---

---



# UNITED STATESSECURITIES AND EXCHANGE COMMISSION

|Washington,
D.C. 20549
|----------------------

|
|

|FORM
20-F
|---------

(Mark One)

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

# OR

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

# For the fiscal year
ended December 31, 2008

# OR

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

# OR

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

Date of event requiring this shell company report ................

# Commission file
number: 0-29884

---

# BVR SYSTEMS (1998) LTD.(Exact name of Registrant as specified in its charter)

# Not Applicable(Translation of Registrants Name into English)

# Israel(Jurisdiction of incorporation or organization)

# 16 Hamelacha Street,
Park Afek, Rosh Haayin 48091, Israel(Address of principal
executive offices)

Reuven ShaharChief Financial Officer+972 (3) 900 8000reuvens@bvr.co.il16 Hamelacha Street, Park Afek, Rosh Haayin 48091, Israel
(Name, Telephone, E-mail and/or Facsimile number of Company Contact Person)

---

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
|Ordinary shares, par value NIS 1.00 per share | OTC Bulletin Board                       

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

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

116,970,535 Ordinary
Shares, par value NIS 0.01 per share (As of December 31, 2008)



---

---

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

Yes o No x

If this report is an annual or
transition report, indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes o No x

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

Large accelerated filer o          Accelerated filer o          Non-accelerated filer x

If this is an annual report,
indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).

Yes o No x

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

U.S. GAAP o

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

Other o

If Other has been
checked in response to the previous question, indicate by check mark which financial
statement item the Registrant elected to follow.

Item 17  o     Item 18 o

If this is an annual report,
indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).

Yes  o     No x

This annual report on Form 20-F is
incorporated by reference into the registrants Registration Statements on Form S-8,
Registration Nos. 333-125879 and 333-140937.

ii

---

---

# TABLE OF CONTENTS

|                 |                                                                              | Page
|---------------- | ---------------------------------------------------------------------------- | ----
|
|
|
|
|INTRODUCTION     |                                                                              | ii  
|PART I           |                                                                              | 1   
|Item 1.          | Identity of Directors, Senior Management and Advisors                        | 1   
|Item 2.          | Offer Statistics and Expected Timetable                                      | 1   
|Item 3.          | Key Information                                                              | 1   
|Item 4.          | Information on the Company                                                   | 17  
|Item 5.          | Operating and Financial Review and Prospects                                 | 33  
|Item 6.          | Directors, Senior Management and Employees                                   | 46  
|Item 7.          | Major Shareholders and Related Party Transactions                            | 56  
|Item 8.          | Financial Information                                                        | 60  
|Item 9.          | Offer and Listing                                                            | 61  
|Item 10.         | Additional Information                                                       | 62  
|Item 11.         | Quantitative and Qualitative Disclosures about Market Risk                   | 79  
|Item 12.         | Description of Securities Other than Equity Securities                       | 81  
|                
|PART II          |                                                                              | 81  
|Item 13.         | Defaults, Dividend Arrearages and Delinquencies                              | 81  
|Item 14.         | Material Modifications to the Rights of Security Holders and Use of Proceeds | 82  
|Item 15 and 15T. | Controls and Procedures                                                      | 82  
|Item 16.         | Reserved                                                                     | 83  
|Item 16A.        | Audit Committee Financial Expert                                             | 83  
|Item 16B.        | Code of Ethics                                                               | 83  
|Item 16C.        | Principal Accountant Fees and Services                                       | 83  
|Item 16D.        | Exemptions from the Listing Standards for Audit Committees                   | 84  
|Item 16E.        | Purchases of Equity Securities by the Issuer and Affiliated Purchasers       | 84  
|Item 16F.        | Change in Registrant's Certifying Accountant                                 | 84  
|Item 16G.        | Corporate Governance                                                         | 85  
|                
|PART III         |                                                                              | 85  
|Item 17.         | Financial Statements                                                         | 85  
|Item 18.         | Financial statements                                                         | 85  
|Item 19.         | Exhibits                                                                     | 86  
|                
|SIGNATURE        |                                                                              | 88  



---

---

# INTRODUCTION

B.V.R.
          Systems (1998) Ltd., (BVR) an Israeli company, was formed in January 1998 to
          receive all of the assets and liabilities of the defense-related business of BVR
          Technologies Ltd. in accordance with the terms of a reorganization plan. The
          reorganization plan was consummated, and BVR commenced operations as an
          independent company in October 1998, effective as of January 1, 1998. BVR is
          controlled by Chun Holdings LP.

Except for the historical information
contained herein, the statements contained in this annual report are forward-looking
statements, within the meaning of the Private Securities Litigation Reform Act of 1995
with respect to our business, financial condition and results of operations. Statements
that use the terms believe, anticipate, expect,
plan, intend, estimate, anticipate,
project and similar expressions in the affirmative and the negative are
intended to identify forward-looking statements. These statements reflect our current
views with respect to future events and are based on current assumptions, expectations,
estimates and projections about our business and the markets in which we operate and are
subject to risks and uncertainties. Actual events (including our results) could differ
materially from those anticipated in these forward-looking statements as a result of
various factors, including the risks discussed in Item 3. Key Information  D.
Risk Factors and elsewhere in this annual report. Except as required by applicable
law, including the securities laws of the United States, we do not undertake any
obligation nor intend to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise.

As used in this annual report, the
terms we, us, our, the Company and
BVR mean B.V.R. Systems (1998) Ltd., and our consolidated subsidiary, unless
otherwise indicated.

All references herein to
dollars or $ are to United States dollars, and all references to
Shekels or NIS are to New Israeli Shekels.

References in this annual report to
Chun refer to our controlling shareholder, Chun Holdings LP.

References in this annual report to fiscal
2004 refer to our fiscal year ended December 31, 2004, references to fiscal 2005 refer to
our fiscal year ended December 31, 2005, references to fiscal 2006 refer to our fiscal
year ended December 31, 2006, references to fiscal 2007 refer to our fiscal year ended
December 31, 2007 and references to fiscal 2008 refer to our fiscal year ended December
31, 2008.

References in this annual report to
the Companies Law refer to the Israel Companies Law, 5759-1999.
Ehud is a trademark jointly owned by Israel Aircraft Industries and us;
and Atas is our wholly-owned trademark. All other trademarks and trade
names appearing in this annual report are owned by their respective holders.

ii

---

---

# PART I

|ITEM 1. |  | Identity of Directors, Senior Management and Advisors
|------- |  | -----------------------------------------------------

| | Not
applicable.
| | ---------------

|ITEM 2. |  | Offer Statistics and Expected Timetable
|------- |  | ---------------------------------------

| | Not
applicable.
| | ---------------

|ITEM 3. |  | Key Information
|------- |  | ---------------

|A. | Selected
Consolidated Financial Data
|-- | ------------------------------------

In accordance with the instructions
of the Israeli Accounting Standard No. 29, Adoption of International Financial
Reporting Standards (IFRS), which was published in July 2006, we have adopted IFRS
as issued by the International Accounting Standards Board (IASB), as of the
period beginning on January 1, 2008. Consequently, we presented comparative financial
statements as at and for the year ended December 31, 2007, in accordance with IFRS as
issued by the IASB. For further details, see Note 2V to our consolidated financial
statements included elsewhere in this annual report.

We derived the following selected
consolidated financial data presented below as of and for each of the years ended December
31, 2008 and 2007 from our Consolidated Financial Statements included in this annual
report. The selected consolidated financial data as of and for the years ended December
31, 2006, 2005 and 2004 have been derived from consolidated financial statements not
included in this annual report and which were prepared in accordance with Israeli
generally accepted accounting principles in Israel (Israeli GAAP), and reconciled to
generally accepted accounting principles in the united states (U.S. GAAP).

1

---

---

You should read the selected
consolidated financial data together with the section entitled Item 5. Operating and
Financial Review and Prospects and our Consolidated Financial Statements included
elsewhere in this annual report.

|                                                | Year Ended December 31,
|----------------------------------------------- | -----------------------
|
|
|
|
|Statement of Operations Data:                   |                        
|In accordance with Israeli GAAP                 |                        
|Revenues                                        |                        
|Cost of  revenues                               |                        
|                                                |                        
|Gross profit                                    |                        
|                                                |                        
|Operating expenses:                             |                        
|Research and development                        |                        
|Selling and marketing                           |                        
|General and administrative                      |                        
|                                                |                        
|Total operating expenses                        |                        
|                                                |                        
|Operating profit (loss)                         |                        
|Financial expenses, net                         |                        
|Other income (expenses), net                    |                        
|                                                |                        
|Profit (loss) before taxes on  income           |                        
|Income tax expense                              |                        
|                                                |                        
|Net profit  (loss) for the year                 |                        
|                                                |                        
|Basic and diluted earning (loss) per share      |                        
|                                                |                        
|Weighted- average number of ordinary shares of  |                        
|nominal NIS 1.00 par value outstanding (in      |                        
|thousands) used in calculation of the basic and |                        
|diluted earning (loss)  per share               |                        
|                                                |                        

|                                                 | Year Ended December 31,
|------------------------------------------------ | -----------------------
|
|
|
|
|Reconciliation to U.S. GAAP:                     |                        
|Net profit (loss) under Israeli GAAP             |                        
|                                                 |                        
|Reversal of restatement entry in according with  |                        
|Israeli GAAP (Standard No.24) (Not in accordence |                        
|with US GAAP)                                    |                        
|Stock-based compensation expenses to service     |                        
|providers  under the fair value based method     |                        
|Compensation expense for all stock-based awards  |                        
|using the modified prospective method            |                        
|                                                 |                        
|Profit (loss) under U.S. GAAP                    |                        
|                                                 |                        
|Basic and diluted net profit (loss) per share    |                        
|under U.S. GAAP                                  |                        
|                                                 |                        
|Weighted average number of ordinary shares       |                        
|outstanding  (in thousands) used in basic        |                        
|profit (loss) per share calculation according    |                        
|to  U.S. GAAP                                    |                        
|                                                 |                        
|Weighted average number of ordinary shares       |                        
|outstanding  (in thousands) used in diluted      |                        
|profit (loss) per share calculation according    |                        
|to  U.S. GAAP                                    |                        
|                                                 |                        

2

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|                                                                    | Year Ended December 31,
|------------------------------------------------------------------- | -----------------------
|
|
|
|
|Statement of Operations Data:                                       |                        
|In accordance with IFRS                                             |                        
|Revenues                                                            |                        
|Cost of  revenues                                                   |                        
|Inventory write off                                                 |                        
|                                                                    |                        
|Gross profit                                                        |                        
|                                                                    |                        
|Operating expenses:                                                 |                        
|Research and development                                            |                        
|Selling and marketing                                               |                        
|General and administrative                                          |                        
|                                                                    |                        
|Total operating expenses                                            |                        
|                                                                    |                        
|Operating profit (loss)                                             |                        
|Financial income                                                    |                        
|Financial expenses                                                  |                        
|                                                                    |                        
|Financial expenses, net                                             |                        
|                                                                    |                        
|Profit (loss) before taxes on  income                               |                        
|                                                                    |                        
|Income tax expense                                                  |                        
|                                                                    |                        
|Net profit  (loss) for the year                                     |                        
|                                                                    |                        
|                                                                    |                        
|Earnings (loss) per share:                                          |                        
|                                                                    |                        
|Basic earnings (loss) per share (in $)                              |                        
|                                                                    |                        
|                                                                    |                        
|Diluted  earnings (loss) per share (in $)                           |                        
|                                                                    |                        
|                                                                    |                        
|Weighted- average number of ordinary shares of nominal NIS 1.00 par |                        
|value outstanding (in thousands) used in calculation of the basic   |                        
|earning (loss)  per share                                           |                        
|                                                                    |                        
|                                                                    |                        
|Weighted- average number of ordinary shares of nominal NIS 1.00 par |                        
|value outstanding (in thousands) used in calculation of diluted     |                        
|earning (loss)  per share                                           |                        
|                                                                    |                        

3

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|                                 | Year Ended December 31,
|-------------------------------- | -----------------------
|
|
|
|
|Consolidated Balance Sheet Data: |                        
|In accordance with Israeli GAAP  |                        
|                                 |                        
|Cash and cash equivalents        |                        
|Total assets                     |                        
|Short-term bank credit and loans |                        
|Share capital                    |                        
|Shareholders equity              |                        
|U.S. GAAP:                       |                        
|Total assets                     |                        
|Shareholders equity              |                        

|                                 | Year Ended December 31,
|-------------------------------- | -----------------------
|
|
|
|
|Consolidated Balance Sheet Data: |                        
|In accordance with IFRS:         |                        
|                                 |                        
|Cash and cash equivalents        |                        
|Total assets                     |                        
|Short-term bank credit and loans |                        
|Share capital                    |                        
|Shareholders equity              |                        

4

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---

# Exchange Rate Information

The following table shows, for each
of the months indicated, the high and low exchange rates between the NIS to the U.S.
dollar, expressed as NIS per U.S. dollar and based upon the daily representative rate of
exchange as published by the Bank of Israel:

|Month          | High (NIS) | Low (NIS)
|-------------- | ---------- | ---------
|
|
|
|
|May 2009       |            |          
|April 2009     |            |          
|March 2009     |            |          
|February 2009  |            |          
|January 2009   |            |          
|               |            |          
|December 2008  |            |          
|November 2008  |            |          
|October 2008   |            |          
|September 2008 |            |          

The following table shows, for each
of the months indicated, the high and low exchange rates between the EURO to the U.S.
dollar, expressed as U.S. dollar per EURO and based upon the daily representative rate of
exchange as published by the Bank of Israel:

|Month          | High (EURO) | Low (EURO)
|-------------- | ----------- | ----------
|
|
|
|
|May 2009       |             |           
|April 2009     |             |           
|March 2009     |             |           
|February 2009  |             |           
|January 2009   |             |           
|               |             |           
|December 2008  |             |           
|November 2008  |             |           
|October 2008   |             |           
|September 2008 |             |           

The following table shows, for
periods indicated, the average exchange rate between the NIS and EURO to the U.S. dollar,
expressed as U.S. dollar per NIS and EURO respectivly, calculated based on the average of
the representative rate of exchange on the last day of each month during the relevant
period as published by the Bank of Israel:

|Year | Average (EURO) | Average (NIS)
|---- | -------------- | -------------
|
|
|
|
|2008 |                |              
|2007 |                |              
|2006 |                |              
|2005 |                |              
|2004 |                |              

5

---

---

The following table shows, currency
exchange rates to the U.S. dollar on the reporting date:

|                             | Reporting date spot rate
|---------------------------- | ------------------------
|
|
|
|
|NIS                          |                         
|EURO                         |                         
|                             |                         
|Change in % :                |                         
|                             |                         
|Exchange rate of NIS in US$  |                         
|Exchange rate of EURO in US$ |                         

On May 31, 2009 the daily
representative rate of exchange between the NIS and EURO to the U.S. dollar as published
by the Bank of Israel was NIS 3.958 EURO 0.7227 respectively to $1.00.

|B. | Capitalization
and Indebtedness
|-- | -------------------------------

| | Not
applicable.
| | ---------------

|C. | Reasons
for the Offer and Use of Proceeds
|-- | -----------------------------------------

| | Not
applicable.
| | ---------------

|D. | Risk
Factors
|-- | ------------

Our business, operating results and
financial condition could be seriously harmed due to any of the following risks. If we do
not successfully address any of the risks described below, we could experience a material
adverse effect on our business, results of operations and financial condition and our
share price may decline. We cannot assure you that we will successfully address any or all
of these risks.

6

---

---

# Risks Related to our
Business

We have reported
operating and net losses in the past and may report operating and net losses in the
future.

We reported a net profit of $1.6
million for the year ended December 31, 2008, a net loss of $4 million, 2.2 million and a
net profit of 0.1 million for the years ended December 31, 2007, 2006 and 2005
respectively. We can offer no assurance that that any profitable operations will be
sustained. Future profitability will depend, among other things, on our ability to develop
new products, the degree of market acceptance of our existing and new products and the
level of competition in the markets in which we operate.

Continuing unfavorable
global economic conditions could have a material adverse effect on our business, operating results
and financial condition.

The recent crisis in the financial
and credit markets in the United States, Europe and Asia has led to a global economic
slowdown, with the economies of the United States and Europe showing significant signs of
weakness. During this current global economic slowdown, many companies have reduced
expenditures, and adverse economic conditions may cause our customers to reduce or
postpone their technology and military spending significantly, which could result in
reductions in sales of our products, longer sales cycles, slower adoption of new
technologies and increased price competition, as our business is subject to the effects of
general economic conditions globally, and, in particular, conditions in the market for
simulation systems for military and civilian applications. If global economic and market
conditions, or economic conditions in the United States, Europe, Asia or our other key
markets do not improve, or continue to deteriorate, the current economic downturn may have
a material adverse effect on our business, operating results and financial condition.

Although we had positive
shareholders equity, we may still need to raise additional funds which may not be available.

As of December 31, 2008, our
shareholders equity was $3.4 million. We expect that our existing cash balance,
together with our forecasted cash flows from operating activities for fiscal 2009,
including orders forecasted in the budget approved by our Board of Directors, a
contemplated equity and debt financing from new investors and credit lines from our banks,
will be sufficient for finance operations for the next twelve months. If our operations do
not generate cash to the extent currently anticipated or if any of the risk factors
discussed in this annual report materialize, we may need to raise additional funds in the
future for a number of uses, including:

7

---

---

| |  | implementing
further marketing and sales activities;
| | - | ----------------------------------------------------

| |  | hiring
additional qualified personnel; and
| | - | ------------------------------------------

| |  | expanding
research and development programs.
| | - | --------------------------------------------

We may not be able to obtain
additional funds on acceptable terms or at all. If we cannot raise needed funds on
acceptable terms, we may not be able to:

| |  | maintain
the level of our current operations;
| | - | ---------------------------------------------

| |  | develop
new products;
| | - | ---------------------

| |  | enhance
our existing products;
| | - | ------------------------------

| |  | remain
current with evolving defense technologies;
| | - | --------------------------------------------------

| |  | take
advantage of future opportunities; or
| | - | ------------------------------------------

| |  | respond
to competitive pressures or unanticipated requirements.
| | - | ---------------------------------------------------------------

Because we receive large
product orders from a relatively small number of customers, our sales and operating
results are subject to substantial periodic variations. Our revenues and operating results
for a specific quarter may not be indicative of our future performance, making it
difficult for investors to evaluate our future prospects based on the results of any one
quarter.

Due to the nature of our customers
and products, we receive relatively large orders for our products from a relatively small
number of customers. Consequently, individual orders from individual customers can
represent a substantial portion of our sales in any one period and significant orders by
any customer during one period may not be followed by further orders from the same
customer in subsequent periods. Accordingly, our sales and operating results are subject
to very substantial periodic variations. Because our quarterly performance is likely to
vary significantly, the results of our operations for any quarter are not necessarily
indicative of the results that we might achieve for any subsequent period and
consequently, year-to-year comparisons of our operating results may not be meaningful.

The loss of any of our
major customers would result in a loss of a significant amount of our revenues.

Three of our customers, all located
in Asia, that awarded us several projects, accounted for 88% of our revenues in fiscal
2008. We cannot be certain that these and other customers will maintain the size of their
respective purchase orders, or will not reschedule or cancel existing purchase orders. We
expect that sales of our products to relatively few customers will account for a
significant portion of our net revenues for the foreseeable future. Consequently, the
cancellation of an order from any one customer may have a material adverse effect on our
business, financial condition, results of operations and cash flows.

8

---

---

We may not be able to
convert our entire backlog into revenue.

We sell the majority of our products
through individual purchase orders. Many of our customers have the right to terminate
orders merely by paying the cost of work in process plus a related profit factor.
Customers may cancel orders due to the cancellation of a budget or for other internal
reasons. As of December 31, 2008, purchase orders and contractual arrangements amounted to
approximately $53 million, compared with $51 million as of December 31, 2007. If we
experience cancellations of pending contracts, terminations or reductions of contracts in
progress, we may not be able to convert our entire backlog into revenue. Any reduction in
backlog will adversely affect our business, financial condition, results of operations and
cash flows.

Because competition in
the market for our products is intense, we may lose market share, and we may be unable to achieve
or maintain profitability.

We compete with numerous other
contractors on the basis of product performance, price, reputation, technical and
managerial capability, product maintenance cost and responsiveness to customers
requirements. Our ability to successfully compete for and retain such new projects and
customers is highly dependent on technical excellence, management proficiency, strategic
alliances, cost-effective performance and the ability to recruit and retain key personnel.

The continuing consolidation of the
global defense industry, which has decreased the number, but increased the relative size
and resources of our competitors, has resulted in intensified competition. Some of the
competitors which are the top-tier contractors for competing products have substantially
greater financial, marketing and other resources than ours. These contractors compete with
us in some cases by offering more aggressive pricing and devoting greater resources to
product marketing or development than we do. This competition may result in lower prices
or reduced demand for our products and a corresponding reduction in our revenues that may
further impair our ability to achieve and maintain profitability.

We rely on contracts with
governments and defense contractors entities that entail certain risks, all of
which may adversely affect our operations.

