth Application processor for serial interfacing;
- BIC2102 - Bluetooth Embedded Application processor; and
- BIC2301 - Bluetooth LAN Access Point  targeted for Bluetooth to LAN access points.

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All products include a complete suite
of Bluetooth software protocol stacks, profiles and applications, forming a complete
solution on a chip. These application chips are targeted for a broad application
portfolio, including Bluetooth enablers for Computer accessories such as Printers, Digital
Cameras, Headsets, Metering Devices, LAN Access Points, Remote Controllers and many
others.

BrightComs Sales
and Marketing

There are many companies already
developing Bluetooth technology, many of which are more established, benefit from greater
market recognition (especially in the United States) and have greater financial,
production and marketing resources than does BrightCom. There can be no assurance that
BrightCom will be successful in selecting, developing, manufacturing and marketing its
technology in a timely manner. There can be no assurance that the marketplace will find
BrightComs products or technology preferable to those of its competitors.

BrightComs Research
and Development

Since it commenced operations, BrightCom
has conducted extensive research, development and engineering activities. Its efforts have
emphasized the development of new products in response to rapidly evolving customer
preferences, technologies and industry standards. All of the products discussed above
result from the extensive research and development activities carried on by BrightCom.

There can be no assurance that any of
BrightComs development efforts will result in commercially successful products, that
such products will be released in a timely manner or that BrightCom will be able to
respond effectively to technological changes or new product announcements by others.

The market for BrightComs
products is characterized by rapidly changing technology, short product-life cycles and
evolving industry standards. There can be no assurance that BrightCom will be successful
in selecting, developing, manufacturing and marketing its technology in a timely manner.

In September 2002, Coresma and
BrightCom ceased a joint research and development project. Following the termination of
such project, Coresma sold all of its rights to any intellectual property developed during
the project to BrightCom, in return for the waiver of a $700,000 debt by BrightCom.

BrightComs
Manufacturing

BrightCom is a fabless semiconductor
company, dependent on the very large-scale integration fabrication services of third
parties. BrightCom licenses intellectual property cores such as the ARC
microprocessors to enable it to choose the most appropriate manufacturing partners for its
next generation chips. The company handles packaging and testing separately.

BrightComs
Competition

There are many companies already
developing Bluetooth technology and as this technology progresses, many companies will
enter the market in competition with BrightCom. Most of the major semiconductor
manufacturers have announced plans for Bluetooth development. Companies like Lucent,
Philips, Texas Instruments and others have either produced initial product samples or plan
to have samples in the near future. BrightCom believes that companies such as Broadcom and
Conexant, which develop both transceiver and baseband chips, may pose a threat to
BrightCom due to their low manufacturing cost and large sales channels. Embedded Wireless
Design is one of the few companies that Brightcom believes has a similar solution approach
to developing baseband, protocol and application technology. Embedded Wireless Design is
focusing on Bluetooth solutions for telephony-oriented applications such as wireless PBX.
In addition, companies such as Cambridge Silicon Radio are developing a single-chip
solution (i.e., the transceiver and baseband components on a single chip) that may capture
part of the market.

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BrightComs Employees

As of May 31, 2003, BrightCom
employed 21 persons, of whom 14 were employed in research and development, 3 were employed
in sales and customer support, 4 in manufacturing, testing and quality assurance,
administration and management.

Financing of BrightCom

A description of BrightComs
recent financing transactions is hereby incorporated by reference to Note 5 of the
Appendix to our Consolidated Financial Statements, attached as Item 17.

In the fourth quarter of 1999,
BrightCom received a credit line from Bank Hapoalim in the amount of One Million U.S.
Dollars. After paying down $666,667, BrightCom issued a warrant to purchase 272,112
ordinary shares to an affiliate of Bank Hapoalim. The warrant expired as of February 2003,
without being exercised.

Management Agreement with
BrightCom

We entered into an agreement with
BrightCom, effective July 2000, pursuant to which BrightCom paid us management fees of
$6,225 per month in exchange for management services which we provide to BrightCom. This
arrangement is no longer in effect, and BrightCom no longer pays us any fees.

# Business Overview of
Unisfair

As of January 9, 2003, our audit
committee and board approved, we signed an agreement to sell all of the securities that we
hold of Unisfair to BCS Growth Fund (Israel) L.P., to an affiliate of Clal Industries and Investments Ltd
and to Yaron
Sheinman. See Item 4. Information on the Company. History and Development of the
Company for more information.

Unisfair Inc. was incorporated under
the laws of the state of Delaware in 2000, and has a wholly-owned subsidiary in Israel,
Unisfair Ltd. Unisfair develops and markets a leading online event platform. Its flagship
product, the GMEP, is a comprehensive technological, web-based platform
focusing on the creation and management of multiple interactive webcasting events.

The product was formally launched in
July 2001, and has been deployed successfully by a number of high-profile customers
worldwide. Product benefits to such customers include substantial incremental revenues;
significant operating cost reduction and improved communication efficiencies.

All references to Unisfair are to
Unisfairs wholly owned subsidiary Unisfair Ltd.

Products  the
platform

Unisfairs technological
platform, GMEPTM(Global Mass Event Platform), is a cutting-edge, Web-based
platform that supports all aspects of the creation, management and delivery of multiple
interactive webcasting events. The platform can be easily managed and customized by event
managers and adapted to different event requirements. It is the only product in the market
offering the powerful combination of a Web seminar and an online interactive trade show,
both imbedded in an exciting, totally branded, interactive arena.

The platform is suitable for both
small-scale and large-scale participant forums, without the need to perform any prior
download and while being fully operational from the web browser on the users desk.

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Unisfairs Marketing
and Sales

Unisfair presents GMEP as a
significant technological innovation that allowed for the establishment of a new category
of electronic collaboration  multiple events. This, however, requires the crafting
of easily understood terminology to differentiate Unisfairs value proposition from
that of other standard web conferencing and Webcasting players.

In addition to direct sales efforts
towards major publishers and leading event management firms, Unisfair focuses on
developing sales channels through the above mentioned players proposing customized online
event solutions to the corporate market place.

In 2002, 90% of Unisfairs sales
were in the United States, and 10% of sales were in Europe.In 2001, 20% of Unisfairs
sales were in the United States, and 80% of sales were in Europe. There were no sales
prior to the year 2001.

Unisfairs
Competition

There is no company providing a
similar solution to that offered by Unisfair. Web conferencing service providers are the
group best positioned to compete against, or ally with, Unisfair. Two companies in this
sector are PlaceWare and WebEx.

While each of the two firms
offerings meets basic user requirements for single events (e.g. business communication,
e-learning), none is capable of providing the features required for comprehensive multiple
events as offered by Unisfair.

Unisfairs GMEP also is the only
system in the market that does not require any prior proprietary software installation and
can be fully operated from the Web browser on the users desk.

Unisfairs Research
and Development

Unisfair believes that its growth
will depend upon its ability to enhance its products and to introduce new products on a
timely basis. Since it commenced operations in 2000, Unisfair has emphasized its extensive
research and development activities. Unisfairs net expenditures in 2001, for
research and development programs totaled approximately $1,000,000. Unisfairs net
expenditures in 2002, for research and development programs totaled approximately
$450,000. Unisfair expects to expend approximately $400,000 for research and development
in 2003.

Unisfairs
Intellectual Property and Product Protection

Unisfairs success and ability
to compete are dependent to a significant degree on its proprietary technology. Unisfair
relies upon a combination of patent, trademark, trade-secrets, copyrights, non-disclosure
agreements and technical measures to establish and protect its proprietary rights. In
addition, Unisfair typically enters into nondisclosure and confidentiality agreements with
its employees and customers that have access to sensitive information. Unisfair has filed
a patent in the United States to protect the basic capabilities of its GMEP product.
Unisfair is also in the final stages of registering a trademark in the Unites States with
respect to the GMEP mark. These measures afford only limited protection, and accordingly,
there can be no assurance that the steps Unisfair takes to protect these proprietary
rights will be adequate to prevent misappropriation of its technology or the independent
development of similar technologies by others. Despite efforts to protect its proprietary
rights, unauthorized parties may attempt to copy aspects of Unisfairs products and
develop similar hardware or software or to obtain and use information that Unisfair
regards as proprietary. In addition, there can be no assurance that one or more parties
will not assert infringement claims against Unisfair. The cost of responding to claims
could be significant, regardless of whether the claims are valid.

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Unisfairs Employees

As of May 30, 2003, Unisfair employed
10 employees, of whom 7 were employed in research and development and customer support and
3 were employed in marketing, sales, administration and management.

Financing of
Unisfair

A description of Unisfairs recent financing transactions is
hereby incorporated by reference to Note 5 of the Appendix to our Consolidated Financial
Statements, attached as Item 17.

Unisfair has experienced operating
losses over the past years, resulting in a deficit equity position. Its financial position
and operating results raise substantial doubts about its ability to continue as a going
concern.

Organizational Structure

For our holdings, please see above
and exhibit 8.1 attached hereto.

# Property, plants and
equipment

Beginning August 29, 1999, we leased
2,280 square meters from Electra Real Estate Ltd., for a period of 10 years. Since then,
we have sublet such premises at a monthly rent which was equal to the rent which we paid
under the master lease with Electra. The master lease and subleases were terminated in
October 2002, and we paid Electra a fine in the amount of $250,000 in return for
Electras agreement to terminate the lease.

In an effort to decrease our expenses
and reduce our overhead, we moved our offices on January 1, 2002 to two rooms located in
Tel Aviv, Israel. On June 1, 2003, we terminated the Tel-Aviv sublease, and moved our
offices to new premises in Tel Aviv made available to us free of charge by our shareholder
Clal Industries and Investments Ltd.
BrightComs executive offices are located in Tel
Aviv, Israel. BrightCom leases 1620 square meters at a monthly rent of approximately
$33,000, which is linked to the consumer price index in the United States. The lease
expires in April, 2006.

Unisfairs executive offices
have been moved from Tel-Aviv, Israel to Ramat Gan, Israel. Unisfair currently leases 200
square meters at a rent of approximately $12 per square meter, which is linked to the
Israeli consumer price index. The lease will expire on September 2003.

Coresmas executive offices are
located in Rosh Haayin, Israel. Coresma currently leases 1,031 square meters at a
monthly rent of approximately $13,000. The lease will expire at the end of 2004.

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# Item 5. Operating And
Financial Review And Prospects

# Selected Consolidated Financial
Data

The following selected consolidated
financial data for the years ended of December 31, 1998, 1999, 2000 2001, and 2002 are
derived from our consolidated financial statements and the financial statements of our
subsidiaries and affiliates, which have been prepared in conformity with Israeli GAAP
applied on a consistent basis, and audited by Kost, Forer & Gabbay, independent
auditors, a member of Ernst and Young Global. The Selected Consolidated Financial Data set
forth below should be read in conjunction with and are qualified by our consolidated
financial statements, notes thereto and other financial information included elsewhere in
this annual report.

16

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|                               | Year Ended December 31,
|------------------------------ | -----------------------
|
|                               | (audited)              
|
|Consolidated Statement of      |                        
|Operations Data:               |                        
|Services to related parties    |                        
|Cost of services to related    |                        
|parties                        |                        
|Gross profit                   |                        
|Research and development       |                        
|expenses, net                  |                        
|General and administrative     |                        
|expenses, net                  |                        
|Operating loss                 |                        
|Financial income (expenses),   |                        
|net                            |                        
|Other income (expenses)        |                        
|Taxes on income                |                        
|Equity in losses of affiliates |                        
|Minority interest              |                        
|Income (loss) from             |                        
|discontinued operation         |                        
|Net income (loss)              |                        
|Basic earnings (loss) per      |                        
|share from:                    |                        
|Continuing operations          |                        
|Discontinued operations        |                        
|Total earnings (loss)          |                        
|per share                      |                        
|Weighted average number of     |                        
|ordinary shares outstanding    |                        
|(in thousands)                 |                        
|                               |                        

(1)    
          In July 2001 and September 2002, we distributed our holdings in Nexus as a
          dividend-in-kind to our shareholders and in April 2002 we distributed our
          holdings in VIZRT as dividend in kind pro rata to our shareholders. According to
          Israeli GAAP, the results of operations relating to Nexus and VIZRT activities
          have been reclassified as an income or loss from discontinued operations. The
          consolidated statements of operations data for the fiscal year ended December
          31, 1998 do not include the results from Nexus and VIZRT activities as a
          discontinued operation but under continuing operations.

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|                             | As at December 31,
|---------------------------- | ------------------
|
|                             | (audited)         
|
|Current Assets               |                   
|Long term investments        |                   
|Fixed assets                 |                   
|Net assets from discontinued |                   
|operation                    |                   
|Current liabilities          |                   
|Long-term liabilities        |                   
|Minority interest            |                   
|Deferred credit              |                   
|Shareholders' equity         |                   
|Total assets                 |                   

# General

Since the spin-off of BVR-Systems
(1998) Ltd. in October 1998, we have become a holding company with commercial portfolio
companies. Our subsidiary and affiliates are engaged primarily in high technology areas of
business.

Our current goal is to realize our
assets and distribute them to our shareholders. We intend to accomplish this distribution
by the sale of securities or assets of privately-held companies and the resulting
distribution of cash to our shareholders. We intend to complete the process of realizing
our assets, if possible, within the period permitted by the tax authorities, in order to
make it possible for our shareholders to enjoy the benefits of the tax ruling we have
obtained from the Israeli Tax Authorities. See Item 10. Tax Ruling for
additional information. Following the distribution of our assets we will probably not
continue our business.

In July 2001 we consummated a
pro-rata distribution among our shareholders of our shareholdings in Nexus as a
dividend-in-kind. In September 2002 we distributed additional shares of Nexus Telocation
Systems Ltd. to shareholders that had received shares in the distribution of July 2001,
and who are not Israeli companies. These additional Nexus shares were withheld by us in
the July 2001 distribution as tax at source, and we were able to release them following
receipt of a tax ruling from the Israeli Tax Authorities reducing the withholding tax
applicable to the distribution.

In April 2002, we distributed our
shareholdings in VIZRT pro-rata among our shareholders as a dividend-in-kind.

As of January 9, 2003, our audit
committee and board approved an agreement to sell all of the securities that we hold of
Unisfair to BCS Growth Fund (Israel) L.P., to an affiliate of Clal Industries &
Investments Ltd., and to Yaron Sheinman. The consideration we will receive for the sale of
our Unisfair securities is $25,000. The consummation of the sale is contingent upon two
conditions: the receipt of a waiver of right of first refusal from other Unisfair
shareholders and the approval of the sale by our shareholders. We intend to bring the sale
before our shareholders for approval at our upcoming shareholders meeting, which should
take place around July 2003. Shareholder approval of the sale is required as Clal
Industries and Investments Ltd. and Yaron Sheinman are considered to be controlling
shareholders of the Company and interested parties. Following such sale we no longer hold
any securities of Unisfair. Although this sale is, in part, to controlling shareholders,
we believe that the transaction is at arms length and that we would have been unable to
obtain a higher price for our Unisfair securities in the market

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As of June 15, 2003, our affiliate
BrightCom Technologies Ltd. entered into an agreement to sell substantially all of its
assets. In consideration for BrightComs assets, the buyer will assume certain of
BrightComs liabilities, and will pay BrightCom through a combination of an initial
payment of $50,000 and earn-out payments on sales of BrightComs products over time,
an amount that could be as little as $50,000 and as high as $15,000,000. We cannot assess
the amount of earn-out payments which BrightCom will receive. The consummation of the
asset sale is contingent upon a few conditions. Following the sale, we expect BrightCom to
remain a passive vehicle for the purpose of receiving royalties from the buyer, and
distributing such royalties to the company and the other BrightCom shareholders. Depending
on the amount of royalties actually received by BrightCom, the sale of BrightComs
assets may favorably affect our financial results.

In January 2003, we distributed
approximately $1,500,000 to our shareholders as cash dividend.

As of May 2003, we entered into an
agreement to sell all of our patent rights BVR Systems, in consideration for the payment
of $12,000 plus value added tax. The consummation of such sale is subject to its approval
by BVR Systems audit committee and board of directors, as we and BVR Systems are
affiliated companies. Despite our affiliation with BVR Systems, we believe that the
transaction is at arms length and that we would have been unable to obtain a higher price
for the rights being sold in the market

Our goal is to continue to make
distributions to shareholders to the extent we can. In addition, we have worked to
decrease our operating expenses by dismissing the remainder of our salaried employees (See
Item 6. Directors, Senior Management And Employees. for more information.),
and by moving our offices to smaller, less expensive, premises.

In order to enable us to continue to
distribute certain of our assets to our shareholders, we requested a tax ruling from the
Israeli Income Tax Authority which would permit us to make such distributions under a
special arrangement for us and for our shareholders. We reached an arrangement with the
Israeli Income Tax Authority, which was approved by our shareholders on April 2, 2002.

The Tax Ruling grants a special
concession to us, allowing us to set off losses from the distribution of securities of
publicly-traded companies against capital gains from the sale of securities in
privately-held companies. In addition, the ruling accords beneficial treatment to our
shareholders. The Tax Ruling is discussed further in Item 10. Additional Information
 Taxation  Tax Ruling, which is incorporated here by reference. We
intend to complete the process of realizing our assets, if possible, within the period
permitted by the tax authorities, in order to make it possible for our shareholders to
enjoy the benefits of the tax ruling we have obtained. See Item 10. Tax Ruling
for additional information.

Our consolidated financial statements
include the financial statements of our subsidiaries and affiliates during the time
periods in which our holdings in such companies exceeded 50%. Thus, our consolidated
financial statements for the years ended December 31, 1997 and 1998 include the financial
statements of VIZRT. At the end of 1998, inclusion of VIZRT was changed to the equity
method of accounting. Our consolidated financial statements for the year ended December
31, 1997, and for the month of January 1998 include the financial statements of Coresma.
From February 1998, on account of issuance of shares of Coresma to third parties,
inclusion of Coresma was changed to the equity method of accounting. We record our gains
or losses from our holdings in Nexus Telocation Systems Ltd., BrightCom and Unisfair based
on the equity method of accounting. Accordingly, in 1999, 2000, 2001 and 2002 we recorded
gains or losses from our affiliates on the equity method of accounting.

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We recognize gains and losses arising
from a decrease in our interest in our affiliates as a result of the issuance of shares by
the affiliates to third parties. If the affiliate is a start-up or a development stage
enterprise the gains will be recognized over a period of three years or according to our
proportionate share of the losses of the affiliate.

Since all the Companys revenues
are generated and denominated in U.S. dollars, the Company elected to adjust its financial
statements according to the changes in the exchange rate of the U.S. dollars, in
conformity with Section 29b to Statement 36 of the Institute of Certified Public
Accountants in Israel.

# Critical Accounting
Policies

The
preparation of financial statements requires management 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 on-going basis, management
evaluates its estimates and judgments. Management bases its estimates and judgments on
historical experience and on various other factors that are believed 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.

Management believes the following
critical accounting policies, among others, affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements.

Investment in affiliates:

Investment in companies, over which
we can exercise significant influence over operating and financial policy of the affiliate
(generally, entities in which we holds 20% to 50% of ownership or voting rights) are
presented according to Israeli Accounting Standard No. 68, using the equity method of
accounting.

Goodwill is amortized using the
straight-line method over the estimated useful life, which is 10 years.

From time to time, we review our
investments in order to identify if there has been a decrease in their value, which is not
of a temporary nature. Such a review is being performed where there is evidence that the
value of permanent investments has been harmed, including a decline in stock market
prices, the investee companys sequential loss, the segment in which the investee
company operates, the value of the goodwill aggregated in the investment and other
parameters.

We discontinue applying the equity
method when our investment is reduced to zero and we have not guaranteed obligations of
the affiliate or otherwise committed to provide further financial support to the
affiliate.

Investment in privately held
companies in which we do not have the ability to exercise significant influence over
operating and financial policy of the affiliate, are recorded at the lower of cost or
estimated fair value.

Deferred Taxes

We record a valuation allowance to
reduce its deferred tax assets to the amount that is more likely than not to be realized.
While we have considered future taxable income and ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in the event the we
were determined that it would be able to realize its deferred tax assets in the future in
excess of its net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such determination was made. Likewise, should we determine that we
would not be able to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period such
determination was made.

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# Operating Results

The following table sets forth, for
the periods indicated, selected items from our consolidated statement of income as a
percentage of total sales.

|                                     | Years ended December 31,
|------------------------------------ | ------------------------
|
|Revenues                             |                         
|Cost of Revenue                      |                         
|Gross Profit                         |                         
|General and administrative expenses, |                         
|net                                  |                         
|Financial income (expenses)          |                         
|Other income (expenses)              |                         
|Equity in losses of affiliates       |                         
|Net Income (loss)                    |                         

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

Revenues.    
          In 2002, our revenues amounted to $145,000 compared to $267,000 in 2001. The
          decrease in revenues is due to the cessation of management fees paid to us by
          our affiliates starting from the third quarter of 2002.

Gross profit. In
2002, our gross profit decreased to $20,000 from $61,000 in 2001. The decrease in the
gross profit is mainly due to the cessation of management fees paid to us by our
affiliates starting from the third quarter of 2002, while our expenses associated with
providing such services did not decrease proportionately. As a result, the gross profit as
a percentage of revenues decreased from 22.8 % in 2001 to 18.3% in 2002.

General and administrative
expenses. General and administrative expenses consist primarily of
compensation costs for administration and management personnel, rental and professional
fees. General and administrative expenses decreased by 2% from $994,000 in 2001 to
$975,000 in 2002. The decrease was primarily due to a significant decrease of $497,000 in
salaries and related expenses. However, such decrease was for the most part offset against
a $250,000 one-time payment for early termination of our lease agreement, as well as
against $177,000 doubtful debts. Operating expenses were reduced in 2002 as a result of a
decision to enhance shareholder value by reducing the number of employees we employ.

Financial income,
net. Net financial income was $476,000 in 2001 as compared to income of
$108,000 in 2002. The decrease was primarily due to the reduction in our income from
interest on short term deposits which was caused by the reduction of interest rates and
the decrease of short term deposit amounts.

Other income
(loss). In 2002, other loss consists primarily of losses derived from
one-time deductions in the value of investments in our affiliates. Other income, net,
decreased to a loss of $1.8 million in 2002 from other loss, net, of $2.2 million in 2001.
These deductions in the value of our investments in affiliates erased completely the value
of investments in our affiliates.

21

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Share in losses of
affiliates. In 2002, our share in the losses of its affiliates decreased to $2.4
million from $2.6 million in 2001. In 2002, our share in the losses of Coresma totaled
$1.06 million, our share in the losses of BrightCom totaled $1.12, and our share of losses
in Unisfair totaled $0.22 million.

Net Loss. As a
result of the above, net loss for the year ended December 31, 2002 totaled $5.08 million
compared to a net loss of $13.1 million in the 2001 fiscal year.

Year Ended December 31,
2001 Compared to Year Ended December 31, 2000

Revenues.    
          In 2001, our revenues amounted to $267,000 compared to $235,000 in 2000. The
          increase in revenues is due to additional management fees and special service
          fees that we received in 2001.

Gross profit. In
2001, our gross profit increased to $61,000 from $43,000 in 2000. The increase in the
gross profit reflects an increase in revenues simultaneously with a decrease in related
costs. As a result, the gross profit as a percentage of revenues increased from 18.3 % in
2000 to 22.8% in 2001.

General and administrative
expenses. General and administrative expenses consist primarily of
compensation costs for administration and management personnel, rental and professional
fees. General and administrative expenses increased by 20.4% from $827,000 in 2000 to
$994,000 in 2001. The increase was primarily due to amortization of deferred stock
compensation on repriced options of $252,000 in 2001. Operating expenses were reduced in
2001 as a result of a decision to enhance shareholder value. We moved into a smaller
facility where we pay lower rent and have fewer employees.

Financial income,
net. Net financial income was $172,000 in 2000 as compared to income of
$476,000 in 2001. The increase was primarily due to investments in short term deposits in
United States dollars.

Other income
(loss). In 2001, other loss consists primarily of losses derived from
one-time deductions from investments in affiliates. Other income, net, decreased to a loss
of $2.2 million in 2001 from other income, net, of $4.8 million in 2000. This decrease is
a result of a decrease in our affiliates activities in the capital markets from
their activities in 2000, as explained below.

Share in losses of
affiliates. In 2001, our share in the losses of its affiliates decreased to $2.6
million from $6.1 million in 2000. In 2001, our share in the losses of Coresma totaled
$1.6 million and our share of losses in Unisfair totaled $1.0 million.

Net loss. As a
result of the above, net loss for the year ended December 31, 2001 totaled $13.1 million
compared to a net loss of $ 4.8 million in the comparable 2000 fiscal year.

# Impact of Inflation and
Currency Fluctuations

For many years prior to 1986, the
Israeli economy was characterized by high rates of inflation and devaluation of the
Israeli currency against the U.S. dollar and other currencies. However, since the
institution by the Israeli government of an economic recovery program in 1985, inflation,
while continuing, has been significantly reduced and the rate of devaluation has been
substantially diminished. Since the majority of our revenues are denominated and paid in
U.S. dollars, we believe that inflation and fluctuations in the U.S. dollar exchange rate
have no material effect on our revenue. Inflation and U.S. dollar exchange rate
fluctuations, however, have some effect on our expenses and, as a result, on our net
income/loss. The cost of our Israel operations, as expressed in U.S. dollars, is
influenced by the extent to which any increase in the rate of inflation in Israel is not
offset (or is offset on a lagging basis) by a devaluation of the NIS in relation to the
U.S. dollar.

22

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The high and low exchange rates
between the NIS and U.S. dollar during the six most recent months, as published by the
Bank of Israel, were as follows:

|MONTH         | HIGH
1 U.S. dollar = | LOW
1 U.S. dollar =
|------------- | -------------------- | -------------------
|December 2002 | 4.791                | 4.632              
|January 2003  | 4.898                | 4.737              
|February 2003 | 4.924                | 4.810              
|March 2003    | 4.858                | 4.687              
|April 2003    | 4.671                | 4.521              
|May 2003      | 4.577                | 4.373              
|June 2003     | 4.434                | 4.312              

The average exchange rate, using
the average of the exchange rates on the last day of each month during the period, for
each of the five most recent fiscal years, was as follows:

|Period                              | Exchange Rate
|----------------------------------- | -------------
|January 1, 1998 - December 31, 1998 | 3.810NIS/$1  
|January 1, 1999 - December 31, 1999 | 4.154NIS/$1  
|January 1, 2000 - December 31, 2000 | 4.067NIS/$1  
|January 1, 2001 - December 31, 2001 | 4.219NIS/$1  
|January 1, 2002 - December 31, 2002 | 4.737NIS/$1  

In 1998, the rate of devaluation of
the NIS against the U. S. Dollar exceeded the rate of inflation, a reversal from prior
years. This was not the case in 1999, when the rate of inflation was approximately 1.3%
and the rate of devaluation was -0.3%. In 2000, the rate of inflation was approximately 0%
and the devaluation rate was 2.7%. During 2001, the NIS was devalued against the
dollar by 9.3%. In 2002, the rate of inflation was about 6.5% and the NIS was devalued
against the dollar by 7.3%. As a result of the differential between the rate of inflation
and the rate of devaluation of the NIS, we experienced increases and decreases in the
costs of our Israel operations, as expressed in U.S. dollars, in 2002, but they did not
materially affect our results of operations in such periods.

We do not presently engage in any
hedging or other transactions intended to manage the risks relating to foreign currency
exchange rate or interest rate fluctuations. However, we may in the future undertake such
transactions if management determines that it is necessary to offset such risks.

23

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Liquidity
and Capital Resources

Cash and cash equivalents were $2.4
million as of December 31, 2002 as compared with $3.8 million as of December 31, 2001.
Shareholders equity decreased from $9.2 million at December 31, 2001 to $1.9 million
at December 31, 2002.

We have met our financial
requirements to date through cash reserves accumulated over prior years, cash received
from issuance of shares, repayment of a loan by BVR Systems (1998) Ltd., and cash
generated from the sale of property.

In the past, we have received funds
in the form of management fees from our affiliates. These management fees will no longer
be transferred to us, due to our affiliates liquidity problems.

In July 2001, we distributed all of
the shares that we held in Nexus Telocation Systems Ltd. pro-rata among our shareholders.

In April 2002, we distributed all of
the shares that we held in VIZRT Ltd. pro-rata among our shareholders.

In January 2003, we distributed
approximately $1,500,000 to our shareholders as cash dividend. The remaining cash balance
after the distribution of the cash dividend is expected to be sufficient for our cash
demands until such time as we finalize the realization and distribution of our assets.

Net cash flow used by investing
activity in 2002 was $549,000 compared to net cash flow of $4.817 million in 2001. Cash
flow used by investing activity in 2002 consisted primarily of investments in the amount
of $548,000 in affiliates compared to investments in the amount of $5.45 million in
affiliates in 2001.

No cash flow provided by financing
activity in 2002, compared to $1 million in 2001. Cash flow provided by financing activity
in 2001 was primarily due to a decrease in our receivables related to the sale of our
building in Har Hotzvim, Jerusalem.

We invested our cash surplus in 2002
in financial institutions in Israel and outside of Israel.

# Research and
Development, Patents and Licenses, etc.

Each of our affiliates has different
research and development policies and has spent varying amounts on company sponsored
research and development activities over the last three years. We have provided
information on each of our affiliates research and development policies in Item 4(b)
Business Overview. None of our affiliates intend to significantly increase the amounts
that they spend on research and development for the fiscal year ending December 31, 2003
without proper funding.

# Trend Information

The continuing downturn in the world
economy and in particular in the high technology sector may affect the results of our
affiliates and consequently, our results. For example, in the broadband and MDU industry
in which Coresma operates, the market has been adversely affected by the global downturn
in the technology sector. Some companies have gone out of business. Those companies that
have not gone out of business find themselves in a more precarious situation. We can give
no assurance that our results will not be affected if any of the customers with whom our
affiliates work consolidate, merger or initiate bankruptcy or liquidation proceedings. The
downturn may also affect our affiliates abilities to raise additional financing, if
necessary. In return, this may affect our ability to sell our holdings in these affiliates
and to enjoy realizations on our investments. The affects of the recent downturn may also
require us to make additional cash investments in companies in which we are currently
invested, as they face increasing difficulties in raising funds from other sources. Since
we no longer have the ability to make additional cash investments in our affiliates, such
affiliates could be adversely affected. In addition, due to the volatility in the
securities markets, our affiliates and we may have to continue to reduce the book value of
certain of our holdings.