As is the case with many companies
that derive a substantial portion of their revenues from government contracts for
defense-related products, our business is subject to specific risks, which include changes
in governmental appropriations and national defense policies and priorities, a change of
government in the customers country, as well as political changes or alterations in
the governments policy regarding the issue of export and import permits to various
countries and the policies of specific governments to favor local over foreign defense
products suppliers. We may be negatively affected by one or more of these factors.

9

---

---

Generally, our contracts with
governments may be terminated or suspended by such governments as a result of factors
which may not depend on us, including as a result of a decrease in the defense budget, a
decline in the military expenditures of governments, the cancellation or a significant
cutback of a large project in which we participate, or as a result of situations such as a
state of war, force majeure or other circumstances seriously disrupting the public
safety, peace or good order of the customers country. Our contracts with
non-governmental military contractors sometimes contain similar provisions. In most cases
we receive advanced payments prior to incurring the cost of fulfilling such contracts, we
realized a positive project cash flow. In the event of an early termination of a contract,
we may be required to return a portion of such advanced payment. Upon such early
termination, we would, in most cases, be entitled to reimbursement for our incurred
contract costs and to payment of a proportionate share of our fee or profit for the work
we actually performed. In order to reduce risks of financial exposure resulting from an
early termination of a contract, we attempt to stagger funding for projects in accordance
with our rate of performance and to insure ourselves against that risk by providing for
positive cash flow in the life cycle of the program. If, and to the extent that, we are
not entitled to all or a portion of the compensation entitled to us under such contracts,
our operations and cash flows would be adversely affected.

Our ability to export our
products is subject to approvals by Israeli and United States governmental agencies.

Our export of military goods and
information is subject to approval of the Defense Export Controls Division or DECD of the
Israel Ministry of Defense. To date, we have received all required approvals from DECD,
but there can be no assurance that we will receive such approvals in the future or that
the Israeli government will not impose additional requirements on our manufacturing or
export activities, which may require us to incur additional substantial expenses or which
may otherwise have a material adverse effect on our operations. DECDs policy has
generally been to encourage the export of military goods and knowledge; however, DECD
generally does not permit sales to countries that are in a state of war or hostility with
Israel and countries which may otherwise endanger the State of Israel.

We purchase a portion of the
commercial computers, air combat maneuvering instrumentation pods hardware and other
off-the-shelf products, such as navigation systems, which we incorporate into
our products from manufacturers in the United States. The export of such components is
subject to the approval of the United States Department of Commerce and/or the United
States Department of Defense, which often restrict sales to certain countries. Following
the events of September 11, 2001, we experienced delays in the receipt of such required
approvals. For example, we experienced a delay in the delivery of several components of a
system to a customer and incurred additional costs, as a result of the need to modify such
components, because of a delay in the receipt of an export approval that has since been
obtained. Further, there can be no assurance that we will receive such approvals in the
future or that the United States Government will not impose additional requirements on our
manufacturing or export activity, which might require us to incur substantial expenses,
and/or find and contract with alternative suppliers in countries that do not impose
similar export restrictions.

10

---

---

Our contracts have a
fixed price and payment thereunder is subject to timely accomplishment of milestones,
which may subject us to unfavorable terms.

The majority of our contracts are for
a fixed price, meaning they are not subject to adjustment for the costs incurred in the
performance of the contract. Consequently, we assume the risk that increased or unexpected
costs may reduce our profits or generate a loss. The risk is heightened under fixed price
contracts involving research and development with respect to new technologies.

The majority of our contracts with
our customers provide that after we receive an advance payment at the commencement of a
project, additional payments are payable upon progress or achievement of specific
milestones. In a majority of the projects, in addition to the bank guarantees that are
generally provided by us for the advance payments, we are required to provide performance
guarantees in an amount equal to a specific percentage of the contract price.

Most agreements with our customers
impose penalties or reduce the amount payable to us in the event that the completion of a
phase of a project is delayed. In addition, we are generally responsible for the delays
and defaults of our subcontractors. To mitigate our risk, we attempt to impose liability
on our subcontractors on a back-to-back basis when such subcontractor is in
delay or default which, in turn, could expose us to liability pursuant to the main
contract. However, we may not be able to obtain full recovery for such liabilities from
such subcontractors.

We may encounter significant
reduction in profits or incur losses as a result of one or more of the above unfavorable
terms.

We are controlled by Chun
Holdings LP which, in the aggregate, beneficially owns approximately 49.71% of our
outstanding Ordinary Shares as of March 31, 2009. Therefore, Chun is able to elect the
majority of our directors and exercise control over the outcome of matters requiring
shareholders approval.

As of March 31, 2009, Chun Holdings
L.P., an Israeli limited partnership beneficially owned an aggregate of 58,142,608 of our
ordinary shares representing approximately 49.71% of our currently outstanding ordinary
shares. As a result, Chun controls the outcome of various actions that require our
shareholder approval. For example, Chun could elect most of our directors, delay or
prevent a transaction in which shareholders might receive a premium over the prevailing
market price for their shares and prevent changes in control or management.

11

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Because we operate in
international markets, we are subject to additional risks.

We currently offer our products in a
number of countries and a key component of our marketing strategy is to continue to expand
in foreign markets. Our business is subject to risks which often characterize
international markets, including:

| |  | economic
and political instability;
| | - | -----------------------------------

| |  | import
or export licensing requirements;
| | - | ----------------------------------------

| |  | difficulties
in collecting accounts receivable;
| | - | -----------------------------------------------

| |  | longer
payment cycles;
| | - | ----------------------

| |  | unexpected
changes in regulatory requirements and tariffs;
| | - | ----------------------------------------------------------

| |  | fluctuations
in exchange rates;
| | - | -------------------------------

| |  | potentially
adverse tax consequences; and
| | - | -----------------------------------------

| |  | potentially
weak protection of intellectual property rights.
| | - | ------------------------------------------------------------

These risks may impair our ability to
generate revenues from our overseas sales efforts, which constitute the majority of our
business.

Our profitability could
suffer if third parties infringe upon our proprietary technology.

Our profitability could suffer if
third parties infringe upon our intellectual property rights or misappropriate our
technologies and trademarks for their own businesses. To protect our rights to our
intellectual property, we rely on a combination of patent, trademark and copyright laws,
trade secret protection, confidentiality agreements and other contractual arrangements
with our employees, some of our affiliates, strategic partners and others. We currently
own five patents registered in the United States and in several other countries, along
with several pending patents and trademarks. The protective steps we have taken may be
inadequate to deter infringement or misappropriation of our proprietary information. We
may be unable to detect the unauthorized use of, or take appropriate steps to enforce, our
intellectual property rights. Effective patent, trademark, copyright and trade secret
protection may not be available in every country, especially in Asia Pacific, in which we
offer, or intend to offer, our products. Any failure to adequately protect our
intellectual property could devalue our proprietary content and impair our ability to
compete effectively. Further, defending our intellectual property rights could result in
the expenditure of significant financial and managerial resources.

12

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Our products may infringe
on the intellectual property rights of others.

Third parties may assert against us
infringement claims or claims that we have violated a patent or infringed a copyright,
trademark or other proprietary right belonging to them. Any infringement claim, even if
not meritorious, could result in the expenditure of significant financial and managerial
resources.

# Risks Relating to Our
Location in Israel

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

We are incorporated under Israeli law
and our principal offices, research and development and manufacturing facilities are
located in the State of Israel. Political, economic and military conditions in Israel
directly affect our operations. Since the establishment of the State of Israel in 1948, a
number of armed conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to security and
economic problems for Israel. During the summer of 2006, Israel was engaged in an armed
conflict with Hezbollah, a Lebanese Islamist Shiite militia group and political party.
This conflict involved missile strikes against civilian targets in northern Israel, and
negatively affected business conditions in Israel. Furthermore, the establishment in 2006
of a government in the Gaza Strip by representatives of the Hamas militant group, which
forcefully took control of the Gaza Strip from the Palestinian Authority in 2007 following
Israels disengagement from the Gaza Strip in 2005, has created additional unrest and
uncertainty in the region that intensified into an armed conflict with Hamas during
December 2008 and January 2009 following the firing of thousands of missile strikes into
southern Israel. Although these missile attacks by Hamas have not targeted the greater Tel
Aviv region, the location of our principal executive offices, our manufacturing facilities
are located in Ashdod, situated in southern Israel, and were in the range of the recent
missile strikes. Any further armed conflict, terrorist activity or political instability
in the region would likely negatively affect business conditions and could significantly
harm the results of our operations.

In addition, Israel and companies
doing business with Israel have been the subject of an economic boycott. Although Israel
has entered into various agreements with Egypt, Jordan and the Palestinian Authority,
Israel has been and is subject to civil unrest and terrorist activity, with varying levels
of severity, since September 2000. These developments have further strained relations
between Israel and the Palestinian Authority. Any future armed conflicts or political
instability in the region may negatively affect general business conditions in Israel and
thereby adversely affect our results of operations. Parties with whom we do business have
sometimes declined to travel to Israel during periods of heightened unrest or tension,
forcing us to make alternative arrangements when necessary. In addition, the political and
security situation in Israel may result in parties with whom we have agreements involving
performance in Israel claiming that they are not obligated to perform their commitments
under those agreements pursuant to force majeure provisions in the agreements. To date, we
do not believe that the political and security situation has had a material adverse impact
on our business but we cannot give any assurance that this will continue to be the case.
Any hostilities involving Israel or the interruption or curtailment of trade between
Israel and its present trading partners could also adversely affect our operations and
could make it more difficult for us to raise capital.

13

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Our insurance does not cover losses
that may occur as a result of events associated with the security situation in the Middle
East. Although the Israeli government currently covers the reinstatement value of direct
damages that are caused by terrorist attacks or acts of war, we cannot assure you that
this government coverage will be maintained and our losses may extend beyond that direct
coverage. Any losses or damages incurred by us could have a material adverse effect on our
business. Any armed conflicts or political instability in the region would likely
negatively affect business conditions and could harm our results of operations.

Like all male adult citizens and
permanent residents of Israel, our directors, officers and employees who are under the age
of 45, unless exempt, are obligated to perform up to 36 days of military reserve duty
annually. Additionally, all such residents are subject to being called to active duty at
any time under emergency circumstances. Some of our officers and employees are currently
obligated to perform annual reserve duty. Were there to be emergency conditions in Israel,
some of our key employees may be called to active duty for extended periods of time which
could adversely affect our operations. No assessment can be made as to the full impact of
such requirements on our workforce or business if conditions in Israel should change, and
no prediction can be made as to the effect of any expansion or reduction of such military
obligations on us.

We are adversely affected
by the devaluation of the dollar against the New Israeli Shekel and could be adversely affected
by the rate of inflation in Israel.

The majority of our revenues are
generated in U.S. dollars. A significant portion of our expenses, primarily salaries,
related personnel expenses, part of our leases and overheads is incurred in NIS. We
anticipate that a significant portion of our expenses will continue to be denominated in
Israeli shekels.

As a result, inflation in Israel
and/or the devaluation of the U.S. dollar in relation to the NIS has and may continue to
have the effect of increasing the cost in dollars of these expenses; hence, our
dollar-measured results of operations are and may continue to be adversely affected. In
order to manage the risks imposed by foreign currency exchange rate fluctuations, from
time to time, we enter into currency forward contracts and put and call options to hedge
some of our foreign currency exposure. We can provide no assurance that our hedging
arrangements will be effective. In addition, if we wish to maintain the dollar-denominated
value of our products in non-U.S. markets, devaluation in the local currencies of our
customers relative to the U.S. dollar may cause our customers to cancel or decrease orders
or default on payment.

14

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Because exchange rates between the
NIS and the dollar fluctuate continuously, exchange rate fluctuations have an impact on
our profitability and period-to-period comparisons of our results of operations. In 2007,
the value of the dollar decreased in relation to the NIS by 8.97%, and the inflation rate
in Israel was 3.4% and as such affected our results of operations in 2007. In 2008, the
value of the dollar which decreased in relation to the NIS by 1.14%, and the inflation
rate of 3.8% in Israel similarly impacted our results of operations in 2008. If this trend
continues, it will continue to adversely affect our result of operations.

If we are considered to
be a passive foreign investment company, either presently or in the future, U.S. Holders will
be subject to adverse U.S. tax consequences.

We will be a passive foreign
investment company, or a PFIC, if 75% or more of our gross income in a taxable year,
including our pro rata share of the gross income of any company, U.S. or foreign, in which
we are considered to own, directly or indirectly, 25% or more of the shares by value, is
passive income. Alternatively, we will be considered a PFIC if at least 50% of our assets
in a taxable year, averaged over the year and ordinarily determined based on fair market
value, including our pro rata share of the assets of any company in which we are
considered to own, directly or indirectly, 25% or more of the shares by value, are held
for the production of, or produce, passive income. If we were to be a PFIC, and a U.S.
Holder does not make an election to treat us as a qualified electing fund, or
QEF, or a mark to market election, excess distributions to a U.S.
Holder, and any gain recognized by a U.S. Holder on a disposition of our ordinary shares,
would be taxed in an unfavorable way. Among other consequences, our dividends would be
taxed at the regular rates applicable to ordinary income, rather than the 15% maximum rate
applicable to certain dividends received by an individual from a qualified foreign
corporation. The tests for determining PFIC status are applied annually and it is
difficult to make accurate predictions of future income and assets, which are relevant to
the determination of PFIC status. In addition, under the applicable statutory and
regulatory provisions, it is unclear whether we would be permitted to use a gross loss
from sales (sales less cost of goods sold) to offset our passive income in the calculation
of gross income. In light of the uncertainties described above, we have not obtained an
opinion of counsel with respect to our PFIC status and no assurance can be given that we
will not be a PFIC in any year. If we determine that we have become a PFIC, we will then
notify our U.S. Holders and provide them with the information necessary to comply with the
QEF rules. If the IRS determines that we are a PFIC for a year with respect to which we
have determined that we were not a PFIC, however, it might be too late for a U.S. Holder
to make a timely QEF election, unless the U.S. Holder qualifies under the applicable
Treasury regulations to make a retroactive (late) election. U.S. Holders who hold ordinary
shares during a period when we are a PFIC will be subject to the foregoing rules, even if
we cease to be a PFIC in subsequent years, subject to exceptions for U.S. Holders who made
a timely QEF or mark-to-market election.

15

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We have tax benefits that
may be discontinued or reduced.

We are entitled to tax benefits under
certain Government of Israel programs. In order to maintain our eligibility for these
programs and benefits, we must continue to meet specified conditions, including making
specified investments in fixed assets. In addition, some of these programs restrict our
ability to manufacture certain products or transfer certain technology outside of Israel.
If we fail to comply with these conditions in the future, the benefits received could be
cancelled and we could be required to pay increased taxes. The Government of Israel has
reduced the benefits available under these programs in recent years, and these programs
and tax benefits may be discontinued or curtailed in the future. If the Government of
Israel ends or reduces these programs and tax benefits, our business, financial condition
and results of operations could be negatively affected.

Provisions of Israeli law
may delay, prevent or make difficult acquisition of us, which could prevent a change of control
and therefore decrease the price of our shares.

Provisions of Israeli corporate and
tax law may have the effect of delaying, preventing or making more difficult a merger
with, or other acquisition of, us. This could cause our ordinary shares to trade at prices
below the price for which third parties might be willing to pay to gain control of us.
Third parties who are otherwise willing to pay a premium over prevailing market prices to
gain control of us may be unable or unwilling to do so because of these provisions of
Israeli law. See Item 6. Directors, Senior Management and Employees  Approval
of Related Party Transactions under Israeli Law for additional information about
some anti-takeover effects of Israeli law.

It may be difficult to
enforce a U.S. judgment against us, our officers and directors named in this annual
report or to assert United States securities laws claims in Israel or serve
process on our officers.

We are incorporated in the State of
Israel. All of our executive officers and directors named in this annual report are not
residents 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 to
enforce a judgment obtained in the United States based upon the civil liabilities
provisions of the United States Federal securities laws against us or any of those persons
or to effect service of process upon these persons in the United States. Additionally, it
may be difficult to enforce civil liabilities under United States federal securities laws
in original actions instituted in Israel.

16

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

We are incorporated under Israeli
law. The rights and responsibilities of the holders of our Ordinary Shares are governed by
our articles of association and by Israeli law. These rights and responsibilities differ
in some respects from the rights and responsibilities of shareholders in typical U.S.
corporations. In particular, a shareholder of an Israeli company has a duty to act in good
faith toward the company and other shareholders and to refrain from abusing his power in
the company, including, among other things, in voting at the general meeting of
shareholders on certain matters. See Item 10. Additional Information  B.
Memorandum and Articles of Association.

|ITEM 4. |  | Information on the Company
|------- |  | --------------------------

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

B.V.R.
          Systems (1998) Ltd., an Israeli company, was formed in January 1998 to receive
          all of the assets and liabilities of the defense-related business of BVR
          Technologies Ltd., or BVR-T, in accordance with the terms of a reorganization
          plan. The reorganization plan was consummated, and BVR commenced operations as
          an independent company, in October 1998, effective as of January 1, 1998. Our
          principal executive offices and research and development facilities are located
          at 16 Hamelacha Street, Afek Industrial Park, Rosh Haayin 48091, Israel,
          and our telephone number is 972-3-900-8000. Our manufacturing facilities are
          located in Ashdod, Israel. Our wholly-owned subsidiary, BVR-S Pacific PTE, which
          is incorporated under the laws of Singapore, is located in Singapore.

In March 2006, H.S.N General Managers
Holdings L.P. (or HSN), an Israeli limited partnership led by Mr. Nir Dor,
invested $3.6 million in our share capital in consideration for the issuance of 20,000,000
ordinary shares, representing approximately 17% of our issued share capital, at a price
per share of $0.18. In connection with this investment, HSN was issued three separate
warrants for the purchase of 6,000,000 of our ordinary shares per each warrant, with
exercise prices of $0.36, $0.54 and $1.00, exercisable for a period of three years, with a
mandatory exercise mechanism under certain conditions. As of the date of this annual
report, none of these warrants have been exercised. Pursuant to this investment, Mr. Dor
was appointed to serve as a member of our board of directors and shall be entitled to
continue to serve on the board, either personally or to nominate a representative on his
behalf, for such time as HSN holds at least nine percent of our outstanding share capital.
As at the date of this report, HSN holds approximately 17% of our issued share capital. As
of March 22, 2009, all the above options have expired.

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On March 3, 2009, we entered into an
agreement in principle with Milestones Upgrading & Industries Company Ltd., or
Milestones Upgrading Ltd., for the investment of $3 million in our share capital at a
price per share of $0.156, and the grant of a convertible loan in the amount of $2
million. Pursuant to the execution of this agreement in principle, Milestones Upgrading
Ltd. provided us with a loan in the amount of $1.5 million, which was to be considered
part of the $2 million loan amount to be granted under the definitive agreements. In May
2009, Milestones Upgrading Ltd. informed the Company that it has encountered technical
difficulties that may come in the way of moving forward with its investment in the Company
and requested an extension of the negotiation period detailed in the Agreement in
Principle entered into in March 2009 in order to ascertain if it is able to resolve those
difficulties. In a letter sent by the Company in May 2009, through its legal counsel, to
Milestones Upgrading Ltd., the Company advised Milestones Upgrading Ltd. that as
Milestones Upgrading Ltd. completed its due diligence review, did not provide any comments
to the Company, and as the parties reached a form of a definitive agreement acceptable to
both parties it is of the position that a binding agreement was entered into between the
parties. Milestones responded to the letter in May 2009, through its legal counsel,
disclaiming the Companys claims. In view of this information the Company is
considering its further actions.

On May 28, 2009, we entered into an
agreement with Yuval Golan Investments Ltd. and Michael Golan Securities Holdings Ltd., or
collectively Golan Investments, to provide to the Company $3.5 million by means of a
debenture, of which $2 million was provided to the Company on May 31, 2009 and the balance
of $1.5 million will be provided on June 21, 2009. Under the agreement Golan Investments
also receives a warrant to purchase 3 million ordinary shares of the Company at an
exercise price of $0.18, which is exercisable for a period of five years. The debenture is
due twelve months from the issue date in the amount of $3.85 million. The agreement
further provides that the debenture will be due upon the occurrence of a merger or
acquisition transaction of the Company in the amount of $4.55 million during the first
twelve month period after the date of the agreement. It was further agreed that if the
Company shall not repay the debenture 12 months from the date of its provision then (a) as
of the commencement of the second year the debenture shall bear a return rate of 15% per
annum; (b) upon a merger or acquisition transaction of the Company during the second year
as of the provision of the debenture the Company shall repay to Golan Investments an
amount of $5,600,000; and (c) the Company shall issue to Golan Investments additional
warrants to purchase 6,000,000 Ordinary Shares, at an exercise price per share of $0.18,
exercisable for a period of four years commencing as of the date of entitlement.

Our web site is
www.bvrsystems.com. Information on our web site is not incorporated by reference in
this annual report.

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# Capital Expenditures

Our capital expenditures totaled $0.3
million in the year ended December 31, 2008, $0.4 million in the year ended December 31,
2007 and $0.3 million, in the year ended December 31, 2006. Of the $0.3 million of capital
expenditures in 2008, $0.27 million was invested in computers and electronic equipment and
$0.03 million was invested in office furniture and equipment.

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

# General

BVR is engaged in the military
training and simulation industry. Our activities can be divided into the following main
units: live and embedded training; virtual training (simulators); and constructive
training. Each of these training methods can be further sub-divided into applications for
air, ground and navalsystems.

We are engaged in the development,
manufacture, marketing and sale of sophisticated training and simulation systems for
military applications. We are currently engaged in the following areas:

| |  | Live
and Embedded Training Systems:
| | - | -----------------------------------

| |  | On-Board,
 Combat Training  Systems such as the "Ehud(TM)";  Air Combat  Maneuvering
 Instrumentation,  or ACMI,          Naval Combat Instrumentation System, or NCMI; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Embedded
 simulation  systems  such as  Embedded  Virtual  Avionics  or  EVA,  In-Flight
 Electronic  Warfare          Simulation, or IFEWS, Hybrid Air Defense Embedded
Simulation System (HADES)
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Virtual
and Constructive Training Systems:
| | - | ------------------------------------------

| |  | Flight
simulators for fighter aircraft, helicopters, trainer aircraft, unmanned aerial vehicles;
| | - | ------------------------------------------------------------------------------------------------

| |  | Armored
& Gunnery Simulators and Infantry Simulators; Infantry and Special forces Simulators; and
| | - | -------------------------------------------------------------------------------------------------

| |  | Naval
Tactical Trainers, or NTT, and Action Speed Tactical Trainers, or ASTT.
| | - | -----------------------------------------------------------------------------

Our products offer advanced, highly
effective and cost-efficient solutions to operational and tactical training needs. Our
products are based on a comprehensive training philosophy, which enables our customers to
reduce the amount of actual military equipment used in training while enhancing the
quality of the training exercises, thereby significantly reducing the risks associated
with actual operations and training in a live operational scenario. In addition, our
diversified product offerings are aimed to improve the mission preparedness of armed
forces by simulating their combat environment with realistic tactical scenarios, thereby
allowing networked training between multiple forces to optimize the joint-force operations
essential in the modern battlezone.

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# Our Product Offerings

We continually design, develop and
market new generation technologies for live, embedded, virtual and constructive training.
The advances we have made in the field reflect our vast experience, unique approach to
technological innovation and our drive to singularly fulfill the needs of our global
military customers.

# Live and Embedded
Training

Our live and embedded training
systems are designed to improve real-time management, monitoring, training, safety and
debriefing for live training exercises and operations carried out by modern air, naval and
ground forces. Our on-board training product line includes the following systems:

Ehud ACMI

Air Combat Maneuvering
Instrumentation

The Ehud air combat maneuvering
instrumentation, or ACMI, system is a complete on-board, autonomous training and safety
suite. This system is designed to enhance the airborne training of an aircraft crew on a
wide variety of missions.

Ehud offers a unique
combination of range-less, real-time and post-flight training and debriefing systems
together with safety warnings and operational capabilities. The system is effective for
air-to-air, air-to-ground and electronics warfare pilot training with an unlimited number
of participants due to our patented datalink protocol which dynamically auto-adapts the
data exchange rate according to the actual number of participants in the network.

The Ehud ACMI system includes
features such as mid-air and ground collision warning systems, which significantly enhance
training safety. The Ehud ACMI system has been flying operationally since 1994 and
has been delivered to many leading air forces around the world.

Naval Combat
Instrumentation System

Our naval combat maneuvering
instrumentation, or NCMI, is a full-scale on-board training system. The system enables the
conduct of both live field training sessions at sea and constructive war-gaming exercises
ashore.

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The basic concept behind our NCMI is
the deployment of a distributed embedded simulation system on-board an instrumented ship
and a maritime patrol aircraft.

Our NCMI system supports the
debriefing, analysis, and evaluation of naval warfare exercises at all command levels.

Our NCMI system supports various
training levels ranging from operators training at console level, through sub-team
and team training, and up to full fleet training. Our NCMI system provides training in
tactical simulators and enhances the reality of seaborne exercises through the use of
computer generated forces integrated with live exercises. Typically, the exercise is
coordinated between the participants via a datalink system, which supports the creation of
a distributed simulation network.

# Embedded Simulation

We are currently marketing a wide
range of embedded simulation solutions. These advanced solutions are an outcome of the
synergies gained from the combination of on-board training and simulation technologies.
With vast experience in these two fields, we believe that we are well positioned to play a
leading role in this evolving market.

Embedded Virtual Avionics
Suite, or EVA

Our Embedded Virtual Avionics Suite,
or EVA, is a state-of-the-art embedded simulation suite, installed on basic or advanced
trainer aircraft, transforms training aircraft into virtual advanced fighter aircraft. A
training aircraft equipped with EVA may offer capabilities such as virtual sensors and
weapons, in-flight live or virtual target threats, operational scenarios of gradually
increasing complexity, full debriefing capabilities and flight safety features. Our
proprietary EVA technology is based on a patent owned by us and registered in numerous
countries, including the United States and several European countries.

An EVA standard training aircraft is
equipped or refitted to replicate the cockpit and avionics instrumentation panel of
specifically targeted advanced fighters. The refitted trainers will resemble the behavior,
displays and controls of the advanced fighter sensors (such as air-to air radar, air to
ground radar and radar warnings receiver, which is part of the electronic warfare suite of
most advanced fighters and seekers) and weapon systems. Pilots flying the EVA-fitted
trainer benefit from a real-time feel and capabilities of the simulated advanced fighter
aircraft. The system offers features such as collision avoidance and hazard warning.

In-Flight Electronic
Warfare Simulation, or IFEWS

Our in-flight electronic warfare
simulator, or IFEWS, is a complete, autonomous, on-board threat-environment training
and safety suite. The system is an embedded simulator for the training and debriefing of
electronic warfare, or EW, scenarios, simulating the real EW systems in an aircraft.
IFEWS provides a virtual EW range and includes our post-flight debriefing
capabilities.

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Our IFEWS generates a wide
range of on-board simulation of virtual ground and airborne threats. The virtual range,
created and managed by the IFEWS computer, authentically simulates the
characteristics, behavior and interactions of both the threatening weapon systems and the
aircrafts self protection suite. Our system is tightly coupled to the
aircrafts existing EW suite. IFEWS simulates all relevant modes of weapon
system, including optical tracking modes and other modes not received by the airborne EW
suite.

After landing, our PC-based ground
station provides advanced After-Action Review and debriefing with a 3D analysis of crew
performance, all weapon engagements, safety events and mission scenarios.

Based on the legacy of the Ehud
ACMI systems, IFEWS provides multiple features including real-time training,
realistic virtual threats, safety elements and debriefing capabilities.

Hybrid Air Defense
Embedded Simulation System (HADES)

The concept behind our HADES is the
deployment of a distributed embedded simulation system on-board an instrumented Air /
Missile Defense task force.

Our HADES system supports the real
time training, debriefing, analysis, and evaluation of Air and Missile Defense warfare
exercises at all command levels.

Our HADES system supports various
training levels ranging from operators training at console level, through
sub-battery and battery team training, up to battalion and joint , multi force training.

Typically, the exercise is
coordinated between the participants via a datalink system, which supports the creation of
a distributed simulation network and connects live and virtual participants to the same
tactical scenario.

For additional information with
respect to these purchase orders, see Item 10. Additional Information  C.
Material Contracts.

# Virtual and Constructive
Training

We provide flight, naval and ground
forces simulators for various platforms, electronics and weapon systems. Our line of
simulators covers a full range of training scale, from basic procedural training to combat
mission training and full mission training. Our simulators support the high level
architecture world-wide standard for simulators connectivity delivering the capacity to
perform sophisticated distributed mission training by communicating and training with
other simulators and training devices. Our product offerings include:

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| |  | Flight
Simulators;
| | - | ------------------

| |  | Ground
Forces Simulators;
| | - | -------------------------

| |  | Naval
Simulators;
| | - | -----------------

| |  | Weapon
and Electronic Systems Simulators; and
| | - | ---------------------------------------------

| |  | Air
and Missile Defense Simulators.
| | - | -----------------------------------

Flight Simulators

Fighter Aircraft Simulators.We have developed and manufactured fighter aircraft simulators for numerous aircrafts,
including the F-16C, F-16D, F-15, F-5, A-4 and Mirage-2000.

Full Mission Simulators. Our
full mission simulators provide training for all aspects of a missions flight and
procedures, including sophisticated weapon system simulations, sensors and full standard
and emergency procedure training. These simulators encompass a high-fidelity cockpit
replica and a large variety of visual systems covering a field of view of up to 360°.

We use high-end computers and
personal computers, or PCs, as image generators to provide the trainee with a
high-resolution, fully-textured outside world visual presentation, based on satellite
imagery and three dimensional targets and shapes.

Our full mission simulators provide
pilots with complex tactical training, using multiple computer generated forces, such as
air, land, or sea participants.

Trainer Aircraft Simulators. We have developed and manufactured trainer aircraft simulators for numerous aircraft,
including the PC-7, MB-339 MLU, MB339 C/D and Fouga Magister.

AMOS  Cadet Screening
Simulator.Our AMOS cadet screening and basic flight training simulator has been
developed for the Israel Air Force Fouga Magister trainer. Our system provides a
methodology for the analysis of cadets learning abilities, through screening while
training.

Helicopter Full Mission
Simulator. We have developed and manufactured helicopter simulators for helicopters,
including the AS-550. Our full mission simulators for helicopters are offered for assault
and fully armed attack helicopter simulation. The simulators are offered in a number of
configurations, from a limited front view outside world imagery to a full dome display.
The full dome display configuration includes a full-size cockpit replica for two pilots
with a three channel high-resolution full color outside world display. The resulting
imagery fidelity level enables the system to perform low flying missions and weapon
deployment simulation. The system is capable of simulating typical helicopter flights and
attacks, including a full range of malfunctions and emergency procedures. Our simulators
also provide for tactical training as the trainee can fly against user pre-programmed
computer generated forces.

23

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Unmanned Air Vehicle Mission
Simulators.We have developed and manufactured an unmanned air vehicle, or UAV, and
tactical mission simulators for tactical UAV, for both the external pilot and the internal
mission crew. Our UAV mission simulator supports training on near-to-real-life quality
imaging systems for the entire crew. Training can be executed both individually and as a
team.

Ground Forces Simulation
Systems

Integrated Tactics and Armor
Combat Trainer. Our integrated tactics armor and weapon system vehicle combat trainer,
or INTACT system, fulfills the need for effective training, debriefing and evaluation of
army units. Our INTACT system was developed by experienced army officers. INTACT is a
multi-station armor and weapon vehicle tactical simulator system. Our INTACT system
provides training that ranges from individual level to combat team multi-participant
tactical exercises.

Our INTACT system provides training
levels from individual precision gunnery to combat team multi-participant exercises and
beyond. The training can include unlimited combinations of manned and computer generated
forces. The INTACT system fills the need for effective training, debriefing and evaluation
of ground forces. Our INTACT system simulates virtual forces and integrates their actions
with real forces, adding value to performance and cost-effective training.

MA2CS.
          Our MA2CS is the Mobile, fast deployable, Autonomous Crew
          Station version of INTACT. MA2CS includes all of the AGTS (Armor
          gunnery & Tactical Simulator) operational support, with the flexibility of
          facility-free large-scale INTACT training, anywhere, anytime. For field-deployed
          forces the MA2CS takes the already-proven Intact ROI (Return On Investment)
          a huge stride forward. Each MA2CS unit has its own onboard computers and
          IOS (Instructor Operation Station) , thus it can work independently, and can
          connect to other MA2CS devices for unit-level training. The MA2CS
          enables the commander to look out the hatch using a head mount on display.

Armored Fighting Vehicles Driving
Simulator  Matador. The Matador training system is an advanced armored
fighting vehicle, or AFV, driving simulator, mounted on top of a motion platform,
specifically designed to provide AFV drivers with the capability of performing
real-life training. The Matador includes the following AGTS and MA2CS
robust operational capabilities, with the professional focus on the necessities of the
contemporary AFV driver:

| |  | Supports
several types of AFV per cabin, with full scale authentic replica of the driving cabin;
| | - | ------------------------------------------------------------------------------------------------

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| |  | Driving
in any given arena (terrain,  weather,  etc.), and  participating  in a range of
contemporary  combat                   and non-combat scenarios; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Provides
basic and advanced driving courses with real-time, trouble-shooting training.
| | - | --------------------------------------------------------------------------------------

TSAT. The Tactical Small Arms Trainer, or TSAT, simulator is a state-of-the-art
          multi-weapon firing simulation training system, specifically designed to provide
          military and paramilitary with the capability of performing
          real-life indoor infantry training and includes the following
          offerings:

| |  | Supports
all operationally standard-issue weapons (pistols, rifles & machine guns) and
mortars, with recoil effects and additional systems (C2, optics, robots);
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Features
unlimited tactically diverse training scenarios with real-life 3D
audio-visual environment and user-definable Computer Generated Forces;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------

| |  | Includes
fire analysis: Hit/miss, hit location, weapon movement during the firing process, scoring
mechanism;
| | - | -------------------------------------------------------------------------------------------------------------

| |  | A
laser based hit detection system with high detection accuracy; and
| | - | --------------------------------------------------------------------

| |  | Saves
time and material expenses (with proven ROI) by user- friendlycalibration
procedure, customizable user interface, PC-based scalable and modular system, and network
based architecture.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On-Guard. The On-Guard training system is a fast-deployable TSAT, specifically
          modified for the training of paramilitary and civil armed personnel in modular
          expertise courses from basic shooting skills to operational decision-making.
          On-Guard includes the TSATs capabilities yet focus on the methodological
          essentials of contemporary security training with the following offerings:

| |  | Video
and/or graphic real-life 3D audio-visual environment for challenging
decision-making scenarios;
| | - | -------------------------------------------------------------------------------------------------------

| |  | Supports
military operation in urban terrain; and
| | - | -------------------------------------------------

| |  | Proven
ROI as it is able to provide any-time any-place activation, no ammunition consumption and
reduced maintenance manpower.
| | - | ------------------------------------------------------------------------------------------------------------------------------

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Defender. The Defender is a PC-based multi-player tactical trainer for task forces,
          simulating varied military operations, arenas, scenarios, and platforms. It may
          be customized and tailored for special operations, law enforcement, homeland
          defense, and first responder training environments. The Defender includes the
          following offerings:

| |  | Perfects
the combined arms training with opposing forces, friendly forces and large scale
multi-site exercises;
| | - | ---------------------------------------------------------------------------------------------------------------

| |  | Participants
operate as virtual entities with unlimited functionality and tasks (infantry, vehicles,
AFV, helicopters & boats);
| | - | -------------------------------------------------------------------------------------------------------------------------------

| |  | Robust
3D mission-planning module, briefing/debriefing tools and performance evaluation
activities;
| | - | ---------------------------------------------------------------------------------------------------

| |  | Supports
all levels of operational expertise and requirements for the solider, commander and unit
level; and
| | - | ------------------------------------------------------------------------------------------------------------

| |  | A
cost-saving standard PC net-class architecture and an off-the-shelf gaming engine.
| | - | ------------------------------------------------------------------------------------

Air and Missile Defense
Simulators

Our Air and Missile Defense
Simulators, or AMDS, are designed to support the training of air defense personnel in the
operation of various air and missile defense systems. The AMDS also enables training of
Air Defense Command and Control functions. The air defense simulator consists of a
high-end graphical display system projected over large diameter domes, each simulator
enabling the mounting of various weapon types. The simulator administration is conducted
using dedicated instructor stations and a debriefing auditorium.

The AMDS caters for trainees to
operate realistic mockups of the air and missile defense systems within a simulated
training environment, projected on the domes, while their actions are monitored and
reviewed by the instructors. After completion of the scenario, the trainees progress
to a debriefing session, where a comprehensive review of the exercise is performed
featuring an advanced analysis and scoring capability.

The AMDS conforms with BVRs
vision of offering its customers large scale joint force training scenarios featuring real
and virtual air defense and airborne assets; this is achieved by providing for full
interoperability with BVRs live and virtual training systems, such as the Hybrid Air
Defense Embedded Simulator (HADES), the EHUD Autonomous Air Combat Maneuvering
Instrumentation (AACMI) system, and the Full Mission Fighter Aircraft Simulator.

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Naval Simulators

We developed a diversified product
line of naval simulators based on dedicated replica workstations and sophisticated visual
images provide system training for operators and officers. We specialize in quick
responses to requests for unique tailor-made systems from a wide range of naval customers.

Naval Tactical Trainer

Our naval tactical trainer, or NTT,
is a complete tactical training system providing a solution for all shore-based tactical
training needs. Our NTT is in operational use by the Israel Navy at its main training
base. Our NTT is used for the tactical training of principal war officers and combat
information center officers. In several regions of the world, this product is also
referred to as the Action Speed Tactical Trainer or ASTT.

Our weapon and avionic systems
simulators provide a unique training device for the training of operators in highly
specialized operational tasks. Products delivered to our customers include the LANTIRN
simulator used to train pilots to fly with the LANTIRN pod, and our weapon systems trainer
used to train the weapon systems officer in the many tasks required to operate and
successfully deliver todays complex weapon to the designated target.

# Homeland Security
Technologies

In our continuous search for advanced
technologies and new markets, we started during 2008 the development of a personal
location tracking and monitoring solution for firefighters and other first responder
personnel. The product, named First responders Independent Navigation Device, or FIND,
aims to develop a way to track emergency workers on a given site without GPS receiving
capabilities.

We are developing FIND together with
the US based precision motion technology developer InterSense Inc. of Bedford, MA and the
activity is partially funded by the Binational Industrial Research and Development
Foundation (BIRD), which supports development cooperation between US and Israeli
companies.

FIND is a Command & Control (C2)
system, enabling accurate tracking of First Responders operations without GPS coverage. In
this program, we are the system integrator as well as the supplier of the C2 components,
the command unit and the patented Data Link radio. The system will use InterSense
NavShoe device  a Solid-State IMU with unique patented accuracy software
and Hardware.

# Raw Materials

The raw materials used for our
on-board training systems and our embedded simulation systems include our own software and
commercial off-the-shelf, or COTS, hardware that we purchase from various suppliers. This
COTS hardware includes computer boards, navigational systems, communication systems and
antennae. Due to the competitive nature of the market for these COTS raw materials, the
prices for such raw materials are not considered volatile. In some countries, however,
such raw materials are controlled items and thus, prior to export, require the issuance of
an export license.

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Strategic
Agreements

In January 2009, we entered into a
teaming agreement with a European aircraft company in which we waived all claims against
the aircraft company and granted it a non-exclusive license to certain of our patents in
exchange for royalty payments. The aircraft company shall pay us an agreed royalty payment
for each aircraft sold, which includes embedded simulation. In future aircraft sales by
the European aircraft company, it will use BVRs embedded training systems on
exclusive basis.

In March 2009, we executed a
partnership agreement with InterSense Inc., to develop the First responders Independent
Navigation Device (FIND). The Agreement will enable the two firms to bring together and
further develop key intellectual property and technology into one solution that meets a
growing need within the first responder community. Funding from the BIRD Foundation will
support development of robust, simple-to-operate system to enhance Emergency Responder
safety by accurately tracking their location in areas without GPS coverage.

# Marketing

We actively seek to identify and
propose solutions for military training and simulation needs of our current and
prospective customer base. Our research and development activities focus on systems
designed to meet specific needs we have identified. We market our products, either as
prime contractor or as a subcontractor, to various governments and defense contractors
throughout the world both directly and through joint ventures, agents or representatives.
We have entered into cooperation agreements with a number of defense contractors, which
provide for joint participation in pursuit and performance of contracts in certain
countries.

In June 1998, we formed a subsidiary
in Singapore, BVR-S Pacific PTE, through which we support our operations in Singapore.

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The following table sets forth the
amount of our revenues, for the periods indicated, by geographic regions:

|             | Year Ended December 31,
|------------ | -----------------------
|
|
|
|
|Sales        |                        
|Israel       |                        
|Asia Pacific |                        
|Europe       |                        
|America      |                        
|Africa       |                        
|             |                        
|Total        |                        
|             |                        

The following table sets forth, for
the period indicated, our consolidated revenues by product line expressed as a percentage
of total revenues.

|                                    | 2008 | 2007 | 2006 | 2005 | 2004
|----------------------------------- | ---- | ---- | ---- | ---- | ----
|
|
|
|
|Live and Embedded Training Systems  |      |      |      | 71   | %   
|Virtual and constructive Simulators |      |      |      | 29   | %   
|Total                               |      |      |      | 100  | %   

# Customers

Currently, all of the end-user
customers of our products are governments or companies that are regulated by government
laws and regulations with respect to their military businesses.