24

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# Item 6. Directors,
Senior Management And Employees

# Directors and Senior
Management

As of July 13, 2003, our directors,
senior management and key employees are as follows:

|Name             | Age | Position with the Company                            
|---------------- | --- | -----------------------------------------------------
|Yaron Sheinman   | 48  | Founder, Chairman of the Board of Directors and Chief
|                 |     | Executive Officer                                    
|Aviv Tzidon      | 46  | Founder and Director                                 
|Orit Refaeli     | 39  | Outside Director                                     
|Rimon Ben-Shaoul | 57  | Director                                             

Tomer Kariv, who served as a member
of the board of directors of B.V.R. since June 1999, resigned from the board of directors
on May 1, 2003.

Dan Avnon, who served as an outside
director on the board of directors of B.V.R. since March 2000, resigned from the board of
directors in March 2003.

Ran Cohen, who served as a member of
the board of directors of B.V.R. since 1999, resigned from the board of directors on June
30, 2002.

Meir Shannie, who served as a member
of the board of directors of B.V.R. since 2001, resigned from the board of directors on
July 13, 2003.

Yaron Sheinman
is a founder of B.V.R., and, from the commencement of operations in 1987, he has served as
chairman of the board of directors. From 1987 through 1996, and again since October 1998,
Mr. Sheinman served as the chief executive officer of B.V.R. From 1985 to 1987, he acted
as an independent consultant to Israel Aircraft Industries for the development of avionics
systems. Mr. Sheinman served as a combat pilot with the Israeli Air Force (including
reserve service) for approximately 15 years. Mr. Sheinman also serves as chairman of the
board of directors of VIZRT, Coresma Ltd. and Unisfair Inc. Mr. Sheinman serves on the
boards of B.V.R. Systems (1998) Ltd., BrightCom Technologies Ltd. and BuyPass Systems
(1999) Ltd.

Aviv Tzidon is a
founder of B.V.R., and has served as chief technology officer and a director of B.V.R.
since it commenced operations in 1987. He also served as president and chief executive
officer from 1996 until October 1998. From October 1998 to April 2000, Mr. Tzidon served
as chairman of the board of directors and chief executive officer of BVR Systems (1998)
Ltd. Mr. Tzidon currently serves as a member of the board of directors of Coresma Ltd.
Previously he worked with Israel Aircraft Industries as an independent consultant for
three years. Mr. Tzidon has been serving as a combat pilot with the Israeli Air Force
(including reserve service) for approximately 20 years.

Orit Refaelihas
served as a member of the board of directors of B.V.R. since March 2000. Since February
2001 she has been as a product manager for Demantra Ltd. Since 1997, she served as a
project manager of a data-mining project in Bashan Systems Ltd. Ms. Refaeli was employed
as a systems analyst at Telrad Telecommunication & Electronic Industries Ltd. from
1992 to 1997. Ms. Refaeli holds M.Sc. and B.Sc. in Industrial and Management Engineering
from Ben Gurion University.

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Rimon Ben-Shaoul
has been a member of the board of directors of B.V.R. since July 2001. He has served as
president and chief executive officer of Clal Industries and Investments Ltd. since 1997.
From 1985 to 1987, Mr. Ben-Shaoul served as President and Chief Executive Officer of Clal
Insurance Company Ltd. Mr. Ben-Shaoul is a member of the board of directors of Clal
(Israel) Ltd. and various of its subsidiaries. Mr. Ben-Shaoul holds a B.A. in Economics
and a M.B.A. from Tel Aviv University.

All directors other than outside
directors hold office until their successors are elected at our next annual general
meeting of shareholders, which is expected to take place in July 2003. Please see Item 6.
Outside Directors, for information regarding the appointment of outside directors.
Officers are appointed by and serve at the will of the board of directors.

# Compensation of
Directors and Officers

The following table sets forth the
aggregate compensation paid to or accrued on behalf of all our directors and officers of
as a group, for the fiscal year ended December 31, 2002.

|                                      | Salaries, Directors' Fees
Commissions & Bonuses | Pension, Retirement and
Similar Benefits
|------------------------------------- | ----------------------------------------------- | ----------------------------------------
|All directors and officers as a group | $260,008                                        | $0                                      
|Yaron Sheinman                        | $243,000                                        | $0                                      
|Orit Raphaeli                         | $    8,504                                      | $0                                      
|Dan Avnon                             | $    8,504                                      | $0                                      

The foregoing amounts do not include
amounts expended by B.V.R. for automobiles made available to its officers, expenses,
including business travel, professional and business association dues and expenses,
reimbursed to officers, and other fringe benefits commonly reimbursed or paid by companies
in Israel.

# Compensation

The aggregate direct remuneration
paid to all persons as a group who served in the capacity of director or executive officer
during the year ended December 31, 2002 was $260,008.

In the past, we have granted each of
our directors Aviv Tzidon, Tomer Kariv, and Ran Cohen, options to purchase 20,000 shares
of the company, our director Yaron Sheinman options to purchase 850,000 shares of the
company, and each of our directors Orit Rapheli and Dan Arnon options to purchase 10,000
shares of the company. These options vest over varying periods of time. Our audit
committee, board of directors and shareholders approved these grants.

In addition to the foregoing, three
employees of the company received options in accordance with Section 102 of the Israeli
Income Tax Ordinance, which provides for certain tax benefits, and exercised

A grantee of options is responsible
for all personal tax consequences of the grant and the exercise thereof. We believe that
no tax consequences will result to us in connection with such grant or exercise.

We have maintained directors and
officers liability insurance to cover possible liability of our directors and officers in
connection with acts or omissions done in their capacity as such.

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# Board Practices

Under the Israeli Companies Law, the
chairman of the board of directors of a publicly-traded company shall not act as or be
granted authorities of the chief executive officer, unless such grant is approved by the
shareholders in a general meeting by a majority of shares voted at the meeting, including
at least two-thirds of the shares held by non-controlling shareholders voted at the
meeting. Any such approval shall be for a period of not more than three years. Our
shareholders have previously approved that Yaron Sheinman shall serve as both the chief
executive officer and the chairman of the board of directors of the company. The three
year period of such approval has ended as of March 2003. Following the appointment of a
new board of directors in the companys upcoming shareholder meeting, the new board
of directors will elect a new chairman.

Our Articles of Association provide
for a board of directors of not less than two nor more than eight members. All members of
the board of directors must be elected at an ordinary general meeting by an ordinary
resolution. Between annual meetings, the board of directors shall be empowered to appoint
or dismiss directors by a majority vote of the directors subject to rights of holders of
certain shares which are empowered to appoint directors, then all such directors shall be
appointed by written documents submitted by the shareholders empowered to appoint them.
Officers serve at the discretion of the board of directors. We no longer have observers to
our board of directors.
 None of our directors service contracts with us or with any
of our affiliates provide for benefits upon termination of employment.

# Outside Directors

The Israeli Companies Law requires
Israeli companies with shares that have been offered to the public in or outside of Israel
to appoint two outside directors.  No person may be appointed as an outside director
if the person or the persons relative, partner, employer or any entity under the
persons control, has or had, on or within the two years preceding the date of the
persons appointment to serve as outside director, any affiliation with the company
or any entity controlling, controlled by or under common control with the company. 
The term affiliation includes:

- an employment relationship;
- a business or professional relationship maintained on a regular basis;
- control; and
- service as an office holder.

No person may serve as an outside
director if the persons position or other business activities create, or may create,
a conflict of interest with the persons responsibilities as an outside director or
may otherwise interfere with the persons ability to serve as an outside
director.  If, at the time outside directors are to be appointed, all current members
of the board of directors are of the same gender, then at least one outside director must
be of the other gender.

Outside directors are to be elected
by a majority vote at a shareholders meeting, provided that either:

- the majority of shares voted at the meeting, including at least one-third of the shares
held by non-controlling shareholders voted at the meeting, vote in favor of election of
the director; or
- the total number of shares held by non-controlling shareholders voted against the election
of the director does not exceed one percent of the aggregate voting rights in the company.

The initial term of an outside
director is three years and may be extended for an additional three years.  Outside
directors may be removed only by the same percentage of shareholders as is required for
their election, or by a court, and then only if the outside directors cease to meet the
statutory qualifications for their appointment or if they violate their duty of loyalty to
the company.  Each committee of a companys board of directors must include at
least one outside director.

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An outside director is entitled to
compensation as provided in regulations adopted under the new Companies Law and is
otherwise prohibited from receiving any other compensation, directly or indirectly, in
connection with service provided as an outside director.

Currently we have only one outside
director, Orit Rafaeli, Orit Rafaeli who was elected to the board of directors as an
outside director also in March, 2000. Orit has concluded three years on the board of
directors. In our upcoming annual general meeting of shareholders, the shareholders will
appoint two new outside directors. Orit Rafaeli has agreed to be nominated for
re-election.

In addition, pursuant to the listing
requirements of the Nasdaq Small Cap Market, we are required to have at least two
independent directors on our board of directors. Our outside directors will qualify as
independent directors under the rules of the Nasdaq Small Cap Market.

# Audit Committee

The Companies Law requires public
companies to appoint an audit committee.  The responsibilities of the audit committee
include identifying irregularities in the management of the companys business and
approving related party transactions as required by law. An audit committee must
consist of at least three directors, including the outside directors of the
company. The chairman of the board of directors, any director employed by or
otherwise providing services to the company, and a controlling shareholder or any relative
of a controlling shareholder, may not be a member of the audit committee.

We are also required by the Nasdaq
Small Cap Market to establish an audit committee, at least a majority of whose members is
independent of management.  
Currently, we have no valid audit committee because of
the resignation of our outside director, Mr. Dan Avnon. We will reestablish our audit
committee following the election of the companys new board of directors (including
outside directors) in the companys upcoming annual general meeting of the
shareholders.

# Internal Auditor

Under the Companies Law, the board of
directors must appoint an internal auditor, nominated by the audit committee. The
role of the internal auditor is to examine, among other matters, whether the
companys actions comply with the law and orderly business procedure. Under the
Companies Law, the internal auditor may be an employee of the company but not an office
holder (as defined below), or an affiliate, or a relative of an office holder or
affiliate, and he may not be the companys independent accountant or its
representative. Our board of directors appointed Danny Shapira to be our internal auditor
on May 14, 2000, according to the recommendation of our audit committee.

# Employees

In May 2003 we dismissed our
remaining salaried employees. As of June 1, 2003, we had no salaried employees. Yaron
Sheinman, our chief executive officer, continues to provide us with services without a
salary. All compensation due to our employees upon severance has been paid in full. We
dismissed our employees because, as we distributed our assets to our shareholders, our
need for employees declined.

# Share Ownership

For information concerning option
grants to our directors and officers see as incorporated by reference in this item 6 above
and item 7 below.

The following table sets forth, as of
July 13, 2003, the number of Shares owned by officers, directors and senior management of
the Company:

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|Name and Address
Yaron Sheinman                              | Number of Shares
Owned | Percent of
Outstanding Shares | Number of Options
|------------------------------------------------------------ | ---------------------- | ----------------------------- | -----------------
|Yaron Sheinman
2 Azrieli Center, 45th Floor
Tel Aviv, Israel | 105,378                | 1.07%                         | 850,0001         
|Aviv Tzidon
2 Azrieli Center, 45th Floor
Tel Aviv, Israel    | 496,608                | 5.05%                         | 20,0002          
|Dan Avnon                                                    |                        |                               | 10,0003          
|Tomer Kariv                                                  |                        |                               | 15,0005          
|Orit Refaeli                                                 |                        |                               | 10,0003          
|Ran Cohen                                                    |                        |                               | 15,0004          
|Rimon Ben-Shaoul                                             |                        |                               |                  
|All directors and officers as a group                        | 601,986                | 6.12%                         | 920,000          

|(1) | Of the 850,000 options, 450,000 options are at an exercise price per share of
               $8.25 and 400,000 options are at an exercise price per share of $2.06. As these
               exercise prices exceed the market value of the shares, which is approximately
               $0.19, it is unreasonable to expect that these options will be exercised.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Of the 20,000 options, 10,000 options are at an exercise price per share of
               $8.25 and 10,000 options are at an exercise price per share of $2.06. As these
               exercise prices exceed the market value of the shares, which is approximately
               $0.19, it is unreasonable to expect that these options will be exercised.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The 5,000 options granted to Dan Avnon and Orit Rephaeli are at an exercise
               price per share of $2.06. As this exercise price exceeds the market value of the
               shares, which is approximately $0.19, it is unreasonable to expect that these
               options will be exercised.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Of the 15,000 options granted to Ran Cohen, 10,000 options are at an exercise
               price per share of $8.25 and 5,000 options are at an exercise price per share of
               $2.06. As these exercise prices exceed the market value of the shares, which is
               approximately $0.19, it is unreasonable to expect that these options will be
               exercised.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Of the 15,000 options granted to Tomer Kariv, 5,000 options are at an exercise
               price per share of $8.25 and 10,000 options are at an exercise price per share
               of $2.06. As these exercise prices exceed the market value of the shares, which
               is approximately $0.19, it is unreasonable to expect that these options will be
               exercised.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The terms of the options granted to each of the shareholders in the above table who hold more than 1% of the Company's
shares are described above.  See "Item 6.  Directors and Senior Management - Compensation."

29

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# Item 7. Major
Shareholders And Related Party Transactions

# Major Shareholders

The following table and notes set
forth information, as of July 13, 2002, concerning the beneficial ownership (as defined in
Rule 13-d under the Securities Exchange Act of 1934, as amended) of ordinary shares by any
person who is known to own at least 5% of our ordinary shares. The voting rights of our
major shareholders do not differ from the voting rights of holders of all of our ordinary
shares.

|Name and Address                                                             | Amount of
Ordinary Shares/
Options Owned(1) | Percentage of
Class(1) | Any significant
change in Past 3
Years (2)                 | Different Voting
Rights
|---------------------------------------------------------------------------- | ------------------------------------------- | ---------------------- | ---------------------------------------------------------- | -----------------------
|Clal Industries & Investments
Ltd.
2 Azrieli Center
Tel Aviv, Israel         | 1,535,870                                   | 14.4%                  | decreased hisholdings over
the last 3 yearsby 96,383shares | See above              
|Clal Industries and Technologies
(1997) Ltd.2 Azrieli CenterTel Aviv, Israel | 329,200                                     | 3.1%                   | .No                                                        | See above              

|(1) | The number of ordinary shares issued and outstanding on June 18, 2003, was
               9,837,701. Ordinary shares deemed beneficially owned (as defined in Rule 13-d
               under the Securities Exchange Act of 1934, as amended) by virtue of the right of
               any person or group to acquire such ordinary shares within 60 days are treated
               as outstanding only for the purposes of determining the percent owned by such
               person or group. To our knowledge, the persons and entities named in the table
               have sole voting and dispositive power with respect to all shares shown as
               beneficially owned by them, except as described below.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Aviv Tzidon, Yaron Sheinman, Polar Communications Ltd. and Koonras Technologies
               Ltd., who owned over 5% of our ordinary shares as disclosed in our 2001 20-F,
               have sold a substantial amount of shares such that they no longer own over 5% of
               our ordinary shares.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | The number of shares formerly held by Clal Industries and Investments Ltd. is
               now held by Clal Industries and Investments Ltd. and by Clal Industries and
               Technologies (1997) Ltd., its subsidiary, together.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Please see Item 9. Offer and
Listing Details. for the portion of each class of shares held in the United States.

# Voting and Right of
First Refusal Agreements

In February 1998, certain of our
shareholders entered into a shareholders agreement that contained certain agreements as to
voting. This agreement was to remain in effect for as long as each of Clal and Koonras
Technologies Ltd. own at least 5% of our issued capital. Due to the recent sale of shares
by Koonras Technologies, this agreement is no longer in effect.

30

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# Related Party
Transactions

# Technology Transfer and
Assignment Agreement with BVR Systems (1998) Ltd.

As of May 2003, we entered into an
agreement to sell all of our patent rights to BVR Systems, in consideration for the
payment of $12,000 plus value added tax. Please see Item 4. Information on the
Company  History and Development of the Company for more information.

# Managements
Shareholdings in and Options to Acquire Shares of Affiliates

Mr.    
          Sheinman holds 60,000 ordinary shares of Coresma, which represent 0.62% of
          Coresmas outstanding share capital. In addition Mr. Sheinman was granted
          70,000 options of Coresmaand Mr. Tzidon was granted 25,000 options of Coresma.
          Assuming that all options granted to Mr. Sheinman and Mr. Tzidon were exercised,
          such options would represent 0.7% and 0.25% of Coresmas outstanding share
          capital, respectively.

# Transactions with
Officers and Directors

Transactions with officers,
directors, key employees and affiliates are authorized in accordance with the requirements
of the Israeli Companies Law which requires that certain transactions with
officeholders (as defined in the Israeli Companies Law) and which includes
directors, officers and certain other senior employees must be approved by the board of
directors subsequent to receipt of the approval of the audit committee of the board of
directors. In certain specified circumstances, such transactions require the approval of
the shareholders at a general meeting.

On December 29, 2000, our audit
committee and board of directors resolved to grant to Aviv Tzidon, Tomer Kariv, Ran Cohen,
Orit Rephaeli and Dan Avnon options to purchase 10,000 of our ordinary shares to vest
equally on December 31, 2001 and 2002. The exercise price of the options is $2.06 per
share. The shareholders approved such grant on March 12, 2001. Further on December 29,
2000, our audit committee and board of directors resolved to grant to Yaron Sheinman
options to purchase 400,000 of our ordinary shares to vest equally on December 31, 2001,
2002 and 2003. Moreover, if a significant event such as a change of control occursthen all non-vested options granted to Yaron Sheinman shall immediately become vested
and exercisable in full and Yaron Sheinman shall be entitled to exercise each of the
options at any time; or alternatively, at the sole discretion of Yaron Sheinman, to
receive the equivalent amount of options to purchase ordinary shares of the continuing or
surviving entity (in the event of merger or consolidation), subject to the approval of
such continuing or surviving entity. The shareholders approved the grant and the terms of
acceleration on March 12, 2001.

# Management Agreements
with Affiliates

Until 2002, we provided various
corporate and other services to Coresma and BrightCom. These agreements are no longer in
effect, due to liquidity difficulties of our affiliates.

# Transactions with
Affiliates

As of January 9, 2003, our audit
committee and board approved an agreement to sell all of the securities that we hold of
Unisfair to Unisfair to BCS Growth Fund (Israel) L.P., to an affiliate of Clal Industries
and Investments Ltd., and to Yaron Sheinman. The consideration we will receive for the
sale of our Unisfair securities is $25,000. Clal Industries and Investments Ltd. And with
Yaron Sheinman are considered to be controlling shareholders of the company and interested
parties. Please see Item 4. Information on the Company  History and
Development of the Company for more information. 
In connection with the financing of
its subsidiaries and affiliates, we have engaged in various transactions with Coresma,
BrightCom and Unisfair. These financing transactions are described in our Consolidated
Financial Statements, in Note 5 thereof, which are hereby incorporated by reference.

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In addition, on November 2, 2001,
Yaron Sheinman loaned the amount of $150,000 to Coresma Ltd., in accordance with a
convertible loan agreement.

In addition to our transactions with
affiliates, our affiliates at times have entered into transactions with each other. These
transactions are described in Note 5 to our Consolidated Financial Statements, which are
hereby incorporated by reference.

# Other Related Party
Transactions

Our shareholder Clal Industries and
Investments Ltd. has agreed to provide us with office space in its Tel Aviv offices, as
well as provide us with certain secretarial services, free of charge.

We believe that the terms of our
relationships with our affiliates are generally no less favorable to us than terms which
might be available to us from unaffiliated third parties.

We believe that the terms of the
transactions in which we have engaged and are currently engaged with related parties are
generally no less favorable to us than terms which might be available to us from
unaffiliated third parties. All future related party transactions and arrangements (or
modifications of existing ones) with our affiliates, transactions in which office holders
of the Company have a personal interest, or transactions which raise issues of such office
holders fiduciary duties, may require approval by the board of directors and our
shareholders under the Companies Law. In making any such determination, the directors will
be bound by their fiduciary duties to the Company (and to any other corporation or other
person to whom they then owe a fiduciary duty).

# Item 8. Financial
Information

# Consolidated statements
and Other Financial Information

Our consolidated financial statements
and other financial information is incorporated herein by reference to pages F-1 through
F-39.

# Material Litigation

We are not involved in any litigation and we are not
aware of any future material litigation in which we might be involved

# Significant
Changes

In January 2003, we distributed approximately $1,500,000 to our shareholders
as cash dividend.

As of June 15, 2003, our affiliate BrightCom Technologies Ltd. entered
into an agreement to sell substantially all of its assets. In consideration for
BrightComs assets, the buyer will assume certain of BrightComs liabilities and
will pay BrightCom, through a combination of an initial payment of $50,000 and earn-out
payments on sales of BrightComs products over time, an amount which can be as little
as $50,000 or as much as $15,000,000. We cannot assess the amount of earn-out payments
which BrightCom will receive. The consummation of the asset sale is contingent upon a few
conditions. Once the asset sale is consummated, we will no longer operate in the field of
highly integrated silicon and software solutions for the Bluetooth appliance markets.

As of January 9, 2003, our audit
committee and board approved an agreement to sell all of the securities that we hold of
Unisfair to BCS Growth Fund (Israel) L.P., to an affiliate of Clal Industries &
Investments Ltd., and to Yaron Sheinman. The consideration we will receive for the sale of
our Unisfair securities is $25,000. The consummation of the sale is contingent upon two
conditions: the receipt of a waiver of right of first refusal from other Unisfair
shareholders and the approval of the sale by our shareholders. We intend to bring the sale
before our shareholders for approval at our upcoming shareholders meeting, which should
take place around July 2003. Shareholder approval of the sale is required as Clal
Industries and Investments Ltd. and Yaron Sheinman are considered to be controlling
shareholders of the Company and interested parties. Following such sale we will no longer
hold any securities of Unisfair, and will no longer operate in the field of technological
platforms to manage and support all aspects of online interactive events.

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# Item 9. The Offer And
Listing

# Markets and Share Price
History

The primary trading market for our
ordinary shares is the Nasdaq Small Cap Market, under the symbol BVRT. The
ordinary shares are not listed on any other stock exchange and have not been publicly
traded outside the United States. As of October 23, 1998, the price of our ordinary shares
reflects the spin-off of BVR Systems pursuant to the spin-off plan.

The table below sets forth the high
and low bid prices of the B.V.R. ordinary shares, as reported by the Nasdaq Small Cap
Market during the specified financial periods:

|Year | High   | Low  
|---- | ------ | -----
|1998 | $14.25 | $2.75
|1999 | $9.72  | $2.00
|2000 | $20.00 | $2.00
|2001 | $4.25  | $0.18
|2002 | $0.66  | $0.08

|Month          | High  | Low  
|-------------- | ----- | -----
|January 2003*  | $0.37 | $0.12
|February 2003* | $0.15 | $0.15
|March 2003*    | $0.15 | $0.10
|April 2003*    | $0.16 | $0.12
|May 2003*      | $0.25 | $0.13
|June 2003*     | 0.32  | 0.18 

|Financial Period     | High   | Low  
|-------------------- | ------ | -----
|Third quarter 2000   | $10.06 | $6.25
|Fourth quarter 2000  | $7.13  | $2.00
|First quarter 2001   | $4.24  | $1.38
|Second quarter 2001  | $2.44  | $1.38
|Third quarter 2001*  | $2.82  | $0.30
|Fourth quarter 2001* | $1.10  | $0.18
|First quarter 2002*  | $0.65  | $0.37
|Second quarter 2002* | $0.61  | $0.2 
|Third quarter 2002*  | $0.28  | $0.08
|Fourth quarter 2002* | $0.29  | $0.12
|First quarter 2003*  | $0.37  | $0.1 
|Second quarter 2003* | $0.32  | $0.12

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*  
Does not include our holdings in Nexus which we distributed pro-rata among our
shareholders in July 2001 and September 2002.

As of June 18, 2003, there were
approximately 21 record holders of ordinary shares, including approximately 7 record
holders in the United States (who held approximately 42.853% of the outstanding ordinary
shares).

# Item 10. Additional
Information

# Memorandum and Articles
of Association

In February 2000, the Companies
Ordinance (New Version)-1983 was replaced by the Companies Law. Since our Articles were
approved before the enactment of the Companies Law, they are not always consistent with
the provisions of the new law. In all instances in which the Companies Law changes or
amends provisions in the Companies Ordinance, thereby making our Articles inconsistent
with the Companies Law, the provisions of the Companies Law apply (unless specifically
stated otherwise in the Companies Law). Similarly, in all places that our Articles refer
to a Section of the Companies Ordinance that has been replaced by the Companies Law, the
Articles shall be understood to be referring to the relevant Section of the Companies Law.

Our objective, as stated in our
Articles and in our Memorandum of Association, is to engage in any lawful activity. We
have currently outstanding only one class of securities, our Ordinary Shares, having a
nominal value of NIS 0.50 per share. Holders of Ordinary Shares have one vote per share,
and are entitled to participate equally in the payment of dividends and share
distributions and, in the event of a liquidation of the Company, in the distribution of
assets after satisfaction of liabilities to creditors. No preferred shares are currently
authorized. Our Articles may be amended by a resolution carried at a General Meeting by
75% of those who voted is required. The shareholders rights may not be modified in any
other way unless otherwise expressly provided in the terms of issuance of the shares.
Our Articles require that we hold our annual general meeting of shareholders each year no
later than 15 months from the last annual meeting, at a time and place determined by the
board of directors. No business may be commenced until a quorum of two or more
shareholders unless such meeting is an extraordinary meeting then no business may be
commenced until a quorum of two or more shareholders holding at least fifty one per cent
of the voting rights are present in person or by proxy. Shareholders may vote in person or
by proxy. Resolutions regarding the following matters must be passed at a general meeting
of shareholders:

- amendments to our Articles
(other than modifications of shareholders rights as mentioned above);
- appointment
or termination of our auditors;
- appointment and dismissal of directors;
- approval of acts and transactions requiring general meeting approval under the Israeli
Companies Law;
- increase or reduction of our authorized share capital or the
rights of shareholders or a class of shareholders, as provided in Sections 286 and 287 of the Israeli
Companies Law;
- any merger as provided in section 320 of the Israeli Companies Law;
- the exercise of the board of directors powers by a general meeting, if the board of
directors is unable to exercise its powers and the exercise of any of its powers is vital
for our proper management, as provided in section 52(a) of the Israeli Companies Law.

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A special meeting of our shareholders
may be convened by the board, or by request of one or more shareholders holding at least
10% of paid up share capital. Shareholders requesting a special meeting must submit their
proposed resolution with their request. Within 21 days of receipt of the request, the
board must convene a special meeting or the requesting shareholders may convene a meeting
by themselves upon seven days notice to all shareholders.
Our shareholders amended
the Articles, in a resolution adopted on March 12, 2001, so that, although directors are
to be elected at an ordinary general meeting, between annual meetings, the board shall be
empowered to appoint or dismiss directors by a majority vote of the directors.
Notwithstanding the foregoing, however, if the holders of certain shares are empowered to
appoint directors, then all such directors shall be appointed by written documents
submitted by the shareholders empowered to appoint them, and a director so appointed may
be dismissed by the delivery of a written notice of his dismissal to the Company by the
shareholder who appointed him.

Our shareholders further amended the
Articles, in a resolution adopted on July 9, 2001, to allow the board of directors to
declare a dividend to be paid to the shareholders according to their rights and benefits
in the profits, and to further allow the board to decide the time of payment.

# The Companies Law

The Companies Law codifies the
fiduciary duties that office holders, including directors and executive
officers, owe to a company.  An office holder, as defined in the Companies Law, is a
director, general manager, chief business manager, deputy general manager, vice general
manager, executive vice president, vice president, another manger directly subordinate to
the managing director or any other person assuming the responsibilities of any of the
foregoing positions without regard to such persons title.  Each person listed
in the table in Item 6. Directors, Senior Management and Employees above is an
office holder.

An office holders fiduciary
duties consist of a duty of care and a duty of loyalty.  The duty of loyalty includes
avoiding any conflict of interest between the office holders position in the company
and his personal affairs, avoiding any competition with the company, avoiding exploiting
any business opportunity of the company in order to receive personal advantage for himself
or others, and revealing to the company any information or documents relating to the
companys affairs which the office holder has received due to his position as an
office holder.  Under the Companies Law, all arrangements as to compensation of
office holders who are not directors require approval of the board of directors. 
With the exception of compensation to outside directors in an amount specified in the
regulations discussed above, arrangements regarding the compensation of directors also
require audit committee and shareholder approval.

The Companies Law requires that an
office holder promptly disclose, no later than the first board meeting in which such
transaction is discussed, any personal interest that he or she may have and all related
material information known to him or her, in connection with any existing or proposed
transaction by the company. In addition, if the transaction is an extraordinary
transaction, as defined under Israeli law, the office holder must also disclose any
personal interest held by the office holders spouse, siblings, parents,
grandparents, descendants, spouses descendants and the spouses of any of the
foregoing, or by any corporation in which the office holder is a 5% or greater
shareholder, holder of 5% or more of the voting power, director or general manager or in
which he or she has the right to appoint at least one director or the general
manager.  An extraordinary transaction is defined as a transaction not in the
ordinary course of business, not on market terms, or that is likely to have a material
impact on the companys profitability, assets or liabilities.

In the case of a transaction that is
not an extraordinary transaction, after the office holder complies with the above
disclosure requirement, only board approval is required unless the Articles of Association
of the company provide otherwise.  The transaction must not be adverse to the
companys interest.  If the transaction is an extraordinary transaction, then,
in addition to any approval required by the Articles of Association, it also must be
approved by the audit committee and by the board of directors, and, under specified
circumstances, by a meeting of the shareholders.  An office holder who has a personal
interest in a matter that is considered at a meeting of the board of directors or the
audit committee may not be present at this meeting or vote on this matter.

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Agreements regarding directors
terms of employment require the approval of the board of directors and the audit
committee. In all matters in which a director has a personal interest, including matters
of his/her terms of employment, he/she shall not be permitted to vote on the matter or be
present in the meeting in which the matter is considered. However, should a majority of
the audit committee or of the board of directors have a personal interest in the matter
then:

|a) | all of the directors shall be permitted to vote on the matter and attend the
          meeting in which the matter is considered; and
|-- | -------------------------------------------------------------------------------------------------------------------------------------

|b) | the matter requires approval of the shareholders at a general meeting.
|-- | ----------------------------------------------------------------------

The Companies Law applies the same
disclosure requirements to a controlling shareholder of a public company. The term
controlling shareholder is defined as a shareholder who has the ability to
direct the activities of a company, other than if this power derives solely from the
shareholders position on the board of directors or any other position with the
company, and the definition for these purposes also includes shareholders that hold 25% or
more of the voting rights if no other shareholder owns more than 50% of the voting rights
in the company. In general, extraordinary transactions with a controlling shareholder or
in which a controlling shareholder has a personal interest, and agreements relating to
employment and compensation terms of a controlling shareholder, require the approval of
the audit committee, the board of directors and the shareholders of the company.  
The
shareholder approval must either include at least one-third of the shares held by
disinterested shareholders who are present, in person or by proxy, at the meeting, or,
alternatively, the total shareholdings of the disinterested shareholders who vote against
the transaction must not represent more than one percent of the voting rights in the
company.  
In addition, a private placement of securities that will increase the
relative holdings of a shareholder that holds five percent or more of the companys
outstanding share capital, assuming the exercise of all of the securities convertible into
shares held by that person, or that will cause any person to become, as a result of the
issuance, a holder of more than five percent of the companys outstanding share
capital, requires approval by the board of directors and the shareholders of the
company. The regulations to the Israeli Companies Law provide certain exceptions. Any
placement of securities that does not fit the above description may be issued at the
discretion of the board of directors.