Although the composition of our
customers has changed from year to year, and revenues from individual customers are
subject to material increases and decreases depending on customer requirements, a customer
located in Asia Pacific accounted for approximately 44% of our revenues in fiscal 2008,
32% in fiscal 2007, 12% in fiscal 2006, and represented approximately 31% of our backlog
as of December 31, 2008. Another customer located in Asia Pacific accounted for
approximately 34% of our revenues in fiscal 2008, 5% in fiscal 2007, 4% in fiscal 2006,
and represented approximately 18% of our backlog as of December 31, 2008. Another customer
located in Asia accounted for approximately 10% of our revenues in fiscal 2008, 3% in
fiscal 2007,no revenue in 2006, and represented approximately 31% of our backlog as of
December 31, 2008. A customer located in Latin America accounted for approximately 4% of
our revenues in fiscal 2008, 13% in fiscal 2007, 5% in 2006, and represented approximately
0.2% of our backlog as of December 31, 2008. A customer located in Europe accounted for
approximately 2% of our revenues in fiscal 2008, 21% in fiscal 2007, 16% of our revenues
in 2006, and represented 4% of our backlog as of December 31, 2008. Another customer
located in Asia Pacific accounted for approximately 2% of our revenues in fiscal 2008, 6%
in fiscal 2007 ,2% in 2006 and represented approximately 1% of our backlog as of December
31, 2008. Another customer located in Europe accounted for approximately 1% of our
revenues in fiscal 2008, 4% in fiscal 2007, 18% of our revenues in 2006, and represented
1% of our backlog as of December 31, 2008. A customer located in Israel accounted for
approximately 1% of our revenues in fiscal 2008 and 2007, 17% of our revenues in 2006, and
represented 0% of our backlog as of December 31, 2008. We expect that sales of our
products to a small number of customers will continue to account for a substantial
percentage of our net revenue in the foreseeable future.

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# General Financial
Considerations for Projects

A significant majority of our
contracts are fixed-price contracts, as opposed to cost-plus type contracts. Under
fixed-price contracts, the price is generally not subject to adjustment for costs actually
incurred in the performance of such contract. Under such fixed-price contracts, we assume
the risk that increased or unexpected costs may reduce our profits or generate a loss.

There are various types of financing
terms applicable to defense contracts. In most cases, after we receive advance payment at
the commencement of a project, we receive progress or milestone payments according to a
percentage of cost incurred in performance or achievement of a specific milestone. In
these projects we are required to provide a bank guarantee in an amount equal to the
payments. In a majority of projects, we are required to provide performance guarantees in
an amount equal to a specific percentage of the contract price. A portion of our
agreements with customers contains clauses that impose penalties or reduce the amount
payable to us in the event that the completion of a phase of work is delayed. We are
generally responsible for the delays and defaults of our subcontractors. Accordingly, we
attempt to impose liability on our subcontractors on a back-to-back basis when
delay or default under a contract could expose us to liability.

Our contracts with governments
generally may be terminated or suspended as a result of factors which may not depend on
us, such as a state of war, force majeure or other circumstances seriously disrupting the
public safety, peace or good order of the customers country. Our contracts with
non-governmental military contractors sometimes contain similar provisions. In most cases
we receive advanced payments prior to incurring the cost of fulfilling the contract, we
realize a positive cash flow. In the event that a contract under which an advance or
progress payment has been paid is cancelled, we may be required to return a portion of
such payments to the customer. In general, in order to reduce risks of financial exposure
resulting from an early termination of a contract, we attempt to expend funds for projects
in accordance with the rate of performance. Upon such termination, we would, in most
cases, be entitled to reimbursement for incurred contract costs and to payment of a
proportionate share of our fee or profit for the portion of such contract that was
actually performed. If, and to the extent, we are not entitled to all or a portion of such
compensation, our operations would be adversely effected. In certain cases, when possible,
we insure ourselves against such risks.

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# Manufacturing and
Suppliers

We develop the majority of the
software and hardware for our products at research and development facilities in two
locations in Israel. We manufacture cockpit replicas, turret replicas and other hardware
components and perform hardware integration, systems assembly and quality assurance
testing at our manufacturing facilities in Ashdod, Israel. We purchase components for the
systems manufactured, including commercial computers, integrated circuits, circuit boards,
sheet metal fabricated into subassemblies and cabinets, power supplies, television and
monitors. Many of the purchased components are manufactured based on our designs and
specifications. Most materials and purchased components are generally available from a
number of different sources.

# Competition

We operate in a competitive
environment with respect to most of our products. The defense industry has been
characterized in recent years by a consolidation of companies, which has decreased the
number, but increased the relative size and resources of competitors. Competition is based
on price, product performance, reputation, reliability, maintenance costs and
responsiveness to customer requirements, including the ability to respond to changing
technology. Some of the companies with which we compete, such as divisions of Thales,
Lockheed-Martin, L-3 Communications, Cubic, Israeli Aircraft Industries (IAI), Elbit
Systems and CAE, have substantially greater financial, marketing and other resources than
ours and have the ability to develop and market products competitive with ours. We believe
that our products favorably compete with those of our competitors based on their
technological capabilities, price/performance ratio, proven track record and common
technological platform. We also believe that our competitive advantage is in our
relatively small size that enables us to be more flexible and responsive to customer
requirements than our larger competitors. In addition, we assume that we typically have
lower overhead costs than our larger competitors.

# Research and Development

The majority of our research and
development activity is performed as an inherent part of our various projects. In
addition, we believe that continued and timely development of new products and
enhancements to existing products is necessary to compete effectively. Accordingly,
through our ongoing and extensive research, development and engineering activities, we
devote a portion of our resources to: (i) sustaining and upgrading our existing products
by improving serviceability and adding new capabilities and features, (ii) decreasing the
cost of owning and operating such products, (iii) maintaining close relationships with our
customers to identify their product needs, (iv) developing new products with improved
capabilities to address such needs and other military training, debriefing and
communications needs identified by us, (v) adapting our products to utilize new evolving
technologies that can lower the costs of our products; and (vi) tailoring our products to
meet the specific needs of our customers.

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Our internally financed expenditures
for all research and development programs during fiscal 2008, 2007 and 2006 totaled
approximately $1.2 million, $1 million and $0.6 million, respectively, which represented
4%, 7% and 6% of our revenue, respectively. We expect that we will continue to commit
resources to research and development in the future.

# Intellectual Property

In order to protect our proprietary
rights and technology used in our products, we rely primarily upon a combination of
patents, trademarks and copyrights as well as on unpatented proprietary know-how, trade
secrets, and various confidentiality and other agreements with employees, consultants and
others, to protect our trade secrets and know-how. These methods, however, may not afford
complete protection and we cannot be sure that others will not independently develop
products including our trade secrets and know-how or obtain access thereto.

BVR has five United States patents
relating to the collision warning and the data link features incorporated in our Ehud®
systems and our airborne avionics simulator technology incorporated in our EVA
systems. Several of these patents were also granted or applied for in Israel and/or in
specific countries in the European Community and worldwide.

Our trademark Ehud®,
jointly-owned with IAI, was recently registered in several AsianPacific countries,
and we have applied for its registration in Israel, the European Community and several
other foreign countries.

|C. | Organizational
Structure
|-- | ------------------------

We are controlled by Chun Holdings L.P.,
which beneficially owns 49.71% of our currently outstanding ordinary shares.

We hold 100% of the issued and
outstanding share capital of BVR-S Pacific PTE, which is incorporated under the laws of
Singapore.

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

Our executive offices and research
and development facilities are located in Rosh Haayin, Israel. At this location, in
2008, we leased approximately 2,539 square meters of office space at a monthly rent of
approximately $23,000. This lease will expire on September 30, 2014, with an option to be
rented for additional five years.

We
lease approximately 1,375 square meters of manufacturing facilities in Ashdod, Israel for
a monthly rent of approximately $20,000. This lease will partly expire on October 31, 2009
with an option to be renewed for an additional two years and partly expire on September
30, 2011.

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The future minimum annual rental
payments as of December 31, 2008 are as follows:

| | Year ending December 31, | $ thousand
| | ------------------------ | ----------
|
|
|
|
| | 2009                     |           
| | 2010                     |           
| | 2011-2014                |           
| |                          |           
| |                          |           
| |                          |           
| |                          |           

We believe that our facilities are
suitable and adequate for our operations as currently conducted. In the event that
additional facilities will be required, we believe that we could obtain such facilities at
commercially reasonable rates.

|ITEM 5. |  | Operating and Financial Review and Prospects
|------- |  | --------------------------------------------

The following discussion of our
financial condition and results of operations should be read in conjunction with
Item 3A. Key InformationA. Selected Financial Data and the Consolidated
Financial Statements and the related notes included elsewhere in this annual report.Our financial statements have been prepared in accordance with International Financial
Reporting Standards and IFRS 1, or IFRS, which differ in certain respects from U.S
Generally Accepted Accounting Principles, or U.S GAAP. Following our adoption of IFRS, as
issued by the IASB, we are no longer required to reconcile our financial statements
prepared in accordance with IFRS to U.S GAAP.

# General

In accordance with the instructions
of the Israeli Accounting Standard No. 29, Adoption of International Financial
Reporting Standards (IFRS), which was published in July 2006, we have adopted IFRS
as issued by the International Accounting Standards Board (IASB), as of the
period beginning on January 1, 2008. Consequently, we presented comparative financial
statements as at and for the year ended December 31, 2007, in accordance with IFRS as
issued by the IASB. For further details, see Note 2V to our consolidated financial
statements included elsewhere in this annual report.

We are engaged in the development,
manufacture and marketing of sophisticated training and computer-based simulation systems
for military applications.

Most of our revenues are generated in
U.S. Dollars, and a significant proportion of our expenses is incurred in U.S. Dollars, or
is linked to the U.S. Dollar. Consequently, we use the U.S. Dollar as our functional
currency. Transactions and balances originally denominated in U.S. Dollars are presented
in the financial statements in their original amounts, and non-dollar transactions and
balances have been translated into U.S. Dollars using the exchange rates in effect on the
date of a transaction or balance. Our Consolidated Financial Statements have been prepared
in accordance with International Financial Reporting Standards (IFRS) and its
interpretations adopted by the International Accounting Standards Board (IASB) for
firstyear adopters.

33

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We derive a substantial portion of
our revenues from government contracts, the majority of which are fixed-price, as opposed
to cost-plus type contracts. Under fixed-price contracts, the price is generally not
subject to adjustment for costs actually incurred in the performance of the contract.

In most of our projects, we receive
advance payment at the commencement of the project and progress or milestone payments
according to our performance or achievement of specific milestones. In most cases, the
advance payments that we receive prior to incurring the cost of fulfilling the contract
create a positive project cash flow. Our contracts generally may be terminated or
suspended as a result of factors which may not depend on us, such as a state of war,
force majeure, or other circumstances seriously disrupting the public safety, peace
or good order of the customers country. In the event that a contract under which an
advance or progress payment has been paid is canceled, we may be required to return such
payments or a portion of them to the customer.

We generally attempt to expend funds
for projects in accordance with the rate of performance in order to reduce risks of
financial exposure resulting from an early termination of a contract. Upon such
termination, we would, in most cases, be entitled to reimbursement for our incurred
contract costs and to payment of a proportionate share of our fee or profit for the work
actually performed.

Revenues related to work in progress
under long-term contracts is stated at cost less amounts charged to cost of revenues in
the statement of operations and associated with revenue recognized on the basis of the
percentage-of-completion method. Cost includes direct costs of materials,
labor, subcontractor and other direct costs and allocated indirect manufacturing costs.
The percentage of completion is measured on the basis of cost (the ratio of the costs
incurred to the total estimated costs),which reflect the progress of the contract
completion. Contract revenue includes the initial amount agreed in the contract plus any
variations in contract work, claims and incentive payments to the extent that it is
probable that they will result in revenue and can be measured reliably. As soon as the
outcome of a construction contract can be estimated reliably, we recognize the contract
revenue and expenses in profit or loss in proportion to the percentage of completion of
the contract. When the outcome of a construction contract cannot be estimated reliably, we
recognize the contract revenue only to the extent of contract costs incurred that are
likely to be recoverable.

With respect to the sale of products
acquired from third parties as shelf products and where the cost of adaptation thereof for
a customers specific needs is not material, the related revenue is recognized after
completion and delivery.

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Provision for estimated losses on
uncompleted contracts are made in the period in which such losses are first determined in
the amount of the estimated loss on the entire contract.

Royalties and commission revenues are
generally recognized when the related payments are received by the third party. We
determine such revenues through confirmation of payments subject to royalties and
commissions directly from the third party.

Revenue from services rendered is
recognized in profit or loss in proportion to the stage of completion of the transaction
at the reporting date. The stage of completion is assessed by reference to surveys of work
performed.

# Critical Accounting
Policies

The preparation of our financial
statements, in conformity with IFRSs requires us to make judgments, estimates and
assumptions that affect the application of accounting policies and the reported amounts of
assets, liabilities, income and expenses. These are our managements best estimates
based on experience, various facts, external circumstances, reasonable assumption and
historical data. Actual results could differ from those estimates.

Certain specific accounting policies
we utilize require higher degrees of judgment than others in their application. These
include going concern, revenue recognition on long-term contract work and income taxes. In
addition, Note 2 to our Consolidated Financial Statements includes a further discussion of
our significant accounting policies regarding revenue recognition.

Adoption of International
Financial Reporting Standards (IFRS)

The Company has adopted IFRS for its
financial statements as of the period beginning on January 1, 2008 with the comparative
period restated herein to be in conformity with the IFRS. Note 2V to the Consolidated
Financial Statements included in this annual report provides an explanation of the effects
of the transition from Israel GAAP to IFRS on the Companys Financial position,
results of operations and cash flows.

Stock-Based Compensation

In accordance with Israeli GAAP,
expenses recognized in respect of share-based payment transactions were recorded against
additional paid-in capital in the shareholders equity. According to IFRS 1,
share-based payment granted prior to November 7, 2002 or vested until January 1, 2007 are
not recorded as share-based payments under IFRS 2. Therefore, in accordance with IFRS, and
on the basis of the accounting policy applied by the Company, the effect was a
reclassification of additional paid-in capital to accumulated deficit. Accordingly, the
balance of the additional paid-in capital decreased as of January 1, 2007 and December 31,
2007 in the amount of $38 thousand and $56 thousand, with a corresponding amount to
accumulated deficit. In addition the operating loss increased as of December 31, 2007 in
the amount of $220 thousand.

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Revenue Recognition

We account for our revenues on fixed
price long-term contract work on the percentage of completion method. This method of
accounting requires us to calculate project profit to be recognized in each reporting
period for each project based upon our predictions of future outcomes which include
estimates of the total cost to complete (such as assumptions relative to future labor
performance and costs, materials costs and subcontractor charges) and estimates of project
schedule and completion date.

At the onset of each contract, we
prepare a detailed analysis of our estimated cost to complete the project. Our project
personnel evaluate the estimated costs at the project level. Significant projects are
reviewed in detail by senior management on a quarterly basis.

Our estimates of revenues and
expenses on long-term contracts could change periodically in the normal course of
business. Such changes would be reflected in results of operations as a change in
accounting estimate in the period the revisions are determined. For all the contracts,
provisions for estimated losses on uncompleted individual contracts are made in the period
in which such losses are first determined, in the amount of the estimated loss on the
entire contract.

Royalties and commission revenues
resulting from the cooperation agreement with Israel Aircraft Industries Ltd.
(IAI) are recognized when the Company receives confirmation of payments
subject to royalties and commissions from IAI.

Revenue
from services rendered is recognized in profit or loss in proportion to the stage of
completion of the transaction at the reporting date. The stage of completion is assessed
by reference to surveys of work performed.

Impairment in value of
assets

At each balance sheet date, we review
all the financial and non- financial assets to determine whether there is any objective
evidence that they are impaired and to review the carrying amounts of the assets. All
impairments losses are recognized in profit or loss. For more information see Note 2M
 in the Financial Statements.

36

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Actuarial calculation

Actuarial calculation of defined
employees benefit plan  We examine on each balance sheet date whether there have
been events or changes in circumstances which would impact actuarial calculations, in
particular future salary increases and employee churn rate. The effect of such changes in
estimates is recognized as actuarial gains/losses in equity.

Our liability for post employment
benefits for certain employees is covered by a defined contribution plan financed by
deposits with insurance companies or with funds managed by a trustee. Obligations for
contributions to defined contribution pension plans are recognized as an expense in profit
and loss when they are due.

Our liability for post employment
benefits for all remaining employees is covered by a defined benefit plan. For more
information see Note 15  in the Financial Statements.

Income Taxes

Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax purposes.
In assessing the realization of deferred tax assets, management considers whether it is
more likely than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets depends on the generation of future taxable
income during the periods in which those temporary differences are deductible. Management
considers projected taxable income and tax planning strategies in making this assessment.
In order to fully realize the deferred tax asset, the Company will need to generate future
taxable income prior to the expiration of the deferred tax assets governed by the tax
code. Based on the level of historical taxable losses, management believes that it is more
likely than not that the Company will not realize the benefits of these deductible
differences.

Currently no deferred tax assets have
been recorded, as we cannot determine whether it is likely that we will be able to use the
tax asset of our net operating loss carry forwards in the future. In the event that we
generate cumulative income in a particular jurisdiction in which we operate and in which
we have net operating loss carry forwards, we may then recognize a deferred tax asset.

37

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|A. | Results
of Operations
|-- | ---------------------

The table below sets forth, for the
periods indicated, financial data, expressed as a percentage of total revenues that we
believe to be significant in analyzing our results of operations.

|                                    | For Years Ended December 31,
|----------------------------------- | ----------------------------
|
|
|
|
|Revenues                            |                             
|Cost of revenues                    |                             
|Inventory Write Off                 |                             
|Gross profit                        |                             
|Research and development            |                             
|Selling and marketing               |                             
|General and administrative expenses |                             
|Operating profit (loss)             |                             
|Financing expenses, net             |                             
|Profit (loss) before income taxes   |                             
|Income tax (expenses) benefits      |                             
|Net Profit (loss)                   |                             

Our order backlog as of December 31,
2008 was $53 million.

# Subsequent Events

On March 3, 2009, the Company
entered into an agreement in principle with a new investor for the investment of $3
million in the share capital of the Company, at a price per share of $0.156, and the
grant of a convertible loan in the amount of $2 million. Pursuant to the execution of
this agreement in principle, the investor provided the Company a loan in the amount of
$1.5 million, which was to be considered part of the $2 million loan amount to be granted
under the definitive agreements. In May 2009, the investor informed the Company that it
has encountered technical difficulties that may come in the way of moving forward with
its investment in the Company and requested an extension of the negotiation period
detailed in the agreement in principle entered into in March 2009 in order to ascertain
if it is able to resolve those difficulties. In view of this information the Company is
considering its further actions. In a letter sent by the Company in May 2009, through its
legal counsel, to Milestones Upgrading Ltd., the Company advised Milestones Upgrading
Ltd. that as Milestones Upgrading Ltd. completed its due diligence review, did not
provide any comments to the Company, and as the parties reached a form of a definitive
agreement acceptable to both parties it is of the position that a binding agreement was
entered into between the parties. Milestones responded to the letter in May 2009, through
its legal counsel, disclaiming the Companys claims.

38

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On May 28, 2009, the Company entered
into an agreement with Yuval Golan Investments Ltd. and Michael Golan Securities Holdings
Ltd., or collectively Golan Investments, to provide to the Company $3.5 million by means
of a debenture, of which $2 million was provided to the Company on May 31, 2009 and the
balance of $1.5 million will be provided on June 21, 2009. Under the agreement Golan
Investments also receives a warrant to purchase 3 million ordinary shares of the Company
at an exercise price of $0.18, which is exercisable for a period of five years. The
debenture is due twelve months from the issue date in the amount of $3.85 million. The
agreement further provides that the debenture will be due upon the occurrence of a merger
or acquisition transaction with the Company in the amount of $4.55 million during the
first twelve month period after the date of the agreement. It was further agreed that if
the Company shall not repay the debenture 12 months from the date of its provision then
(a) as of the commencement of the second year the debenture shall bear a return rate of
15% per annum; (b) upon a merger or acquisition transaction of the Company during the
second year as of the provision of the debenture the Company shall repay to Golan
Investments an amount of $5,600,000; and (c) the Company shall issue to Golan Investments
additional warrants to purchase 6,000,000 Ordinary Shares, at an exercise price per share
of $0.18, exercisable for a period of four years commencing as of the date of entitlement.

# Year Ended December 31,
2008 Compared to Year Ended December 31, 2007

Revenues.

Revenues in fiscal 2008 were $31.6
million, an increase of 141% compared to revenues of $13.1 million in fiscal 2007. The
increase was primarily attributed to the increase of the order backlog in 2007 of $29
million and to the progress achieved during 2008 in significant new projects that were
received in the fiscal 2007 and 2008, which contributed $9.4 and $10.3 million,
respectively to the revenues of fiscal 2008. Revenues from sales of our live and embedded
training systems products in fiscal 2008 accounted for 71% and 56% in fiscal 2007.
Revenues derived from our virtual and constructive simulator products accounted for 29% of
our revenues in fiscal 2008 and 44% in fiscal 2007. The geographical breakdown of our
revenues in fiscal 2008 was as follows: approximately 90% of our revenues were in Asia, 5%
in Europe, 4% in America and 1% in Israel. In fiscal 2007, approximately 45% of our
revenues were in Asia Pacific, 39% in Europe, 13% in America and 3% in Israel. The
fluctuations in the proportion of our revenues attributed to geographic areas are the
result of the completion of several contracts, which we had with various countries. Our
agreements are multi-year contracts, and we generally recognize revenues on the percentage
of completion method, recognizing expenses when incurred.

Gross Profit.

Gross profit in fiscal 2008 was
approximately $8.3 million, an increase of $6.6 million from a gross profit of $1.7
million in fiscal 2007. The Increase in gross profit was primarily due to the increase of
the revenues in fiscal 2008. As a percentage of revenues, gross margins increased
significantly from an overall gross margin of 13% in fiscal 2007 to an overall gross
margin of 26% in fiscal 2008. Our gross margin is influenced by various factors, such as
the type and size of a project, and the portion of projects performed by subcontractors.

39

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Research and Development
Costs.

Research and development expenditures
consist primarily of salaries, subcontractors and other personnel related expenses related
to design, development and enhancement of our products and, to a lesser extent,
depreciation and other expenditures. Research and development expenses in fiscal 2008 were
$1.2 million, an increase of $0.2 million from fiscal 2007. Research and development
expenses were primarily increased due to continuing the development of new products.

Selling and Marketing
Expenses.

Selling and marketing expenditures
consist primarily of costs relating to payroll expenses, sales commissions, subcontractors
and consultants, travel expenses, demonstrations, exhibitions and participation in trade
shows. Selling and marketing expenditures in fiscal 2008 were $2.1 million, a slight
decrease of $0.1 million, or 5%, from $2.2 million in fiscal 2007 attributed to the fact
that there were no changes in marketing activities in fiscal 2008.

General and
Administrative Expenses.

General and administrative expenses
consist primarily of salaries and related costs of welfare and administration, finance and
general management personnel, professional fees, office, vehicle and rental expenses.
General and administrative expenses in fiscal 2008 were $2.8 million, an increase of $0.3
million, or 10.6%, from $2.5 million in fiscal 2007. The increase in general and
administrative expenses was primarily attributed to an increase in our workforce and
related expenses such as recruitment and welfare costs and an increase of the dollar value
of the salary expenses.

Operating Profit (Loss).

As a result of the foregoing, we had
an operating profit of $2.2 million in fiscal 2008, compared to an operating loss of
($4.0) million in fiscal 2007. As a percentage of revenues, operating profit increased
from an operating loss of (31%) in fiscal 2007, to an operating profit of 7% in fiscal
2008.

Financial Expenses, Net.

Financial expenses consist primarily
of interest paid on loans, bank charges, losses from foreign exchange erosion of monetary
balances and losses from derivatives instruments. Financial income consists primarily of
interest earned from short-term deposits and interest on non-current receivables.
Financial expenses, net in fiscal 2008 were approximately $547,000 compared to $18,000 in
fiscal 2007. The increase is attributed to losses from derivative instruments and foreign
exchange losses and increase in bank charges relating to guarantees due to an increase in
guarantees performed by the company.

40

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# Impact of Inflation and
Devaluation on Results of Operations, Liabilities and Assets

The dollar cost of our operations is
influenced by the extent to which inflation in Israel is or is not offset, or is offset on
a lagging basis, by the devaluation of the NIS in relation to the dollar. When the rate of
inflation in Israel exceeds the rate of devaluation of the NIS against the dollar,
companies experience increases in the dollar cost of their operations in Israel. Unless
offset by a devaluation of the NIS, inflation in Israel will have a negative effect on our
profitability, as we receive payment in dollars or dollar-linked NIS for all of our sales,
while we incur a portion of our expenses in NIS.

The following table presents
information about the rate of inflation in Israel, the rate of devaluation of the NIS
against the dollar, and the rate of inflation in Israel adjusted for the devaluation:

|Year ended
December 31 | Israeli inflation %
rate | Devaluation of the
NIS
% rate | Israeli inflation
adjusted for
devaluation %
|---------------------- | ------------------------ | ----------------------------- | --------------------------------------------
|
|
|
|
|2004                   |                          |                               |                                             
|2005                   |                          |                               |                                             
|2006                   |                          |                               |                                             
|2007                   |                          |                               |                                             
|2008                   |                          |                               |                                             

A devaluation of the NIS in relation
to the dollar has the effect of reducing the dollar amount of any of our expenses or
liabilities payable in NIS, unless those expenses or payables are linked to the dollar or
to another currency. This devaluation also has the effect of decreasing the dollar value
of any asset that consists of NIS or receivables payable in NIS, unless the receivables
are linked to the dollar or to another currency. Conversely, any increase in the value of
the NIS in relation to the dollar has the effect of increasing the dollar value of any
unlinked NIS assets and the dollar amounts of any unlinked NIS liabilities and expenses.

Because exchange rates between the
NIS and the dollar fluctuate continuously, exchange rate fluctuations as recently
experienced in Israel and, particularly larger periodic devaluations or revaluations, will
have an impact on our profitability and period-to-period comparisons of our results. In
2007 and 2008, the devaluation of the dollar against the NIS exceeded the rate of
inflation in Israel, and we experienced an increase in the dollar cost of our operations
in Israel.

The effects of foreign currency
re-measurements are reported in our consolidated financial statements in the statement of
operations.

41

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We are exposed to a variety of market
risks, including changes in interest rates and foreign currency fluctuations.

We entered into currency future
contracts and put and call option contracts to reduce our exposure to fluctuations of
specific currencies against the dollar, resulting primarily from firm commitments in such
currencies.

As of December 31, 2008, we had an
obligation to sell $750,000 for a total amount of NIS 2,970,000. The fair value of this
derivative financial instrument created a gain of $30,000.

# Effective Corporate Tax
Rate

The statutory Israeli corporate tax
rate was 27% in 2008 compared to 29% in 2007 and 31% in 2006. It is scheduled to further
decrease to 26% in 2009 and 25% in 2010 and thereafter.

However, our old manufacturing
facilities in Jerusalem and our facilities in Rosh Haayin have been granted
Approved Enterprise status (as more fully described in Item 10:
Additional InformationIsraeli Taxation below) under the Law for the
Encouragement of Capital Investments, 1959, as amended, known as the Investment Law.
Consequently, these facilities are eligible, subject to compliance with specified
requirements, for tax exemption for a period of two years and reduced tax rate of 25% for
an additional period of five years on our increased income, if any, commencing on the day
we derive taxable income from our facilities in Rosh Haayin. We may utilize such tax
benefits until 2016. The tax benefits under the Investment Law are not available with
respect to income derived from products manufactured outside of Israel. We expect to
derive a substantial portion of our income from our Approved Enterprise facilities.

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

Historically we have met our
financial requirements primarily through the private sale of equity securities, customer
payments and advances and the utilization of bank credit lines. In addition, we raised
capital through equity financings in 2004 and in 2006. In March 3, 2009 we entered into an
agreement in principle with a new investor for the investment of $3 million in share
capital and the grant of a convertible loan of $2 million. Pursuant to the execution of
this agreement in principle, the investor provided us a $1.5 million loan which was
considered part of the $2 million loan amount to be granted under the definitive
agreement. In May 2009, this investor informed the Company that it has encountered
technical difficulties that may come in the way of moving forward with its investment in
the Company and requested an extension of the negotiation period detailed in the agreement
in principle entered into in March 2009 in order to ascertain if it is able to resolve
those difficulties. On May 28, 2009, we announced that we entered into an agreement with
Golan Investments for the investment of $3.5 million in the Company by means of a
debenture, of which $2 million was provided to the Company on May 31, 2009 and the balance
of $1.5 million will be provided on June 21, 2009. Under the agreement Golan Investments
would also receive an option to purchase 3 million ordinary shares of the Company at an
exercise price of $0.18, which is exercisable for a period of five years. The debenture is
due twelve months from the issue date in the amount of $3.85 million, and provides that it
can be extended for additional consideration. For additional information on these
investments in the Company, see Item 5  Operating and Financial Results and
Prospects  Results of Operations  Subsequent Events.

42

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As of December 31, 2008, we had cash
and cash equivalents of approximately $4.2 million and a positive working capital of
approximately $1.8 million.

We have obtained bank guarantees to
secure our performance of certain obligations, including under our leases and contracts
with customers. Of these guarantees, which amounted to an aggregate of $41.8 million on
December 31, 2008, guarantees in an aggregate of $41.5 million are to be released by our
obtaining specific performance milestones, which are scheduled to be completed through
October 2013. As of December 31, 2008, we have deposits pledged with our banks in the
amount of $9 million that are released from these pledges commensurate with the reduction
of these bank guarantees from time to time.

In connection with our guarantees,
loans and credit lines from banks, we have placed equally ranking, first priority fixed
and floating liens on all of our assets.

Our operating cash flow is influenced
by cash provided from our customers as an advance and by cash used in the performance of
ongoing projects. Operating activities for the year 2008, and 2007, provided (or used)
cash of approximately 9.6 million and ($0.5) million respectively. For fiscal 2008, cash
derived from changes in assets and liabilities of 7.3 million primarily consisted of an
increase in deferred revenues of 7.9 million. Additionally, there was an increase in trade
payables of $2.9 million.

For fiscal 2007, cash derived from
changes in assets and liabilities of 2.8 million primarily consisted of a decrease in
trade receivables of 1.9 million. Additionally there was an increase in deferred revenues
of $0.6 million and increase in trade payables of $0.4 million.

Investing activities for fiscal 2008
and fiscal 2007 used cash of approximately (5.9) million and, ($1.8) million respectively.
Cash flows used in investing activities in fiscal 2008 consisted primarily of a purchase
of fixed assets and intangible assets in the amount of $0.4 million and an increase in
restricted bank deposits (net of interest received) of $5.5 million. The increase in
restricted bank deposits was due to an increase in advanced payments and performance
guarantees.

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Cash flows used in investing
activities in fiscal 2007 consisted primarily of a purchase of fixed assets and intangible
assets in the amount of $0.4 million and an increase in restricted bank deposits (net of
interest received) of $1.5 million. The increase in restricted bank deposits was due to an
increase in advanced payments and performance guarantees.

Financing activities for fiscal 2008
and fiscal 2007 provided (or used) cash of approximately of ($0.9) and $0.4 million
respectively.

Cash flows used in financing
activities in fiscal 2008 consisted primarily of repayment of short-term bank credit and
loan in the total amount of $1 million.

Cash flows provided in financing
activities in fiscal 2007 consisted primarily of receipt of short-term bank credit and
loan in the total amount of $1 million and the net repayment of long-term loans from banks
of $0.5 million.

Our current assets exceed our current
liabilities. We believe that the existing cash balances, together with a new contemplated
investment, will enable us to meet forecasted cash flows from operating activities for
fiscal 2009, in addition obtaining orders forecasted in the budget approved by the Board
of Directors, will be sufficient to meet our capital expenditure needs in the next twelve
months.

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

See Item 4  Information
on the Company  B. Business Overview  Research and Development; Intellectual
Property.

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

Trend information is included
throughout the other sections of this Item 5.

|E. | Off-Balance
Sheet Arrangements
|-- | ------------------------------

The premises occupied by the Company
are rented under various operating leases expiring at the end of September 2009. On
November 6, 2008 and on September 28, 2008 the Company signed extensions to two of its
operating leases that expire at the end of October 2014 and the end of September 2011,
respectively.

The future minimum annual rental
payments as of December 31, 2008 are $493,000 and $378,000 for the years ending December
31, 2009 and 2010, respectively.

44

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

Our significant financial and
contractual obligations as of December 31, 2008, and the periods in which such obligations
are due are as follows:

|                             | Payments and Amount of Commitment Expiration
Per Period
(U.S. Dollars in Thousands)
|---------------------------- | -----------------------------------------------------------------------------------
|
|
|
|
|Borrowed Lines of credit     |                                                                                    
|                             |                                                                                    
|Guarantees:                  |                                                                                    
|Performance guarantees       |                                                                                    
|Advance payment guarantees   |                                                                                    
|Other bank guarantees        |                                                                                    
|                             |                                                                                    
|Total Guarantees             |                                                                                    
|                             |                                                                                    
|Operating lease commitments  |                                                                                    
|                             |                                                                                    
|Total commercial commitments |                                                                                    

(1)
          Excludes liability for employee severance benefits, net in the amount of $77,000

|G. | Safe
Harbor
|-- | -----------

All information included in Item 5.E
of this Item is deemed to be a forward looking statement as that term is
defined in the statutory safe harbors, except for historical facts. The safe harbor
provided in Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934 shall apply to all forward-looking information provided in Item 5.E and F of
this Item.

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|ITEM 6. |  | Directors, Senior Management and Employees
|------- |  | ------------------------------------------

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

The following table lists the name,
age and position held by each of our executive officers and directors, as of May 31,
2009:

|Name             | Age |  | Position                                             
|---------------- | --- |  | -----------------------------------------------------
|
|
|
|
|Aviv Tzidon      | 53  |  | Director and Chairman of the Board of Directors      
|Uri Manor        | 66  |  | Director                                             
|Avraham Gilat    | 62  |  | Director                                             
|Rimon Ben-Shaoul | 64  |  | Director                                             
|Orit Stav        | 38  |  | Director*                                            
|Alicia Rotbard   | 63  |  | Director*                                            
|Ken Lalo         | 51  |  | Director                                             
|Nir Dor          | 45  |  | Director                                             
|Eival Gilady     | 58  |  | Director                                             
|Ilan Gillies     | 40  |  | Chief Executive Officer                              
|Reuven Shahar    | 50  |  | Vice President of Finance and Chief Financial Officer
|Shuki Carpassi   | 36  |  | Vice President of Engineering                        
|Yoav Ben-Shem    | 41  |  | Vice President of Marketing                          

|
|

|*
External Director
|-------------------

Aviv Tzidon has
been a Director and the Chairman of our Board of Directors since November 24, 2003. Mr.
Tzidon was the co-founder of BVR-T and served as its Chief Technology Officer and a
director since it commenced operations in 1987. From October 1998, upon the spin-off of
BVR Systems (1998) Ltd. from BVR-T, and until April 2000, Mr. Tzidon served as Chairman of
the Board of Directors and Chief Executive Officer of BVR-T. For three years, Mr. Tzidon
worked as an independent consultant for Israel Aircraft Industries. Mr. Tzidon is also a
member of the Board of Directors of CHUN Holdings Ltd. Mr. Tzidon served as a combat pilot
with the Israel Air Force, including reserve service, for approximately 20 years.

Uri Manor has
been a director since March 1, 2004. Mr. Manor has served as Managing Director of Datus
Ltd., a consulting company specializing in the marketing of defense systems since January
1, 1996 and Managing Director of Loven Hachatzav Ltd., a holding company specializing in
high tech and defense companies since 2001. Mr. Manor is also a member of the board of
directors of Soltam Systems, Mobideo Aerospace Ltd., Laser Detection Systems Ltd. and CHUN
Holdings Ltd. From 1969 to 1996, Mr. Manor held various management positions in Israel
Aircraft Industries Ltd. including Deputy General Manager, MBT Division. Mr. Manor holds a
B.Sc. and a M.Sc. in Aeronautical Engineering from the Technion, the Israel Institute of
Technology.

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Avraham Gilat
 has been a director since June 28, 2005. Mr. Gilat serves as the Chairman of Soltam
Systems Ltd., one of Israels prominent defense companies and as a Director General
of Mikal Ltd., a holdings company for a wide range of defense and commercial activities.
Prior to such time, Mr. Gilat served in various positions in Israel Military Industries
Ltd. Mr. Gilat holds an M.B.A. from New York University and a B.A. in Economics from
Tel-Aviv University.

Rimon Ben-Shaoul
 has been a director since March 1, 2004. Since 2004, Mr. Ben-Shaoul has served as
President and Chief Executive Officer of Polar Communications Ltd., an investment company
investing in the technology and telecommunications sectors, and as Chairman or a member of
the Board of Directors of various private and publicly traded companies within the Polar
group. Since February 2001, Mr. Ben-Shaoul has also served as Co-Chairman, President and
Chief Executive officer of Koonras Technologies Ltd., an investment company controlled by
Polar Investments Ltd. From June 1997 to February 2001, Mr. Ben-Shaoul served as President
and Chief Executive Officer of Clal Industries and Investments Ltd., one of Israels
largest holdings companies in the industrial and high-tech sectors, and as a member of the
Board of Directors of Clal (Israel) Ltd. and various subsidiaries thereof. From 1985 to
June 1997, Mr. Ben-Shaoul served as President and Chief Executive Officer of Clal
Insurance Company Ltd., was a member of its board of directors and served as Chairman or
as a member of the board of directors of various subsidiaries of Clal Insurance Company
Ltd. Mr. Ben-Shaoul holds an M.B.A. and a B.A. in Economics from Tel-Aviv University.

Orit Stav has
been one of our external directors since March 1, 2004. Ms. Stav is an Investment
Associate at Siemens Venture Capital. Prior to joining Siemens VC, Ms. Stav was a partner
in Platinum Neurone Ventures (PNV), an Israeli Venture Capital Fund and has more than six
years of experience in the venture capital market and the technology industry in Israel.
She led investments from seed stage to exit and worked with leading international VCs. She
gained experience with varied technology companies throughout the Siemens investment
spectrum. Ms. Stav holds a B.A. in Economics and Management from Tel Aviv University and
an M.B.A. from Hertfordshire University, UK.

Alicia Rotbard
 has been one of our external directors since July 10, 2008. Ms. Rotbard founded DOORS
Informations Systems, Inc. in 1989 and served as its CEO until 2002. From 1989, she served
as President and CEO of Quality Computers Ltd. From 1980 to 1985, she served as Deputy
General Manager of the Tel-Aviv Stock Exchange, managing its computer department and
operations. Ms. Rotbard holds a B.Sc. in Mathematics and Physics from the Hebrew
University in Jerusalem.

Ken Lalo has
been a director since February 20, 2006. Since 2004, Mr. Lalo has served as Executive Vice
President of Polar Communications Ltd., an Israeli investment company and is a member of
the Boards of Directors of various affiliates of Polar, including publicly traded and
private companies. Between 2001 and 2004, Mr. Lalo served as Vice President and General
Counsel of other entities within the Shrem Fudim Group. From 1993 to 2001, Mr. Lalo served
as Vice President and General Counsel of Clal Industries and Investments Ltd. and was a
member of the Boards of Directors of various affiliates of Clal, including publicly traded
and private companies. From 1986 to 1992, Mr. Lalo worked as an attorney in Maryland, USA.
Mr. Lalo holds an M.B.A. from Northwestern University / Tel- Aviv University, an M.C.L.
from George Washington University and an LL.B. from Tel-Aviv University.

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Nir Dorhas been
a director since March 21, 2006. Mr. Dor currently serves as the chairman of the board of
directors of Cargal Carton Industries Ltd., Vice Chairman of the board of directors of
Global Factoring Ltd. and serves on the board of directors of The Danone Spring of Eden
BV. Mr. Dor served as the chief executive officer of Eden Springs Ltd. between 1999 and
2004. Mr. Dor is a certified public accountant and holds a B.A. in business management and
finance from the College of Management of Tel-Aviv.

Eival Gilady has
been a director since March 6, 2008. Mr. Gilady is the CEO of the Portland Trust in
Israel. He is also the President of Vanadis Ltd., Chairman of the Western Galilee College,
Chairman of KIEDF, and the Honorary Consul of Slovenia in Tel Aviv. A Brigadier General in
the IDF, Mr. Gilady had a distinguished military career spanning three decades 
commanding field units for twenty years, and serving an additional ten years on the
General Staff of the IDF. Mr. Gilady earned his Bachelors and three Masters
degrees from Haifa University, National Defense University and George Washington
University, in the areas of Resources Management, Policy Analysis, National Security
Strategy, and Public Finance. From 1999 to 2001, he was assigned as a research fellow at
the Hoover Institution and the Center for International Security and Cooperation at
Stanford University.

Ilan Gillies has
been our Chief Executive Officer since his appointment on November 26, 2003. Mr. Gillies
has been employed by the BVR Group since 1995 and served as Managing Director of BVR- S
Pacific from November1998 to September 2003. Mr. Gillies has served as a combat pilot with
the Israel Air Force since 1989.

Reuven Shaharhas been our Chief Financial Officer and Vice President of Finance since his
appointment on July 1, 2000. From 1995 through June 2000, he was Treasurer and Director of
Finance of Elisra Electronic Systems Ltd. From 1990 to 1995, Mr. Shahar was the head of
the economic staff in the defense division of Elisra. He previously held various positions
at Elisra as of 1984. Mr. Shahar holds a B.A. in business management from the Hebrew
University of Jerusalem and an M.B.A. from Recanati Graduate School of Business
Administration in Tel Aviv University.

Shuki Carpassi
has been our Vice President of Engineering since November 20, 2007. Mr. Carpassi joined
BVR in 1998 and served in different positions in the company. From 2004, he has served as
BVRs Engineering Department Director. Mr. Carpassi has over 15 years experience in
real-time/embedded software and systems engineering in the areas of simulation, avionics
and mission-critical applications.

48

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Yoav Ben-Shemhas been our Vice President of Marketing since May 1, 2008. Mr. Ben-Shem
joined BVR in 1996 and has served in different positions in the company, including Project
Manage and Director, Simulators Division. Between 2000 and 2004, Mr. Ben-Shem served in
business development positions in several telecommunication companies such as Amdocs and
TTI Telecom. In 2004, he returned to BVR and served as Director of Product management and
from February 1, 2008, as Director of Business Development. Mr. Ben-Shem holds a B.A in
Economy and Business Management and an M.B.A both from the Recanati School of Business
Administration in Tel-Aviv University.