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

- any amendment to the Articles of Association;
- an increase of the company's authorized share capital;
- a merger; or
- approval of interested party transactions that require shareholder approval.

In addition, any controlling
shareholder, any shareholder who knows that it possesses the power to determine the
outcome of a shareholder vote and any shareholder who, under a companys Articles of
Association, can appoint or prevent the appointment of an office holder, is under a duty
to act with fairness towards the company.  The Companies Law does not describe the
substance of this duty. The Israeli Companies Law requires that specified types of
transactions, actions and arrangements be approved as provided for in a companys
articles of association and in some circumstances by the audit committee, by the board of
directors and by the general meeting of the shareholders. The vote required by the audit
committee and the board of directors for approval of these matters, in each case, is a
majority of the disinterested directors participating in a duly convened meeting.

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# Anti-Takeover Provisions
under Israeli Law

The Companies Law provides that an
acquisition of shares in a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become shareholder with over 25% of the
voting rights in the company. This rule does not apply if there is already another
shareholder of the company with 25% or more of the voting rights. Similarly, the Companies
Law provides that an acquisition of shares in a public company must be made by means of a
tender offer if as a result of the acquisition the purchasers shareholdings would
entitle the purchaser to over 45% of the voting rights in the company, unless there is a
shareholder with 50% or more of the voting rights in the company. These rules do not apply
if the acquisition is made by way of a merger. Regulations promulgated under the Companies
Law provide that these tender offer requirements do not apply to companies whose shares
are listed for trading outside of Israel if, according to the law in the country in which
the shares are traded, including the rules and regulations of the stock exchange or which
the shares are traded, either:

- there is a limitation on acquisition of any level of control of the company; or
- the acquisition of any level of control requires the purchaser to do so by means of a
tender offer to the public.

Finally, in general, Israeli tax law
treats specified acquisitions less favorably than does U.S. tax law. However, Israeli tax
law has recently been amended to provide for tax deferral in specified acquisitions,
including transactions where the consideration for the sale of shares is the receipt of
shares of the acquiring company, making Israeli tax consequences more favorable than they
had been in the past for shareholders who exchange their ordinary shares for shares in a
foreign corporation under certain circumstances.

# Material Contracts

As of January 9, 2003, our audit
committee and board approved an agreement to sell all of the securities that we hold of
Unisfair to Unisfair to BCS Growth Fund (Israel) L.P., to an affiliate of Clal Industries
and Investments Ltd. and to Yaron Sheinman. The consideration we will receive for the sale
of our Unisfair securities is $25,000. Clal Industries and Investments Ltd. And Yaron
Sheinman are considered to be controlling shareholders of the company and interested
parties. Please see Item 4. Information on the Company  History and
Development of the Company for more information.

As of May 2003, we entered into an
agreement to sell all of our patent rights to BVR Systems, in consideration for the
payment of $12,000 plus value added tax. Please see Item 4. Information on the
Company  History and Development of the Company for more information.

Beginning August 29, 1999, we leased
2,280 square meters from Electra Real Estate Ltd., for a period of 10 years. Since then,
we have sublet such premises at a monthly rent which was equal to the rent which we paid
under the master lease with Electra. The master lease and subleases were terminated in
October 2002, and we paid Electra a fine in the amount of $250,000 in return for
Electras agreement to terminate the lease.

Our affiliate BrightCom has entered
into an agreement for the sale of all of its assets. See Item 4. History and
Development of the Company for more information.
In April 30, 2001, and in July 1,
2001, Unisfair issued us convertible promissory notes each in the aggregate amount of
$250,000, pursuant to a Loan Agreement dated April 30, 2001. The loan is payable on April
30, 2003, and bears interest at LIBOR (as quoted by Bank Hapoalim Israel Ltd.) plus 2% per
annum. Under the provisions of the promissory note, the note is subject to automatic
conversion in certain circumstances; however, if the loan has not been repaid and the note
has not been automatically converted by April 30, 2003, we have the option to convert it
to Series A Preferred Shares of Unisfair at the price of $2.50 per share. The parties have
agreed on an extension of the last repayment date of this loan. Substantially identical
promissory notes were issued to each of B.C.S. Growth Fund (Israel) L.P. and Benny Bergman
in the aggregate amount of $400,000.

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In August 29, 2001 Unisfair issued to
each of B.C.S, Bergman and us, additional convertible promissory notes pursuant to a loan
agreement, dated the same date, each in the amount of $225,000, $25,000 and $250,000,
respectively. The repayment date of the convertible promissory notes is August 28, 2003.
These notes are subject to substantially identical terms as described above, except for
certain of the terms of the automatic conversion. If the loan has not been repaid by the
repayment date we have the option to convert it to Series C Preferred Shares of Unisfair
which shall have the same rights as Unisfarirs Series A Preferred Shares, except for
the liquidation preference.
In December, 2001 Unisfair issued to each of B.C.S, Bergman
and us, convertible promissory notes, each in the amount of $91,000, $9,000 and $100,000,
respectively. The repayment date of the convertible promissory notes is August, 2003.
These notes are subject to substantially identical terms as described immediately above.

Pursuant to a Loan Agreement dated March 2002, Unisfair issued to each of B.C.S, Bergman,
David Piekraz (Piekraz) and us, convertible promissory notes, in the amount of
$13,500, $1,500, $50,000 and $15,000, respectively. These amounts are payable on August
23, 2003. The notes are subject to automatic conversion in certain circumstances. If the
loan has not been repaid or automatically converted by August 23, 2003, we (and the other
lenders) have the option to convert it to Series C Preferred Shares of Unisfair at the
price of $2.5 per share. However, the rights attached to the Series C Preferred Shares
shall be the same as the rights attached to the Series A Preferred Shares, except for the
liquidation preference.

We now intend to sell all notes
issued to us by Unisfair, in accordance with the agreement we have entered into with BCS
Growth Fund (Israel) L.P., to an affiliate of Clal Industries and Investments Ltd and Yaron Sheinman. See
Item 4. History and Development of the Company for more information.

In November 1, 2001, EVR, our
wholly-owned subsidiary, together with other lenders extended a bridge loan to Coresma in
the aggregate amount of $3,000,000. EVR loaned $1,700,000. The Loan is payable on December
31, 2003 and bears interest at the rate of 12-month LIBOR (as quoted by Bank Hapoalim)
plus 2% per annum. The Loan is subject to automatic conversion in certain circumstances.
Under the provisions of the Agreement, EVR (and the other lenders, one of whom was Yaron
Sheinman) will also receive warrants to purchase shares of Coresma of the class and at the
price per share determined in the Agreement, in the aggregate price of 25% of the loan
amount provided by each lender. The warrant is exercisable upon the earlier of certain
conversion events or 3 years following its issuance. As a condition to closing, all
previous shareholder loans that were granted to Coresma in 1998 became convertible to
ordinary shares, at a price per share of 1.72. As a result, EVR received a total of
913,125 ordinary shares.

See Note 4 of the Appendix to our
Consolidated Financial Statements, attached as Item 17.

# Exchange Controls

The Israeli Currency Control Law, 1978
imposes certain limitations concerning foreign currency transactions and transactions
between Israeli and non-Israeli residents, which limitations may be regulated or waived by
the Controller of Foreign Exchange at the Bank of Israel, through general and
special permits. In May 1998, a new general permit was issued
pursuant to which substantially all transactions in foreign currency are permitted. Any
dividends or other distributions paid in respect of ordinary shares and any amounts
payable upon the dissolution, liquidation or winding up of our affairs, as well as the
proceeds of any sale in Israel of the our securities to an Israeli resident, are freely
repatriable into non-Israeli currencies at the rate of exchange prevailing at the time of
conversion, provided that Israeli income tax has been paid on (or withheld from) such
payments. Because exchange rates between the NIS and the United States dollar fluctuate
continuously, United States shareholders will be subject to any such currency fluctuation
during the period from when such dividend is declared through the date payment is made in
United States dollars.

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The ownership or voting of ordinary
shares by non-residents of Israel, except with respect to citizens of countries that are
in a state of war with Israel, are not restricted in any way by our Memorandum or Articles
of Association nor by Israeli law.

# Taxation

The following is a summary of some of
the current tax law applicable to companies in Israel, with special reference to its
effect on our affiliates and us.  The following also contains a discussion of
specified Israeli tax consequences to our shareholders and government programs benefiting
us and some of our affiliates.  To the extent that the discussion is based on tax
legislation that has not been subject to judicial or administrative interpretation, there
can be no assurance that the views expressed in the discussion will be accepted by the tax
authorities in question. 
This discussion is not intended, and should not be construed, as
legal or professional tax advice and is not exhaustive of all possible tax considerations.

# General Corporate Tax
Structure

Israeli companies are generally
subject to company tax at the rate of 36% of taxable income. However, the effective tax
rate payable by a company which derives income from an approved enterprise (as further
discussed below) may be considerably less.

# Israeli Government
Research and Development Grants

Certain of our affiliates have  participated  in programs  offered by the Office of the Chief Scientist
of Israel ("OCS")
that support research and development
activities.

Under the terms of these grants, a
royalty of 3% to 5% of the net sales of products developed from a project funded by the
OCS must be paid, beginning with the commencement of sales of products developed with
grant funds and ending when 100% of the dollar value of the grant is repaid (100% plus
LIBOR interest for grants received from January 1, 1999 and afterwards). The terms of
Israeli government participation also require that the manufacture of products developed
with government grants be performed in Israel, unless a special approval has been granted
by the OCS. This approval, if granted, is generally subject to an increase in the total
amount to be repaid to the OCS to between 120% and 300% of the amount granted, depending
on the extent of the manufacturing to be conducted outside of Israel. A recent amendment
to applicable law has provided that the restriction on manufacturing outside of Israel
shall not apply to the extent that plans to so manufacture were disclosed when applying
for funding. Separate Israeli government consent is required to transfer to third parties
technologies developed through projects in which the government participates. Transfer to
non-Israeli third parties is prohibited. A recent amendment to applicable law has stressed
that it is not just transfer of know-how that is prohibited, but also transfer of any
rights in such know-how. These restrictions do not apply to exports from Israel of
products developed with these technologies

# Law for the Encouragement of Capital
Investments, 1959

From time to time, certain of our affiliates have been granted
Approved Enterprise status under the Law for the Encouragement of Capital
Investments, 1959, as amended.
The Law for Encouragement of Capital Investments provides
that a capital investment in eligible facilities may, upon application to the Investment
Center of the Ministry of Industry and Trade of the State of Israel (known as the
Investment Center), be designated as an Approved Enterprise. Each certificate
of approval for an Approved Enterprise relates to a specific investment program delineated
both by its financial scope, including its capital sources, and by its physical
characteristics, e.g., the equipment to be purchased and utilized pursuant to the program.
The tax benefits derived from any such certificate of approval relate only to taxable
income attributable to the specific Approved Enterprise.

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Taxable income of a company derived
from an Approved Enterprise is subject to Company Tax at the rate of up to 25% (rather
than 36% as stated above) for the Benefit Period, a period of seven years
commencing with the year in which the approved enterprise first generated taxable income.
In any event, the Benefit Period is limited to 12 years from commencement of production or
14 years from the date of approval, whichever is earlier. Under certain circumstances (as
further detailed below), the Benefit Period may be extended to a maximum of ten years from
its commencement. In the event that a company is operating under more than one approval or
that its capital investments are only partly approved (a Mixed Enterprise),
its effective Company Tax rate is the result of a weighted combination of the various
applicable rates.

A company owning an Approved
Enterprise may elect to forego certain Government grants that may be extended to Approved
Enterprises in return for an alternative package of tax benefits (the
Alternative Package). Under the Alternative Package, a companys
undistributed income derived from an approved enterprise will be exempt from Company Tax
for a period of between two and ten years, depending on the geographic location of the
Approved Enterprise within Israel, and such company will be eligible for the tax benefits
under the Law for Encouragement of Capital Investments for the remainder of the Benefits
Period.

A company which qualifies as a
Foreign Investors Company is entitled to further reductions in the tax
rate normally applicable to Approved Enterprises. Subject to certain conditions, a
Foreign Investors Company is a company which has more than 25% of its
combined shareholders investment in share capital (in terms of rights to profits,
voting and the appointment of directors) and in long term shareholders loans made by
persons who are not residents of Israel. The percentage owned by nonresidents of Israel
for any tax year will be determined by the lowest percentage of any of the above rights
held by nonresidents during that year. Such a company will pay Company Tax at reduced
rates for an extended ten-year (rather than the otherwise applicable seven-year) period
and is exempt from any other tax on the income from its Approved Enterprise:

|Extent of Foreign Investment  | Tax Rate
|----------------------------- | --------
|Over 25% but less than 49%    | 25%     
|49% or more but less than 74% | 20%     
|74% or more but less than 90% | 15%     
|90% or more                   | 10%     

Entitlement to these benefits is
subject to the final ratification of the Investment Center, and is conditioned upon
fulfillment of the conditions stipulated by the law, regulations published thereunder and
the instruments of approval for the specific investments in the Approved Enterprise.

Certain of our affiliates enjoy
Approved Enterprise benefits. In the event of failure to comply with the above conditions,
the benefits may be canceled and our affiliates may be required to refund the amount of
the benefits, in whole or in part, with the addition of linkage differences and interest.
In addition, our affiliates which enjoy Approved Enterprise benefits may not be able to
obtain future approval for additional approved enterprises, the provisions of the Law for
Encouragement of Capital Investments may change with respect to future approvals, and the
above-mentioned shareholding portion may not be reached for each subsequent year.

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A company that has elected the
Alternative Package and that subsequently pays a dividend out of income derived from the
Approved Enterprise(s) during the tax exemption period will be subject to deferred Company
Tax in the year the dividend is distributed in respect of the amount distributed
(including the Company Tax thereon) at the rate which would have been applicable had such
company not elected the Alternative Package (generally 10% to 25%, depending on the extent
to which non-Israeli shareholders hold such companys shares). The dividend recipient
is taxed at the reduced rate applicable to dividends from Approved Enterprises (generally,
15% as compared to 25%), if the dividend is distributed during the tax exemption period or
within a specified period thereafter. (In the event, however, that the company qualifies
as a Foreign Investors Company, there is no such time limitation). This tax must be
withheld by such company at source, regardless of whether the dividend is converted into
foreign currency.

Subject to certain provisions
concerning income subject to the Alternative Package, all dividends are considered to be
attributable to the entire enterprise and the effective tax rate is the result of a
weighted combination of the various applicable tax rates. However, such company is not
obliged to distribute exempt retained profits under the Alternative Package, and such
company may generally decide from which years profits to declare dividends. 
Each application to the Investment Center is reviewed separately, and a decision as to whether
or not to approve such application is based, among other things, on the then prevailing
criteria set forth in the Law for Encouragement of Capital Investments, on the specific
objectives of the applicant company set forth in such application and on certain financial
criteria of the applicant company. Accordingly, any application may be rejected.

# Taxation under Inflationary Conditions

The Income Tax Law (Inflationary
Adjustments), 1985 (the Inflationary Adjustments Law) is intended to
neutralize the erosion of capital investments in business and to prevent tax benefits
resulting from deduction of inflationary expenses. This law applies a supplementary set of
inflationary adjustments to the normal taxable profits computed under regular historical
cost principles. We are taxed under this law.

Under the Inflationary Adjustments
Law, results for tax purposes are measured in real terms, in accordance with the changes
in the consumer price index. In addition, subject to certain limitations, depreciation of
fixed assets and losses carried forward are adjusted for inflation on the basis of changes
in the consumer price index. 
The salient features of the Inflationary Adjustments Law can
be described generally as follows:

(a)     A special tax adjustment for the preservation of
equity whereby certain corporate assets are classified broadly into Fixed (inflation
resistant) Assets and Non-Fixed (non-inflation resistant) Assets. Where a
corporations equity, as defined in such law, exceeds the depreciated cost of Fixed
Assets, a tax deduction which takes into account the effect of the annual inflationary
change on such excess is allowed (up to a ceiling of 70% of taxable income in any single
tax year, with the unused portion permitted to be carried forward on a linked basis). If
the depreciated cost of Fixed Assets exceeds a corporations equity, then such excess
multiplied by the annual inflation rate is added to taxable income.

(b)    
          Subject to certain limitations, depreciation deductions on fixed assets and
          losses carried forward are adjusted for inflation based on the increase in the
          Israeli Consumer Price Index; and

(c)    Gains from the sale of certain traded
          securities are fully taxable notwithstanding the exemptions or reduced tax rates
          which might otherwise apply to those securities.

However, dealers in securities are
subject to the regular tax rules applicable to business income in Israel.

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# Law for the
Encouragement of Industry (Taxes), 1969

Certain of our affiliates qualify as
industrial companies within the definition of the Law for the Encouragement of
Industry (Taxes), 1969 (the Industry Encouragement Law). According to the
Industry Encouragement Law, an industrial company is a company resident in Israel, at
least 90% of the income of which in any tax year (exclusive of income from defense loans,
capital gains, interest and dividends) is derived from an industrial enterprise owned by
it. An industrial enterprise is defined as an enterprise whose principal activity in a
given tax year is industrial production activity.

The following preferred corporate tax
benefits are available to industrial companies: deduction of purchases of know-how and
patents over an eight-year period for tax purposes; deduction of expenses incurred in
connection with a public issuance of certain securities over a three-year period; an
election under certain conditions to file a consolidated tax return with additional
related Israeli industrial companies, and with its parent company that is defined as an
industrial holding company; and accelerated depreciation rates on equipment and buildings.
Eligibility for the benefits under the Industry Encouragement Law is not subject to
receipt of prior approval from any governmental authority. No assurance can be given that
our affiliates will continue to qualify as industrial companies, that we will qualify as
an industrial holding company, or that the benefits described above will be available in
the future.

# Capital Gains Tax

Israeli law imposes a capital gains
tax on the sale of capital assets. The law distinguishes between the real gain and the
inflationary surplus. The real gain is the excess of the total capital gain over the
Inflationary Surplus, computed on the basis of the increase of the consumer price index
between the date of purchase and date of sale. The inflationary surplus accumulated until
December 31, 1993 is taxed at a rate of 10% for residents of Israel (reduced to no tax for
non-residents if calculated according to the exchange rate of the foreign currency
lawfully invested in shares of an Israeli resident company, instead of the consumer price
index). Inflationary surplus accumulated from and after December 31, 1993 is exempt from
any capital gains tax.

Until January 1, 2003, gains from the
sale of our ordinary shares were exempt from Israeli capital gains tax so long as we were
considered an industrial company or industrial holding company as defined in the Income
Tax Order (Exemption from Tax on Capital Gains on the Sale of Shares), 1981. An industrial
holding company is a company at least 80% of the assets of which, except for funds
received in an offering outside Israel during the previous 12 month period, are invested
in the share capital of, or in loans of three years or more, to industrial companies.
Gains from the sale of our ordinary shares accrued from January 1, 2003, are subject to
15% capital gains tax. Nonresidents are exempt from this tax so long as the shares are not
held in connection to a permanent establishment maintained by a nonresident in Israel.
Dealers in securities in Israel and companies taxed under the Inflationary Adjustment Law
are taxed at regular tax rates applicable to business income.

# Tax Ruling

As described above, in July 2001 we
began a process of distributing certain of our assets to our shareholders. As we intend to
accomplish this distribution by either the in-kind transfer of securities of
publicly-traded companies pro rata among our shareholders, or by the sale of securities or
assets of privately-held companies and the resulting distribution of cash to our
shareholders, we requested a tax ruling from the Israeli Income Tax Authority which would
permit us to make such distributions under a special arrangement for us and for our
shareholders. We reached an arrangement with the Israeli Income Tax Authority, which was
approved by our shareholders on April 2, 2002. 
The Tax Ruling grants a special concession
to us, allowing us to set off losses from the distribution of securities of
publicly-traded companies against capital gains from the sale of securities in
privately-held companies. We will be liable for Israeli corporate taxes at the regular
rate of 36% on our net income. The provisions of this special concession are contingent on
three conditions: (a) our completion of the liquidation of our assets within two years of
the date of the distribution of our shares in Nexus, which occurred in July, 2001, or a
later date, pursuant to the approval of the Israel Tax Authority, (b) our receipt of net
income of at least $5.5 million from the distribution of our assets, and (c) our payment
of a minimum of $2 million in Israeli taxes regarding the distribution of our assets.

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Pursuant to the Tax Ruling, each of
our shareholders will be viewed by the tax authorities as disposing of their shares in
consideration for the value of assets distributed to them by us, whether in the form of a
distribution of securities or a cash distribution on the sale of assets. This deemed
disposition is a potential taxable event in Israel. The Ruling provides that the
consideration received by each shareholder will be deemed to include such
shareholders pro rata share of the tax paid by us at the corporate level, and the
shareholder will then receive a credit for that pro rata share of corporate tax on any tax
it is liable to pay. The Israel Tax Authority is entitled to determine a higher value for
the consideration received by each shareholder for its shares, if it is believed that the
distribution was not done at fair market value.

Shareholders will be liable for
capital gains tax on the deemed disposition of our shares depending on the personal facts
and circumstances of each. Tax liability is calculated based on the deemed consideration
received from us, minus the total amount that the shareholder paid for his shares. As
noted above, each shareholder receives a tax credit for its pro rata share of the tax we
paid at the corporate level. The Tax Ruling provides that we will withhold taxes at a rate
of 5% of each distribution for the public shareholders. At the time of our distribution of
the ordinary shares of Nexus Telocation Systems Ltd. pro-rata among the shareholders in
July 2001, we treated the distribution as a dividend-in-kind, and withheld 25% of the
Nexus distribution in anticipation of a withholding tax obligation at that rate. Pursuant
to the approval and finalization of the Tax Ruling, we have paid as of September 2002 5%
of the amount we distributed in satisfaction of our withholding tax obligations and
transferred the remainder to persons from whom we deducted the 25% at the time of the
Nexus distribution.

A shareholder who asserts that all or
a portion of the taxes withheld by us should be refunded, can approach the tax authority
for a refund on an individual basis.
Under the Tax Ruling, interested party shareholders
will not be exempt from Israeli tax on any gains received from the eventual sale of the
securities such shareholders receive as a distribution from us. Yaron Sheinman and Aviv
Tzidon, who are our founders and also directors, will calculate their taxes differently,
as there is a component based on the share price of shares they owned prior to the
spin-off of B.V.R. Systems (1998) Ltd. in 1998. Under certain circumstances, the founders
may not be liable for any Israeli capital gains tax.

# United States-Israel Tax
Treaty

The Convention Between the Government
of the United States of America and the Government of Israel with Respect to Taxes on
Income (referred to as the United States-Israel Tax Treaty), exempts any person who
qualifies as a resident of the United States within the meaning of the United
States-Israel Tax Treaty and who is entitled to claim the benefits afforded to such
resident by the United States-Israel Tax Treaty (called a Treaty United States Resident)
from Israeli capital gains tax on the sale, exchange or disposition of ordinary shares
unless (a) such Treaty United States Resident is an individual and was present in Israel
for more than 183 days during the relevant taxable year or (b) such Treaty United States
Resident holds, directly or indirectly, shares representing 10% or more of the voting
power of a company during any part of the 12-month period preceding such sale, exchange or
disposition. A sale, exchange or disposition of shares by a Treaty United States Resident
who is an individual and was present in Israel for more than 183 days during the relevant
taxable year or who holds, directly or indirectly, shares representing 10% or more of the
voting power of a company at any time during such preceding 12-month period would be
subject to such Israeli tax, to the extent applicable; however, under the United
States-Israel Tax Treaty, such Treaty United States Resident would be permitted to claim a
credit for such taxes against the United States income tax imposed with respect to such
sale, exchange or disposition, subject to the limitations in United States laws applicable
to foreign tax credits.

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Taxation of Non-Residents

Non-residents of Israel are
subject to income tax on income accrued or derived from sources in Israel or received in
Israel. Such sources of income include passive income such as dividends, royalties and
interest, as well as non-passive income from services rendered in Israel. On distributions
of dividends other than bonus shares (stock dividends), income tax at the rate of 25% is
withheld at a source, unless a different rate is provided in a treaty between Israel and
the shareholders country of residence. For example, 12.5% if the non-resident is a
company which holds 10% of our voting power pursuant to the United States-Israel Tax
Treaty. Under the United States-Israel Tax Treaty, the maximum tax on dividends paid to a
holder of ordinary shares who is a resident of the United States will be 25%. However,
under the Law for Encouragement of Capital Investments, dividends generated by an approved
enterprise are taxed at the rate of 15%.

For information with respect to the
applicability of Israeli capital gains taxes on the sale of ordinary shares by United
States residents, see Capital Gains Tax.

Passive Foreign Investment Company Status under U.S. Federal Income Tax Law

For U.S. federal income tax purposes, we may
be classified as a passive foreign investment company (PFIC) for any taxable year in which
either (i) 75% or more of our gross income (including the pro rata gross income of any
company (U.S. or foreign) in which we are considered to own 25% or more of the ordinary
shares by value) for the taxable year is passive income, or (ii) at least 50% of the
average value of all of our gross assets (including the pro rata fair market value of the
assets of any company in which we are considered to own 25% or more of the ordinary shares
by value) during the taxable year, calculated quarterly by value, produce, or are held for
the production of, passive income.

Due to the impracticability of
obtaining certain necessary information, we are unable to determine whether we are, have
been, or will be in the future, a PFIC. Therefore, shareholders will not be able to rely
on us to determine our PFIC status. If we were classified as a PFIC for U.S. federal
income tax purposes, highly complex rules would apply to our U.S. shareholders.
Accordingly, U.S. shareholders are urged to consult their tax advisors regarding the
application of such rules.

If we were deemed to be a PFIC for
any taxable year during which a U.S. shareholder failed to make either a qualified
electing fund election (a QEF election) or a mark-to-market election (as described below),
then:

- gains recognized by the U.S. shareholder upon the disposition of, as well as
distributions exceeding a certain threshold
amount on, our shares would be taxable as ordinary income;
- the U.S.  shareholder  would be required to allocate such dividend income and/or  disposition  gain ratably over
such shareholder's entire holding period for our shares;
- the amount allocated to each year other than (i) the year of the dividend payment or
disposition and (ii) any year prior to our becoming a PFIC, would be subject to tax at the
highest individual or corporate marginal rate, as applicable, in effect for that year, and
an interest charge would be imposed with respect to the resulting tax liability; and
- any U.S. shareholder who acquired our shares upon the death of a U.S. shareholder would
not receive a step-up of the income tax basis to fair market value for such shares.
Instead, such U.S. shareholder beneficiary would have a tax basis equal to the
decedents basis, if lower than fair market value.

Therefore, if we were deemed to be a
PFIC for any taxable year during which a U.S. shareholder held our shares, the receipt by
these U.S. shareholders of other shares could generate ordinary income taxable, in part,
at the highest individual or corporate marginal tax rate (as applicable), and possibly an
interest charge as discussed above.
 Although a determination as to a corporations
PFIC status is made annually, an initial determination that a corporation is a PFIC for
any taxable year generally will cause the above- described consequences to apply for all
future years as to U.S. shareholders who held shares in the corporation at any time during
the PFIC taxable year and who made neither a valid QEF election with respect to such
shares nor a valid election to mark such shares to market (as discussed below). This will
be true even if the corporation loses its PFIC status in later years. However, with
respect to a PFIC that does not make any distributions or deemed distributions, the above
tax treatment would apply only to gains realized on the disposition of such shares by a
U.S. shareholder.

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The tax treatment discussed above may
be avoided by a shareholder making either a valid QEF election or a valid mark-to-market
election in respect of its stock in a PFIC. In general, if a shareholder makes a valid QEF
election with respect to its PFIC stock, such shareholder would be required for each
taxable year to include in income such holders pro rata share of the PFICs (i)
ordinary earnings as ordinary income, and (ii) net capital gain as long-term capital gain,
in each case computed under U.S. federal income tax principles, even if such earnings of
gains have not been distributed. The QEF election will be effective only if the PFIC
provides the shareholder with certain information regarding its earnings in each year that
it is a PFIC and agrees to permit such shareholder to verify the accuracy of this
information.

Since we are unable to provide the
requisite information to our U.S. shareholders in order for them to make a valid QEF
election with respect to their B.V.R. shares, no such election will be available.
Alternatively, subject to certain limitations, a U.S. shareholder of shares in a PFIC may
avoid the foregoing tax treatment by electing to mark annually the shares to market. Under
such election the U.S. shareholder will include in income each year the excess of the fair
market value of the PFIC stock at the close of each taxable year over the U.S.
shareholders adjusted basis in such stock. The U.S. shareholder generally will be
allowed an ordinary deduction for the excess, if any, of the adjusted basis of the PFIC
stock over its fair market value at the close of the taxable year, or the amount of any
net marketto-market gains recognized for prior taxable years, whichever is less.
Additionally, any amounts included in income pursuant to a mark-to-market election, as
well as gain on the actual sale or other disposition of the PFIC stock, are treated as
ordinary income. Ordinary loss treatment also applies to any loss recognized on the actual
sale or disposition of PFIC stock to the extent that the amount of such loss does not
exceed the net mark-to-market gains previously included with respect to such stock. In
certain circumstances, making a mark-to-market election may give rise to an additional tax
liability in the taxable year in which such election is made. A U.S. shareholder makes a
valid mark-to-market election by attaching a completed IRS Form 8621 to a timely filed
U.S. federal income tax return for the first taxable year during which such holder owned
stock in a corporation and such corporation was classified as a PFIC. Subject to the
shares in the PFIC ever ceasing to be marketable, a mark-to-market election is irrevocable
without obtaining the consent of the IRS and would continue to apply even in years in
which the corporation is no longer a PFIC.