The term of one of our external
directors, Mr. Amnon Harari, expired on July 2008, pursuant to the provisions of the
Israel Companies Law  1999, as amended from time to time (the Companies Law), and
he was replaced by Ms. Alicia Rotbard.

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

The aggregate remuneration we paid
for the year ended December 31, 2008 to all executive officers as a group (6 persons) was
approximately $838,000 in salaries, fees, commissions and bonuses. This amount includes
approximately $111,000 set aside to provide for pension, retirement or similar benefits
provided to our directors and executive officers.

Members of our board of directors,
other than our external directors, do not receive cash compensation for their service on
the board of directors or any committee of the board of directors. However, all of our
directors are reimbursed for their expenses for each board of directors meeting attended.
Our external directors received an aggregate of approximately $20,000 for the year ended
December 31, 2008.

As of March 31, 2009, options to
purchase 7,354,000 Ordinary Shares granted to our directors and executive officers under
our option plans were outstanding. The exercise price of these options was $0.18 per
share. Of these options, options to purchase 6,462,000 Ordinary Shares are currently
exercisable or will become exercisable within 60 days of such date.

|C. | Board
Practices
|-- | ---------------

Our articles of association provide
for a board of directors of not less than two and no more than fifteen members. Each
director is elected to serve until the next annual general meeting of shareholders and
until his or her successor has been elected. Officers serve at the discretion of the board
of directors.

Our articles of association provide
that any director may, by written notice, appoint another person to serve as a substitute
director and may cancel such appointment. According to the Companies Law, a person may not
serve as a substitute director for more than one director and a director may not serve as
a substitute director. Any substitute director will have all of the rights and obligations
of the director appointing him or her, except the power to appoint a substitute, unless
the instrument appointing him provides otherwise, and the right to remuneration.
Appointment of a substitute director for a member of a committee of the board of directors
is only permitted if the substitute is a member of the board of directors and does not
regularly serve as a member of such committee. If the committee member being substituted
is an external director, such substitute may only be another external director possessing
the same expertise as the external director being substituted and may not be a regular
member of such committee. Unless the time period or scope of any appointment is limited by
the appointing director, the appointment is effective for all purposes, but will expire
upon the expiration of the appointing directors term. To our knowledge, no director
currently has appointed any other person as a substitute director.

49

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# External Directors

Under the Companies Law, companies
incorporated under the laws of Israel whose shares have been offered to the public in or
outside of Israel are required to appoint no less than two external directors. The
Companies Law provides that a person may not be appointed as an external director if the
person or the persons relative, partner, employer or any entity under the
persons control, has, as of the date of the persons appointment to serve as
external director, or had, during the two years preceding that date, any affiliation with
the company, any entity controlling the company or any entity controlled by the company or
by this controlling entity. 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 can serve as an external
director if the persons position or other business creates, or may create, conflict
of interests with the persons responsibilities as an external director. A person
shall be qualified to serve as an external director only if he or she possesses accounting
and financial expertise or professional qualifications. At least one external director
must posses accounting and financial expertise and the other external directors are to
possess professional qualifications as promulgated by regulations to the Companies Law;
these regulations provide that financial and accounting expertise require such external
director to possess a high level of understanding in business matters, such that he or she
can read and understand financial statements in depth and be able to raise issues with
respect to the manner in which the financial data is presented therein. The companys
board of directors is to determine such candidates qualifications based on his or
her education, experience and skills regarding financial and control matters in companies
of similar size and in a similar industry and knowledge of preparation and approval of
financial statements under the Companies Law and Israeli securities laws. These
requirements apply to external directors appointed or reappointed for an additional term
following the recent amendment to the Companies Law. Until the lapse of two years from
termination of office, a company may not engage an external director to serve as an office
holder and cannot employ or receive services from that person, either directly or
indirectly, including through a corporation controlled by that person. External directors
are to be elected by a majority vote at a shareholders meeting, provided that
either:

50

---

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| |  | the
total number of votes for the appointment of the external directors shall include the
votes of at least one third of the shares represented at the meeting in person or by
proxy, which are not held by controlling shareholders of the company; or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of votes against the appointment of the external directors, among the
non-controlling shareholders of the company, shall not exceed 1% of the aggregate voting
rights in the company.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

When counting the votes of the
non-controlling shareholders, abstentions are not to be included.

An external director is entitled to
compensation as provided in regulations promulgated under the Companies Law and is
otherwise prohibited from receiving any compensation, directly or indirectly, in
connection with services provided as an external director. We compensate our two external
directors in accordance with regulations promulgated under the Companies Law.

The initial term of an external
director is three years and may be extended for an additional three years. Each committee
of a companys board of directors, which exercises board powers, is required to
include at least one external director. However, the audit committee should include all of
the companys the external directors.

Pursuant to the decisions of the
General Meetings dated July 9, 2002 and March 1, 2004, respectively, Mr. Amnon Harari and
Ms. Orit Stav were each appointed to serve as external directors of the Company for a
three-year term. On June 28, 2005 and on July 17, 2007, respectively, our shareholders
extended the appointment of Mr. Harari and Ms. Stav to continue to serving as external
directors for additional three-year terms. At the Companys annual general meeting
held on July 10, 2008, the Company appointed Ms. Alicia Rotbard to serve as an external
director instead of Mr. Harari following the end of his second three-year term.

51

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# Exculpation, Insurance
and Indemnification of Directors and Officers

Under the Companies Law, an Israeli
company may not exempt an office holder from liability with respect to a breach of his
duty of loyalty, but may exempt in advance an office holder from his or her liability to
the company, in whole or in part, with respect to a breach of his duty of care, provided,
that the company is so permitted under its articles of association. The breach of such
duty is governed by Israeli contract laws.

Office Holder Insurance

Our articles of association provide
that, subject to the provisions of the law, we may enter into a contract for the insurance
of the liability of any of our office holders with respect to:

| |  | a
breach of his or her duty of care to us or to another person;
| | - | ---------------------------------------------------------------

| |  | a
breach of his or her duty of loyalty to us, provided that the office holder acted in good
faith and had reasonable cause to assume that his act would not prejudice our interests;
or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | a
financial liability imposed upon him or her in favor of another person concerning an act
performed by him or her in their capacity as an office holder.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------

Indemnification of Office
Holders

Our articles of association provide
that we may indemnify an office holder against:

| |  | a
financial liability imposed on him or her in favor of another person by any judgment,
including a settlement or an arbitrators award approved by a court concerning an
act performed in his or her capacity as an office holder; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | reasonable
litigation expenses, including attorneys fees, expended by the office holder or
charged to him or her by a court, in proceedings we institute against him or her or
instituted on our behalf or by another person, or in a criminal charge from which he or
she was acquitted, or a criminal charge in which he or she was convicted for a criminal
offense that does not require proof of intent, in each case relating to an act performed
in his or her capacity as an office holder.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Under the Companies Law, these
provisions are subject to shareholder approval.

52

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Limitations on Insurance
and Indemnification

The Companies Law provides that a
company may not indemnify an office holder nor enter into an insurance contract which
would provide coverage for any monetary liability incurred as a result of any of the
following:

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

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

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

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

In addition, under the Companies Law,
indemnification of, and procurement of insurance coverage for, our office holders must be
approved by our Audit Committee and our Board of Directors and, in specified
circumstances, by our shareholders.

We have obtained liability insurance
for our directors and officers.

# Audit Committee

Under the Companies Law, the board of
directors of any public company, as defined by the Companies Law, must appoint an audit
committee comprised of at least three directors, including all of the companys
external directors, but excluding the chairman of the board of directors, the general
manager, the chief executive officer and a controlling shareholder or its relative and any
director employed by the company or who provides services to the company on a regular
basis. Ken Lalo, Alicia Rotbard and Orit Stav currently serve as members of our Audit
Committee. Orit Stav is the financial expert of the Committee.

The role of the audit committee is to
examine any flaws in the companys business management, in consultation with its
internal auditor and independent accountants, and suggest appropriate courses of action.

In addition, the approval of the
audit committee is required to effect specified actions and transactions with office
holders and interested parties. An interested party is defined in the Companies Law as a
5% or greater shareholder, any person or entity who has the right to designate one or more
directors or the general manager of the company or any person who serves as a director or
as a general manager. An audit committee may not approve an action or a transaction with
an interested party or with an office holder unless at the time of approval the two
external directors are serving as members of the audit committee and at least one external
director was present at the meeting in which such approval was granted.

53

---

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# Management Employment
Agreements

We have entered into employment or
consulting agreements with each of our executive officers. These agreements contain
various provisions, including provisions relating to assignment of intellectual property
rights to us and confidentiality and are in effect until terminated by either party upon
advance notice or otherwise in accordance with the terms of the particular agreement. All
of these agreements also contain non-competition provisions.

# Employee Share Option
Plans

We have two employee share option
plans. Options granted under our option plans generally vest over a period of two to five
years. Options granted under each plan expire five or eight years from the date of grant.
Our share option plans are administered by our Board of Directors. All of our employees
are eligible to participate in our option plans. Our board of directors has complete
discretion to make all decisions relating to the interpretation and operation of our
option plans, including the discretion to determine which eligible individuals are to
receive an award, and to determine the type, number, vesting requirements and other
features and conditions of each award.

On January 4, 2004, our board of
directors adopted a new share option plan under which options for the purchase of
5,000,000 Ordinary Shares of the Company may be granted to our employees and consultants.
In 2006, our Board of Directors approved an increase to the total option program to
5,200,000 Ordinary Shares. Under this plan, as of March 31, 2009, 5,961,200 options have
been granted to employees and consultants of the Company, at an exercise price ranging
between $0.145 and $0.65 per share. These options will vest over five years with one-fifth
vesting each year, and each increment expiring three years after vesting. As of March 31,
2009 1,880,000 options had expired and 110,000 options were exercised. Moreover, as of
March 31, 2009, an additional 1,118,800 Ordinary Shares of the Company were reserved for
issuance pursuant to options issuable under this share option plan.

As of March 31, 2009, we had
outstanding options for the purchase of an aggregate of 3,971,200 Ordinary Shares of the
Company.

54

---

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# Employees

The following table sets forth for
the last three fiscal years, the number of our employees engaged in the specified
activities:

|                                      | Year ended December 31,
|------------------------------------- | -----------------------
|
|
|
|
|Production & Research and Development |                        
|Marketing and Sales                   |                        
|Administration and Management         |                        
|                                      |                        
|Total                                 |                        
|                                      |                        

As of March 31, 2009, we employed
approximately 116 employees in research and development operations and productions, both
internally financed and pursuant to contracts with our customers performed an integral
role in our various projects.

Our employees are required to sign a
nondisclosure agreement covering all of our proprietary information which they might
possess or to which they might have access. We believe that we have satisfactory labor
relations with our employees and have never experienced a work stoppage.

We are subject to labor laws and
regulations in Israel. We and our Israeli employees are also subject to certain provisions
of the general collective bargaining agreements between the Histadrut, the General
Federation of Labor in Israel, and the Coordination Bureau of Economic Organizations,
including the Industrialists Association, by order of the Israel Ministry of Labor and
Welfare. None of our employees are represented by a labor union and we have not
experienced any work stoppages. We generally provide our employees with benefits and
working conditions beyond the required minimums. In addition to salary and other benefits,
certain of our marketing and sales personnel are paid commissions based on our performance
in certain territories worldwide.

We are subject, like all other
Israeli employers, to Israeli labor laws and regulations. These laws principally concern
matters like paid annual vacation, paid sick days and other conditions of employment. In
addition, Israeli law generally requires severance pay, which may be funded by
managers insurance described below (or by other funds), upon the retirement or death
of an employee or termination of employment, subject to the provisions of the law.
Provisions for severance pay amount to approximately 8.33% of wages. Furthermore, Israeli
employees and employers are required to pay predetermined sums to the National Insurance
Institute, which is broadly parallel to the United States Social Security Administration.
These amounts also include payments by the employee for national health insurance. The
total payments to the National Insurance Institute are equal to approximately 16.25% of
the wages (up to a specified amount), of which the employee contributes approximately 66%
and the employer contributes approximately 34%.

55

---

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We follow a common business practice,
although not legally required, to contribute funds on behalf of all of our employees to a
fund known as managers insurance. This fund provides a combination of
savings plan, insurance and severance pay benefits to the employee, giving the employee a
lump-sum payment upon retirement and securing the severance pay, if legally entitled, upon
termination of employment. We decide whether each employee is entitled to participate in
the plan, and each employee who agrees to participate contributes an amount equal to 5% of
his or her base salary and the employer contributes approximately 14% of the salary.

|D. | Share
Ownership
|-- | ---------------

As of March 31, 2009, Aviv Tzidon
beneficially owned an option to purchase 5,400,000 Ordinary Shares, (for further
information, see item 6B) exercisable at a price of $0.18 per share for three years.
Assuming the exercise of such options and no other exercise of our convertible securities,
Mr. Tzidon will hold 4.41% of our then outstanding Ordinary Shares. In addition, Mr.
Tzidon holds 50% of Chun LP, which beneficially owned, as of March 31, 2009, 58,142,608
Ordinary shares, amounting to 49.71% of our outstanding Ordinary Shares.

Other than Mr. Aviv Tzidon, none of
our directors and officers beneficially owned more than 1% of our outstanding equity
securities.

|ITEM 7. |  | Major Shareholders and Related Party Transactions
|------- |  | -------------------------------------------------

|A. | Major
Shareholders
|-- | ------------------

The following table sets forth
certain information regarding the beneficial ownership of our Ordinary Shares as of, May
31, 2009, by each person or entity known to own beneficially more than 5% of our
outstanding Ordinary Shares based on information provided to us by the holders or
disclosed in public filings with the Securities and Exchange Commission.

|Name                                   | Number of Ordinary
Shares Beneficially Owned(1) | Percentage of
Outstanding Ordinary
Shares(2)
|-------------------------------------- | ----------------------------------------------- | --------------------------------------------
|
|
|
|
|CHUN Holdings Limited Partnership (3)  |                                                 |                                             
|c/o Yigal Arnon & Co.                  |                                                 |                                             
|1 Azrieli Center Tel-Aviv 67021 Israel |                                                 |                                             
|H.S.N General Managers Holdings LP     |                                                 |                                             
|7 Berkowitz St.                        |                                                 |                                             
|Tel Aviv Israel                        |                                                 |                                             
|Polar Investments House                |                                                 |                                             
|Platinum House                         |                                                 |                                             
|21 Ha'arbah St.                        |                                                 |                                             
|Tel Aviv 64731 Israel                  |                                                 |                                             
|Bank Leumi Le-Israel B.M.              |                                                 |                                             
|24-32 Yehuda Halevi St.                |                                                 |                                             
|Tel Aviv 63432 Israel                  |                                                 |                                             

56

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|(1) | Except
as otherwise noted and pursuant to applicable community property laws,
               each person named in the table has sole voting and investment power with
respect                to all ordinary shares listed as owned by such person. Shares
beneficially owned                include shares that may be acquired pursuant to options
that are exercisable                within 60 days of May 31, 2009.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Ordinary
shares deemed beneficially owned by virtue of the right of any person                or
group to acquire these ordinary shares within 60 days of May 31, 2009 are
               treated as outstanding only for the purposes of determining the percent
owned by                such person or group. The percentage of outstanding ordinary
shares is based on                116,970,535 Ordinary Shares outstanding as of May 31,
2009.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Based
on information reported by Chun LP in its Schedule 13D, the general
               partner of Chun LP is Chun Holdings Ltd., a private Israeli company
jointly held                by Aviv Tzidon (50%), and Portal Marketing SA (50%).
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Includes
3,181,807 Ordinary Shares held by Koonras Technologies Ltd., a
               wholly-owned subsidiary of Polar Investments Ltd.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------

As of March 31, 2009, there were a
total of four holders of record of our ordinary shares with addresses in the United
States. Such United States holders were, as of such date, the holders of record of 223,875
ordinary shares representing approximately 0.2% of our outstanding share capital The
number of record holders in the United States is not representative of the number of
beneficial holders nor is it representative of where such beneficial holders are resident
since many of these ordinary shares were held of record by brokers or other nominees
(including one U.S. nominee company, CEDE & Co., which held approximately 11.5% of our
outstanding ordinary shares as of said date).

|B. | Related
Party Transactions
|-- | --------------------------

# Agreement with Consult
Wise Pte Ltd.

On January 1, 2004, we entered into
an agreement with Consult Wise Pte Ltd., a Singaporean company. Maayan Tzidon, the brother
of Aviv Tzidon, the Chairman of our Board of Directors, holds 50% of the issued and
outstanding shares of Consult Wise. Pursuant to this agreement, we agreed to pay Consult
Wise $3,000 per month for the provision of its marketing services of our products and
services in Korea and Singapore, for a period of three years commencing January 1, 2004.
In lieu of cash, we agreed to pay the monthly fee in our Ordinary Shares based on a per
share price of $0.18. In order to facilitate the payment of shares, a trustee was issued
600,000 of our Ordinary Shares and was instructed to release 16,667 of our Ordinary Shares
to Consult Wise each month during the term of the agreement.

On January 1, 2007, following the
expiration of the above agreement, we entered into a new agreement with Consult Wise Pte
Ltd. Pursuant to this agreement, we agreed to pay Consult Wise $3,500 per month for the
provision of its marketing services and $3,500 per month for supporting our operating
programs in Singapore; furthermore, Consult Wise is entitled to commissions on purchase
orders issued by customers introduced to us pursuant to its marketing services. As of
April 19, 2009 this agreement was renewed for an additional period of 2 years,
retroactively from January 1, 2009 until December 31, 2010.

57

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# Agreement with Eyepoint
Ltd.

On March 1, 2004, the Company entered
into a consulting agreement with, an Israeli company wholly owned by Mr. Dekel Tzidon,
brother of Mr. Aviv Tzidon, the Chairman of our Board of Directors. Pursuant to this
consulting agreement, Mr. Dekel Tzidon continues to serve as the Companys Vice
President of Research & Development and Chief Technological Officer. The terms of this
agreement were approved by the Companys Audit Committee in July 2004. In July 2008
the BOD approve the following changes to his consulting agreement:

|1. | Mr.
Dekel Tzidon no longer serves as the Companys Vice President of
               Research & Development and Chief Technological Officer.
|-- | -------------------------------------------------------------------------------------------------------------------------------------------

|2. | His
effort capacity reduced first to 70% and in March 1, 2009 its effort
               capacity reduced to 50%.
|-- | ----------------------------------------------------------------------------------------------------------------

58

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# Sale of Shares to
Principal Shareholders

Sale of Shares to and Issue of
Warrants to H.S.N General Managers Holdings L.P.

In March 2006, H.S.N General Managers
Holdings L.P. (or HSN), an Israeli limited partnership led by Mr. Nir Dor invested $3.6
million in our share capital in consideration for the issuance of 20,000,000 Ordinary
Shares, representing approximately 17% of our issued share capital, at a price per share
of $0.18. In connection with this investment, HSN was issued three separate warrants for
the purchase of 6,000,000 of our Ordinary Shares per each warrant, with exercise prices of
$0.36, $0.54 and $1.00, exercisable for a period of three years, with a mandatory exercise
mechanism under certain conditions. In addition, HSN was granted the right to appoint a
representative to our board of directors for such time as it holds no less than 9% of the
outstanding share capital. As of March 2006, Mr. Dor serves in this capacity as a member
of our board of directors. As of March 22, 2009 all of the options described above have
expired.

Sale of Shares to and
Issue of Warrants to Chun

On November 21, 2003, Chun Holdings
Ltd., or Chun, issued a tender offer to purchase all of our outstanding shares for a
purchase price of $0.18 per share. Pursuant to the tender offer, which expired on December
30, 2003, some of our shareholders, including Clal Industries Ltd. and our former
controlling shareholder Elisra Electronics Systems Ltd., or Elisra, tendered an aggregate
of 7,142,608 of their shares, constituting 67% of our issued and outstanding share
capital. Upon the request of Chun, all of the tendered shares were registered in the name
of its affiliate Chun Holdings L.P., or Chun LP which became our controlling shareholder.
As of, March 31, 2009 Chun was holding an aggregate of 49.71% of our outstanding shares.

Following the expiration of the
tender offer, Elisra is no longer a holder of any of our share capital.

On March 3, 2004, Chun entered into
an agreement to purchase 33,333,333 of our Ordinary Shares at a price per share of $0.18
for an aggregate purchase price of $6,000,000. This transaction was approved by our
shareholders at a general meeting held on March 1, 2004.

Chun also agreed on such date to
provide our company with a credit line in the amount of $3.2 million. In consideration for
this credit line, we granted Chun a four-year warrant to purchase an additional 40,000,000
of our Ordinary Shares for an exercise price of $0.18 per share. Chun, however, waived its
right to receive warrants for the purchase of 11,468,889 of our Ordinary Shares and agreed
that 10,000,000 options shall be distributed among the other shareholders of the Company,
pro-rata to the cash invested by them during 2004, and 1,468,889 to the Companys
principal banks. During the third quarter of 2004, the $3.2 million credit line was
replaced by an additional investment in the same amount made by Chun in our share capital.

59

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# Employment Agreements

We have entered into employment or
consulting agreements with each of our executive officers. See Item 6 
Directors, Senior Management and Employees  C. Board PracticesManagement
Employment Agreements.