For purposes of the discussion of the
U.S. federal income tax treatment of our shares, U.S. shareholders refer to any of the
following that hold our shares as a capital asset within the meaning of Section 1221 of
the U.S. Internal Revenue Code (i.e., generally for investment):

- any beneficial owner of stock who is a citizen or resident of the United States for United
States federal income tax purposes;
- a corporation, or other entity treated as a corporation under United States federal income
tax law, created or organized under the laws of the United States or of any state or the
District of Columbia;
- an estate the income of which
is subject to United States federal income taxation regardless of its source;
- a
trust if its administration is subject to the primary supervision of a United States court
and having one or more
United States persons with the authority to control all of such trusts substantial
decisions; and
- a trust if the trust was in existence and qualified as a United
States person, within the meaning of the U.S. Internal Revenue Code, on August 20, 1996 under the law as then in effect and elected to continue
to be so treated.

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This discussion does not address all
aspects of U.S. federal income taxation that may be relevant to a U.S. shareholder in
light of his or her particular circumstances or to a U.S. shareholder subject to special
treatment under U.S. federal income tax law. U.S. shareholders are urged to consult their
tax advisors about the PFIC rules, including the advisability, procedure and timing of
making a mark-to-market election, in connection with their holding of our shares,
including warrants or rights to acquire our shares.

# Documents on Display

We are required to file reports and
other information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 and the regulations thereunder applicable to foreign private issuers.
Reports and other information filed by us with the Securities and Exchange Commission may
be inspected and copied at the Securities and Exchange Commissions public reference
facilities described below. Although as a foreign private issuer we are not required to
file periodic information as frequently or as promptly as United States companies, we
generally do publicly announce our quarterly and year-end results promptly and file
periodic information with the Securities and Exchange Commission under cover of Form 6-K.
As a foreign private issuer, we are also exempt from the rules under the Exchange Act
prescribing the furnishing and content of proxy statements and our officers, directors and
principal shareholders are exempt from the reporting and other provisions in Section 16 of
the Exchange Act.

You may review a copy of our filings
with the Securities and Exchange Commission, including any exhibits and schedules, at the
Securities and Exchange Commissions public reference facilities in Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You may also obtain
copies of such materials from the Public Reference Section of the Securities and Exchange
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. You may call the Securities and Exchange Commission at 1-800-SEC-0330
for further information on the public reference rooms. As a foreign private issuer we have
not been required to file through the Securities and Exchange Commissions EDGAR
system until this Annual Report on Form 20-F, and our periodic filings until now are
therefore not available on the Securities and Exchange Commissions Web site. You may
read and copy any reports, statements or other information that we file with the
Securities and Exchange Commission at the Securities and Exchange Commission facilities
listed above. These Securities and Exchange Commission filings are also available to the
public from commercial document retrieval services.

Any statement in this annual report
about any of our contracts or other documents is not necessarily complete. If the contract
or document is filed as an exhibit to the registration statement, the contract or document
is deemed to modify the description contained in this annual report. We urge you to review
the exhibits themselves for a complete description of the contract or document.

# Item 11. Quantitative
And Qualitative Disclosures About Market Risk

# General

The currency of our primary economic
environment is United States dollars. However, we have balances and activities in NIS. We
are exposed to market risks arising from changes in currency exchange rates. We are also
exposed to equity-price and interest rate risks.

# Interest Rate Risks

Our exposure to market rate risks,
resulting from changes in interest rates, relates primarily to our financial assets
including short-term deposits which are denominated in United States dollars, with a
floating-rate interest. Our market risk is the potential loss arising from adverse changes
in interest rates on the United States dollar deposits and loan and from adverse changes
in interest rates. Our deposits in United States dollars bears a floatinginterest
based on LIBOR.

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Market risk is estimated as the
potential decrease in pretax earnings resulting from a hypothetical 10% decrease in
interest rates on our financial assets. Even if such an increase occurred, the decrease in
interest rate earnings based on the average outstanding financial assets during the year
ended December 31, 2002, will not be material to our operating results.

# Item 12. Description Of
Securities Other Than Equity Securities

Not applicable.

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# PART II.

# Item 13. Defaults,
Dividend Arrearages And Delinquencies

Our  affiliate  Coresma Ltd. is in default  relating to its  indebtedness  towards  numerous  suppliers,  in an aggregate
amount of approximately $1,000,000.  The default is failure to timely pay such debt.

Item 14.
Material Modifications To The Rights Of Security Holders And Use Of Proceeds

Not applicable.

# Item 15.

The company has established and maintains
disclosure controls and procedures that are designed to ensure that material information
relating to the company required to be disclosed in the reports that it files or submits
under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported
within the time periods specified in the Securities and Exchange Commissions rules
and forms, and that such information is accumulated and communicated to the companys
management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate to allow timely decisions regarding required disclosure.

Within the 90 days prior to the
filing date of this annual report, the company carried out an evaluation, under the
supervision and with the participation of management, including the Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the design and operation of
disclosure controls and procedures. Based on that evaluation of these disclosure controls
and procedures, the Chief Executive Officer and Chief Financial Officer concluded that the
companys disclosure controls and procedures were effective as of the date of such
evaluation. 
The Chief Executive Officer and Chief Financial Officer have also concluded
that there were no significant changes in the Companys internal controls or in other
factors that could significantly affect the internal controls subsequent to the date that
the company completed its evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.

# Item 16. [Reserved]

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# PART III

# Item 17. Financial
Statements

# Item 18. Not applicable

# Item 19. Exhibits

1.1      Memorandum of Association filed by
us as an Exhibit to our Registration Statement on Form F-1, registration number 33-40330,
and incorporated herein by reference.

1.2
     
Articles of Association filed by us as an Exhibit to our to our annual report on Form 20-F
for the fiscal year ended December 31, 2000, as filed with the Securities and Exchange
Commission on June 30, 2001, and incorporated herein by reference.

1.3      Report of Amendment to Articles
of Association, dated March 12, 2001, as filed with the Israeli Registrar of Companies,
and English summary thereof, filed by us as an Exhibit to our annual report on Form 20-F
for the fiscal year ended December 31, 2001, as filed with the Securities and Exchange
Commission on June 28, 2002.

1.4      Report of Amendment to Articles of Association, dated
July 9, 2001, as filed with the Israeli Registrar of Companies and English summary
thereof, filed by us as an Exhibit to our annual report on Form 20-F for the fiscal year
ended December 31, 2001, as filed with the Securities and Exchange Commission on June 28,
2002.

3.1     Form of shareholders voting agreement entered into in February 1998 among Clal
Industries and Technologies (1997) Ltd., Investment Company of Bank Polar Communications
Ltd., Yaron Sheinman and Aviv Tzidon, filed by us as an Exhibit to our annual report on
Form 20-F for the fiscal year ended December 31, 2000, as filed with the Securities and
Exchange Commission on June 30, 2001.

4.1      Convertible Loan Agreement
between EVR, our wholly-owned subsidiary, and Coresma, dated November 1, 2001, for $1.7
million, which is also the Agreement pursuant to which Yaron Sheinman loaned Coresma the
sum of $150,000, filed by us as an Exhibit to our annual report on Form 20-F for the
fiscal year ended December 31, 2001, as filed with the Securities and Exchange Commission
on June 28, 2002.

4.2      Convertible Loan Agreement with
Unisfair, dated April 30, 2001, in the amount of $500,000, a Promissory Note, dated April
2001 in the amount of $250,000, executed in connection therewith. An additional Promissory
Note subject to the same terms and conditions in the amount of $250,000 was executed July
1, 2001, filed by us as an Exhibit to our annual report on Form 20-F for the fiscal year
ended December 31, 2001, as filed with the Securities and Exchange Commission on June 28,
2002.

4.3      Loan Agreement with Unisfair,
dated August 29, 2001, in the amount of $250,000, together with Promissory Note executed
in connection therewith, and Amendment to Promissory Note, dated December, 2001, filed by
us as an Exhibit to our annual report on Form 20-F for the fiscal year ended December 31,
2001, as filed with the Securities and Exchange Commission on June 28, 2002.

4.4      Convertible Promissory Note given
by Unisfair, dated December, 2001, in the amount of $100,000, filed by us as an Exhibit to
our annual report on Form 20-F for the fiscal year ended December 31, 2001, as filed with
the Securities and Exchange Commission on June 28, 2002.

4.5      Loan Agreement with Unisfair in
the amount of $15,000, together with Convertible Promissory Note dated March 20, 2002,
executed in connection therewith, filed by us as an Exhibit to our annual report on Form
20-F for the fiscal year ended December 31, 2001, as filed with the Securities and
Exchange Commission on June 28, 2002.

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4.6     
Share Purchase Agreement with BCS Growth Fund (Israel) L.P., Infinity Venture Capital Ltd. and Yaron Sheinman.

4.7     Technology Transfer and Assignment Agreement with BVR Systems (1998) Ltd., dated May, 2003.

8.1     
A list of our  subsidiaries  is found  on page 39 of our  consolidated  financial  statements  and
incorporated herein by reference.

10.1    Certification by Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

10.2    Certification by
Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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# SIGNATURES

Pursuant
to the requirements of Section 12 of the Securities Exchange Act of 1934, the Registrant
certifies that it meets all of the requirements for filing on Form 20-F and has duly
caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tel Aviv, State of Israel, on the
 day of July, 2003.

| |  | B.V.R. TECHNOLOGIES LTD.BY: /S/ Yaron Sheinman
Yaron Sheinman
| |  | ---------------------------------------------------------------------------

51

---

---

DRAFT: 13.07.2003

B.V.R.
TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2002

IN U.S. DOLLARS



INDEX

|                                                                                                          | Page   
|--------------------------------------------------------------------------------------------------------- | -------
|                                                                                                          |        
|                                                                                                          |        
|Report of Independent Auditors                                                                            | 2      
|                                                                                                          |        
|Consolidated Statement of Net Assets in Liquidation as of December
  31, 2002                             | 3 - 4  
|                                                                                                          |        
|Consolidated Balance Sheet as of December 31, 2001                                                        | 5 - 6  
|                                                                                                          |        
|Consolidated Statements of Changes in Net Assets in Liquidation for
  the year ended 
  December 31, 2002 | 7      
|                                                                                                          |        
|Consolidated Statements of Operations for the years ended December
  31, 2002 and 2001                    | 8      
|                                                                                                          |        
|Statements of Changes in Shareholders Equity                                                             | 9      
|                                                                                                          |        
|Consolidated Statements of Cash Flows                                                                     | 10 - 12
|                                                                                                          |        
|Notes to Consolidated Financial Statements                                                                | 13 - 42

- - - - - - - -

---

---

ERNST
&YOUNG

REPORT OF INDEPENDENT AUDITORS

To
the Shareholders of

B.V.R. TECHNOLOGIES LTD.

We have
audited the accompanying consolidated statement of the net assets in
liquidation of B.V.R. Technologies Ltd. (the Company) and its subsidiary as
of December 31, 2002 and the consolidated balance sheet as of December 31,
2001, and the consolidated statements of changes in net assets in liquidation
for the year ended December 31, 2002 and the consolidated statements of
operations for each of the two years in the period ended December 31, 2001 and
the statements of changes in shareholders equity and cash flows for the three
years in the period ended December 31, 2002. These financial statements are the
responsibility of the Companys board of directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We did not
audit the financial statements of affiliate, the investment in which on the
equity basis of accounting totaled $ 0 and $ 1,795 thousand as of
December 31, 2002 and 2001, respectively, and the Companys share in the
net loss of which totaled $ 1,126 thousand and $ 2,381 thousand for the two
years ended December 31, 2002 and 2001, respectively. These financial
statements were audited by other auditors, whose report has been furnished to
us, and our opinion, insofar as it relates to amounts included for this certain
affiliate, is based solely on the reports of the other auditors.

We
conducted our audits in accordance with auditing standards generally accepted
in the United States and in Israel, including those prescribed by the Israeli
Auditors Regulations (Auditors Mode of Performance), 1973. Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by the management, as
well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of the other auditors provide a reasonable
basis for our opinion.

As stated
in Note 1a to the financial statements, although an approval was not yet
received by the Companys shareholders, following the distribution of the
Companys assets, as described in Note 4e and 4f, it is probable that the
Company will not continue its business. As a result, the Company has changed
its accounting basis for the year 2002 from going-concern basis to a
liquidation basis.

In our
opinion, based on our audits and the reports of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the value of net assets in liquidation as of December 31,
2002 and the consolidated financial position as of December 31, 2001 and the
changes in net assets in liquidation for the year ended December 31, 2002 and
the consolidated results of operations for each of the two years in the period
ended December 31, 2001 and changes in shareholders equity and cash flows for
each of the three years in the period ended December 31, 2002, in conformity
with generally accepted accounting principles in Israel, which differ in
certain respects from those followed in the United States, as described in Note
12 to the consolidated financial statements.

|Tel-Aviv, Israel | KOST
  FORER & GABBAY           
|---------------- | --------------------------------
|May 29, 2003     | A Member of Ernst & Young Global

- 2 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

---

|                                       |                                                     | December 31,
  2002
|-------------------------------------- | --------------------------------------------------- | -------------------
|                                       |                                                     |                    
|                                       | ASSETS                                              |                    
|                                       |                                                     |                    
|CURRENT
  ASSETS:                      |                                                     |                    
|                                       | Cash and
  cash equivalents                         |                    
|                                       | Accounts
  receivable and prepaid expenses (Note 3) |                    
|                                       |                                                     |                    
|                                       |                                                     |                    
|Total
  current assets                 |                                                     |                    
|                                       |                                                     |                    
|                                       |                                                     |                    
|PROPERTY AND
  EQUIPMENT, NET (Note 5) |                                                     |                    
|                                       |                                                     |                    
|                                       |                                                     |                    
|Total
  assets                         |                                                     | $                  
|                                       |                                                     |                    
|                                       |                                                     |                    

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

- 3 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION

---

|                                                  |                                                                                                                                                                                                                 | December 31,
  2002
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|                                                  |                                                                                                                                                                                                                 |                    
|                                                  | LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                                                                                          |                    
|                                                  |                                                                                                                                                                                                                 |                    
|CURRENT
  LIABILITIES:                            |                                                                                                                                                                                                                 |                    
|                                                  | Trade
  payables                                                                                                                                                                                                |                    
|                                                  | Other
  accounts payable and accrued expenses (Note 6)                                                                                                                                                          |                    
|                                                  |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|Total
  current liabilities                       |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|ACCRUED
  SEVERANCE PAY, NET                      |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|COMMITMENTS
  AND CONTINGENT LIABILITIES (Note 8) |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|SHAREHOLDERS
  EQUITY (Note 7):                  |                                                                                                                                                                                                                 |                    
|                                                  | Share
  capital:Ordinary
  shares of NIS 0.5 par value:      Authorized:
  30,000,000 shares at December 31, 2002; Issued: 9,837,701 at 
        December 31, 2002; Outstanding: 9,718,451 at December 31, 2002 |                    
|                                                  | Additional
  paid-in capital                                                                                                                                                                                    |                    
|                                                  | Accumulated
  deficit                                                                                                                                                                                           |                    
|                                                  | Dividend
  declared                                                                                                                                                                                             |                    
|                                                  | Treasury
  stock                                                                                                                                                                                                |                    
|                                                  |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|Total
  shareholders equity                      |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    
|Totalliabilities
  and shareholders equity       |                                                                                                                                                                                                                 | $                  
|                                                  |                                                                                                                                                                                                                 |                    
|                                                  |                                                                                                                                                                                                                 |                    

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

- 4 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEET

---

|                                               |                                                      | December 31,
  2001
|---------------------------------------------- | ---------------------------------------------------- | -------------------
|                                               |                                                      |                    
|                                               | ASSETS                                               |                    
|                                               |                                                      |                    
|CURRENT
  ASSETS:                              |                                                      |                    
|                                               | Cash and
  cash equivalents                          |                    
|                                               | Accounts
  receivable and prepaid expenses (Note 3)  |                    
|                                               | Investment
  in affiliate to be disposed of (Note 4) |                    
|                                               |                                                      |                    
|                                               |                                                      |                    
|Total
  current assets                         |                                                      |                    
|                                               |                                                      |                    
|                                               |                                                      |                    
|LONG-TERM
  INVESTMENTS IN AFFILIATES (Note 4) |                                                      |                    
|                                               |                                                      |                    
|                                               |                                                      |                    
|PROPERTY AND
  EQUIPMENT, NET (Note 5)         |                                                      |                    
|                                               |                                                      |                    
|                                               |                                                      |                    
|Total
  assets                                 |                                                      | $                  
|                                               |                                                      |                    
|                                               |                                                      |                    

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

- 5 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED BALANCE SHEET

---

|                                                  |                                                                                                                                                     | December 31,
  2001
|------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------
|                                                  |                                                                                                                                                     |                    
|                                                  | LIABILITIES
  AND SHAREHOLDERS EQUITY                                                                                                              |                    
|                                                  |                                                                                                                                                     |                    
|CURRENT
  LIABILITIES:                            |                                                                                                                                                     |                    
|                                                  | Trade
  payables                                                                                                                                    |                    
|                                                  | Other
  accounts payable and accrued expenses (Note 6)                                                                                              |                    
|                                                  |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|Total
  current liabilities                       |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|ACCRUED
  SEVERANCE PAY, NET                      |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|COMMITMENTS
  AND CONTINGENT LIABILITIES (Note 8) |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|SHAREHOLDERS
  EQUITY (Note 7):                  |                                                                                                                                                     |                    
|                                                  | Share
  capital:                                                                                                                                    |                    
|                                                  | Ordinary
  shares of NIS 0.5 par value:                                                                                                             |                    
|                                                  | Authorized:
  30,000,000 shares at December 31, 2001; Issued: 9,836,528 shares at 
  December 31, 2001; Outstanding: 9,717,278 at December 31, 2001 |                    
|                                                  | Additional
  paid-in capital                                                                                                                        |                    
|                                                  | Accumulated
  deficit                                                                                                                               |                    
|                                                  | Treasury stock                                                                                                                                      |                    
|                                                  |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|Total
  shareholders equity                      |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    
|Total
  liabilities and shareholders equity      |                                                                                                                                                     | $                  
|                                                  |                                                                                                                                                     |                    
|                                                  |                                                                                                                                                     |                    

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

- 6 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS IN LIQUIDATION

---

|                                                                        |  | Year ended 
  December 31,
  2002
|----------------------------------------------------------------------- |  | ---------------------------------
|                                                                        |  |                                  
|                                                                        |  |                                  
|Services to
  related parties                                           |  | $                                
|                                                                        |  |                                  
|Cost of
  services to related parties                                   |  |                                  
|                                                                        |  |                                  
|                                                                        |  |                                  
|Gross profit                                                            |  |                                  
|                                                                        |  |                                  
|General and
  administrative expenses                                   |  |                                  
|                                                                        |  |                                  
|                                                                        |  |                                  
|Operating
  loss                                                        |  |                                  
|Financial
  income, net (Note 10a)                                      |  |                                  
|Other
  expenses, net (Note 10b)                                        |  |                                  
|                                                                        |  |                                  
|                                                                        |  |                                  
|Loss before
  taxes on income                                           |  |                                  
|Taxes on
  income (Note 9)                                              |  |                                  
|                                                                        |  |                                  
|                                                                        |  |                                  
|Loss from
  continuing operations before equity in losses of affiliates |  |                                  
|Equity in
  losses of affiliates                                        |  |                                  
|                                                                        |  |                                  
|                                                                        |  |                                  
|Loss from
  continuing operations                                       |  |                                  
|Loss from
  discontinued operations (Note 10c)                          |  |                                  
|                                                                        |  |                                  
|                                                                        |  |                                  
|Net loss                                                                |  | $                                
|                                                                        |  |                                  
|                                                                        |  |                                  
|Basic and
  diluted net loss per share from:                            |  |                                  
|                                                                        |  |                                  
|Continuing
  operations *)                                              |  | $                                
|                                                                        |  |                                  
|                                                                        |  |                                  
|Discontinued
  operations                                               |  | $                                
|                                                                        |  |                                  
|                                                                        |  |                                  
|Net loss                                                                |  | $                                
|                                                                        |  |                                  
|                                                                        |  |                                  
|Weighted
  average number of shares outstanding (in thousands)          |  |                                  
|                                                                        |  |                                  

*)       The
loss per share is computed at NIS 0.5 par value of Ordinary shares.

**)     Represents an amount lower than $
0.01.

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

- 7 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

---

|                                                                                       |                            | Year ended December 31,
|-------------------------------------------------------------------------------------- | -------------------------- | -----------------------
|                                                                                       |                            |                        
|                                                                                       |                            | 2001                   
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Services to
  related parties                                                          |                            | $                      
|                                                                                       |                            |                        
|Cost of
  services to related parties                                                  |                            |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Gross profit                                                                           |                            |                        
|                                                                                       |                            |                        
|General and
  administrative expenses                                                  |                            |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Operating
  loss                                                                       |                            |                        
|Financial
  income (expenses), net (Note 10a)                                          |                            |                        
|Other income
  (expenses), net (Note 10b)                                              |                            |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Income
  (loss) before taxes on income                                                 |                            |                        
|Taxes on
  income (Note 9)                                                             |                            |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Income
  (loss) from continuing operations before equity in losses of 
     affiliates |                            |                        
|Equity in
  losses of affiliates                                                       |                            |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Loss from
  continuing operations                                                      |                            |                        
|Loss from
  discontinued operations (Note 10c)                                         |                            |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Net loss                                                                               |                            | $                      
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Basic and
  diluted net loss per share from:                                           |                            |                        
|                                                                                       |                            |                        
|                                                                                       | Continuing
  operations *) |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|                                                                                       | Discontinued
  operations  |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|                                                                                       | Net loss                   |                        
|                                                                                       |                            |                        
|                                                                                       |                            |                        
|Weighted
  average number of shares outstanding (in thousands)                         |                            |                        
|                                                                                       |                            |                        

*)       The
loss per share is computed at NIS 0.5 par value of Ordinary shares.

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

- 8 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

---

|                             |                                                                | Number of 
  Ordinary
  shares |           | Share
  capital |  | Additional
  paid-in
  capital |       | Deferred
  stock 
  compensation |  | Accumulated
  deficit |        | Treasury
  stock |   | Dividend
  declared |      | Total
  shareholders
  equity |  
|---------------------------- | -------------------------------------------------------------- | ------------------------------ | --------- | --------------- |  | ------------------------------ | ----- | -------------------------------- |  | --------------------- | ------ | ---------------- | - | ------------------- | ---- | ------------------------------ | -
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  
|Balance at January 1, 2000   |                                                                |                                | 9,008,488 |                 |  | $                              | 1,736 |                                  |  | $                     | 27,321 |                  |   | $                   | -    |                                |  
|                             | Conversion of convertible debentures                           |                                |           | 461,540         |  |                                |       | 58                               |  |                       |        | 2,942            |   |                     |      | -                              |  
|                             | Exercise of options and warrants                               |                                |           | 222,500         |  |                                |       | 28                               |  |                       |        | 830              |   |                     |      | -                              |  
|                             | Treasury stock                                                 |                                |           | -               |  |                                |       | -                                |  |                       |        | -                |   |                     |      | -                              |  
|                             | Deferred stock compensation on repricedoptions                 |                                |           | -               |  |                                |       | -                                |  |                       |        | 186              |   |                     |      | (186                           | )
|                             | Amortization of deferred stockcompensation on repriced options |                                |           | -               |  |                                |       | -                                |  |                       |        | -                |   |                     |      | 37                             |  
|                             | Net loss                                                       |                                |           | -               |  |                                |       | -                                |  |                       |        | -                |   |                     |      | -                              |  
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  
|Balance at December 31, 2000 |                                                                |                                | 9,692,528 |                 |  |                                | 1,822 |                                  |  |                       | 31,279 |                  |   |                     | (149 | )                              |  
|                             | Spin-off of Nexus Telocation Systems Ltd.                      |                                |           | -               |  |                                |       | -                                |  |                       |        | -                |   |                     |      | -                              |  
|                             | Exercise of
  options                                          |                                |           | 144,000         |  |                                |       | 16                               |  |                       |        | -                |   |                     |      | -                              |  
|                             | Deferred stock compensation on repricedoptions                 |                                |           | -               |  |                                |       | -                                |  |                       |        | 103              |   |                     |      | (103                           | )
|                             | Amortization of deferred stockcompensation on repriced options |                                |           | -               |  |                                |       | -                                |  |                       |        | -                |   |                     |      | 252                            |  
|                             | Net loss                                                       |                                |           | -               |  |                                |       | -                                |  |                       |        | -                |   |                     |      | -                              |  
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  
|Balance at December 31, 2001 |                                                                |                                | 9,836,528 |                 |  |                                | 1,838 |                                  |  |                       | 31,382 |                  |   |                     | -    |                                |  
|                             | Dividend
  declared                                            |                                |           | -               |  |                                |       | -                                |  |                       |        | (1,500           | ) |                     |      | -                              |  
|                             | Spin-off of
  Vi[z]Rt Ltd.                                     |                                |           | -               |  |                                |       | -                                |  |                       |        | (2,230           | ) |                     |      | -                              |  
|                             | Exercise of
  options                                          |                                |           | 1,173           |  |                                |       | *)   -                           |  |                       |        | -                |   |                     |      | -                              |  
|                             | Net loss                                                       |                                |           | -               |  |                                |       |                                  |  |                       |        | -                |   |                     |      | -                              |  
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  
|Balance at December 31, 2002 |                                                                |                                | 9,837,701 |                 |  | $                              | 1,838 |                                  |  | $                     | 27,652 |                  |   | $                   | -    |                                |  
|                             |                                                                |                                |           |                 |  |                                |       |                                  |  |                       |        |                  |   |                     |      |                                |  

*)      Represents
an amount lower than $1.

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

- 9 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

|                                                         |                                                                                                        | Year ended December 31, |       
|-------------------------------------------------------- | ------------------------------------------------------------------------------------------------------ | ----------------------- | ------
|                                                         |                                                                                                        |                         |       
|                                                         |                                                                                                        | 2002                    |       
|                                                         |                                                                                                        |                         |       
|Cash flows
  from operating activities:                  |                                                                                                        |                         |       
|                                                         | Net loss                                                                                               |                         | $     
|                                                         | Adjustments
  required to reconcile net loss to net cash used in operating activities (a)              |                         |       
|                                                         |                                                                                                        |                         |       
|                                                         |                                                                                                        |                         |       
|Net cash
  used in operating activities                  |                                                                                                        |                         | (794  
|                                                         |                                                                                                        |                         |       
|                                                         |                                                                                                        |                         |       
|Cash flows
  from investing activities:                  |                                                                                                        |                         |       
|                                                         | Purchase of
  property and equipment                                                                   |                         |       
|                                                         | Proceeds
  from sale of property and equipment                                                         |                         |       
|                                                         | Investment
  in affiliates                                                                             |                         |       
|                                                         | Investment
  in long term loans, convertible loans and 
  convertible debentures granted to affiliates |                         |       
|                                                         | Proceeds
  from short-term loan to BVR-S, net                                                          |                         |       
|                                                         |                                                                                                        |                         |       
|                                                         |                                                                                                        |                         |       
|Net cash
  used in investing activities                  |                                                                                                        |                         | (549  
|                                                         |                                                                                                        |                         |       
|                                                         |                                                                                                        |                         |       
|Cash flows
  from financing activities:                  |                                                                                                        |                         |       
|                                                         | Proceeds
  from exercise of options                                                                    |                         |       
|                                                         | Decrease in
  receivable related to sale of building                                                   |                         |       
|                                                         | Purchase of
  treasury stock                                                                           |                         |       
|                                                         | Proceeds
  from issuance of shares, net upon exercise of 
  options and warrants                       |                         |       
|                                                         | Short-term
  bank loans, net                                                                           |                         |       
|                                                         |                                                                                                        |                         |       
|                                                         |                                                                                                        |                         |       
|Net cash
  provided by financing activities              |                                                                                                        |                         | -     
|                                                         |                                                                                                        |                         |       
|                                                         |                                                                                                        |                         |       
|Decrease in
  cash and cash equivalents                  |                                                                                                        |                         | (1,343
|Cash and
  cash equivalents at the beginning of the year |                                                                                                        |                         | 3,778 
|                                                         |                                                                                                        |                         |       
|                                                         |                                                                                                        |                         |       
|Cash and
  cash equivalents at the end of the year       |                                                                                                        | $                       | 2,435 
|                                                         |                                                                                                        |                         |       

*) Represents
an amount lower than $ 1.

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

- 10 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

|    |                                                                                  |                                                                          | Year ended December 31, |      
|--- | -------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | ----------------------- | -----
|    |                                                                                  |                                                                          |                         |      
|    |                                                                                  |                                                                          | 2002                    |      
|    |                                                                                  |                                                                          |                         |      
|    |                                                                                  |                                                                          |                         |      
|(a) | Adjustments
  to reconcile net loss to net cash used in 
  operating activities: |                                                                          |                         |      
|    |                                                                                  |                                                                          |                         |      
|    |                                                                                  | Equity in
  losses of affiliates                                         |                         | $    
|    |                                                                                  | Loss (gain)
  on sale of property and equipment                          |                         |      
|    |                                                                                  | Gain on
  issuance of shares to a third party by affiliates              |                         |      
|    |                                                                                  | Depreciation
  and impairment of property and    equipment               |                         |      
|    |                                                                                  | Interest on
  long-term loans and convertible loans to     affiliates    |                         |      
|    |                                                                                  | Accrued
  severance pay, net                                             |                         |      
|    |                                                                                  | Amortization
  of deferred stock compensation on     repriced options    |                         |      
|    |                                                                                  | Impairment
  of investment in affiliates                                 |                         |      
|    |                                                                                  | Decrease in
  accounts receivable and prepaid expenses                   |                         |      
|    |                                                                                  | Increase
  (decrease) in trade payables                                  |                         |      
|    |                                                                                  | Increase
  (decrease) in other accounts payable and     accrued expenses |                         |      
|    |                                                                                  | Others                                                                   |                         |      
|    |                                                                                  |                                                                          |                         |      
|    |                                                                                  |                                                                          |                         |      
|    |                                                                                  |                                                                          | $                       | 4,289
|    |                                                                                  |                                                                          |                         |      
|    |                                                                                  |                                                                          |                         |      
|(b) | Supplemental
  disclosure of cash flows activities:                              |                                                                          |                         |      
|    |                                                                                  |                                                                          |                         |      
|    |                                                                                  | Net cash
  paid during the year for:
     Interest                       |                         | $    
|    |                                                                                  |                                                                          |                         |      

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

- 11 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

---

|    |                        |                                               |  | Year ended December 31, |       
|--- | ---------------------- | --------------------------------------------- |  | ----------------------- | ------
|    |                        |                                               |  |                         |       
|    |                        |                                               |  | 2002                    |       
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|(c) | Non-cash
  activities: |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    | 1.                     | Issuance of
  shares                          |  | $                       | -     
|    |                        | Conversion
  of convertible debentures        |  |                         | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    |                        |                                               |  | $                       | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    | 2.                     | Investments
  in an affiliate                 |  | $                       | -     
|    |                        | Spin-off of
  Nexus Telocation Systems Ltd.   |  |                         | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    |                        |                                               |  | $                       | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    | 3.                     | Other
  accounts payable and accrued expenses |  | $                       | -     
|    |                        | Spin-off of
  Nexus Telocation Systems Ltd    |  |                         | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    |                        |                                               |  | $                       | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    | 4.                     | Investment
  in an affiliate                  |  | $                       | (2,230
|    |                        | Spin-off of
  Vi[z]Rt Ltd.                    |  |                         | 2,230 
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    |                        |                                               |  | $                       | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    | 5.                     | Receivable
  related to sale of building      |  | $                       | -     
|    |                        | Property and
  equipment                      |  |                         | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    |                        |                                               |  | $                       | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    | 6.                     | Investments
  in affiliates                   |  | $                       | -     
|    |                        | Other
  accounts payable and accrued expenses |  |                         | -     
|    |                        |                                               |  |                         |       
|    |                        |                                               |  |                         |       
|    |                        |                                               |  | $                       | -     
|    |                        |                                               |  |                         |       

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

- 12 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 1:- | GENERAL             
|-------- | --------------------
|         |                     
|         | a.                  
|         |                     
|         |                     
|         |                     
|         |                     
|         |                     
|         |                     
|         |                     
|         |                     
|         |                     
|         | b.                  
|         |                     
|         | Subsidiary          
|         |                     
|         | Affiliated
  company
|         |                     
|         | Related
  parties   

- 13 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                
|         | The
  consolidated financial statements of the Company conform with generally
  accepted accounting principles in Israel (Israeli GAAP), which differ in
  certain aspects from those followed in the United States (U.S. GAAP), as
  described in Note 12.
|         |                                                                                                                                                                                                                                                                
|         | a.                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         | b.                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         | c.                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         | d.                                                                                                                                                                                                                                                             
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                
|         |                                                                                                                                                                                                                                                                

- 14 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------

| | 2)                                                                      | Accounts
  receivable:                                                                                                                                          
| | ----------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                         |                                                                                                                                                                 
| |                                                                         | (a)                                                                                                                                                             
| |                                                                         |                                                                                                                                                                 
| |                                                                         | (b)                                                                                                                                                             
| |                                                                         |                                                                                                                                                                 
| | 3)                                                                      | Investment
  in affiliates:                                                                                                                                     
| |                                                                         |                                                                                                                                                                 
| |                                                                         | The
  investment is presented net of the provision for the decline in value, based
  on the balance effectively received from the realization of the investment.
| |                                                                         |                                                                                                                                                                 
| |                                                                         | The
  investment in a subsidiary is presented on an equity basis reflecting its
  market value.                                                                 
| |                                                                         |                                                                                                                                                                 
| | 4)                                                                      | Property and
  equipment, net                                                                                                                                   
| |                                                                         |                                                                                                                                                                 
| |                                                                         | Investments
  in property and equipment are stated at the lower of fair value or cost, net
  of accumulated depreciation.                                       
| |                                                                         |                                                                                                                                                                 
| | 5)                                                                      | Other
  accounts payable -                                                                                                                                      
| |                                                                         |                                                                                                                                                                 
| |                                                                         | Government
  authorities, expenses payable and other:                                                                                                           
| |                                                                         |                                                                                                                                                                 
| | According to
  the balance as of the dates of the financial statements.
| |                                                                         |                                                                                                                                                                 
| | 2.                                                                      | Consolidated
  statements of changes in net assets in liquidation:                                                                                              
| |                                                                         |                                                                                                                                                                 
| |                                                                         | a)                                                                                                                                                              
| |                                                                         |                                                                                                                                                                 
| |                                                                         | b)                                                                                                                                                              
| |                                                                         |                                                                                                                                                                 
| |                                                                         | c)                                                                                                                                                              

- 15 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | e.                                     
|         |                                        
|         |                                        
|         |                                        
|         | f.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

- 16 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | g.                                     
|         |                                        
|         |                                        

| |                                   | %                         
| | --------------------------------- | --------------------------
| |                                   |                           
| | Computers
  and related equipment | 33                        
| | Leasehold
  improvements          | Over the term of the lease

| |    | The Company
  periodically assesses the recoverability of the carrying amount of property
  and equipment and provides for any possible impairment loss based upon the
  difference between the carrying amount and fair value of such assets. In
  2002, no impairment losses have been identified.                                                                                                                                                                                      
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | h. | Deferred
  income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The Company
  accounts for taxes on income under the liability method of accounting for
  taxes on income.                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | i. | Revenue
  recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The
  Companys revenues derived from management services provided to affiliates.                                                                                                                                                                                                                                                                                                                                                                                                         
| |    | The revenues
  are recognized as services are provided.                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | j. | Severance
  pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The
  Companys liability for severance pay is calculated pursuant to Israeli
  severance pay law based on the most recent salary of the employees multiplied
  by the number of years of employment as of balance sheet date. Employees are
  entitled to one months salary for each year of employment, or a portion
  thereof. The Companys liability for all of its employees is fully provided
  by monthly deposits with severance pay und insurance policies and by an
  accrual.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

- 17 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         | k.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | l.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

- 18 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        

| |                                                     |  | Year ended December 31, |      
| | --------------------------------------------------- |  | ----------------------- | -----
| |                                                     |  |                         |      
| |                                                     |  | 2002                    |      
| |                                                     |  |                         |      
| | Net loss
  according to U.S. GAAP 
  (see Note 12m) |  | $                       | 6,295
| |                                                     |  |                         |      
| |                                                     |  |                         |      
| | Pro-forma
  net loss                                |  | $                       | 6,581
| |                                                     |  |                         |      
| |                                                     |  |                         |      
| | Pro-forma
  basic and diluted net loss per share    |  | $                       | 0.68 
| |                                                     |  |                         |      

| |    | The total
  compensation expenses included in the pro-forma information for 2002, 2001
  and 2000, is $286, $1,728 and $911, respectively.                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The Company
  applies SFAS No. 123 and Emerging Issues Task Force (EITF) No. 96-18 Accounting
  for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
  or in Conjunction with Selling, Goods or Services (EITF 96-18), with
  respect to options and warrants issued to non-employees. SFAS No. 123
  requires the use of option valuation models to measure the fair value of the
  options and warrants at the date of grant.                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | m. | Discontinuing investments in affiliates:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Through December 31, 2001, discontinued
  operations related to investments in affiliates have been accounted for under
  Accounting Principles Board Opinion No. 30 Reporting the Results of
  Operations-Reporting the Effects of Disposal of a Segment of a Business, and
  Extraordinary, Unusual and Infrequently Occurring Events and Transactions
  (APB No. 30), which was the common practice under Israeli GAAP. As
  such, during 2001 and 2000 the Company accounted for its investments in Nexus
  and VIZ as discontinued operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | In 2002, discontinued operations related to
  investments in affiliates have been accounted for under Israeli Accounting
  Standard No. 8 Discontinuing operations (Standard No. 8), which is
  effective since January 1, 2002. The standard sets out rules
  for disclosure of information concerning a discontinued operation.                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | According to
  Standard No. 8 investments in affiliates, which were accounted under the
  equity method, are not qualified as discontinued operations. Therefore, the
  Companys investments in BrightCom and Unisfair were not accounted for as
  discontinued operations (see also Note 4e and 4f).                                                                                                                                                                                                                                                 

- 19 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         | n.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | o.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         | p.                                     
|         |                                        
|         |                                        
|         |                                        
|         |                                        

- 20 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-------- | ---------------------------------------
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        
|         |                                        

- 21 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 3:-  ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

| |                                                                                                       |  | December 31,
| | ----------------------------------------------------------------------------------------------------- |  | ------------
| |                                                                                                       |  |             
| |                                                                                                       |  | 2002        
| |                                                                                                       |  |             
| |                                                                                                       |  |             
| | Government
  authorities                                                                              |  | $           
| | Affiliates (net
  of doubtful allowance amounted to $177 and $0
  in 2002 and 2001, respectively) (1) |  |             
| | Others                                                                                                |  |             
| |                                                                                                       |  |             
| |                                                                                                       |  |             
| |                                                                                                       |  | $           
| |                                                                                                       |  |             

| | (1) | Current
  balances bear no interest. (see Note 11).
| | --- | ---------------------------------------------------

NOTE 4:-  LONG-TERM INVESTMENTS IN AFFILIATES

| | a. | Investments
  in affiliates and investments in affiliates to be disposed of, are composed
  as follows:
| | -- | -------------------------------------------------------------------------------------------------------

| |                                                |  | December 31,
| | ---------------------------------------------- |  | ------------
| |                                                |  |             
| |                                                |  | 2002        
| |                                                |  |             
| |                                                |  |             
| | Long-term
  loans                              |  | $           
| | Convertible
  loans and convertible debentures |  |             
| | Impairment
  charges                           |  |             
| | Equity                                         |  |             
| |                                                |  |             
| |                                                |  |             
| |                                                |  |             
| |                                                |  |             
| | Goodwill:                                      |  |             
| | Original
  amount, net                         |  |             
| | Amortization                                   |  |             
| | Impairment
  charges                           |  |             
| |                                                |  |             
| |                                                |  |             
| |                                                |  |             
| |                                                |  |             
| |                                                |  |             
| | Total
  investments in affiliates              |  | $           
| |                                                |  |             

| | b. | Coresma:
| | -- | --------
| |    |         
| |    | 1.      
| |    |         
| |    |         
| |    |         
| |    |         

- 22 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

NOTE 4:-   LONG-TERM INVESTMENTS IN AFFILIATES (Cont.)

| |  | 2. | Long-term
  loans:
| |  | -- | ------------------
| |  |    |                   
| |  |    | a)                
| |  |    |                   
| |  |    |                   
| |  |    | b)                
| |  |    |                   
| |  |    |                   
| |  |    |                   
| |  |    |                   
| |  |    |                   
| |  |    |                   
| |  |    |                   
| |  |    | c)                
| |  |    |                   
| |  |    |                   
| |  |    |                   
| |  |    |                   

- 23 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 4:- | LONG-TERM INVESTMENTS IN AFFILIATES (Cont.)
|-------- | -------------------------------------------
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         | c.                                         
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            

- 24 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 4:- | LONG-TERM INVESTMENTS IN AFFILIATES (Cont.)
|-------- | -------------------------------------------
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         | d.                                         
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            

- 25 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 4:- | LONG-TERM INVESTMENTS IN AFFILIATES (Cont.)
|-------- | -------------------------------------------
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         | e.                                         
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            

- 26 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 4:- | LONG-TERM INVESTMENTS IN AFFILIATES (Cont.)
|-------- | -------------------------------------------
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         | f.                                         
|         |                                            
|         |                                            
|         |                                            
|         |                                            

- 27 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 4:- | LONG-TERM INVESTMENTS IN AFFILIATES (Cont.)
|-------- | -------------------------------------------
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            
|         |                                            

- 28 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 5:- | PROPERTY AND EQUIPMENT
|-------- | ----------------------

| |                             |                                   | December 31,
| | --------------------------- | --------------------------------- | ------------
| |                             |                                   |             
| |                             |                                   | 2002        
| |                             |                                   |             
| | Cost:                       |                                   |             
| |                             | Computers
  and related equipment |             
| |                             | Leasehold
  improvements          |             
| |                             |                                   |             
| |                             |                                   |             
| |                             |                                   |             
| |                             |                                   |             
| | Accumulated
  depreciation: |                                   |             
| |                             | Computers
  and related equipment |             
| |                             | Leasehold
  improvements          |             
| |                             |                                   |             
| |                             |                                   |             
| |                             |                                   |             
| |                             |                                   |             
| |                             |                                   |             
| | Depreciated
  cost          |                                   | $           
| |                             |                                   |             

| | In 2001, the
  Company recognized an impairment loss in the amount of $ 43. (See also Note
  2g).
| | -------------------------------------------------------------------------------------------------

|NOTE 6:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|-------- | -------------------------------------------

| |                                |  | December 31,
| | ------------------------------ |  | ------------
| |                                |  |             
| |                                |  | 2002        
| |                                |  |             
| |                                |  |             
| | Payroll and
  related accruals |  | $           
| | Government
  authorities       |  |             
| | Other
  accrued expenses       |  |             
| |                                |  |             
| |                                |  |             
| |                                |  | $           
| |                                |  |             

|NOTE 7:- | SHAREHOLDERS EQUITY
|-------- | --------------------

| | a. | In April
  1999, the Company granted to shareholder warrants to purchase up to an
  aggregate of 200,000 Ordinary shares of BVR, par value of NIS 0.5 at an
  exercise price of $4 per share. The warrants are vested immediately and will
  expire on December 31, 2001. In January 2000, the aforementioned warrants
  were exercised into Ordinary shares of BVR.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                     
| | b. | In June
  1999, BVR issued $3,000 in convertible debentures to two of its shareholders.
  The debentures are linked to the U.S. dollar, bear annual interest of 7% to
  be paid semi annually and will mature on June 15, 2003. The debentures shall
  be converted at a conversion rate of $6.5 per share at the option of the
  holders.                          
| |    |                                                                                                                                                                                                                                                                                                                                                                     
| |    | On February
  8, 2000, the debentures were converted into 461,540 Ordinary shares.                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                     
| | c. | In December
  2000, BVR purchased its own 119,250 Ordinary shares in consideration of $302.
  Treasury shares are presented, as cost and reduce shareholders equity.                                                                                                                                                                                               

- 29 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 7:- | SHAREHOLDERS EQUITY (Cont.)
|-------- | ----------------------------
|         |                             
|         | d.                          
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             
|         |                             

- 30 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 7:- | SHAREHOLDERS EQUITY (Cont.)
|-------- | ----------------------------

| | In December 2000, 90,000 previously granted options with an exercise price of $8.25 were
  repriced to 0.5 NIS (which is the par value of the shares) resulting in new measurement date and total compensation expenses of $186, of which $37 was
  recognized in 2000 for the portion already vested.                                                                   
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                          
| | On June 28,
  2001, the Company approved an acceleration for 54,000 unvested options out of
  the abovementioned repriced options, to be vested immediately. On the same
  date, additional 54,000 previously granted options with an exercise price of
  $3 were repriced to NIS 0.5 (which is the par value of the shares), and
  accelerated to be vested immediately.
| |                                                                                                                                                                                                                                                                                                                                                                          
| | Total
  compensation expenses in respect of the above repricing and acceleration of
  options in 2001 amounted to $252.                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                          
| | A summary of
  the Companys stock option activity, and related information for the years
  ended December 31, 2002, 2001 and 2000, is as follows:                                                                                                                                                                                                                       

| |                                             |  | 2002                    |         | 2001                         |  | 2000                 
| | ------------------------------------------- |  | ----------------------- | ------- | ---------------------------- |  | ---------------------
| |                                             |  |                         |         |                              |  |                      
| |                                             |  | Number 
  of 
  options |         | Weightedaverageexerciseprice |  | Number
  of
  options
| |                                             |  |                         |         |                              |  |                      
| | Options:                                    |  |                         |         |                              |  |                      
| | Outstanding at the beginning 
  of the year |  |                         | 950,000 |                              |  | $                    
| | Granted                                     |  |                         | -       |                              |  | $                    
| | Exercised                                   |  |                         | -       |                              |  | $                    
| | Forfeited                                   |  |                         | -       |                              |  | $                    
| |                                             |  |                         |         |                              |  |                      
| | Outstanding at the end of the
  year        |  |                         | 950,000 |                              |  | $                    
| |                                             |  |                         |         |                              |  |                      
| |                                             |  |                         |         |                              |  |                      
| | Exercisable at December 31,                 |  |                         | 741,667 |                              |  | $                    
| |                                             |  |                         |         |                              |  |                      

| | The options
  outstanding as of December 31, 2002, have been separated into exercise price
  categories as follows:
| | -------------------------------------------------------------------------------------------------------------------

| |  | exercise 
  price |      | Number 
  outstanding at 
  December 31,
  2002 |  | Weighted average 
  remaining 
  contractual 
  life (years) |         | Number 
  exercisable at 
  December 31,
  2002 |  | Weighted 
  average 
  exercise 
  price
| |  | ----------------- | ---- | ----------------------------------------------- |  | ------------------------------------------------------------ | ------- | ----------------------------------------------- |  | ----------------------------------------
| |  |                   |      |                                                 |  |                                                              |         |                                                 |  |                                         
| |  |                   |      |                                                 |  |                                                              |         |                                                 |  |                                         
| |  | $                 | 8.25 |                                                 |  |                                                              | 490,000 |                                                 |  |                                         
| |  | $                 | 2.06 |                                                 |  |                                                              | 460,000 |                                                 |  |                                         
| |  |                   |      |                                                 |  |                                                              |         |                                                 |  |                                         
| |  |                   |      |                                                 |  |                                                              |         |                                                 |  |                                         
| |  |                   |      |                                                 |  |                                                              | 950,000 |                                                 |  |                                         
| |  |                   |      |                                                 |  |                                                              |         |                                                 |  |                                         

- 31 -

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B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 8:- | COMMITMENTS AND CONTINGENT LIABILITIES
|-------- | --------------------------------------
|         |                                       
|         | a.                                    
|         |                                       
|         |                                       
|         |                                       
|         |                                       

| | December 31, |  |   |   | 
| | ------------ |  | - | - | 
| |              |  |   |   | 
| | 2003         |  | $ | 5 | 
| |              |  |   |   | 

| | b. | Management
  services agreements:                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                             
| |    | According to
  agreements with Nexus Data (a wholly owned subsidiary of Nexus), BrightCom
  and Coresma, BVR provides management services to Coresma in consideration of
  $120 per year each, $75 per year for BrightCom and $60 per year for Nexus
  Data.
| |    |                                                                                                                                                                                                                                                             
| |    | BVR signed
  an agreement, which became effective in January 2000 with the chairman of the
  Board of Directors to receive management services for annual payment of $250.                                                                                  
| |    |                                                                                                                                                                                                                                                             
| |    | The Company
  believes that the amounts charged in connection with the services to
  affiliates approximate the amount the Company would charge unrelated
  companies for the same services.                                                                

|NOTE 9:- | TAXES ON INCOME
|-------- | ---------------
|         |                
|         | a.             
|         |                
|         |                

- 32 -

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B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 9:- | TAXES ON INCOME (Cont.)
|-------- | -----------------------
|         |                        
|         | b.                     

| |                                                                                                              |  | Year ended December 31,
| | ------------------------------------------------------------------------------------------------------------ |  | -----------------------
| |                                                                                                              |  |                        
| |                                                                                                              |  | 2002                   
| |                                                                                                              |  |                        
| |                                                                                                              |  |                        
| | Income (loss) before taxes on income                                                                         |  | $                      
| |                                                                                                              |  |                        
| |                                                                                                              |  |                        
| | Theoretical tax expenses (benefits)                                                                          |  | $                      
| | Carryforward
  losses and other temporary 
  differences, for which deferred taxes were 
  not provided, net |  |                        
| | Gain from
  decrease in interest in affiliates
  and selling shares of an affiliate, net                     |  |                        
| | Changes in
  prior years accrual for income
  taxes                                                          |  |                        
| | Others                                                                                                       |  |                        
| |                                                                                                              |  |                        
| |                                                                                                              |  |                        
| | Taxes on
  income in statements of 
  operations*)                                                           |  | $                      
| |                                                                                                              |  |                        

| |    | *)     All
  income taxes are domestic.                                                                                                                                                                                                                                                                                                                                                                    
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| | c. | Income tax
  assessments:                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | BVR and EVR
  received final tax assessments up to and including tax year 1998.                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| | d. | Loss
  carryforward:                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | As of
  December 31, 2002, BVRs operating loss carryforward amounted to
  approximately $ 1,455 and none operating loss carryforward related to
  EVR.                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | BVRs
  capital losses carryforward for tax purposes amounted to approximately $
  2,960.                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| | e. | Deferred
  income taxes:                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | Management
  currently believes that since the Company and its subsidiary have a history
  of losses it is probable that the deferred tax regarding the loss
  carryforwards and temporary differences will not be realized in the
  foreseeable future, and therefore as described in Note 2h, the Company did
  not provide deferred income taxes for the years ended December 31, 2002, 2001
  and 2000.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| | f. | Tax ruling:                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                            
| |    | In January
  2002, BVR received the final tax ruling from the Israeli Income Tax
  Authority. The tax ruling treats the distribution of Nexus and VIZ shares,
  that took place is July 2001 and April 2002, respectively, and any future
  distributions of cash or securities as a liquidation for tax purposes only.                                                                                    

- 33 -

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---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 9:- | TAXES ON INCOME (Cont.)
|-------- | -----------------------
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        
|         |                        

NOTE
10:-   SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS

| |    |                                                              |                                                                      | Year ended December 31,
| | -- | ------------------------------------------------------------ | -------------------------------------------------------------------- | -----------------------
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      | 2002                   
| |    |                                                              |                                                                      |                        
| | a. | Financial income (expenses), net:                            |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    | Income:                                                      |                                                                      |                        
| |    |                                                              | Investment on long-term loans and convertible 
  loans to affiliates |                        
| |    |                                                              | Investment on short-term loan to BVR-S                               |                        
| |    |                                                              | Other interest                                                       |                        
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    | Expenses:                                                    |                                                                      |                        
| |    |                                                              | Bank charges and interest on short-term credit                       |                        
| |    |                                                              | Interest on convertible debentures                                   |                        
| |    |                                                              | Functional currency translation adjustments                          |                        
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      | $                      
| |    |                                                              |                                                                      |                        
| | b. | Other income (expenses), net                                 |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    | Gain on issuance of shares to a third party by 
  affiliates |                                                                      | $                      
| |    | Impairment of investment in affiliates (1)                   |                                                                      |                        
| |    | Gain (loss) on sale of property and equipment                |                                                                      |                        
| |    | Others                                                       |                                                                      |                        
| |    |                                                              |                                                                      |                        
| |    |                                                              |                                                                      | $                      
| |    |                                                              |                                                                      |                        

- 34 -

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B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 10:- | SUPPLEMENTARY INFORMATION TO STATEMENTS OF OPERATIONS
(Cont.)
|--------- | -------------------------------------------------------------

| |    | (1)                                                                                                                                                                                                                                                                     | In 2000, BVR
  invested in two companies an amount of $ 319. The investments were presented
  using the cost method of accounting.                                                                                                                   
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                         | As a result
  of assessing the recoverability of the carrying amount of the aforementioned
  investments in 2001, the Companys management decided to write-off all of the
  investments amounts. The impairment has been recorded in other expenses.
| |    |                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                         | In addition,
  in 2002 and 2001, the Company wrote-off affiliates investment balances in
  the amount of $ 6,701 and $ 6,838, respectively (see Note 4).                                                                                            
| |    |                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                      
| | c. | Loss from
  discontinued operations:                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                        
| |    | As a result
  of the spin-off of Nexus and VIZ the results of operations of Nexus and VIZ
  were reported separately as discontinued operations in the statements of
  operations for the years ended December 31, 2002, 2001 and 2000 and are
  summarized as follows:

| |                                         |  | Year ended December 31,
| | --------------------------------------- |  | -----------------------
| |                                         |  |                        
| |                                         |  | 2002                   
| |                                         |  |                        
| |                                         |  |                        
| | Services                                |  | $                      
| | Cost of services                        |  |                        
| | Financial income                        |  |                        
| | Other income                            |  |                        
| | Equity in losses of Nexus and VIZ       |  |                        
| |                                         |  |                        
| |                                         |  |                        
| | Total loss from discontinued operations |  | $                      
| |                                         |  |                        

|NOTE 11:- | RELATED PARTIES
|--------- | ---------------

| |    |                                   |  | December 31,
| | -- | --------------------------------- |  | ------------
| |    |                                   |  |             
| |    |                                   |  | 2002        
| |    |                                   |  |             
| | a. | Balance with related parties      |  |             
| |    |                                   |  |             
| |    | Other current assets (see Note 3) |  | $           
| |    |                                   |  |             

| |    |                                   |  | Year ended December 31,
| | -- | --------------------------------- |  | -----------------------
| |    |                                   |  |                        
| |    |                                   |  | 2002                   
| |    |                                   |  |                        
| | b. | Transactions with related parties |  |                        
| |    |                                   |  |                        
| |    | Financial income (1) (2)          |  | $                      
| |    | Management fees (2-(6)            |  | $                      
| |    | Management services (7)           |  | $                      
| |    | Directors fees                    |  | $                      

| | (1) | From Coresma.              
| | --- | ---------------------------
| | (2) | From Nexus.                
| | (3) | From VIZ                   
| | (4) | From Nexus Data (1993) Ltd.

- 35 -

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B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 11:- | RELATED PARTIES (Cont.)
|--------- | -----------------------

| | (5) | From BrightCom.                                                                                   
| | --- | --------------------------------------------------------------------------------------------------
| | (6) | From Unisfair.                                                                                    
| | (7) | Luna Hi-Tech Management (1999) Ltd. (owned
  by BVRs CEO and chairman of the board of directors).

|NOTE 12:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP
|--------- | -----------------------------------------------------------------

| | The
  consolidated financial statements of the Company conform with generally
  accepted accounting principles in Israel (Israeli GAAP), which differ in
  certain respects from those followed in the United States (U.S. GAAP), as
  described below:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                            
| | a.                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| | b.                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                            

- 36 -

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B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 12:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------

| | c. | Access of
  loss over investments in affiliates:                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under
  Israeli GAAP when the investment amount reduced to zero due to previous
  equity losses, the Company should recognize additional equity losses, only if
  the Company has additional obligation to support the affiliate.                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The
  additional equity losses should be based on the percentage of the affiliate
  shares held by the Company.                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under U.S.
  GAAP, the additional equity losses should be based on the percentage of the
  affiliates convertible securities and outstanding loans held by the Company.                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | d. | Treatment of
  deferred income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under
  Israeli GAAP, companies reporting in or linked to the U.S. dollar provide
  deferred income taxes on differences between the financial reporting and tax
  bases of assets and liabilities.                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under U.S.
  GAAP, however, paragraph 9(f) of SFAS No. 109, Accounting for Income Taxes,
  creates an exception which prohibits the recognition of deferred tax
  liabilities or assets that arise from differences between the financial
  reporting and tax bases of assets and liabilities that are remeasured from
  the local currency into U.S. dollars using historical exchange rates and that
  result from (i) changes in exchange rates or (ii) indexing for tax purpose.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under
  Israeli GAAP, deferred income taxes are not provided on the undistributed tax
  exempt profits of an approved enterprise, whose such profits have been
  reinvested and will not be distributed to the Companys shareholders.                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The Company
  has not provided deferred income taxes in respect of undistributed tax exempt
  profits attributed to the approved enterprise of affiliates under the
  alternative system of benefits (Tax Holiday), which may be distributed,
  since it is the Companys policy to not initiate a distribution of dividend
  that involves an additional tax liability to the Company.                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under U.S.
  GAAP, deferred taxes are provided on the undistributed tax exempt profits of
  domestic affiliates in Israel that arose subsequent to December 15, 1992.                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under
  Israeli GAAP, deferred income taxes should not be provided for gain resulting
  from the issuance of shares in an affiliate to a third party.                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under U.S.
  GAAP, deferred income taxes should be provided for the gain resulting from
  the issuance of shares in an affiliate to a third party. Such deferred income
  taxes are debited to equity when the related gain is recorded in equity,
  after utilizing net operating losses for tax purposes.                                                                                                                                                                           

- 37 -

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B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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|NOTE 12:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------

| |  | Under
  Israeli GAAP deferred income taxes should not be provided for the realization
  of investments in subsidiary or in affiliates that management intends to
  retain.                                                                                                                                                                 
| |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                                                                                                                                                                                                                                            
| |  | Under U.S.
  GAAP deferred income taxes should be provided for the realization of
  investment in subsidiaries or in affiliates that management intends to
  retain.                                                                                                                                                                       
| |  |                                                                                                                                                                                                                                                                                                                                            
| |  | Income from
  gain on sale of shares by affiliates as described in Note 12b is credited to
  equity. Tax liability gives rise to tax benefits from the utilization of
  current period loss and prior years carryforward losses, is allocated to the
  net income (loss) for the year. The remaining tax liability is debited to
  equity .
| |  |                                                                                                                                                                                                                                                                                                                                            
| |  | There is no
  effect of the aforementioned differences on the consolidated financial
  statements of the Company.                                                                                                                                                                                                                          
| |  |                                                                                                                                                                                                                                                                                                                                            
| |  | A valuation
  allowance has been recorded against the deferred tax assets as follows:                                                                                                                                                                                                                                                      

| |                                                                |  | December 31,
| | -------------------------------------------------------------- |  | ------------
| |                                                                |  |             
| |                                                                |  | 2002        
| |                                                                |  |             
| |                                                                |  |             
| | Deferred tax liability from decrease in interest in affiliates |  | $           
| | Temporary differences                                          |  |             
| | Tax losses and deductions                                      |  |             
| |                                                                |  |             
| |                                                                |  |             
| | Liabilities before valuation allowance                         |  |             
| | Valuation allowance                                            |  |             
| |                                                                |  |             
| |                                                                |  |             
| | Net deferred tax liability                                     |  | $           
| |                                                                |  |             
| |                                                                |  |             
| | Deferred tax liability allocated to equity                     |  | $           
| | Deferred tax assets allocated to income taxes                  |  |             
| |                                                                |  |             
| |                                                                |  |             
| |                                                                |  | $           
| |                                                                |  |             

| |  | A
  reconciliation of the theoretical tax expenses, assuming all income is
  taxable at the statutory rates (36%) applicable in Israel and the actual tax
  expenses, is as follows:
| |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                         |  | Year ended December 31,
| | ------------------------------------------------------------------------------------------------------- |  | -----------------------
| |                                                                                                         |  |                        
| |                                                                                                         |  | 2002                   
| |                                                                                                         |  |                        
| |                                                                                                         |  |                        
| | Loss before taxes on income                                                                             |  | $                      
| |                                                                                                         |  |                        
| |                                                                                                         |  |                        
| | Theoretical tax benefits                                                                                |  | $                      
| | Carryforward losses and other temporary 
  differences, for which a valuation 
  allowance was provided |  |                        
| | Deferred taxes in respect of prior year losses                                                          |  |                        
| | Others                                                                                                  |  |                        
| |                                                                                                         |  |                        
| |                                                                                                         |  |                        
| | Taxes on
  income in statements of operations                                                           |  | $                      
| |                                                                                                         |  |                        