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

Not applicable.

|ITEM 8. |  | Financial Information
|------- |  | ---------------------

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

The Financial Statements required by
this item are found at the end of this Annual Report, beginning on page F-1.

# Legal Proceedings

On May 17, 2009, we brought action
against Hartec Systems Limited, an Israeli company, and Hartec Technologies Limited, an
Israeli company, and certain individuals for infringement of our intellectual property
rights relating to our simulation and live training software, and to enjoin the defendants
from further breaches of our intellectual property rights. Our infringement claim sought
initial damages of approximately $2.5 million (NIS 10 million) and other costs and
injunctive relief. The claim is currently in the initial stages of court proceedings.

|B. | Significant
Changes
|-- | -------------------

There have been no material changes
in our financial position since December 31, 2008 except as otherwise disclosed in this
annual report.

60

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|ITEM 9. |  | The Offer and Listing
|------- |  | ---------------------

|A. | Offer
and Listing Details
|-- | -------------------------

Our Ordinary Shares have traded on
the Over The Counter Bulletin Board under the symbol BVRSF.OB since February 2003 and
previously traded on the Nasdaq Small Cap Market from March 2001. From October 1998 until
March 2001 our shares were traded on the Nasdaq National Market.

The following table sets forth, for
the periods indicated, the range of high and low sales prices of our Ordinary Shares:

|                              | High | Low
|----------------------------- | ---- | ---
|
|
|
|
|2004                          |      |    
|Year ending December 31, 2004 |      |    
|                              |      |    
|2005                          |      |    
|Year ending December 31, 2005 |      |    
|                              |      |    
|2006                          |      |    
|First Quarter                 |      |    
|Second Quarter                |      |    
|Third Quarter                 |      |    
|Fourth Quarter                |      |    
|                              |      |    
|2007                          |      |    
|Second Quarter                |      |    
|Third Quarter                 |      |    
|Fourth Quarter                |      |    
|                              |      |    
|2008                          |      |    
|First Quarter                 |      |    
|Second Quarter                |      |    
|Third Quarter                 |      |    
|Fourth Quarter                |      |    
|December                      |      |    
|                              |      |    
|2009                          |      |    
|First Quarter                 |      |    
|January                       |      |    
|February                      |      |    
|March                         |      |    
|April                         |      |    
|May                           |      |    

61

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|B. | Plan
of Distribution
|-- | --------------------

Not applicable.

|C. | Markets
|-- | -------

Our Ordinary Shares traded on the
Nasdaq Capital Market until February 13, 2003. Our Ordinary Shares were then delisted from
the Nasdaq Capital Market after we failed to comply with its required listing standards.
Since February 14, 2003, our Ordinary Shares have been traded on the Over-the-Counter
Bulletin Board under the symbol BVRSF.OB.

|D. | Selling
Shareholders
|-- | --------------------

Not applicable.

|E. | Dilution
|-- | --------

Not applicable.

|F. | Expenses
of the Issue
|-- | ---------------------

Not applicable.

|ITEM 10. |  | Additional
Information
|-------- |  | ----------------------

|A. | Share
Capital
|-- | -------------

Not applicable.

|B. | Memorandum
and Articles of Association
|-- | --------------------------------------

# Objects and Purposes

We were first registered under
Israeli law on January 6, 1998. Our registration number with the Israel Registrar of
Companies is 52-004362-1. Our objectives and purposes include the development, design,
manufacture and marketing of advanced training systems for military objectives and a wide
variety of other business purposes.

# Transactions Requiring
Special Approval

An office holder is
defined in the Companies Law as a director, general manager, chief business manager,
deputy general manager, vice general manager and any person assuming the responsibilities
of any of the foregoing positions without regard to such persons title and any other
manager who is directly subject to the general manager.

62

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The Companies Law imposes a duty of
care and a duty of loyalty on all office holders of a company. The duty of care requires
an office holder to act with the level of care which a reasonable office holder in the
same position would have acted under the same circumstances. The breach of such duty is
governed by Israeli contract laws. The duty of care includes a duty to use reasonable
means to obtain:

| |  | information
on the appropriateness of a given action brought for the office holders approval or
performed by the officer holder by virtue of his or her position; and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | all
other important information pertaining to the previous actions.
| | - | -------------------------------------------------------------------

The duty of loyalty requires an
office holder to act in good faith for the interests of the company and includes a duty
to:

| |  | refrain
from any conflict of interest between the performance of the office holders duties
in the company and his or her personal affairs;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------

| |  | refrain
from any activity that is competitive with the company;
| | - | ---------------------------------------------------------------

| |  | refrain
from  exploiting  any business  opportunity  of the company to receive a personal gain
for himself or          herself or for others; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------

| |  | disclose
to the company any information or documents relating to a companys affairs which
the office holder has received due to his or her position as an office holder.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Each person listed in the table under
Item 6  Directors, Senior Management and Employees  A. Directors and
Senior Management is an office holder.

The Companies Law requires that an
office holder disclose to the company 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. The disclosure is required to be made promptly and in
any event, no later than the board of directors meeting in which the transaction is first
discussed. A personal interest of an office holder includes an interest of a company in
which the office holder is, directly or indirectly, a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one director or
the general manager. If the transaction is an extraordinary transaction, the office holder
must also disclose any personal interest held by his or her relative.

Under the Companies Law, an
extraordinary transaction is a transaction:

| |  | not
in the ordinary course of business;
| | - | ---------------------------------------

| |  | not
on market terms; or
| | - | -----------------------

| |  | likely
to have a material impact on the company's profitability, assets or liabilities.
| | - | ---------------------------------------------------------------------------------------

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Under the Companies Law, once an
office holder complies with the above disclosure requirement, the board of directors may
approve the transaction, unless the companys articles of association provide
otherwise. A transaction that is adverse to the companys interest may not be
approved. If the transaction is an extraordinary transaction, then it also must be
approved by the audit committee, before the board approval, and under certain
circumstances, following board approval, by the shareholders of the company. A director
who has a personal interest in a matter which 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. If a majority of the directors has a personal interest in a transaction, these
directors are permitted to be present and vote, but shareholder approval is also required.

Under the Companies Law, the
disclosure requirements which apply to an office holder also apply to a controlling
shareholder of a public company. A controlling shareholder includes a shareholder that
holds 25% or more of the voting rights in a public company if no other shareholder owns
more than 50% of the voting rights in the company. Extraordinary transactions of a public
company with a controlling shareholder or in which a controlling shareholder has a
personal interest, and the terms of compensation of a controlling shareholder who is an
office holder, require the approval of the audit committee, the board of directors and the
shareholders of the company. The shareholder approval must satisfy either of the following
criteria:

| |  | the
majority of the votes for the approval includes the votes of at least one-third of the
total votes of shareholders who are present and voting at the meeting and who have no
personal interest in the transaction (the votes of abstaining shareholders shall not be
included in the number of the said total votes); or
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | the
total number of votes against the approval, among the shareholders who are present at the
meeting and who have no personal interest in the transaction shall not exceed 1% of the
aggregate voting rights in the company.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

For information concerning the direct
and indirect personal interests of certain of our office holders and principal
shareholders in certain transactions with us, see Item 7  Major Shareholders
and Related Party Transactions  B. Related Party
Transactions.

# Directors
Compensation

Under the Companies Law, all
arrangements as to compensation of office holders who are not directors require approval
of the board of directors. Arrangements as to compensation of directors also require audit
committee approval, before board approval, and, following board approval, shareholder
approval. Nevertheless, pursuant to our articles of association, whether or not required
by law, our directors who are not our employees or professional services providers shall
not be paid any remuneration for their services unless it was approved by the general
meeting of our shareholders.

64

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# Directors
Borrowing Powers

Our board of directors may from time
to time, in its discretion, cause the Company to borrow or secure the payment of any sum
or sums of money for the purposes of the Company. Such borrowing powers may be exercised
by a majority of the board in accordance with our articles of association.

# Rights attached to our
Shares

Dividend Rights. Our articles
of association provide that our shareholders at a general meeting and upon the
recommendation of our board of directors may, from time to time, declare such dividend as
may appear to be justified but not in excess of our board of directors
recommendation. Subject to the rights of the holders of shares with preferential or other
special rights that may be authorized in the future, holders of Ordinary Shares are
entitled to receive dividends according to their rights and interest in our profits.

Voting Rights. Holders of
Ordinary Shares have one vote for each ordinary share held on all matters submitted to a
vote of shareholders. These voting rights may be affected by the grant of any special
voting rights to the holders of a class of shares with preferential rights that may be
authorized in the future. The Ordinary Shares do not have cumulative voting rights in the
election of directors. As a result, holders of Ordinary Shares that represent more than
50% of the voting power have the power to elect all the directors to the exclusion of the
remaining shareholders.

Liquidation Rights. In the
event of our liquidation, after satisfaction of liabilities to creditors, our assets will
be distributed to the holders of Ordinary Shares in proportion to their respective
holdings. This liquidation right may be affected by the grant of preferential dividends or
distribution rights to the holders of a class of shares with preferential rights that may
be authorized in the future.

Redemption Provisions. We may,
subject to applicable law, issue redeemable preference shares and redeem the same.

Capital Calls. Under our
memorandum of association and the Companies Law, the liability of our shareholders is
limited to the par value of the shares held by them.

Preemptive, First Refusal and
Co-Sale Rights. All outstanding Ordinary Shares are validly issued, fully paid and
non-assessable and do not have preemptive rights, rights of first refusal or co-sale
rights.

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Transfer of Shares. Fully paid
Ordinary Shares are issued in registered form and may be transferred pursuant to our
articles of association, unless such transfer is restricted or prohibited by another
instrument and subject to applicable securities laws.

# Modification of Rights

Unless otherwise provided by our
articles of association, rights attached to any class may be modified or abrogated by a
resolution adopted in a general meeting approved by a majority of 75% of the voting power
represented at the meeting in person or by proxy and voting thereon, subject to the
sanction of a resolution passed by majority of the holders of 75% a majority of the shares
of such class present and voting as a separate general meeting of the holders of such
class.

# Shareholders
Meetings and Resolutions

The quorum required for an ordinary meeting
of shareholders consists of at least two shareholders present in person or by proxy, who
hold or represent between them at least 33-1/3% of the outstanding voting shares, unless
otherwise required by applicable rules. A meeting adjourned for lack of a quorum generally
is adjourned to the same day in the following week at the same time and place or any time
and place as the chairman of the board may designate. At such reconvened meeting the
required quorum consists of any two shareholders present in person or by proxy.

Under the Companies Law, each
shareholder of record will be provided at least 21 calendar days prior notice of any
general shareholders meeting.

Under the Companies Law and our
articles of association, all resolutions of our shareholders require a simple majority of
the shares present, in person or by proxy, and voting on the matter, subject to certain
exceptions provided for under the Companies Law, which require a majority of at least 75%
of the shares present. However, the Companies Law requires that any amendment to the
articles of association of a company incorporated prior to February 1, 2000, shall be
approved by holders of at least 75% of the voting rights represented at the meeting, in
person or by proxy, and voting thereon, unless the articles are amended to the effect of
requiring a different majority.

Under the Companies Law, each and
every shareholder has a duty to act in good faith in exercising his rights and fulfilling
his obligations towards us and other shareholders, such as in voting in the general
meeting of shareholders on the following matters:

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

| |  | an
increase of our authorized share capital;
| | - | --------------------------------------------

| |  | a
merger; or
| | - | ------------

| |  | approval
of certain actions and transactions that require shareholder approval.
| | - | -------------------------------------------------------------------------------

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In addition, each and every
shareholder has the general duty to refrain from depriving other shareholders of their
rights.

Our annual general meetings are held
once in every calendar year at such time (within a period of not more than fifteen months
after the last preceding annual general meeting) and at such place as determined by our
board. All general meetings other than annual general meetings are called extraordinary
general meetings. Our board may, whenever it thinks fit, convene an extraordinary general
meeting at such time and place as it determines, and shall be obligated to do so upon a
requisition in writing in accordance with the Companies Law.

# Limitation on Owning
Securities

The ownership of our Ordinary Shares
by nonresidents of Israel is not restricted in any way by our memorandum of association
and articles of association or the laws of the State of Israel, except for citizens of
countries, which are in a state of war with Israel, who may not be recognized as owners of
our Ordinary Shares.

# Mergers and Acquisitions
under Israeli Law

The Companies Law includes provisions
that allow a merger transaction and require that each company that is a party to a merger
have the transaction approved by its board of directors and a vote of at least 75% of its
shares, at a shareholders meeting called on at least 21 days prior notice. For
purposes of the shareholders vote, unless a court rules otherwise, the merger will not be
deemed approved if a majority of the shares held by parties other than the other party to
the merger, or by any person who holds 25% or more of the shares of the other party, or
the right to appoint 25% or more of the directors of the other party, vote against the
merger. Upon the request of a creditor of either party of the proposed merger, the court
may delay or prevent the merger if it concludes that there exists a reasonable concern
that as a result of the merger, the surviving company will be unable to satisfy the
obligations of any of the parties to the merger. In addition, a merger may not be
completed unless at least 50 days have passed from the time that a proposal for the
approval of the merger has been filed with the Israel Registrar of Companies and 30 days
have passed from the time that the approval of the merging parties shareholders has
been received.

The Companies Law also provides that
an acquisition of shares of a public company must be made by means of a tender offer if as
a result of the acquisition the purchaser would become a 25% shareholder of the company
and there is no existing 25% or greater shareholder in the company. If there is no
existing 45% or greater shareholder in the company, the Companies Law provides that an
acquisition of shares of a public company must be made by means of a tender offer if as a
result of the acquisition the purchaser would become a 45% shareholder of the company.
Regulations adopted 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 laws of the country in which the shares have been offered to the public
or in which the shares are listed for trading on an exchange, including the rules and
regulations of such exchange, there is either a restriction upon any acquisition of
control to any extent, or the acquisition of control to any extent requires the purchaser
to make a tender offer to the public.

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If following any acquisition of
shares, the acquirer will hold 90% or more of the companys shares or of a class of
shares, the acquisition may not be made other than through a tender offer to acquire all
of the shares of such class. If the shareholders who declined the tender offer hold 5% or
less of the companys outstanding share capital or class of shares, all the shares
that the acquirer offered to purchase will be transferred to it. However, the tendered
shareholders may seek to alter the consideration by court order.

|C. | Material
Contracts
|-- | ------------------

In
January 2008, we entered into a major contract with an international customer for the
supply of ACMI systems. The contract price is $18.4 million, which, as in substantially
all of our contracts, is payable in accordance and subject to timely milestones during the
lifetime of the project. We expect to complete this project during the second quarter of
2010. As of March 31, 2009, we received $11.6 million under this contract.

In January 2008, we entered into a
major contract with an international customer for the supply of Naval Tactical Trainer
systems. The contract price is $3.2 million, which, as in substantially all of our
contracts, is payable in accordance and subject to timely milestones during the lifetime
of the project. We expect to complete this project during the second quarter of 2010. As
of March 31, 2009, we received $1.6 million under this contract.

In
June 2008, we entered into a major contract with an international customer for the supply
of a Trainer Aircraft Full Mission Simulator FMS. The contract price is $4.95 million,
which, as in substantially all of our contracts, is payable in accordance and subject to
timely milestones during the lifetime of the project. We expect to complete this project
during the first quarter of 2010. As of March 31, 2009, we received $1.5 million under
this contract.

In September 2008, we entered into a
maintenance agreement to support airborne ACMI products. The contract price is
approximately $1.2 million, which is payable in accordance with fulfillment of support
activities during the lifetime of the project. We expect to complete this project during
the fourth quarter of 2010.

In October 2008, we entered into an
agreement with a leading aircraft integrator for the integration of its advanced Hybrid
Datalink solution. The contract price is approximately $2.5 million, which, as in
substantially all of our contracts, is payable in accordance and subject to timely
achievement of specific milestones during the lifetime of the project. We expect to
complete this project during the third quarter of 2010.

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In December 2008, we entered into a
contract with an international customer for the upgrade of its distributed naval embedded
training system. The contract price is approximately $1.4 million, which, as in
substantially all of our contracts, is payable in accordance and subject to timely
milestones during the lifetime of the project. We expect to complete this project during
the first quarter of 2012. As of March 31, 2009, we received $0.9 million under this
contract.

In January 2009, we entered into
license agreement, with a major European defense company pursuant to which BVR granted the
company a worldwide, non exclusive license to BVRs Embedded Virtual Avionics (EVA)
patents. In addition to this agreement, BVR and the company will further evaluate joint
business opportunities in the area of live and virtual training. The contract price is
approximately $2.9 million, and is payable in accordance with a predetermined payment
schedule during the following two years. As of March 31, 2009, we received approximately
$0.7 million under this contract.

In January 2009, we entered into a
contract with a leading air force to train Instructors of Weapon Systems Operators (IWSO).
The contract price is approximately $1.45 million, which, as in substantially all of our
contracts, is payable in accordance and subject to timely milestones during the lifetime
of the project. We expect to complete this project during the fourth quarter of 2011. As
of March 31, 2009, we received $0.3 million under this contract.

In February 2009, we entered into a
contract with an international customer for the supply of an Airborne Live Training
Program. The contract price is $2.5 million, which, as in substantially all of our
contracts, is payable in accordance and subject to timely milestones during the lifetime
of the project. We expect to complete this project during the second quarter of 2011. As
of March 31, 2009, we received $0.6 million under this contract.

For a summary of our other material
contracts, see:

| |  | "Item
4 - Information on the Company - A. History and Development of the Company"
| | - | ---------------------------------------------------------------------------------

| |  | "Item
4 - Information on the Company - B. Business Overview - Strategic Relationships"
| | - | --------------------------------------------------------------------------------------

| |  | "Item
6 - Directors, Senior Management and Employees - B. Compensation"
| | - | -----------------------------------------------------------------------

| |  | "Item
7 - Major Shareholders and Related Party Transactions - B. Related Party Transactions."
| | - | ---------------------------------------------------------------------------------------------

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|D. | Exchange
Controls
|-- | -----------------

Under current Israeli regulations, we
may pay dividends or other distributions in respect of our Ordinary Shares either in
non-Israeli or Israeli currencies. If we make these payments in Israeli currency, they
will be freely converted into non-Israeli currencies at the rate of exchange prevailing at
the time of conversion. Because exchange rates between the NIS and the dollar continuously
fluctuate, a U.S. shareholder will be subject to the risk of currency fluctuations between
the date when we declare NIS-denominated dividends and the date when we pay them in NIS.
See Item 3. Key Information D. Risk Factors.

Non-residents of Israel may freely
hold and trade our securities pursuant to the general permit issued under the Israeli
Currency Control Law, 1978. Neither our memorandum of association nor the laws of the
State of Israel restrict in any way the ownership of our Ordinary Shares by non-residents,
except that such restrictions may exist with respect to citizens of countries which are in
a state of war with Israel.

|E. | Taxation
|-- | --------

# Israeli Tax
Considerations and Government Programs

The following is a summary of the
current tax structure applicable to companies in Israel, with special reference to its
effect on us. The following also contains a discussion of certain Israeli and United
States tax consequences to purchasers of our Ordinary Shares and certain Israeli
Government programs benefiting us. To the extent that the discussion is based on new 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. The discussion is not intended, and should not be construed, as
legal or professional tax advice and is not exhaustive of all possible tax considerations.

HOLDERS OF OUR ORDINARY SHARES
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE UNITED STATES, ISRAELI OR OTHER TAX
CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF ORDINARY SHARES, INCLUDING, IN
PARTICULAR, THE EFFECT OF ANY FOREIGN, STATE OR LOCAL TAXES.

General Corporate Tax
Structure

Generally, Israeli companies were
subject to corporate tax at the rate of 27% in the 2008 tax year. The rate was reduced to
26% in 2009 and 25% in 2010 and thereafter. However, the effective tax rate payable by a
company which derives income from an Approved Enterprise (as further discussed below) may
be considerably less.

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Tax Benefits under the Law for the
Encouragement of Capital Investments, 1959

On March 30, 2005, the Knesset
approved a reform of the Encouragement of Capital Investments Law  1959 (the
Encouragement Reform). Following in Section A is the outline of The Investment
Law before the Encouragement Reform. Section B notes several of the significant changes in
the Investment Law which are relevant to our company. The Investment Law provides that
terms and benefits included in any certificate of approval that was granted before March
31, 2005 will remain subject to the provisions of the Investment Law as they were on the
date of such approval. Therefore the Encouragement Reform will not apply to any of our
programs approved under the Investment Law before March 31, 2005.

|A. | The
Investment Law before the Encouragement Reform
|-- | --------------------------------------------------

The Investment Law provides that a
proposed capital investment in eligible facilities may, upon application to the Investment
Center of the Ministry of Industry and Commerce of the State of Israel, 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. If a company has more than one approval or only a portion of
its capital investments are approved, its effective tax rate is the result of a weighted
combination of the applicable rates. The tax benefits under the law are not generally
available with respect to income derived from products manufactured outside of Israel.

Taxable income of a company derived
from an Approved Enterprise is subject to corporate tax at a maximum rate of 25% (rather
than the ordinary corporate tax rate) for the benefit period. The
benefit period is seven years (and under certain circumstances, as further
detailed below, ten years) commencing with the year in which the Approved Enterprise first
generates taxable income, and is limited to twelve years from commencement of production
or 14 years from the date of approval, whichever is earlier. The Investment Law also
provides that a company that has an Approved Enterprise is entitled to accelerated
depreciation on its property and equipment that are included in an approved investment
program.