- 38 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 12:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------

| | e. | Loss per
  share:                                                                                                                                                                                                                                                    
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                      
| |    | 1.                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                      
| |    | 2.                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                      
| | f. | Convertible
  securities of subsidiaries and affiliates:                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                      
| |    | Under
  Israeli GAAP, when exercise of convertible securities of subsidiaries or
  affiliates is deemed probable and a loss in respect of this dilution will
  result in the parent company, a provision for this loss is recorded.                                  
| |    |                                                                                                                                                                                                                                                                      
| |    | Under U.S.
  GAAP, such a loss in the parent company is recorded when the conversion of
  the debenture or the exercise of a warrant actually occurs in the subsidiary.                                                                                              
| |    |                                                                                                                                                                                                                                                                      
| | g. | Accrued
  severance pay:                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                      
| |    | According to
  Israeli GAAP, accrued severance pay is included in the balance sheet net, and
  income from earnings on amounts funded is netted from the severance pay.                                                                                              
| |    |                                                                                                                                                                                                                                                                      
| |    | According to
  U.S. GAAP accrued severance pay is included in the balance sheets at the
  total liabilities amount and total amounts funded through provident fund and
  insurance policies. Income from earnings on amounts funded is added to
  severance pay fund.
| |    |                                                                                                                                                                                                                                                                      
| |    | The
  difference between the two methods described above is immaterial with respect
  to the consolidated financial statements of the Company.                                                                                                                       
| |    |                                                                                                                                                                                                                                                                      

- 39 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 12:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------

| | h. | Goodwill amortization:                                                                                                                                                                                                                                                                                                                                                                                
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under
  Israeli GAAP, goodwill is amortized over the estimated period of benefit, but
  usually not longer than 10 years.                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under U.S. GAAP, Goodwill arose from acquisitions prior July 1, 2001,
  was amortized until December 31, 2001, on a straight-line basis over the
  estimated period of benefit. Under Statement of Financial Accounting Standard
  No. 142, Goodwill and Other Intangible Assets goodwill acquired in a
  business combination for which date is on or after July 1, 2001, shall not be
  amortized.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| | i. | Dividend
  declared:                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under
  Israeli GAAP, dividends declared subsequent to balance sheet date are
  presented as separate component in shareholders equity.                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under U.S.
  GAAP, the dividends are not recorded as a separate component in shareholders
  equity.                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| | f. | Negative
  goodwill:                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under
  Israeli GAAP, negative goodwill is amortized over the estimated period of
  benefit, but no longer than 10 years.                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Under U.S.
  GAAP, negative goodwill arose from acquisitions prior July 1, 2001 should be written
  off and recognized as the cumulative effect of a change in accounting
  principle when SFAS No. 142 is adopted.                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The
  difference between the two methods described above was immaterial in respect
  to the consolidated financial statements of the Company.                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| | k. | Summarized
  financial information of 50% or less owned subsidiaries:                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | The
  following information summarizes supplemental information for the Companys
  significant affiliates, which are Coresma and BrightCom in 2002 and Coresma,
  BrightCom and VIZ in 2001 and 2000.                                                                                                                                                                                                

| |                         |  | December 31,
| | ----------------------- |  | ------------
| |                         |  |             
| |                         |  | 2002        
| |                         |  |             
| |                         |  |             
| | Current assets          |  | $           
| | Non-current assets      |  | $           
| | Current liabilities     |  | $           
| | Non-current liabilities |  | $           

- 40 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 12:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------

| |                                 |  | Year ended December 31,
| | ------------------------------- |  | -----------------------
| |                                 |  |                        
| |                                 |  | 2002                   
| |                                 |  |                        
| |                                 |  |                        
| | Revenues                        |  | $                      
| | Gross profit                    |  | $                      
| | Loss from continuing operations |  | $                      
| | Net loss                        |  | $                      

| | l. | Impact of
  recently issued accounting standards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In January
  2003, the FASB issued Interpretation No. 46, Consolidation of Variable
  Interest Entities (FIN 46). The objective of FIN 46 is to improve financial
  reporting by companies involved with variable interest entities. A variable
  interest entity is a corporation, partnership, trust, or any other legal
  structure used for business purposes that either (a) does not have equity
  investors with voting rights or (b) has equity investors that do not provide
  sufficient financial resources for entity to support its activities. FIN 46
  requires a variable interest entity to be consolidated by a company if that
  company is subject to a majority of the risk of loss from the variable
  interest entitys activities or entitled to receive a majority of the
  entitys residual returns or both. FIN 46 also requires disclosures about
  variable interest entities that the company is not required to consolidate
  but in which it has a significant variable interest. The consolidation
  requirements of Interpretation 46 apply immediately to variable interest
  entities created after January 31, 2003. The consolidation requirements apply
  to older entities in the first fiscal year or interim period beginning after
  June 15, 2003. Certain of the disclosure requirements apply in all financial
  statements issued after January 31, 2003, regardless of when the variable
  interest entity was established. As of December 31, 2002, the Company has not
  yet determined what effect, if any, FIN 46 will have on its consolidated
  financial statements.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | m. | The effect
  of the material differences between Israeli and U.S. GAAP of the
  aforementioned items on the financial statements is as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | On the
  consolidated statements of operations:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                                                    |  | Year ended December 31,
| | -------------------------------------------------- |  | -----------------------
| |                                                    |  |                        
| |                                                    |  | 2002                   
| |                                                    |  |                        
| | Net loss as reported, according to Israeli 
  GAAP |  | $                      
| | Gain from decrease in interest in affiliates       |  |                        
| | Excess loss over investments in affiliates         |  |                        
| |                                                    |  |                        
| |                                                    |  |                        
| | Net loss according to U.S. GAAP                    |  | $                      
| |                                                    |  |                        

| |  | On the
  consolidated balance sheets:                                                                                
| |  | ---------------------------------------------------------------------------------------------------------------------
| |  |                                                                                                                      
| |  | According to
  U.S. GAAP the investments amount as of December 31, 2002 and 2001 was
  $ 0 and $ 4,365, respectively.

- 41 -

---

---

B.V.R. TECHNOLOGIES LTD. AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---

|NOTE 12:- | EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI GAAP AND U.S. GAAP (Cont.)
|--------- | -------------------------------------------------------------------------

| | n. | Basic and
  diluted net earnings (loss) per share:
| | -- | --------------------------------------------------

| |                                       |  | Year ended December 31,
| | ------------------------------------- |  | -----------------------
| |                                       |  |                        
| |                                       |  | 2002                   
| |                                       |  |                        
| | As reported according to Israeli GAAP |  |                        
| | From continuing operations            |  | $                      
| |                                       |  |                        
| |                                       |  |                        
| | From discontinued operations          |  | $                      
| |                                       |  |                        
| |                                       |  |                        
| | Net loss                              |  | $                      
| |                                       |  |                        
| |                                       |  |                        
| | Per U.S. GAAP                         |  |                        
| | From continuing operations            |  | $                      
| |                                       |  |                        
| |                                       |  |                        
| | From discontinued operations          |  | $                      
| |                                       |  |                        
| |                                       |  |                        
| | Net loss                              |  | $                      
| |                                       |  |                        

|NOTE 13:- | SUBSEQUENT EVENTS                                                                                         
|--------- | ----------------------------------------------------------------------------------------------------------
|          |                                                                                                           
|          | Subsequent to the balance sheet date, the Company paid $ 1,500 in cash, as a dividend to its shareholders.

- - - - - - - - -

- 42 -

---

---

BRIGHTCOM TECHNOLOGIES LTD.

CONSOLIDATED FINANCIAL STATEMENTS

2002 ANNUAL REPORT

---

---

BRIGHTCOM TECHNOLOGIES LTD.

CONSOLIDATED FINANCIAL STATEMENTS

2002 ANNUAL REPORT

TABLE OF CONTENTS

|                                                                          | Page                                           
|------------------------------------------------------------------------- | -----------------------------------------------
|                                                                          |                                                
|AUDITORS REPORT                                                          | 2                                              
|                                                                          |                                                
|CONSOLIDATED FINANCIAL STATEMENTS - IN U.S.
    DOLLARS ($) IN THOUSANDS: |                                                
|                                                                          |                                                
|                                                                          | Balance
  sheets                               
|                                                                          |                                                
|                                                                          | Statements
  of operations                     
|                                                                          |                                                
|                                                                          | Statements
  of changes in shareholders equity
|                                                                          |                                                
|                                                                          | Statements
  of cash flows                     
|                                                                          |                                                
|                                                                          | Notes to
  financial statements                

---

---

---

---

---

AUDITORS REPORT

To the shareholders of

BRIGHTCOM TECHNOLOGIES LTD.

We have audited the consolidated balance
sheets of Brightcom Technologies Ltd. (the Company) and its subsidiary as of
December 31, 2002 and 2001,and the related consolidated statements of
operations, changes in shareholders equity and cash flows for the each of the
years then ended. These consolidated financial statements are the
responsibility of the Companys Board of Directors and management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.

We conducted our audits in
accordance with auditing standards generally accepted in Israel and in the
United States of America, including those prescribed by the Israeli Auditors
(Mode of Performance) Regulations, 1973. 
Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by the Companys Board of Directors and management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiary as of December
31, 2002, and 2001, and the consolidated results of their operations, changes
in shareholders equity and their cash flows for each of the years then ended,
in conformity with accounting principles generally accepted in Israel and in
the United States of America.

The accompanying financial statements have been prepared assuming that
Brightcom Technologies Ltd. will continue as a going concern. As discussed in
note 1 to the financial statements, Brightcom Technologies Ltd. has suffered
recurring losses from operations that raises substantial doubt about its
ability to continue as a going concern. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.

Tel-Aviv, Israel
      ________, 2002

2

---

---

BRIGHTCOM TECHNOLOGIES LTD.

CONSOLIDATED BALANCE SHEETS

(In thousands)

|                                       |                                                                                                                                                                                                                 |  |      |    |  | December 31 |  
|-------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -- |  | ----------- | -
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  | Note |    |  | 2002        |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|A 
  s  s  e  t  s                     |                                                                                                                                                                                                                 |  |      |    |  |             |  
|CURRENT ASSETS:                        |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | Cash and
  cash equivalents                                                                                                                                                                                     |  |      |    |  |             |  
|                                       | Short-term
  deposits                                                                                                                                                                                           |  |      |    |  |             |  
|                                       | Prepaid and
  other current assets                                                                                                                                                                              |  |      | 4a |  |             |  
|                                       | Inventories                                                                                                                                                                                                     |  |      | 4b |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | T o t a l  current assets                                                                                                                                                                                       |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|LONG-TERM ASSETS:                      |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | Long-term
  lease deposits                                                                                                                                                                                      |  |      |    |  |             |  
|                                       | Property and
  equipment, net                                                                                                                                                                                   |  |      | 3  |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | T o t a l   long-term assets                                                                                                                                                                                    |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | T o t a
  l  assets                                                                                                                                                                                             |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|Liabilities and shareholders equity   |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                      
|CURRENT LIABILITIES:                   |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | Short-term
  bank credit                                                                                                                                                                                        |  |      |    |  |             |  
|                                       | Trade
  payables                                                                                                                                                                                                |  |      |    |  |             |  
|                                       | Other
  accounts payable and accruals                                                                                                                                                                           |  |      | 4c |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | T o t a
  l  current liabilities                                                                                                                                                                                |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|LONG-TERM LIABILITY-                   |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | Long-term
  bank credit                                                                                                                                                                                         |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|COMMITMENTS AND CONTINGENT LIABILITIES |                                                                                                                                                                                                                 |  | 10   |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | T o t a
  l  liabilities                                                                                                                                                                                        |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|SHAREHOLDERS EQUITY:                  |                                                                                                                                                                                                                 |  | 7    |    |  |             |  
|                                       | Ordinary
  shares of NIS 0.01 par value; 50,000,000 shares authorized at
  December 31, 2002 and 2001; 19,866,165 and 19,817,765 shares
  issued and outstanding at December 31, 2002 and 2001,
  respectively. |  |      |    |  |             |  
|                                       | Series A
  convertible preferred shares of NIS 0.01 par value;
  10,000,000 shares authorized, 5,043,616 shares issued and
  outstanding at December 31, 2002 and 2001                                          |  |      |    |  |             |  
|                                       | Additional
  paid-in capital                                                                                                                                                                                    |  |      |    |  |             |  
|                                       | Deferred
  stock-based  compensation                                                                                                                                                                            |  |      |    |  |             |  
|                                       | Accumulated
  deficit                                                                                                                                                                                           |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       | T o t a
  l  liabilities and shareholders
  equity                                                                                                                                                             |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             | $
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  
|                                       |                                                                                                                                                                                                                 |  |      |    |  |             |  



| | Tomer Kariv           |  | Alon Bloomenfeld | 
| | --------------------- |  | ---------------- | 
| | Chairman of The Board |  | CFO              | 
| |                       |  |                  | 
| |                       |  |                  | 

Date of approval of the consolidated financial statements: ________,
2002.

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

3

---

---

BRIGHTCOM TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

|                                                  |                                                     | 2002 |   | 2001  |      
|------------------------------------------------- | --------------------------------------------------- | ---- | - | ----- | -----
|                                                  |                                                     |      |   |       |      
|REVENUES                                          |                                                     |      | $ | 206   |      
|COST OF
  REVENUE                                 |                                                     |      |   | 116   |      
|                                                  |                                                     |      |   |       |      
|GROSS
  MARGIN                                    |                                                     |      |   | 90    |      
|OPERATING
  EXPENSES:                             |                                                     |      |   |       |      
|RESEARCH
  AND DEVELOPMENT EXPENSES:              |                                                     |      |   |       |      
|                                                  | Research and development,
  other, net              |      |   |       | 4,589
|                                                  | Amortization of non-cash
  stock-based compensation |      |   |       | 9    
|                                                  |                                                     |      |   |       |      
|                                                  | T o t a l  research and
  development               |      |   |       | 4,598
|                                                  |                                                     |      |   |       |      
|MARKETING,
  GENERAL AND ADMINISTRATIVE EXPENSES: |                                                     |      |   |       |      
|                                                  | Marketing, general and
  administrative, other      |      |   |       | 2,854
|                                                  | Amortization of non-cash
  stock-based compensation |      |   |       | 78   
|                                                  |                                                     |      |   |       |      
|                                                  | T o t a l marketing,
  general and administrative   |      |   |       | 2,932
|                                                  |                                                     |      |   |       |      
|OPERATING
  LOSS                                  |                                                     |      |   | 7,440 |      
|                                                  |                                                     |      |   |       |      
|FINANCIAL
  EXPENSES (INCOME) , net:              |                                                     |      |   |       |      
|                                                  | Financial income, other,
  net                      |      |   |       | (5   
|                                                  | Amortization of non-cash
  warrants                 |      |   |       | 39   
|                                                  |                                                     |      |   |       |      
|                                                  | Total financial expenses
  (income)                 |      |   |       | 34   
|                                                  |                                                     |      |   |       |      
|OTHER
  EXPENSES                                  |                                                     |      |   | 1     |      
|                                                  |                                                     |      |   |       |      
|NET LOSS                                          |                                                     |      | $ | 7,475 |      
|                                                  |                                                     |      |   |       |      
|                                                  |                                                     |      |   |       |      

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

4

---

---

BRIGHTCOM TECHNOLOGIES LTD.

STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY

(In thousands, except share
data)

|                               |                                                                     | Ordinary shares |            | Preferred shares   |  | Additional
  paid-in
  capital |    | Deferred
  stock-based
  compensation |  | Accumulated
  deficit |           | Total
  shareholders
  equity | 
|------------------------------ | ------------------------------------------------------------------- | --------------- | ---------- | ------------------ |  | ------------------------------ | -- | ------------------------------------- |  | --------------------- | --------- | ------------------------------ | 
|                               |                                                                     |                
|Number 
  of shares            |                                                                     | Amount          |            | Number
  of shares |  | Amount                        
|                               |                                                                     |                 |            |                    |  |                                |    |                                       |  |                       |           |                                | 
|BALANCE AT
  JANUARY 1, 2001   |                                                                     |                 | 12,885,504 |                    |  |                                | 32 |                                       |  |                       | -         |                                | 
|CHANGES
  DURING 2001:         |                                                                     |                 |            |                    |  |                                |    |                                       |  |                       |           |                                | 
|                               | Issuance of series A
  preferred shares, net                        |                 |            | -                  |  |                                |    | -                                     |  |                       |           | 5,043,616                      | 
|                               | Exercise of warrants                                                |                 |            | 559,616            |  |                                |    | 1                                     |  |                       |           | -                              | 
|                               | Exercise of options                                                 |                 |            | 18,000             |  |                                |    | *                                     |  |                       |           | -                              | 
|                               | Conversion of convertible
  loans into ordinary shares              |                 |            | 6,354,645          |  |                                |    | 16                                    |  |                       |           | -                              | 
|                               | Deferred compensation
  related to employee stock options grants    |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               | Compensation related to
  grant of warrants                         |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               | Amortization of deferred
  stock-based compensation                 |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               | Amounts assigned to options
  granted to none-employees             |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               | Net loss                                                            |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               |                                                                     |                 |            |                    |  |                                |    |                                       |  |                       |           |                                | 
|BALANCE AT
  DECEMBER 31, 2001 |                                                                     |                 | 19,817,765 |                    |  | $                              | 49 |                                       |  |                       | 5,043,616 |                                | 
|                              
|CHANGES
  DURING 2002:         |                                                                     |                 |            |                    |  |                                |    |                                       |  |                       |           |                                | 
|                               | Amortization of warrant granted in connection with
  line of credit |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               | Exercise of options                                                 |                 |            | 48,400             |  |                                |    | *                                     |  |                       |           | -                              | 
|                               | Amortization of deferred stock-based compensation                   |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               | Amounts assigned to options granted to non-employees                |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               | Net loss                                                            |                 |            | -                  |  |                                |    | -                                     |  |                       |           | -                              | 
|                               |                                                                     |                 |            |                    |  |                                |    |                                       |  |                       |           |                                | 
|BALANCE AT
  DECEMBER 31, 2002 |                                                                     |                 | 19,866,165 |                    |  | $                              | 49 |                                       |  |                       | 5,043,616 |                                | 
|                               |                                                                     |                 |            |                    |  |                                |    |                                       |  |                       |           |                                | 

* Representing an amount less than $1,000.

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

5

---

---

BRIGHTCOM TECHNOLOGIES LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

|                                                         |                                                                                   | 2002 |         | 2001      |  
|-------------------------------------------------------- | --------------------------------------------------------------------------------- | ---- | ------- | --------- | -
|                                                         |                                                                                   |      |         |           |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                    |                                                                                   |      |         |           |  
|                                                         | Net loss                                                                          |      |         | $  (7,475 | )
|                                                         | Adjustments
  to reconcile net loss to net cash used in
  operating activities:   |      |         |           |  
|                                                         | Depreciation
  and amortization                                                   |      |         | 715       |  
|                                                         | Accrued
  severance pay, net of amount founded                                    |      |         | -         |  
|                                                         | Compensation
  related to grant of warrants                                       |      |         | 39        |  
|                                                         | Amortization
  of deferred compensation related to
  employee stock option grants |      |         | 87        |  
|                                                         | Amounts
  assigned to options granted to non-employees                            |      |         | 11        |  
|                                                         | Gain on sale
  of property and equipment                                          |      |         | -         |  
|                                                         | Interest on
  principle of long term Bank loans                                   |      |         | 6         |  
|                                                        
|                                                         | Changes in
  operating assets and liabilities:                                    |      |         |           |  
|                                                         | Prepaid and
  other current assets                                                |      |         | 409       |  
|                                                         | Inventories                                                                       |      |         | (275      | )
|                                                         | Deferred
  revenue                                                                |      |         | -         |  
|                                                         | Accounts
  payable and accruals                                                   |      |         | (302      | )
|                                                         |                                                                                   |      |         |           |  
|                                                         | Net cash
  used in operating activities                                           |      |         | (6,785    | )
|                                                         |                                                                                   |      |         |           |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                    |                                                                                   |      |         |           |  
|                                                         | Purchase of
  property and equipment                                              |      |         | (240      | )
|                                                         | Amounts
  carried to long-term lease deposit                                      |      |         |           |  
|                                                         | Proceeds
  from  (acquisition of) short-term
  deposits, net                      |      |         | 4,217     |  
|                                                         | Proceeds
  from sale of property and equipment                                    |      |         | -         |  
|                                                         |                                                                                   |      |         |           |  
|                                                         | Net cash
  provided by (used in) investing activities                             |      |         | 3,977     |  
|                                                         |                                                                                   |      |         |           |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                    |                                                                                   |      |         |           |  
|                                                         | Issuance of
  shares, net                                                         |      |         | -         |  
|                                                         | Exercise of
  warrants                                                            |      |         | -         |  
|                                                         | Proceeds
  from shareholders convertible loans                                   |      |         | -         |  
|                                                         | Discharged
  of shareholders convertible loans                                   |      |         | -         |  
|                                                         | Long-term
  loans received                                                        |      |         |           |  
|                                                         | Short-term
  bank credit, net and current maturities of long-term loans           |      |         | 19        |  
|                                                         |                                                                                   |      |         |           |  
|                                                         | Net cash
  provided by financing activities                                       |      |         | 19        |  
|                                                         |                                                                                   |      |         |           |  
|INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         |                                                                                   |      | (2,789  | )         |  
|                                                        
|CASH AND CASH EQUIVALENTS AT THE BEGINNING
  OF THE YEAR |                                                                                   |      | 4,378   |           |  
|                                                         |                                                                                   |      |         |           |  
|CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR         |                                                                                   |      | $ 1,589 |           |  
|                                                         |                                                                                   |      |         |           |  
|                                                         |                                                                                   |      |         |           |  

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

6

---

---

BRIGHTCOM TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

|NOTE
  1  - | THE
  COMPANY                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | BrightCom Technologies
  Ltd. (the Company) is a fabless wireless communication semiconductor
  company, founded on August 17, 1998. The Company develops and markets silicon
  and software solutions for Personal Area Networking over the Bluetooth
  Wireless Standard.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | The accompanying financial
  statements have been prepared assuming that BrightCom Technologies Ltd.  will continue as a going concern. the
  Company has incurred losses and negative cash flows from operations since
  inception. For the period ended December 31, 2002, the Company incurred a
  loss from operations of approximately $ 23,758,000 and negative cash flows
  from operations of $ 6,785,000. Management expects operating losses and
  negative cash flows to continue for the foreseeable future for the year ended
  December 31,2002. Management is seeking additional debt and equity financing
  to fund operations, however, there is no assurance that management will
  obtain additional financing. Failure to successfully develop and market the
  product, to generate sufficient revenues could have a material adverse effect
  on the Companys ability to continue as a going concern. The financial
  statements do not include any adjustments that may result from the outcome of
  these uncertainties.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|NOTE
  2  - | SUMMARY
  OF SIGNIFICANT ACCOUNTING POLICIES                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | The significant accounting
  policies, applied on a consistent basis, are as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

7

---

---

BRIGHTCOM TECHNOLOGIES LTD.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  2  - | SUMMARY
  OF SIGNIFICANT ACCOUNTING POLICIES(continued):
|----------- | --------------------------------------------------------
|            |                                                         
|            | c.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            | d.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            | e.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            | f.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            | g.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            | h.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            |                                                         

| |                                      |  |  | %    | 
| | ------------------------------------ |  |  | ---- | 
| |                                      |  |  |      | 
| | Computers and peripheral
  equipment |  |  | 33   | 
| | Electronic equipment                 |  |  | 15   | 
| | Office furniture and
  equipment     |  |  | 7-15 | 

| |    | Leasehold improvements are
  amortized on a straight  line basis
  over the lesser of their estimated useful life or the lease term.                                                                              
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                   
| | i. | Stock-based
  compensation                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                   
| |    | The Company accounts for
  stock-based employee compensation arrangements in accordance with the
  provisions of Accounting Principles Board Opinion (APB) No. 25, Accounting
  for stock Issued to Employees.

8

---

---

BRIGHTCOM TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  2  - | SUMMARY
  OF SIGNIFICANT ACCOUNTING POLICIES(continued):
|----------- | --------------------------------------------------------
|            |                                                         
|            | j.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            | k.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            |                                                         
|            |                                                         
|            | l.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            | m.                                                      
|            |                                                         
|            |                                                         
|            |                                                         
|            | n.                                                      
|            |                                                         
|            |                                                         
|            |                                                         

9

---

---

BRIGHTCOM TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  2  - | SUMMARY
  OF SIGNIFICANT ACCOUNTING POLICIES (continued):
|----------- | ---------------------------------------------------------
|            |                                                          
|            | o.                                                       
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          
|            |                                                          

10

---

---

BRIGHTCOM TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  3  - | PROPERTY
  AND EQUIPMENT:
|----------- | -------------------------

| |                                                     |  | December 31    |      
| | --------------------------------------------------- |  | -------------- | -----
| |                                                     |  |                |      
| |                                                     |  | 2002           |      
| |                                                     |  |                |      
| |                                                     |  | In
  thousands |      
| |                                                     |  |                |      
| | Cost:                                               |  |                |      
| | Computers
  and peripheral equipment                |  | $              | 2,137
| | Electronic
  equipment                              |  |                | 183  
| | Office
  furniture and equipment                    |  |                | 261  
| | Leasehold
  improvements                            |  |                | 553  
| |                                                     |  |                |      
| |                                                     |  |                | 3,134
| |                                                     |  |                |      
| | L e s s-accumulated
  depreciation and amortization |  |                | 1,668
| |                                                     |  |                |      
| |                                                     |  | $              | 1,466
| |                                                     |  |                |      

|NOTE 4
  - | SUPPLEMENTARY
  BALANCE SHEET INFORMATION:
|---------- | ------------------------------------------

| |                                              |  | December 31    |    
| | -------------------------------------------- |  | -------------- | ---
| |                                              |  |                |    
| |                                              |  | 2002           |    
| |                                              |  |                |    
| |                                              |  | In
  thousands |    
| |                                              |  |                |    
| | a.    Prepaid
  and other current assets:    |  |                |    
| | Institutions                                 |  | $              | 19 
| | Prepaid
  expenses                           |  |                | 17 
| | Employees                                    |  |                | 34 
| | Others                                       |  |                | 109
| |                                              |  |                |    
| |                                              |  | $              | 179
| |                                              |  |                |    
| |                                              |  |                |    
| | b.    Inventories:                           |  |                |    
| | Finished
  products                          |  | $              | 650
| |                                              |  |                |    
| |                                              |  | $              | 650
| |                                              |  |                |    
| |                                              |  |                |    
| | c.    Other
  accounts payable and accruals: |  |                |    
| | Employees
  and payroll accruals             |  | $              | 439
| | Accrued
  expenses                           |  |                | 231
| |                                              |  |                |    
| |                                              |  | $              | 670
| |                                              |  |                |    

11

---

---

BRIGHTCOM TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  5  - | LIABILITY
  FOR EMPLOYEE RIGHTS UPON RETIREMENT                                                                                                                                                                                                                                                                                                                                                                             
|----------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | Israeli law generally
  requires payment of severance pay upon dismissal of an employee or upon
  termination of employment in certain other circumstances. The Companys
  pension and severance pay liability to their employees is covered mainly by
  purchase of insurance policies.                                                                                                                                   
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | Severance pay for the
  Companys employees - under labor agreements, these external insurance
  policies provide severance pay liability. The severance pay liabilities
  covered by these insurance policies are not reflected in the financial
  statements as the severance pay risks have been irrevocably transferred to
  the insurance funds.                                                                       
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|NOTE
  6  - | SHAREHOLDERS
  CONVERTIBLE LOANS                                                                                                                                                                                                                                                                                                                                                                                           
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | Under the Founders
  Agreement, the Company received convertible loans in the amount of 
  approximately $ 1,500,000.  The
  loan was linked to the U.S. dollar and bear interest at a rate of LIBOR per
  annum, and was due for repayment within five years from the date of grant.  The loan may be converted into Ordinary
  shares of the Company at any time until August 2001, at a price of
  $ 0.375 per share.    
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | In 2000, the Company
  received a convertible loan in the amount of  $1,599,250. The loan was
  linked to the higher of the U.S. dollar exchange rate or the Israeli Consumer
  Price Index, bear interest at a rate of LIBOR per annum and was due for
  repayment within five years from the date of grant.  The loan may be converted at any time into Ordinary shares of
  the Company at a price of $ 0.5375 per share.
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | In June 2001, approximately
  $359,000 of the loans including the accrued interest of approximately $
  26,000 was paid back to the shareholders. The remaining amount of $
  2,765,000, including interest, has been converted into 6,354,645 shares.                                                                                                                                                                      
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|NOTE
  7  - | SHARE
  CAPITAL                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | In June 2001, the Company
  effected a 1:7 stock split through a stock dividend of ordinary and preferred
  shares. All references to preferred and ordinary shares amounts and prices
  have been retroactively restated to reflect the stock split.                                                                                                                                                                       
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | a.                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            | b.                                                                                                                                                                                                                                                                                                                                                                                                                          
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             
|            |                                                                                                                                                                                                                                                                                                                                                                                                                             

|           |                                |                          | Number of shares |            | Proceeds,
  net of
  issuance
  costs | 
|---------- | ------------------------------ | ------------------------ | ---------------- | ---------- | ------------------------------------- | 
|          
|Authorized |                                | Issued and
  outstanding
|           |                                |                          |                  |            |                                       | 
|           |                                |                          |                  |            |                                       | 
|           |                                |                          |                  |            |                                       | 
|           |                                |                          |                  |            |                                       | 
|           | Series A, NIS 0.01 par
  value |                          |                  | 10,000,000 |                                       | 
|           |                                |                          |                  |            |                                       | 

12

---

---

BRIGHTCOM
TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  7  - | SHARE
  CAPITAL(continued)
|----------- | --------------------------
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|NOTE 8  -   | STOCK
  OPTION PLANS:     
|            |                           
|            | a.                        
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           
|            |                           

13

---

---

BRIGHTCOM
TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  8  - | STOCK
  OPTION PLANS(continued)
|----------- | -------------------------------
|            |                                
|            |                                
|            |                                
|            |                                
|            | b.                             
|            |                                
|            |                                
|            |                                
|            |                                
|            |                                
|            |                                
|            |                                
|            |                                
|            |                                
|            |                                
|            |                                
|            |                                
|            | c.                             
|            |                                
|            | d.                             
|            |                                
|            |                                
|            |                                

14

---

---

BRIGHTCOM
TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  8  - | STOCK
  OPTION PLANS(continued):
|----------- | --------------------------------
|            |                                 
|            | e.                              
|            |                                 
|            |                                 
|            |                                 
|NOTE
  9  - | INCOME  TAXES :                 
|            |                                 
|            | a.                              
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 
|            |                                 

15

---

---

BRIGHTCOM
TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE
  9  - | INCOME
  TAXES(continued):               
|----------- | -----------------------------------------
|            |                                          
|            | b.                                       
|            |                                          
|            |                                          
|            |                                          
|            | c.                                       
|            |                                          
|            |                                          
|            |                                          
|            |                                          
|NOTE 10  -  | COMMITMENTS
  AND CONTINGENT LIABILITIES:
|            |                                          
|            | a.                                       
|            |                                          
|            |                                          
|            |                                          
|            |                                          
|            |                                          
|            |                                          
|            |                                          
|            |                                          
|            |                                          

| |      |  | In thousands |    
| | ---- |  | ------------ | ---
| |      |  |              |    
| | 2003 |  | $            | 104
| | 2004 |  |              | 41 
| |      |  |              |    
| |      |  | $            | 145
| |      |  |              |    

| | b. | Charges
  and guaranties:                                                                                                                                                                                                                                                                                               
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                         
| |    | 1)                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                         
| |    | 2)                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                         
| | c. | The Company is obligated
  to pay under a license agreement executed on July 1999, between the Company
  and Arc Cores Ltd, royalty fee per each chip sold or otherwise disposed of
  which contains Are Cores Ltd.s technology according to an agreed schedule.                                                       
| |    |                                                                                                                                                                                                                                                                                                                         
| | d. | Contingent
  liability                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                         
| |    | As of December 2001, the
  Company notified one of its vendors that a purchase order of software in a
  total amount of approximately $1.2 million is cancelled. The Company is
  unable to make a meaningful estimate of the amount or range of loss that
  could result from an unfavorable resolution of this matter.

16

---

---

BRIGHTCOM
TECHNOLOGIES LTD.

NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 11  - | RELATED
  PARTIES:
|---------- | ------------------
|           |                   
|           | a.                
|           |                   
|           | b.                
|           |                   
|           |                   
|           |                   
|           |                   
|           |                   
|           | c.                
|           |                   
|           |                   
|           |                   
|           | d.                
|           |                   
|           |                   

17

---

---

BRIGHTCOM TECHNOLOGIES LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

|NOTE 12 - | SUBSEQUENT EVENTS:
|--------- | ------------------
|          |                   
|          | a.                
|          |                   
|          | b.                
|          |                   
|          |                   
|          |                   
|          |                   

---

---

---

18

---

---

# CORESMA LTD.

# CONSOLIDATED FINANCIAL
STATEMENTS

# AS OF DECEMBER 31, 2002 
IN U.S. DOLLARS

# INDEX

|                                                  | Page 
|------------------------------------------------- | -----
|Report of Independent Auditors                    | 2    
|Consolidated Balance Sheets                       | 3 - 4
|Consolidated Statements of Operations             | 5    
|Statements of Changes in Shareholders' Deficiency | 6    
|Consolidated Statements of Cash Flows             | 7 - 8
|Notes to Consolidated Financial Statements        | 9-23 

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# REPORT OF INDEPENDENT AUDITORS

To the Shareholders ofCORESMA LTD.

We
have audited the accompanying consolidated balance sheets of Coresma Ltd. (the
Company) and its subsidiary as of December 31, 2001 and 2002 and the related
consolidated statements of operations, changes in shareholders deficiency and cash
flows for each of the two years in the period ended December 31, 2002. These financial
statements are the responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our audits.

We
did not audit the financial statements of Coresma Inc., a U.S. subsidiary, which
statements reflect total assets constituting 6% and 14% of the total consolidated assets
as of December 31, 2001 and 2002, respectively, and total revenues constituting 6% and 15%
of the total consolidated revenues for each of the two years in the period ended December
31, 2002. Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it related to data included for Coresma, Inc. is based
solely on the reports of other auditors.

We
conducted our audits in accordance with generally accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of the other auditors
provide a reasonable basis for our opinion.

In
our opinion, based on our audits and the reports of other auditors, the consolidated
financial statements referred to above, present fairly, in all material respects, the
consolidated financial position of the Company as of December 31, 2001 and 2002 and the
consolidated results of their operations and cash flows for each of the two years in the
period ended December 31, 2002, in conformity with generally accepted accounting
principles.

As
discussed in Note 1 to the consolidated financial statements, the Company has experienced
operating losses over the past few years, resulting in a deficit equity position. The
Companys financial position and operating results raise substantial doubts about its
ability to continue as a going concern. The financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that may result
from the outcome of this uncertainty.

| | Kost Forer & Gabbay 
in partnership with 
Michael Barzily &Co. 
A Member of Ernst & Young International
| | -------------------------------------------------------------------------------------------------------

Jerusalem, Israel
April 15, 2003

2

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CORESMA LTD.

CONSOLIDATED
BALANCE SHEETSU.S. dollars in thousands

|                                                                                                |        | December 31, |      
|----------------------------------------------------------------------------------------------- | ------ | ------------ | -----
|                                                                                                |        |              |      
|                                                                                                |        | 2001         |      
|                                                                                                |        |              |      
|                                                                                                | ASSETS |              |      
|                                                                                                |        |              |      
|CURRENT ASSETS:                                                                                 |        |              |      
|Cash and cash equivalents                                                                       |        | $            | 1,935
|Trade receivables (net of
  allowance for doubtful
  accounts of $ 205 as of December 31, 2002) |        |              | 3,289
|Other accounts receivable
  (Note 3)                                                            |        |              | 335  
|Work in progress (Note 4)                                                                       |        |              | -    
|Inventories (Note 5)                                                                            |        |              | 868  
|                                                                                                |        |              |      
|                                                                                                |        |              |      
|Total current assets                                                                            |        |              | 6,427
|                                                                                                |        |              |      
|                                                                                                |        |              |      
|LONG-TERM INVESTMENTS:                                                                          |        |              |      
|Severance pay fund (Note
  8)                                                                   |        |              | 363  
|                                                                                                |        |              |      
|                                                                                                |        |              |      
|PROPERTY AND EQUIPMENT,
  NET (Note 6)                                                          |        |              | 1,205
|                                                                                                |        |              |      
|                                                                                                |        |              |      
|                                                                                                |        |              | 7,995
|                                                                                                |        |              |      
|                                                                                                |        |              |      

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

3

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CORESMA LTD.

CONSOLIDATED
BALANCE SHEETSU.S. dollars in thousands (except share data)

|                                                                                                   |                                                        | December 31, |        
|-------------------------------------------------------------------------------------------------- | ------------------------------------------------------ | ------------ | -------
|                                                                                                   |                                                        |              |        
|                                                                                                   |                                                        | 2001         |        
|                                                                                                   |                                                        |              |        
|                                                                                                   | LIABILITIES
  AND
    SHAREHOLDERS DEFICIENCY         |              |        
|                                                                                                   |                                                        |              |        
|CURRENT LIABILITIES:                                                                               |                                                        |              |        
|                                                                                                   | Short-term bank credit                                 |              | $      
|                                                                                                   | Trade payables                                         |              |        
|                                                                                                   | Other accounts payable and
  accrued expenses (Note 7) |              |        
|                                                                                                   |                                                        |              |        
|                                                                                                   |                                                        |              |        
|Total current liabilities                                                                          |                                                        |              | 8,087  
|                                                                                                   |                                                        |              |        
|                                                                                                   |                                                        |              |        
|LONG-TERM LIABILITIES:                                                                             |                                                        |              |        
|                                                                                                   | Accrued severance pay
  (Note 8)                       |              |        
|                                                                                                   | Long-term loans from a
  shareholder (Note 9)          |              |        
|                                                                                                   | Convertible loans from
  shareholders (Note 10)        |              |        
|                                                                                                   |                                                        |              |        
|                                                                                                   |                                                        |              |        
|Total long-term
  liabilities                                                                      |                                                        |              | 8,281  
|                                                                                                   |                                                        |              |        
|                                                                                                   |                                                        |              |        
|COMMITMENTS AND CONTINGENT
  LIABILITIES (Note 13)                                                 |                                                        |              |        
|                                                                                                   |                                                        |              |        
|SHAREHOLDERS DEFICIENCY:                                                                          |                                                        |              |        
|Preferred A shares of NIS
  0.01 par value                                                         |                                                        |              |        
|Authorized, issued and
  outstanding - 348,150 shares as of
  December 31 2001 and 2002 (Note 14): |                                                        |              | 1      
|Preferred B shares of NIS
  0.01 par value                                                         |                                                        |              |        
|Authorized, issued and
  outstanding - 781,479 shares as of
  December 31 2001 and 2002 (Note 14): |                                                        |              | 2      
|Aggregate liquidation preference
  of $ 11,000 at December 31, 2001
  and 2002                     |                                                        |              | -      
|Ordinary shares of NIS
  0.01 par value:                                                           |                                                        |              |        
|Authorized 48,870,371 shares as of December 31, 2001 and
  2002                                    |                                                        |              |        
|Issued and outstanding -
  8, 547,605 shares as of
  December 31, 2001 and 2002                    |                                                        |              | 22     
|Additional paid-in capital                                                                         |                                                        |              | 16,344 
|Deferred stock
  compensation                                                                      |                                                        |              | (58    
|Accumulated deficit                                                                                |                                                        |              | (24,684
|                                                                                                   |                                                        |              |        
|Total shareholders
  deficiency                                                                   |                                                        |              | (8,373 
|                                                                                                   |                                                        |              |        
|                                                                                                   |                                                        |              |        
|                                                                                                   |                                                        |              | 7,995  
|                                                                                                   |                                                        |              |        
|                                                                                                   |                                                        |              |        

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

|                            |  |                          
|--------------------------- |  | -------------------------
|Moshe Eli
  General Manager |  | Yaron Shienman
  Chairman
|Date                       

4

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CORESMA LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS
U.S. dollars in thousands

|                                     |                                            | Year ended
  December 31, |       
|------------------------------------ | ------------------------------------------ | ------------------------- | ------
|                                     |                                            |                           |       
|                                     |                                            | 2001                      |       
|                                     |                                            |                           |       
|                                     |                                            |                           |       
|Sales (Note 16a)                     |                                            | $                         | 12,899
|Cost of sales                        |                                            |                           | 8,439 
|                                     |                                            |                           |       
|                                     |                                            |                           |       
|Gross profit                         |                                            |                           | 4,460 
|                                     |                                            |                           |       
|                                     |                                            |                           |       
|Operating expenses:                  |                                            |                           |       
|                                     | Research and development,
  net (Note 16a) |                           |       
|                                     | Selling and marketing                      |                           |       
|                                     | General and administrative                 |                           |       
|                                     |                                            |                           |       
|                                     |                                            |                           |       
|Total operating expenses             |                                            |                           | 8,869 
|                                     |                                            |                           |       
|                                     |                                            |                           |       
|Operating loss                       |                                            |                           | (4,409
|Financial expenses, net
  (Note 16b) |                                            |                           | (203  
|                                     |                                            |                           |       
|                                     |                                            |                           |       
|                                     |                                            |                           | (4,612
|Other income net                     |                                            |                           | 257   
|                                     |                                            |                           |       
|                                     |                                            |                           |       
|Loss for the year                    |                                            | $                         | (4,355
|                                     |                                            |                           |       

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

5

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CORESMA LTD.

STATEMENTS OF
CHANGES IN SHAREHOLDERSDEFICIENCYU.S. dollars in thousands (except shares data)

|                                                                                             |  | Ordinary
  shares |           | Other
  shares |  | Additional
  paid-in
  capital |     | Deferred stock
  compensation |  | Accumulated
  deficit |           | Total
  shareholders
  deficiency | 
|-------------------------------------------------------------------------------------------- |  | ----------------- | --------- | -------------- |  | ------------------------------ | --- | ----------------------------- |  | --------------------- | --------- | ---------------------------------- | 
|                                                                                             |  |                   |           |                |  |                                |     |                               |  |                       |           |                                    | 
|                                                                                             |  | Shares            |           | Amount         |  | Shares                         |     | Amount                        |  |                       |           |                                    | 
|                                                                                             |  |                   |           |                |  |                                |     |                               |  |                       |           |                                    | 
|Balance as of January 1, 2001                                                                |  |                   | 8,547,605 |                |  |                                | 22  |                               |  |                       | 1,129,629 |                                    | 
|Amortization of deferred
  stock compensation                                                |  |                   |           |                |  |                                | -.- |                               |  |                       | -.-       |                                    | 
|Beneficial conversion
  feature on issuance of
  convertible loan with
  detachable warrants |  |                   |           |                |  |                                | -.- |                               |  |                       | -.-       |                                    | 
|Loss for the year                                                                            |  |                   | -.-       |                |  |                                | -.- |                               |  |                       | -.-       |                                    | 
|                                                                                             |  |                   |           |                |  |                                |     |                               |  |                       |           |                                    | 
|Balance as
  of December 31, 2001                                                            |  |                   | 8,547,605 |                |  |                                | 22  |                               |  |                       | 1,129,629 |                                    | 
|                                                                                            
|Amortization of deferred
  stock compensation                                                |  |                   |           |                |  |                                | -.- |                               |  |                       | -.-       |                                    | 
|Loss for the year                                                                            |  |                   | -.-       |                |  |                                | -.- |                               |  |                       | -.-       |                                    | 
|                                                                                             |  |                   |           |                |  |                                |     |                               |  |                       |           |                                    | 
|Balance as
  of December 31, 2002                                                            |  |                   | 8,547,605 |                |  |                                | 22  |                               |  |                       | 1,129,629 |                                    | 
|                                                                                             |  |                   |           |                |  |                                |     |                               |  |                       |           |                                    | 

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

6

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CORESMA
LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS
U.S. dollars in thousands

|                                                                                     |                                                                                | Year ended
  December 31, |       
|------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------ | ------------------------- | ------
|                                                                                     |                                                                                |                           |       
|                                                                                     |                                                                                | 2001                      |       
|                                                                                     |                                                                                |                           |       
|                                                                                     |                                                                                |                           |       
|Cash flows from operating
  activities:                                              |                                                                                |                           |       
|Loss for the year                                                                    |                                                                                | $                         | (4,355
|Adjustments required to
  reconcile
  loss to net cash used in operating activities: |                                                                                |                           |       
|Capital loss                                                                         |                                                                                |                           | 1     
|                                                                                     | Accrued interest on and
  erosion of long-term loans
    and convertible loans |                           |       
|                                                                                     | Depreciation                                                                   |                           |       
|                                                                                     | Accrued severance pay, net                                                     |                           |       
|                                                                                     | Amortization of deferred
  compensation                                        |                           |       
|                                                                                     | Decrease in trade
  receivables                                                |                           |       
|                                                                                     | Discount of convertible
  loan
    issued with warrants                        |                           |       
|                                                                                     | Decrease (increase) in
  other accounts  receivable                            |                           |       
|                                                                                     | Increase in work in
  progress                                                 |                           |       
|                                                                                     | Decrease in inventories                                                        |                           |       
|Decrease in trade payables                                                           |                                                                                |                           | (141  
|Decrease in other accounts
  payable and
    accrued expenses                        |                                                                                |                           | (136  
|                                                                                     |                                                                                |                           |       
|                                                                                     |                                                                                |                           |       
|Net cash used in operating
  activities                                              |                                                                                |                           | (2,895
|                                                                                     |                                                                                |                           |       
|                                                                                     |                                                                                |                           |       
|Cash flows from investing
  activities:                                              |                                                                                |                           |       
|                                                                                     |                                                                                |                           |       
|Proceeds from sale of
  property and
    equipment                                   |                                                                                |                           | 14    
|Purchase of property and
  equipment                                                 |                                                                                |                           | (707  
|                                                                                     |                                                                                |                           |       
|Net cash used in investing
  activities                                              |                                                                                |                           | (693  
|                                                                                     |                                                                                |                           |       

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

7

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CORESMA LTD.

CONSOLIDATED
STATEMENTS OF CASH FLOWSU.S. dollars in thousands

|                                                               |  | Year ended
  December 31, |      
|-------------------------------------------------------------- |  | ------------------------- | -----
|                                                               |  |                           |      
|                                                               |  | 2001                      |      
|                                                               |  |                           |      
|                                                               |  |                           |      
|Cash flows from financing
  activities:                        |  |                           |      
|                                                               |  |                           |      
|Short-term bank credit,
  net                                  |  |                           | 2,087
|Convertible loans from
  shareholders                          |  |                           | 3,000
|                                                               |  |                           |      
|                                                               |  |                           |      
|Net cash provided by (used
  in) financing activities          |  |                           | 5,087
|                                                               |  |                           |      
|                                                               |  |                           |      
|Increase (decrease) in
  cash and cash equivalents             |  |                           | 1,499
|Cash and cash equivalents
  at the
    beginning of the year   |  |                           | 436  
|                                                               |  |                           |      
|Cash and cash equivalents
  at the
    end of the year         |  | $                         | 1,935
|                                                               |  |                           |      
|                                                               |  |                           |      
|Supplemental disclosure of
  non -cash financing
  activities: |  |                           |      
|                                                               |  |                           |      
|Cash paid during the year
  for:                               |  |                           |      
|                                                               |  |                           |      
|Interest                                                       |  | $                         | 218  
|                                                               |  |                           |      

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

8

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CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands

|NOTE 1:- | GENERAL                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | Coresma Ltd. (the Company) was incorporated under the laws of
  Israel in 1994 under the name NetGame Ltd. On May 22, 2000 the name was
  changed to Coresma Ltd.. The Company, which operates in one reportable
  segment, designs, develops and markets software-based products which enable
  data over cable service providers to offer high speed data traffic
  connectivity to private and business end-users. The Companys products
  operate on existing coaxial cable television networks worldwide.                                                                                                                                                     
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | In September 1999 the Company established a wholly-owned subsidiary
  in North America, Coresma Inc, which markets and distributes its products in
  the U.S.A..                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | A majority of the Companys sales are to Europe.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | For the year ended December 31, 2002 approximately 38% of the
  Companys total revenues derived from sales to one  customer in Sweden.
  The Company is dependent upon sole source suppliers for certain key
  components used in its products, including certain digital signal processing
  chips. Although there is a limited number of manufacturers of these
  particular components, management believes that other suppliers could provide
  similar components at comparable terms. A change in suppliers, however, could
  cause a delay in manufacturing and a possible loss of sales, which could
  adversely affect the operating results of the Company.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | Going Concern 
  The company has experienced operating losses over the past years, resulting
  in a deficit equity position. The companys activity has also decreased
  substantially during the year 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | The
  Companys financial position and operating results raise substantial doubts
  about the Companys ability to continue as a going concern. The
  consolidated financial statements do not include any adjustments to reflect
  the possible future effects on the recoverability and classification of
  assets or the amounts and classification of liabilities that may result from
  the outcome of this uncertainty.                                                                                                                                                                                                                                     

9

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CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

|NOTE 2:- | SIGNIFICANT ACCOUNTING POLICIES
|-------- | -------------------------------
|         |                                
|         | a.                             
|         |                                
|         |                                
|         |                                
|         | b.                             
|         |                                
|         |                                
|         |                                
|         | c.                             
|         |                                
|         |                                
|         |                                
|         | d.                             
|         |                                
|         |                                
|         |                                
|         | e.                             
|         |                                
|         |                                
|         |                                
|         |                                
|         |                                
|         | f.                             
|         |                                
|         |                                

10

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CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTSU.S. dollars in thousands

| |                                    |  |  | %                          | 
| | ---------------------------------- |  |  | -------------------------- | 
| |                                    |  |  |                            | 
| | Computers and peripheral equipment |  |  | 20  33                    | 
| | Office furniture and equipment     |  |  | 6  20                     | 
| | Motor vehicles                     |  |  | 15                         | 
| | Testing equipment                  |  |  | 50                         | 
| | Leasehold improvements             |  |  | Over the term of the lease | 

| | g. | Revenue recognition:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Revenues from product sales are recognized, according to SOP 97-2,
  Software Revenue Recognition (as amended) when delivery has occurred,
  persuasive evidence of an arrangement exists, the vendors fee is fixed or
  determinable and collectibility is probable.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    | The Company does not generally grant a right of return to its
  customers. When a right of return exists, the Company defers revenue until
  the right of return expires.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Revenue on development contracts is recognized according to the
  percentage of completion method, provided that milestones agreed upon are
  achieved, and where contract results can reasonably be estimated. Provisions
  for losses, if any, on uncompleted contracts are made in the period when such
  losses are apparent.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | h. | Research and
  development costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Research and
  development expenditures are charged to operations as incurred. FASB
  statement No. 86, Accounting for the Costs of Computer Software to be Sold,
  Leased or Otherwise Marketed, requires capitalization of certain software
  development costs subsequent to the establishment of technological
  feasibility. Based on the Companys product development process,
  technological feasibility is established upon the completion of a working
  model. The Company does not incur material costs between the completion of
  the working model and the point at which the product is ready for general
  release. Therefore, the Company has charged all costs to research and
  development expenses in the consolidated statement of operations during the
  period incurred.

11

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CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

| | i. | Debt issued with stock purchase warrants:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Debt issued with detachable stock purchase warrants is accounted for
  in accordance with the provisions of Accounting Principles Board Opinion  No. 14, Accounting for Convertible Debt
  and Debt Issued with Stock Purchase Warrants (APB No. 14). Under APB No.
  14, the portion of the proceeds of debt securities issued with detachable
  stock purchase warrants which is allocable to the warrants is accounted for
  as additional paid  in capital. The allocation is based on the relative fair
  values of the two securities at the time of issue. Any resulting discount or
  premium on the debt securities is accounted for as such and amortized over
  the term of the debt securities.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | j. | Convertible Debt:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Convertible debt is accounted for in accordance with the provisions
  of EITF 98  5 Accounting for Convertible Securities with Beneficial Conversion
  Features (EITF 98  5). Under EITF 98  5 an embedded beneficial
  conversion feature in convertible debt is accounted for as additional       paid  in capital.                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | k. | Advertising expenses:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Advertising expenses are charged to the consolidated statement of
  operations as incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | l. | Income taxes:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The Company accounts for income taxes in accordance with FASB
  statement No. 109, Accounting for Income Taxes. This Statement prescribes
  the use of the liability method whereby deferred tax assets and liability
  account balances are determined based on differences between financial
  reporting and tax bases of assets and liabilities and are measured using the
  enacted tax rates and laws that will be in effect when the differences are
  expected to reverse. The Company provides a valuation allowance, if
  necessary, to reduce deferred tax assets to their estimated realizable value.                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | m. | Warranty costs:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | The Company provides warranty up to 12 months, at no extra charge. A
  provision is recorded for probable costs, based on the Companys and
  managements experience.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

12

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

| | n. | Concentrations of credit risk:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Financial instruments that potentially subject the Company and its
  subsidiary to concentrations of credit risk consist primarily of cash and
  cash equivalents and trade receivables. The majority of the Companys cash
  and cash equivalents are invested in dollar and dollar linked instruments
  with major Israeli banks. Management believes that the financial institutions
  that hold the Companys investments are financially sound, and accordingly,
  minimal credit risk exists with respect to these investments.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Trade
  receivables of the Company and its subsidiary are derived from sales to
  customers located primarily in Europe and North America. As of December 31,
  2002, the Companys trade receivables include the amount of $ 498 derived
  from one customer in Finland. The Company performs ongoing credit evaluations
  of its customers. An allowance for doubtful accounts is provided with respect
  to those amounts that the Company has determined to be doubtful of
  collection.                                         
| |    | The Company
  has no significant off-balance sheet concentration of credit risk, such as
  foreign exchange contracts or other foreign hedging arrangements.                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | o. | Stock-based compensation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company has elected to follow Accounting Principles Board Opinion
  No. 25, Accounting for Stock Issued to Employees (APB-25) and
  Interpretation No. 44, Accounting for Certain Transactions Involving Stock
  Compensation, in accounting for its employee stock based compensation. Under
  APB-25, when the exercise price of the Companys employee stock options is
  less than the market price of the underlying stock on the date of grant,
  compensation expense is recognized.                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company applies FASB No. 123, Accounting for Stock-Based
  Compensation and EITF 96-18 Accounting for Equity Instruments that are
  Issued to other than Employees for Acquiring, or in Conjunction with Selling
  Goods or Services with respect to options and warrants issued to
  non-employees. Statement No. 123 requires the use of option valuation models
  to measure the fair value of the warrants at the grant date.                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | p. | Severance pay:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Companys liability for severance pay is calculated pursuant to
  Israeli severance pay law based on the most recent salary of the employees
  multiplied by the number of years of employment as of balance sheet date.
  Employees are entitled to one months salary for each year of employment, or
  a portion thereof. The Companys liability is fully provided by monthly
  deposits with insurance policies and by an accrual. The value of these
  policies is recorded as an asset in the Companys balance sheet.    

13

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

|         |                           | The deposited funds include profits accumulated up to the balance
  sheet date. The deposited funds may be withdrawn only upon the fulfillment of
  the obligation pursuant to Israeli severance pay law or labor agreements. The
  value of the deposited funds are based on the cash surrendered value of these
  policies, and include immaterial profits.
|-------- | ------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                           |                                                                                                                                                                                                                                                                                                                                                              
|         | q.                        | Fair value of financial instruments:                                                                                                                                                                                                                                                                                                                         
|         |                           |                                                                                                                                                                                                                                                                                                                                                              
|         |                           | The following method and assumption were used by the Company and its
  subsidiary in estimating its fair value disclosures for financial
  instruments:                                                                                                                                                                                                      
|         |                           |                                                                                                                                                                                                                                                                                                                                                              
|         |                           | Cash and cash equivalents, short-term bank credits, trade
  receivables, trade payables and short-term loan - The carrying amounts
  of these items approximate their fair value due to the short-term maturity of
  such instruments.                                                                                                                       
|         |                           |                                                                                                                                                                                                                                                                                                                                                              
|         |                           | Long-term loans - The carrying amounts of the Companys borrowing
  arrangements approximate their fair value. Fair values were estimated using
  discounted cash flow analyses, based on the Companys incremental borrowing
  rates for similar types of borrowing arrangements.                                                                           
|         |                           |                                                                                                                                                                                                                                                                                                                                                              
|NOTE 3:- | OTHER ACCOUNTS RECEIVABLE

| |                                                                                                           |  | December 31, |    
| | --------------------------------------------------------------------------------------------------------- |  | ------------ | ---
| |                                                                                                           |  |              |    
| |                                                                                                           |  | 2001         |    
| |                                                                                                           |  |              |    
| |                                                                                                           |  |              |    
| | Government
  authorities                                                                                  |  | $            | 141
| | Shareholders
  *)                                                                                         |  |              | 72 
| | Other                                                                                                     |  |              | 122
| |                                                                                                           |  |              |    
| |                                                                                                           |  | $            | 335
| |                                                                                                           |  |              |    
| |                                                                                                           |  |              |    
| | *) Linked to the Israeli Consumer Price Index (CPI) and bearing
  interest at the rate of 4% per annum.

|NOTE 4:- | WORK IN PROGRESS                                                                                                                             
|-------- | ---------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                              
|         | Cost of development contracts with customers capitalized until
  milestones are achieved and relative income accumulated (see also Note 2 g).

14

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---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

|NOTE 5:- | INVENTORIES
|-------- | -----------

| |                                |  | December 31, |    
| | ------------------------------ |  | ------------ | ---
| |                                |  |              |    
| |                                |  | 2001         |    
| |                                |  |              |    
| |                                |  |              |    
| | Raw
  materials and components |  | $            | 611
| | Finished
  goods               |  |              | 257
| |                                |  |              |    
| |                                |  | $            | 868
| |                                |  |              |    

|NOTE 6:- | PROPERTY AND EQUIPMENT, NET
|-------- | ---------------------------

|                                     |  | December 31, |      
|------------------------------------ |  | ------------ | -----
|                                     |  |              |      
|                                     |  | 2001         |      
|                                     |  |              |      
|Cost:                                |  |              |      
|Computers
  and peripheral equipment |  | $            | 1,694
|Office
  furniture and equipment     |  |              | 324  
|Testing
  equipment                  |  |              | 104  
|Motor
  vehicles                     |  |              | 18   
|Leasehold
  improvements             |  |              | 91   
|                                     |  |              |      
|                                     |  |              | 2,231
|                                     |  |              |      
|Accumulated
  depreciation:          |  |              |      
|Computers
  and peripheral equipment |  |              | 857  
|Office
  furniture and equipment     |  |              | 69   
|Testing
  equipment                  |  |              | 55   
|Motor
  vehicles                     |  |              | 5    
|Leasehold
  improvements             |  |              | 40   
|                                     |  |              |      
|                                     |  |              | 1,026
|                                     |  |              |      
|Depreciated
  cost                   |  | $            | 1,205
|                                     |  |              |      
|                                     |  |              |      
|As for charges, see Note 11 g.       |  |              |      

|NOTE 7:- | OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|-------- | -------------------------------------------

| |                                          |  | December 31, |      
| | ---------------------------------------- |  | ------------ | -----
| |                                          |  |              |      
| |                                          |  | 2001         |      
| |                                          |  |              |      
| |                                          |  |              |      
| | Employees
  payroll accruals             |  | $            | 733  
| | Accrued
  expenses                       |  |              | 344  
| | B.V.R.
  Technologies Ltd. (shareholder) |  |              | 69   
| | Other                                    |  |              | 62   
| |                                          |  |              |      
| |                                          |  | $            | 1,208
| |                                          |  |              |      

15

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

|NOTE 8:-  | SEVERANCE PAY                                                                                                                                                                                                                                                                                                                                 
|--------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                                                                                                                                                                                                               
|          | The Companys liability for severance pay pursuant to Israeli law is
  fully provided by an accrual. Part of the liability is funded through
  insurance policies which are designated only for severance payments. The
  value of these policies is recorded as an asset in the Companys balance
  sheets.                                  
|          |                                                                                                                                                                                                                                                                                                                                               
|NOTE 9:-  | LONG-TERM LOANS FROM A SHAREHOLDER                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                               
|          | The loans are linked to the higher of the Israel Consumer Price Index
  (CPI) or the U.S. dollar plus LIBOR. Repayments will be at the rate of 25% of
  the Companys net income. In the event of an IPO or a private placement, in
  which the Company raises an amount exceeding $ 8,000, the unpaid balance of
  the loans will become due.
|          |                                                                                                                                                                                                                                                                                                                                               
|NOTE 10:- | CONVERTIBLE LOANS FROM SHAREHOLDERS                                                                                                                                                                                                                                                                                                           
|          |                                                                                                                                                                                                                                                                                                                                               
|          | a.                                                                                                                                                                                                                                                                                                                                            
|          |                                                                                                                                                                                                                                                                                                                                               
|          | b.                                                                                                                                                                                                                                                                                                                                            

16

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

|          |                                                                                                                                                               | A.                                                                                                                                                                                                                                                                                                                                              | Equity investment of $ 2 m in Preferred shares of the Company.                                                                                                                          
|--------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |                                                                                                                                                               | B.                                                                                                                                                                                                                                                                                                                                              | Aquisition of the Company or its business as defined in the
  agreement.                                                                                                                
|          |                                                                                                                                                               | C.                                                                                                                                                                                                                                                                                                                                              | Issuance of shares or other securities of the Company resulting in
  the shareholders of the Company prior to the event own less than 50% of the
  voting power subsequent to the event.
|          |                                                                                                                                                               | D.                                                                                                                                                                                                                                                                                                                                              | IPO event.                                                                                                                                                                              
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                         
|          |                                                                                                                                                               | Upon occurrence of any of the events, except Event D, the shares
  issued will be given senior liquidation preference to all other classes,
  including preferred A and B shares.                                                                                                                                                              
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                               | In the event of occurrence of Event D, the Company will issue
  Ordinary shares.                                                                                                                                                                                                                                                               
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                               | Upon occurrence of a conversion event, the Company shall allot
  419,790 Preferred A shares to Preferred A shareholders and 942,186 Preferred
  B shares to Preferred B shareholders as a final and conclusive allotment,
  which will exhaust any and all prior anti-dilution rights to which the
  abovementioned shareholders were entitled.
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                         
|          | Warrants:                                                                                                                                                    
|          |                                                                                                                                                              
|          | The Company shall grant, with no additional consideration, to each
  lender a warrant to purchase shares of the Determining Class at the
  following terms:
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                
|          | a.                                                                                                                                                            | The Warrant aggregate purchase price of Warrant shares for each
  lender shall equal 25% of the loan amount provided by such lender.                                                                                                                                                                                                           
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                
|          | b.                                                                                                                                                            | The warrant may be exercised from day of grant until the earlier of a
  Conversion Event or three years from grant date at an exercise price per
  share equal to the conversion price per share of the loans provided.                                                                                                                        
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                         
|NOTE 11:- | COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                       
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                         
|          | a.                                                                                                                                                            | Lease commitments:                                                                                                                                                                                                                                                                                                                             
|          |                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                
|          |                                                                                                                                                               | Future minimum lease commitments under the operating lease for the
  years ended December 31, are as follows:                                                                                                                                                                                                                                  

| |  |  | 2003 |  |   | 137 |  |  |  | 
| |  |  | ---- |  | - | --- |  |  |  | 
| |  |  | 2004 |  |   | 137 |  |  |  | 
| |  |  |      |  |   |     |  |  |  | 
| |  |  |      |  | $ | 274 |  |  |  | 
| |  |  |      |  |   |     |  |  |  | 

17

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

| | b. | The Company participated in a program sponsored by the Israeli
  Government for the support of research and development activities. The
  Company had obtained grants from the Office of the Chief  Scientist in the Israeli Ministry of
  Industry and Trade ( the OCS) aggregating to $ 519 for the Companys
  research and development project. The Company is obligated to pay royalties
  to the OCS amounting to 3%-5% of the sales of  the products and other related revenues generated from such
  project, up to the amount of the grants received, linked to the U.S.
  Dollar.                                             
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | The Company paid all royalties due to The Chief Scientist up to the
  amount of $ 519. As yet, the Company has not received a final invoice from
  The Chief Scientist.                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | c. | In late
  March of 2002, the Company signed an agreement with Lucent to license a cable modem termination system (CMTS).
  Coresmas name for this product is the CC8000. The Lucent CMTS allows the
  Company to meet the needs of existing customers and target new prospects with
  a CMTS based on the industry standard, DOCSIS (Data Over Cable Systems
  Interface Specification). The Company intends to bring this product through
  standards qualification tests over the next 12-18 months; however, there is a
  market today for non-qualified CMTS technology that offers the benefits of
  interoperability and low costs.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | Coresma has
  paid $350,000 to Lucent and owes another $450,000 of defined milestone
  payments net of any product, components or inventory we are buying from them
  In addition to milestone payments, the company owes Lucent royalties for each
  unitin the amount of $ 375  1,000 depending on the kind of units.  Management believes that the CC8000 should
  help the company to broaden the range of customers it can target for selling
  CMTS technology, thereby resulting in additional sales opportunities                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | d. | BrightCom:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    | In the year 2000 the company signed an agreement with BrightCom
  Technologies Ltd. (an affiliate) whereby it would purchase from Brightcom
  certain rights in an architecture patent for cable on a chip for
  consideration of $ 5 million. The company is not using and has no intention
  to use the aforementioned patent rights since the company reached a
  settlement with BrightCom as follows:                                                                                                                                                                                                                                
| |    | The company will be obliged only for a one lump-sum payment of $ 1
  million, payable by way of cash or stock (at Coresmas discretion), only upon
  a major liquidity event (i.e., IPO or merger/acquisition at pre-money
  evaluation of at least US $ 80M). Coresma agrees to make no future use of the
  BrightCom IP as part of this agreement.                                                                                                                                                                                                                                                                                      

18

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

|          |              | Accordingly, no asset or liability has been recorded in the financial
  statements in regard to this agreement. In the year 2002 this commitment was
  canceled.                                                                                                                                                                                                                                                                                                                                                                                                                    
|--------- | ------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|          |              | In the year 2000 the company entered into a development contract with
  Brightcom in the amount of $ 1.8 million. During the year 2001 the parties
  agreed on a payment of $ 704 thousand to terminate this agreement. This
  amount was not paid and during the year 2002 was waivered by BrightCom.                                                                                                                                                                                                                                                                              
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | e.           | Litigation:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |              | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |              | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | f.           | Guarantees:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |              | A bank has issued suppliers of the Company guarantees in the amount
  of approximately $ 860 to assure payments by the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | g.           | Charges:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |              | The Company placed a floating charge in favor of a bank on all
  Company assets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|NOTE 12:- | INCOME TAXES
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          | a.           | Tax benefits under the Law for the Encouragement of Capital
  Investments, 1959 (the law):                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|          |              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|          |              | In accordance with the law, during 1996 the Companys production
  facilities were granted Approved Enterprise status.                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|          |              | Pursuant to the aforementioned law, the Company has chosen the
  alternative benefits - waiver of Government grants in return for tax
  exemption. Income derived from the Approved Enterprise will be tax-exempt
  for a period of four years, commencing the first year taxable income is
  earned, and subject to a corporate tax at the reduced rate of 10%- 25%, for
  an additional period of three to six years (depending on the level of foreign
  investment in the Company). As the Company currently has no taxable income,
  these benefits have not yet commenced.

19

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

| |    | The tax-exempt income attributable to the Approved Enterprise can
  be distributed to shareholders without subjecting the Company to taxes only
  upon the complete liquidation of the Company. If these retained tax-exempt
  profits are distributed in a manner other than in the complete liquidation of
  the Company, they would be taxed at the corporate tax rate applicable to such
  profits, as if the Company had not elected the alternative system of benefits
  (currently, 25% for an Approved Enterprise). The Companys Board of
  Directors has determined that such tax-exempt income will not be distributed
  as dividends.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    | The period of tax benefits detailed above is subject to limits of the
  earlier of 12 years from commencement of production or 14 years from
  receiving the approval.                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Should the Company derive income from sources other than the
  Approved Enterprise during the relevant period of benefits, such income
  will be taxable at the regular corporate tax rate of 36%.                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | b. | Tax benefits under the Law for the Encouragement of Industry
  (Taxation),  1969:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | The Company is an industrial company under the above law and, as
  such, is entitled to certain tax benefits, mainly accelerated depreciation of
  machinery and equipment.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | c. | Measurement of results for tax purposes under the Income Tax Law  (Inflationary Adjustments), 1985:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | Results for tax purposes are measured in terms of earnings in NIS,
  after certain adjustments for increases in the CPI. As explained in Note 2b,
  the financial statements are presented in U.S. dollars. The differences
  between the annual change in the CPI and in the NIS/dollar exchange rate
  causes a difference between taxable income and the income before taxes shown
  in the financial statements. In accordance with paragraph 9(f) of FASB
  statement No. 109, the Company has not provided deferred income taxes on this
  difference between the financial reporting currency and the tax bases of
  assets and liabilities.  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | d. | Net operating losses carryforwards:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | As of December 31, 2002, the Company had approximately $16 million of Israeli net operating loss carryforwards. The Israeli
  loss carryforwards have no expiration date. The Company expects that during
  the period in which these tax losses are utilized, its income would be
  substantially tax exempt. Accordingly, there will be no tax benefit available
  from such losses, and no deferred income taxes have been included in these
  financial statements.                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    | As of December 31, 2002 the U.S. subsidiary had U.S. federal net
  operating loss carryforwards for income tax purposes in the amount of
  approximately  $ 5.5 million.
  Expiration of the carryforward losses are between the years 2,019 and 2,022.                                                                                                                                                                                                                                                                                                                                                                                              
| |    | The Company and its subsidiary have not recorded deferred tax assets
  reaching from tax loss carryforwards because its Management currently
  believes that since the Company has a history of losses, it is more likely than
  not that the deferred tax regarding the loss carryforwards and other
  temporary differences will not be realized in the foreseeable future.                                                                                                                                                                                                                                                                        

20

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

|NOTE 13:- | RELATED PARTIES
|--------- | ---------------
|          |                
|          | a.             

| |                                                                                     |  | Year ended
  December 31, |    
| | ----------------------------------------------------------------------------------- |  | ------------------------- | ---
| |                                                                                     |  |                           |    
| |                                                                                     |  | 2001                      |    
| |                                                                                     |  |                           |    
| |                                                                                     |  |                           |    
| | Research and
  development cost (1)(2)                                              |  | $                         | 190
| |                                                                                     |  |                           |    
| | General and
  administrative (1)                                                    |  | $                         | 120
| |                                                                                     |  |                           |    
| | Financial
  expenses (1)                                                            |  | $                         | 215
| |                                                                                     |  |                           |    
| | Other income
  (2)                                                                  |  |                           | -.-
| |                                                                                     |  |                           |    
| |                                                                                     |  |                           |    
| | (1)   To shareholders.                                                             
| | (2)   Waivered by BrightCom Technologies Ltd.,
  an affiliate (see also Note 11 d).

| | b. | Balances with related parties:
| | -- | ------------------------------

| |                                          |  | December 31, |      
| | ---------------------------------------- |  | ------------ | -----
| |                                          |  |              |      
| |                                          |  | 2001         |      
| |                                          |  |              |      
| |                                          |  |              |      
| | Due from:                                |  |              |      
| | Other
  accounts receivable shareholders |  | $            | 72   
| |                                          |  |              |      
| | Due to:                                  |  |              |      
| | Trade
  payables - affiliates            |  | $            | 976  
| | BVR
  Technologies Ltd                   |  | $            | 69   
| | BVR
  Systems (1998) Ltd                 |  | $            | 48   
| | Long-term
  loans from a shareholder     |  | $            | 2,514
| | Convertible
  loans                      |  | $            | 5,679

|NOTE 14:- | SHARE CAPITAL
|--------- | -------------
|          |              
|          | a.           
|          |              

21

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

| | b. | Stock option plan:                                                                                      
| | -- | --------------------------------------------------------------------------------------------------------
| |    |                                                                                                         
| |    | According to a board of directors resolution during 2002 the
  Employee Stock Option Plan was canceled.
| |    | As of
  December 31. 2002, the companys outstanding options are as follows:                            

| | Option Outstanding |  | Exercise Price |      
| | ------------------ |  | -------------- | -----
| |                    |  |                |      
| |                    |  |                |      
| | 262,460            |  |                | 0.35 
| | 485,130            |  |                | 1.72 
| | 236,709            |  |                | 8.62 
| | 791                |  |                | 10.24
| |                    |  |                |      
| | 985,090            |  |                |      
| |                    |  |                |      

|NOTE 15:- | GEOGRAPHIC OPERATING INFORMATION
|--------- | --------------------------------
|          |                                 
|          | a.                              
|          |                                 
|          |                                 

| |                                                     |  | Total revenues            |       
| | --------------------------------------------------- |  | ------------------------- | ------
| |                                                     |  |                           |       
| |                                                     |  | Year ended
  December 31, |       
| |                                                     |  |                           |       
| |                                                     |  | 2001                      |       
| |                                                     |  |                           |       
| | Israel                                              |  | $                         | 215   
| | Export:                                             |  |                           |       
| | Scandinavia                                         |  |                           | 9,300 
| | North
  America                                     |  |                           | 1,905 
| | Eastern
  Europe                                    |  |                           | 651   
| | Far East                                            |  |                           | 615   
| | Western
  Europe - (excludingScandinavia) and other |  |                           | 213   
| |                                                     |  |                           |       
| |                                                     |  | $                         | 12,899
| |                                                     |  |                           |       

22

---

---

CORESMA LTD.

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
U.S. dollars in thousands

| | b. | Major
  customers data as a percentage of total revenues:
| | -- | ---------------------------------------------------------

| |            |  |  | 2000 |   | 2001 |  | 2002 |  
| | ---------- |  |  | ---- | - | ---- |  | ---- | -
| |            |  |  |      |   |      |  |      |  
| | Customer A |  |  | 39   | % |      |  | 56   | %
| |            |  |  |      |   |      |  |      |  
| | Customer B |  |  | 12   | % |      |  | 16   | %
| |            |  |  |      |   |      |  |      |  
| | Customer C |  |  | -    | % |      |  | 7    | %
| |            |  |  |      |   |      |  |      |  

|NOTE 16:- | SELECTED STATEMENTS OF OPERATING DATA
|--------- | -------------------------------------
|          |                                      
|          | a.                                   

| |                                                  |  | Year endedDecember 31, |    
| | ------------------------------------------------ |  | ---------------------- | ---
| |                                                  |  | 2001                   |    
| |                                                  |  |                        |    
| |                                                  |  |                        |    
| | Waiver of a
  debt(also see note 11 d)           |  |                        | -  
| | Depreciation
  of an asset                       |  |                        | -  
| | Decrease of
  costs of unexecutedpublic offering |  |                        | 253
| | Loss from
  disposition of assets                |  |                        | -.-
| |                                                  |  |                        |    
| | Others, net                                      |  |                        | 4  
| |                                                  |  |                        |    
| |                                                  |  | $                      | 257
| |                                                  |  |                        |    

| | b. | Financial expenses, net:
| | -- | ------------------------

| |                                                                               |  | Year endedDecember 31, |     
| | ----------------------------------------------------------------------------- |  | ---------------------- | ----
| |                                                                               |  | 2001                   |     
| |                                                                               |  |                        |     
| |                                                                               |  |                        |     
| | Amortization
  of the discount of a
  convertible loan issued with
  warrants |  | $                      | -   
| | Interest on
  long-term
  and convertible loans                               |  |                        | 215 
| | Interest to
  the banks net                                                   |  |                        | 218 
| |                                                                               |  |                        |     
| | Government  Authorities                                                       |  |                        | 18  
| |                                                                               |  |                        |     
| | Others                                                                        |  |                        | (248
| |                                                                               |  |                        |     
| |                                                                               |  | $                      | 203 
| |                                                                               |  |                        |     

23

---

---

SHARE PURCHASE AGREEMENT

This Share Purchase Agreement (this Agreement) is made and entered
into effective as of December ___, 2002 by and betweenBVR Technologies Ltd. (hereinafter BVR), a company organized under the laws
of the State of Israel, with offices at 1 Azrieli Center, Tel Aviv, Israel, and
each of the purchasers listed in Exhibit A
hereto (hereinafter the Purchasers).

W I T N E S S E T H

|WHEREAS                                                                                                                          | BVR holds
  ________ Series A Preferred Stock, par value $0.01 each (the Shares) of Unisfair Inc. (Unisfair), a company incorporated under
  the laws of the State of Delaware, and the rights attached to  Convertible Promissory Notes issued to BVR
  by Unisfair in an amount of $__________ (the Convertible Promissory Notes together with the Shares the Package); and
|-------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                      
|WHEREAS                                                                                                                          | BVR wishes
  to sell the Package to the Purchasers on the terms and conditions more fully
  set forth in this Agreement; and                                                                                                                                                                                                                                                         
|                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                      
|WHEREAS                                                                                                                          | the
  Purchasers wish to purchase the Package pursuant to the terms and conditions
  more fully set forth in this Agreement.                                                                                                                                                                                                                                                         
|                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                      
|                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                      
|NOW, THEREFORE, in consideration of the
  mutual promises and covenants set forth herein, the parties hereby agree as
  follows:

| | 1. | Sale of the Package                                                                                                                                                                                                                                                                                                                                                                                                            
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | Subject to
  the terms and conditions hereof, at the Closing, as defined below, BVR shall
  transfer to each of the Purchasers and each of the Purchasers shall accept
  from BVR the Package for an aggregate consideration of $25,000 (the Purchase Price).  Each Purchaser shall purchase such portion
  of the Package in consideration for such amount as detailed opposite such
  Purchasers name in Exhibit A hereto.

---

---

| | 2. | Closing of Sale and Purchase of Package                                                                                                                                                                                                                                                                                                                                                                             
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | 2.1                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | 2.2                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | 2.3                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 3. | Package free
  of any Liens. 
  BVR represents that it is the lawful owner, beneficially and of record
  of the Package and of all rights thereto, free and clear of all liens,
  claims, charges, encumbrances, restrictions, rights, options to purchase,
  proxies, voting trust and other voting agreements, calls or commitments of
  every kind and is free to transfer the Package to each of the Purchasers.

2

---

---

| | 4. | Miscellaneous.
| | -- | --------------
| |    |               
| |    | 4.1           
| |    |               
| |    | 4.2           
| |    |               
| |    | 4.3           
| |    |               
| |    | 4.4           

In witness hereof, each of the parties has signed this Share Purchase
Agreement as of the date first hereinabove set forth.

|BVR TECHNOLOGIES LTD.
|---------------------
|                     
|By:                  
|                     
|Name:                
|                     
|Title:               
|                     
|                     
|PURCHASERS           
|                     
|                     
|                     
|                     
|                     

3

---

---

EXHIBIT A



4

---

---

Schedule 2.3.1A

Share Transfer
Deed

The
undersigned (the Transferor) hereby transfers to each of the Purchasers
listed in Exhibit A (the Transferee) _________ Series A
Preferred Stock, par value $0.01 each, registered in the
name of the Transferor in the company known as Unisfair, Inc. to hold unto the
Transferee and the heirs, executors, administrators, successors and assigns of
the Transferee, on the same conditions as the Transferor held the same
immediately prior to the transfer thereof.  
And the Transferee hereby accepts transfer of such shares subject to
said conditions.

IN WITNESS
WHEREOF the Transferor and the Transferee have executed this instrument this
____day of ____________, 2003.

|                      
|----------------------
|                      
|Signature
  of Witness
|                      
|                      
|Name:                 
|                      
|                      
|                      
|Address:              
|                      
|                      
|                      
|                      
|                      
|Signature
  of Witness
|                      
|                      
|Name:                 
|                      
|                      
|Address:              
|                      
|                      
|                      
|                      

5

---

---

Schedule 2.3.1B

Assignment of
Convertible Promissory Notes

The
undersigned (the Assignor) hereby assigns to each of the Purchasers listed in
Exhibit A (the Assignee) Convertible Promissory Notes issued to
BVR by Unisfair, Inc. in an amount of $__________  (the Notes) to hold unto the
Assignee and the heirs, executors, administrators, successors and assigns of
the Assignee, on the same conditions as the Assignor held the same immediately
prior to the assignment thereof.   And
the Assignee hereby accepts assignment of the Notes subject to said conditions.

IN WITNESS
WHEREOF the Assignor and the Assignee have executed this instrument this
____day of ____________, 2003.

|                      
|----------------------
|                      
|Signature
  of Witness
|                      
|                      
|Name:                 
|                      
|                      
|                      
|Address:              
|                      
|                      
|                      
|                      
|                      
|Signature
  of Witness
|                      
|                      
|Name:                 
|                      
|                      
|Address:              
|                      
|                      
|                      
|                      
|                      

6

---

---

TECHNOLOGY TRANSFER AND ASSIGNMENT AGREEMENT

This Technology Transfer and Assignment Agreement (this Agreement) is
entered into as of the __ day of May, 2003 by and between BVR Technologies
Ltd., of 1 Azrieli Center, Tel Aviv 67021, Israel, an Israeli company (BVR-T) and BVR Systems (1998) Ltd., of 16
Hamelacha Street, Rosh Ha-Ayin 48091, Israel, an Israeli company (BVR-S).

|WHEREAS | in October
  1998 BVR-T and BVR-S entered into a Technology Assignment and Cross-License
  Agreement Regarding Improvement (the Cross License Agreement); and                                  
|------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |                                                                                                                                                                                                  
|WHEREAS | BVR-S is
  interested in purchasing from BVR-T any or all such rights, title and
  interest in the Patents, as defined hereunder, so that BVR-S shall become the
  sole owner of the Patents; and
|        |                                                                                                                                                                                                  
|WHEREAS | BVR-T wishes
  to irrevocably transfer and assign to BVR-S its rights, title and interest in
  the Patents in accordance with the terms herein.                                                  

NOW,
THEREFORE, in consideration of the mutual covenants
and agreements set forth herein, the parties agree as follows:

|1. | The Patents                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | The Patents
  shall mean the patents which were filed by BVR-T worldwide prior to the date
  of this Agreement as further detailed in Exhibit
  A hereto, including but not limited to any and all intellectual or industrial
  property and like rights, know how, trade secrets, information, formulation, data,
  technology, designs, inventions, derivatives and discoveries related thereto.                                                                                                  
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|2. | Transfer and Assignment of Title                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   | BVR-T hereby
  transfers and assigns to BVR-S, in consideration for the payment of $12,000
  plus VAT (the Consideration), all of its rights, title and interest, for
  all countries, in the Patents, so that after such assignment BVR-S shall be
  the sole owner of the Patents.  The
  Consideration shall be made by wire transfer to the account of BVR-T, Bank
  Hapoalim, branch 615, account number 81111, upon coming into effect of this
  Agreement in accordance with Section 7 below.

---

---

|3. | Assignment                                                                                                                                                                                                                                                                                                                  
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                                                             
|   | BVR-T hereby
  grants to BVR-S an irrevocable worldwide proxy to sign and execute on its
  behalf and on behalf of its officers and directors any and all documents, or
  acts which may be required to effect the transfer and assignment of the
  Patents and the registration of BVR-S as the sole owner of such Patents.
|   |                                                                                                                                                                                                                                                                                                                             
|4. | Representations and Warranties.                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                             
|   | BVR-T
  represents and warrants that:                                                                                                                                                                                                                                                                                       
|   |                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                             
|   |                                                                                                                                                                                                                                                                                                                             
|   | 4.2                                                                                                                                                                                                                                                                                                                         
|   |                                                                                                                                                                                                                                                                                                                             
|   | 4.3                                                                                                                                                                                                                                                                                                                         

2

---

---

|5. | This
  Agreement contains the entire agreement between the parties in respect of the
  subject matter hereof, and supersedes and replaces all previous
  representations, warranties, agreements, understandings, commitments or
  arrangements, oral or written, with respect thereto.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                                                        
|6. | Governing Law                                                                                                                                                                                                                                                                          
|   |                                                                                                                                                                                                                                                                                        
|   | This
  Agreement shall be governed by the laws of the State of Israel.  The parties hereto submit to the exclusive
  jurisdiction of the Tel Aviv- Jaffa district.                                                                                                                     
|   |                                                                                                                                                                                                                                                                                        
|7. | Approvals                                                                                                                                                                                                                                                                              
|   |                                                                                                                                                                                                                                                                                        
|   | This
  Agreement is subject to, and shall come into effect upon, its approval by
  BVR-S audit committee and board of directors.                                                                                                                                                      

IN WITNESS HEREOF, the parties hereto, each
by its duly authorized signatory, have executed this Agreement as of the date
first above written.

|BVR TECHNOLOGIES LTD. | BVR SYSTEMS (1998) LTD.
|--------------------- | -----------------------
|                      |                        
|By:                   | By:                    
|                      |                        
|Name:                 | Name:                  
|                      |                        
|Title:                | Title:                 
|                      |                        

3

---

---

EXHIBIT A (not final  a substitute will be
provided)

|Country         |  | Patent No. |  | Grant Date           |  | Title                                                                                         
|--------------- |  | ---------- |  | -------------------- |  | ----------------------------------------------------------------------------------------------
|                |  |            |  |                      |  |                                                                                               
|Israel          |  | 95,990     |  | July 18, 1991        |  | GPS-BASED
  ANTI-COLLISION WARNING SYSTEM                                                     
|United
  States |  | 5,325,302  |  | June 28, 1994        |  | GPS-BASED
  ANTI-COLLISION WARNING SYSTEM                                                     
|Israel          |  | 100,804    |  | January 31, 1996     |  | METHOD AND
  SYSTEM OF COMMUNICATION BETWEEN MOVING PARTICIPANTS                              
|United
  States |  | 5,396,644  |  | March 7, 1996        |  | METHOD AND
  SYSTEM OF COMMUNICATION BETWEEN MOVING PARTICIPANTS                              
|Europe          |  | 561,129    |  | September 8,
  1999  |  | METHOD AND
  SYSTEM OF COMMUNICATION BETWEEN MOVING PARTICIPANTS                              
|Germany         |  | 69,326,270 |  | September 8,
  1999  |  | KOMMUNIKATIONSVERFAHREN
  UND SYSTEM ZWISCHEN SICH BEWEGENDEN TEILNEHMERN                     
|France          |  |            |  | September 8,
  1999  |  |                                                                                               
|Great
  Britain |  | EP0561129  |  | September 8,
  1999  |  | METHOD AND
  SYSTEM OF COMMUNICATION BETWEEN MOVING PARTICIPANTS                              
|United
  States |  | 5,756,354  |  | May 26, 1998         |  | ANIMATING
  THREE DIMENSIONAL IMAGES BY SELECTIVELY PROCESSING INTERMEDIATE ANIMATION
  FRAMES
|                |  |            |  |                      |  |                                                                                               
|United
  States |  | 5,807,109  |  | September 15,
  1998 |  | AIRBORNE
  AVIONICS SIMULATOR SYSTEM                                                          
|Europe          |  | 732,677    |  | May 10, 2000         |  | AIRBORNE
  AVIONICS SIMULATOR SYSTEM                                                          

4

---

---

|Austria         |  | 192,870    |  | May 10, 2000         |  | SYSTEM ZUR
  SIMULATION DER LUFTBEFOERDERTEN              
|--------------- |  | ---------- |  | -------------------- |  | ----------------------------------------------------------
|Germany         |  | 69,608,157 |  | May 10, 2002         |  | SYSTEM ZUR
  SIMULATION DER LUFTBEFOERDERTEN              
|Spain           |  | 2,146,357  |  | May 10, 2002         |  | SISTEMA
  SIMULADOR DE LA ELECTRONICA AERONAUTICA EN VUELO
|Greece          |  | 3,034,159  |  | May 10, 2002         |  |                                                           
|Belgium         |  |            |  | May 10, 2002         |  |                                                           
|Switzerland     |  | 00732677   |  | May 10, 2002         |  | Système de
  simulation de lavionique aéroportée         
|France          |  |            |  | May 10, 2002         |  |                                                           
|Great
  Britain |  | EP0732677  |  | May 10, 2002         |  | AIRBORNE
  AVIONICS SIMULATOR SYSTEM                      
|Italy           |  |            |  | May 10, 2002         |  |                                                           
|Australia       |  | 9,931,845  |  | September
  27, 1999 |  | METHOD OF
  SELECTING AN OPTIMAL COMMUNICATION CHANNEL    
|United
  States |  | 6,127,946  |  | October 3,
  2000    |  | METHOD OF
  SELECTING AN OPTIMAL COMMUNICATION CHANNEL    
|Israel          |  | 138,458    |  | November 31,
  2001  |  | METHOD OF
  SELECTING AN OPTIMAL COMMUNICATION CHANNEL    
|Europe          |  | 1,060,587  |  | Not yet
  granted    |  | METHOD OF
  SELECTING AN OPTIMAL COMMUNICATION CHANNEL    

5

---

---

# CERTIFICATION

I, Yaron Sheinman,
certify that:

1.    I have
reviewed this annual report on Form 20-F of BVR Technologies Ltd.;

2.    Based on my
knowledge, this annual report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report;

3.    Based on my knowledge, the
financial statements, and other financial information included in this annual report,
fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this annual report;

4.    The registrants other certifying officer and I are
responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

| | a)  designed
such disclosure controls and procedures to ensure that material information relating to
the registrant, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this annual report is being
prepared; 
b)  evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the filing date of this
annual report (the Evaluation Date); and 
c)  presented in this
annual report our conclusions about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.    The
registrants other certifying officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit committee of registrants
board of directors (or persons performing the equivalent function):

| | a)  all
significant deficiencies in the design or operation of internal controls which could
adversely affect the registrants ability to record, process, summarize and report
financial data and have identified for the registrants auditors any material
weaknesses in internal controls; and 
b)  any fraud, whether or not material,
that involves management or other employees who have a significant role in the
registrants internal controls; and
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.    The
registrants other certifying officer and I have indicated in this annual report
whether or not there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.

_________________,
2003

| |  | BY: /S/ Yaron Sheinman
Yaron SheinmanChief Executive Officer
| |  | --------------------------------------------------------------------------

52

---

---

# Certification Pursuant
to 18.U.S.C. Section 1350,  As adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002

In connection with the annual report
of BVR Technologies Ltd. (the Company) on Form 20-F for the period ending
December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof
(the Report), the undersigned, being the Chief Executive Officer of the
Company, certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:

|1) | The Report fully complies with the requirements of sections 13(a) or 15(d) of
                    the Securities Exchange Act of 1934; and
|-- | ------------------------------------------------------------------------------------------------------------------------------------------

|2) | The information contained in the Report fairly presents, in all material
                    respects, the financial condition and results of operations of the Company.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Signature:
____________________

Yaron Sheinman, Chief
Executive Officer

Date:
_________________________

53

---

---

# CONSENT OF INDEPENDENT AUDITORS

We
consent to the incorporation by reference in the Registration Statement (Form S-8) filed
with the Securities and Exchange Commission on December 10, 1999 pertaining to the 1995
Flexible Stock Incentive Plan, 1997 Stock Option Plan and 1998 Non-Employee Director Share
Option Plan of B.V.R. Technologies Ltd., of our report dated May 29, 2003 with respect to
the consolidated financial statements of B.V.R. Technologies Ltd. included in this Annual
Report (Form 20-F) for the year ended December 31, 2002.

|Tel Aviv, Israel | KOST FORER & GABBAY              
|---------------- | ---------------------------------
|July 13, 2003    | A Member of Ernst  & Young Global

---

---