A company owning an Approved
Enterprise may elect to receive an alternative package of benefits. Under the
alternative package of benefits, a companys undistributed income derived from an
Approved Enterprise will be exempt from corporate tax for a period of between two and ten
years from the first year of taxable income, depending on the geographic location of the
Approved Enterprise within Israel, and such company will be eligible for a reduced tax
rate for the remainder of the benefits period.

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Our requests for designation of our
capital investment at our facility in Rosh Haayin as an Approved
Enterprise program were approved under the Investment Law. For this Approved
Enterprise, we elected the alternative package of benefits

A company that has elected the
alternative package of benefits and that subsequently pays a dividend out of income
derived from the Approved Enterprise during the tax exemption period will be subject to
tax in respect of the amount distributed (including the tax thereon) at the rate which
would have been applicable had it not elected the alternative package of benefits
(generally 10%-25%, depending on the extent of foreign shareholders holding its ordinary
shares). In addition, the dividend recipient is taxed at the reduced rate applicable to
dividends from Approved Enterprises (15%), if the dividend is distributed during the tax
exemption period or within a specified period thereafter. We must withhold this tax at
source, regardless of whether the dividend is converted into foreign currency. See
Taxation of Ordinary SharesTaxation of Dividends Paid On Ordinary
Shares and Note 18 to the Consolidated Financial Statements.

Subject to certain provisions
concerning income under the alternative package of benefits, all dividends are considered
to be attributable to the entire enterprise and the effective tax rate on the dividends is
the result of a weighted combination of the various applicable tax rates. We are not
obliged to distribute exempt retained profits under the alternative package of benefits,
and we may generally decide from which years profits to declare dividends. We
currently intend to reinvest the amount of our tax-exempt income and not to distribute
such income as a dividend.

The Investment Center bases its
decision as to whether or not to approve an application on the criteria set forth in the
Investment Law and regulations, the then prevailing policy of the Investment Center, and
the specific objectives and financial criteria of the applicant. Accordingly, there can be
no assurance that any such application will be approved. In addition, the benefits
available to an Approved Enterprise are conditional upon the fulfillment of conditions
stipulated in the Investment Law and its regulations and the criteria set forth in the
specific certificate of approval, as described above. In the event that a company does not
meet these conditions, it would be required to refund the amount of tax benefits, with the
addition of the consumer price index linkage adjustment and interest.

Subject to compliance with applicable
requirements, income derived from our Approved Enterprise facilities will be tax exempt
for a period of two years after we have taxable income and will be subject to a reduced
rate of corporate tax of up to 25% depending on the extent of foreign shareholders holding
our ordinary shares for the following five years. Due to cumulative losses for tax
purposes, we have not yet utilized tax benefits derived from our Approved Enterprise
facilities.

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|B. | Outline
of the primary changes of the Encouragement Reform
|-- | ----------------------------------------------------------

The Encouragement Reform provides
that Approved Enterprise status will continue to be granted by the Investment
Center to qualifying investments. However, the Amendment limits the scope of enterprises
which may be approved by the Investment Center by setting criteria for the approval of a
facility as an Approved Enterprise, such as provisions generally requiring that at least
25% of the Approved Enterprises income will be derived from export to market of at
least 12 million residents.

The Encouragement Reform also
provides that Approved Enterprise status will only be necessary for receiving grants from
the Investment Center. As a result, it is no longer necessary for a company to acquire
Approved Enterprise status in order to receive the tax benefits previously available under
the alternative package of benefits. Rather, a company may claim the tax benefits offered
by the Investment Law as amended directly in its tax returns, provided that its facilities
meet the criteria for tax benefits set out by the Amendment. Companies are entitled to
approach the Israeli Tax Authority for a pre-ruling regarding their eligibility for
benefits under the Encouragement Reform.

Tax benefits are available under the
Encouragement Reform to production facilities (or other eligible facilities), which are
generally required to derive more than 25% of their business income from export. In order
to receive the tax benefits, the Encouragement Reform states that the company must make an
investment which meets all the conditions set out in the Amendment for tax benefits and
exceeds a minimum amount specified in the Law (at least NIS 300,000). Such investment
allows the company to receive a Benefited Enterprise status, and may be made
over a period of no more than three years ending on the end of the year in which the
company requested to have the tax benefits apply to the Benefited Enterprise (the
Year of Election). Where the company requests to have the tax benefits apply
to an expansion of existing facilities, only the expansion will be considered to be a
Benefited Enterprise and the companys effective tax rate will be the weighted
average of the applicable rates. In this case, the minimum investment required in order to
qualify as a Benefited Enterprise is required to exceed a certain percentage of the value
of the companys production assets before the expansion, as follows:

|Production Assets          | % of Required
Investment |  | Required Investment       
|-------------------------- | ------------------------ |  | --------------------------
|
|
|
|
|Up to NIS 140 million      | 12%                      |  | Up to NIS 16.8 million    
|From NIS 140 - 500 million | 7%                       |  | From NIS 16.8 - 42 million
|Over NIS 500 million       | 5%                       |  | From NIS 42 million       

The extent of the tax benefits
available under the Amendment to qualifying income of a Benefited Enterprise are
determined by the geographic location of the Benefited Enterprise. The location will also
determine the period for which tax benefits are available.

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Dividends paid out of income derived
by a Benefited Enterprise will be treated similarly to payment of dividends by an Approved
Enterprise under the alternative package of benefits. Therefore, dividends paid out of
income derived by a Benefited Enterprise (or out of dividends received from a company
whose income is derived from a Benefited Enterprise) are generally subject to withholding
tax at the rate of 15% (deductible at source). The reduced rate of 15% is limited to
dividends and distributions out of income derived from a Benefited Enterprise during the
benefits period and actually paid at any time up to 12 years thereafter. A company
qualifying for tax benefits under the Amendment which pays a dividend out of income
derived by its Benefited Enterprise during a period in which the Benefited Enterprise was
exempt from tax will be subject to tax in respect of the gross amount of the dividend at
the otherwise applicable rate of 25%, (or lower in the case of a qualified company owned
by a certain percentage of non-Israeli residents). The dividend recipient would be subject
to tax at the rate of 15% on the amount received which tax would be deducted at source.

Grants under the Law for the
Encouragement of Industrial Research and Development, 1984

Under the Law for the Encouragement
of Industrial Research and Development, 1984 (Research Law), research and
development programs which meet certain criteria and are approved by the Research
Committee, a governmental committee of the Office of the Chief Scientist, are eligible for
grants of up to 50% of the projects expenditure, as determined by the Research
Committee, in return for the payment of royalties from the sale of the product developed
in accordance with the program. Regulations promulgated under the Research Law generally
provide for the payment of royalties to the Chief Scientist ranging from 3% to 6% on
revenues from products developed using such grants until 100% of the dollar-linked grant
is repaid. Following the full repayment of the grant, there is no further liability for
payment. We have completed payment of all royalties due with respect to grants we received
from the Office of the Chief Scientist. The terms of these grants also require that the
manufacture of products developed with government grants be performed in Israel, unless a
special approval has been granted. These restrictions do not apply to exports from Israel
of products developed with such technologies.Technology developed pursuant to the terms of
these grants may be transferred outside of Israel only subject to the payments promulgated
under the Research Law and subject to the prior approval of the Research Committee;
technology transfers within Israel are also subject to the prior approval of the Research
Committee. Such approval is not required for the export of any products resulting from
such research or development. Approval of the transfer of technology in Israel may be
granted only if the recipient abides by all the provisions of the Research Law and
regulations promulgated thereunder, including the restrictions on the transfer of know-how
and production and the obligation to pay royalties in an amount that may be increased.

Effective for grants received from
the Office of the Chief Scientist under programs approved after January 1, 1999, the
outstanding balance of such grants will be subject to interest equal to the 12
months LIBOR rate applicable to dollar deposits that is published on the first
business day of each calendar year.

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As governmental incentives, the funds
generally available for grants from the Office of the Chief Scientist may be reduced in
the future and there is no assurance that the government will not abolish such grants in
the future. Even if these grants are maintained, there is no assurance we will receive
Office of the Chief Scientist grants in the future. In addition, each application to the
Office of the Chief Scientist is reviewed separately, and grants are based on the program
approved by the Research Committee. Generally, expenditures supported under other
incentive programs of the State of Israel are not eligible for grants from the Office of
the Chief Scientist. There is no assurance that applications to the Office of the Chief
Scientist will be approved and, until approved, the amounts of any such grants are not
determinable.

Tax Benefits and Grants
for Research and Development

Israeli tax law allows, under certain
conditions, a tax deduction in the year incurred for expenditures (including capital
expenditures) in scientific research and development projects, if the expenditures are
approved by the relevant Israeli government Ministry (determined by the field of research)
and the research and development is for the promotion of the enterprise and is carried out
by or on behalf of the company seeking such deduction. Such expenditures not so approved
are deductible over a three-year period. However, expenditures made out of proceeds made
available to us through government grants are not deductible, according to Israeli law.

Tax Benefits Under the
Law for the Encouragement of Industry (Taxes), 1969

According to the Law for the
Encouragement of Industry (Taxes), 1969, or 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, determined in Israeli currency (exclusive of income from
certain government loans, capital gains, interest and dividends), is derived from an
Industrial Enterprise owned by it. An Industrial Enterprise is
defined as an enterprise whose major activity in a given tax year is industrial production
activity. We believe that we currently qualify as an Industrial Company within
the definition of the Industry Encouragement Law.

Under the Industry Encouragement Law,
Industrial Companies are entitled to the following preferred tax benefits:

|(a) | deduction
of purchases of know-how and patents over an eight-year period for tax
               purposes;
|--- | ---------------------------------------------------------------------------------------------------------

|(b) | right
to elect under certain conditions to file a consolidated tax return with
               additional related Israeli Industrial Companies;
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(c) | accelerated
depreciation rates on equipment and buildings;
|--- | ----------------------------------------------------------

|(d) | deduction
over a three-year period of expenses related to the issuance and                listing
of shares on a stock exchange;
|--- | --------------------------------------------------------------------------------------------------------------------------------

75

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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 we qualify or that we will continue
to qualify as an Industrial Company or that the benefits described above will
be available in the future.

Special Provisions
Relating to Taxation under Inflationary Conditions

The Income Tax Law (Inflationary
Adjustments), 1985 or the Inflationary Adjustments Law, which was repealed effective
January 1, 2008, represented an attempt to overcome the problems presented to a
traditional tax system by an economy undergoing rapid inflation. The Inflationary
Adjustments Law is highly complex. For all tax years prior to 2008, the features which
were material to us were as follows:

|(a) | There
was a special tax adjustment for the preservation of equity whereby
               certain corporate assets are classified broadly into fixed (inflation
resistant)                assets and non-fixed (soft) assets. Where a companys
equity, as defined in                such law, exceeded the depreciated cost of fixed
assets, a deduction from                taxable income that takes into account the effect
of the applicable annual rate                of inflation on such excess was 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 exceeded a                companys equity, then
such excess multiplied by the applicable annual rate                of inflation was
added to taxable income.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Subject
to certain limitations, depreciation deductions on fixed assets and                losses
carried forward were adjusted for inflation based on the increase in the
               consumer price index.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

On February 26, 2008 the Income Tax
Law (Inflationary Adjustments) (Amendment No. 20) (Restriction of Period of Application)
 2008 (the Amendment) was passed by the Knesset. According to the Amendment, the
Adjustments Law will no longer be applicable subsequent to the 2007 tax year, except for
the transitional provisions whose objectives are to prevent distortion of the taxation
calculations.

Capital Gains Tax on
Sales of Our Ordinary Shares

Israeli law generally imposes on
residents and non-residents capital gains tax on the sale of capital assets in Israel,
including our ordinary shares, unless a specific exemption is available or unless a tax
treaty between Israel and the shareholders country of residence provides otherwise.
The law distinguishes between the inflationary surplus and the real gain. The
inflationary surplus is a portion of the total capital gain which is equivalent to the
increase of the relevant assets purchase price that is attributable to the increase
in the Israeli consumer price index or, in certain circumstances, a foreign currency
exchange rate, between the date of purchase and the date of sale. The real gain is the
excess of the total capital gain over the inflationary surplus.

76

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On January 1, 2006, an amendment to
the Israeli tax regime became effective (the 2006 Tax Reform). The 2006 Tax
Reform significantly changed the tax rates applicable to income derived from shares.

According to the 2006 Tax Reform, an
individual is subject to a 20% tax rate on real capital gains derived from the sale of
shares, as long as the individual is not a substantial shareholder (generally
a shareholder with 10% or more of the right to profits, right to nominate a director and
voting rights) of the company issuing the shares. There will generally be no capital gains
tax on the inflationary surplus. The rate on the gains from publicly traded shares
applicable to gains that were realized before January 1, 2006 was 15%.

A substantial shareholder will be
subject to tax at a rate of 25% in respect of real capital gains derived from the sale of
shares issued by the company in which he or she is a substantial shareholder. The
determination of whether the individual is a substantial shareholder will be made on the
date that the securities are sold. In addition, the individual will be deemed to be a
substantial shareholder if at any time during the 12 months proceeding this date he had
been a substantial shareholder.

With respect to gains accrued before
January 1, 2003, regulations promulgated under the Israeli Income Tax Ordinance provided
for an exemption from Israeli capital gains tax on gains that were derived from the sale
of shares of an Industrial Company, as defined by the Industry Encouragement
Law. This exemption only applied to shares that were traded on specified non-Israeli
markets, including the NASDAQ National Market, provided that the sellers purchased their
shares either in the companys initial public offering or in public market
transactions thereafter. The exemption did not apply to shareholders who are in the
business of trading securities, or to shareholders that are Israeli resident companies and
subject to the Income Tax Law (Inflationary Adjustments)  1985. We believe that we
are currently an Industrial Company, as defined by the Industry Encouragement Law. There
can be no assurance that the Israeli tax authorities will not deny our status as an
Industrial Company, possibly with retroactive effect. Non-Israeli residents are exempt
from Israeli capital gains tax on any gains derived from the sale of shares in an Israeli
corporation publicly traded on the TASE and/or on a foreign stock exchange, provided such
gains do not derive from a permanent establishment of such shareholders in Israel and that
such shareholders did not acquire their shares prior to the issuers initial public
offering. However, non-Israeli corporations will not be entitled to such exemption if an
Israeli resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the revenues
or profits of such non-Israeli corporation, whether directly or indirectly.

In some instances where our
shareholders may be liable to Israeli tax on the sale of their ordinary shares, the
payment of the consideration may be subject to the withholding of Israeli tax at the
source.

77

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Pursuant to the treaty between the
Governments of the United States and Israel with respect to taxes on income, or the
U.S.-Israel tax treaty, the sale, exchange or disposition of our ordinary shares by a
person who qualifies as a resident of the United States under the treaty and who is
entitled to claim the benefits afforded to him by the treaty, will generally not be
subject to Israeli capital gains tax. This exemption shall not apply to a person who held,
directly or indirectly, shares representing 10% or more of the voting power in our company
during any part of the 12-month period preceding the sale, exchange or disposition,
subject to certain conditions. A sale, exchange or disposition of our shares by a U.S.
resident qualified under the treaty, who held, directly or indirectly, shares representing
10% or more of the voting power in our company at any time during the preceding 12-month
period would be subject to Israeli tax, to the extent applicable; however, under the
treaty, this U.S. resident would be permitted to claim a credit for these taxes against
the U.S. income tax with respect to the sale, exchange or disposition, subject to the
limitations in U.S. laws applicable to foreign tax credits.

|C. | Taxation
of Dividends
|-- | ---------------------

Non-residents of Israel are subject
to income tax on income accrued or derived from sources in Israel. These sources of income
include passive income such as dividends, royalties and interest, as well as non-passive
income from services rendered in Israel. On distributions of dividends other than bonus
shares, or stock dividends, to Israeli individuals and foreign resident individuals and
corporations we would be required to withhold income tax at the rate of 20%. If the income
out of which the dividend is being paid is attributable to an Approved Enterprise under
the Law for the Encouragement of Capital Investments, 1959, the rate is 15%. A different
rate may be provided for in a treaty between Israel and the shareholders country of
residence. Under the U.S.-Israel tax treaty, if the income out of which the dividend is
being paid is not attributable to an Approved Enterprise, then income tax with respect to
shareholders that are U.S. corporations holding at least 10% of our voting power in the
twelve-month period preceding the distribution of such dividends, is required to be
withheld at the rate of 12.5%.

Foreign Exchange Regulations

Dividends (if any) paid to the
holders of our Ordinary Shares and any amounts payable upon our dissolution, liquidation
or winding up, as well as the proceeds of any sale in Israel of the Ordinary Shares to an
Israeli resident, may be paid in non-Israeli currency or, if paid in Israeli currency, may
be freely converted into dollars at the rate of exchange prevailing at the time of
conversion. Because exchange rates between the NIS and the dollar fluctuate continuously,
a U.S. shareholder will be subject to the risk of currency fluctuations between the date
when we declare NIS-denominated dividends and the date when we pay them in NIS.

|D. | Dividends
and Paying Agents
|-- | ---------------------------

Not applicable.

78

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|E. | Statements
by Experts
|-- | ---------------------

Not applicable.

|F. | Documents
on Display
|-- | --------------------

We are subject to the informational
requirements of the Securities Exchange Act of 1934 (Exchange Act), as amended, applicable
to foreign private issuers and fulfill the obligation with respect to such requirements by
filing reports with the Securities and Exchange Commission. You may read and copy any
document we file with the Securities and Exchange Commission without charge at the
Securities and Exchange Commissions public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such material may be obtained by mail from the Public
Reference Branch of the Securities and Exchange Commission at such address, at prescribed
rates. Please call the Securities and Exchange Commission at l-800-SEC-0330 for further
information on the public reference room.

As a foreign private issuer, we are
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 short-swing profit recovery provisions contained in Section
16 of the Exchange Act. In addition, we are not required under the Exchange Act to file
periodic reports and financial statements with the Securities and Exchange Commission as
frequently or as promptly as United States companies whose securities are registered under
the Exchange Act. A copy of each report submitted in accordance with applicable United
States law is available for public review at our principal executive offices.

|G. | Subsidiary
Information
|-- | ----------------------

Not applicable.

|ITEM 11. |  | Quantitative
and Qualitative Disclosures About Market Risk
|-------- |  | ----------------------------------------------------------

Market risk represents the risk of
changes in the value of a financial instrument caused by fluctuations in interest rates,
equity prices and foreign currency exchange rates.

# Interest Rate Risk

We are exposed to interest rate
volatility primarily relating to interest rate changes applicable to our withdrawals under
our credit lines. Our credit lines bear interest at rates, which vary with changes in
LIBOR. We do not speculate on the future direction of such interest rates. On March 2004,
the Company reached an agreement with its principal bank lenders for the repayment of
$6.55 million and the deferral of repayment of long-term loans totaling $1.5 million until
the years 2005, 2006 and 2007. As of December 31, 2008 and 2007, there were no current
maturities of long  term loans.

79

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The weighted average interest rates
on short-term bank credit (linked to the U.S. dollar) as at December 31, 2007, 2006 and
2005 are 7.45%%, 6.9% and 5.4%, respectively.

# Equity Price Risk

As of December 31, 2008, we did not
have any marketable securities that were recorded at a fair value; hence there was no
exposure to equity price risk.

# Foreign Currency
Exchange Risk

As of December 31, 2008, we had cash
and cash equivalents in New Israeli Shekels (NIS) or in funds linked thereto in the amount
of $1,461,000(out of $4,249,000 in cash and cash equivalents that we had in total). Market
risk is estimated as the potential decrease in fair value resulting from a hypothetical
10% increase in the year-end dollar exchange rate. Assuming such increase in the dollar
exchange rate, the fair value of our cash and cash equivalents would decrease by
$133,000. As of December 31, 2008, we had accounts receivable in New Israeli
Shekels (NIS) or in funds linked thereto in the amount of $74,000. Market risk is
estimated as the potential decrease in fair value resulting from a hypothetical 10%
increase in the year-end dollar exchange rate. Assuming such increase in the dollar
exchange rate, the fair value of our accounts receivable would decrease by $6,700. As of
December 31, 2008, we had other receivables in New Israeli Shekels (NIS) or in funds
linked thereto in the amount of $140,000. Market risk is estimated as the potential
decrease in fair value resulting from a hypothetical 10% increase in the year-end dollar
exchange rate. Assuming such increase in the dollar exchange rate, the fair value of our
accounts receivable would decrease by $12,700. As of December 31, 2008, we had
accounts payable in New Israeli Shekels (NIS) or in funds linked thereto in the amount of
$1,633,000. Market risk is estimated as the potential increase in fair value resulting
from a hypothetical 10% decrease in the year-end dollar exchange rate. Assuming such a
decrease in the Dollar exchange rate, the fair value of our accounts payable would
increase by $148,000. As of December 31, 2008, we had other payable in New Israeli Shekels
(NIS) or in funds linked thereto in the amount of $1,377,000. Market risk is estimated as
the potential increase in fair value resulting from a hypothetical 10% decrease in the
year-end dollar exchange rate. Assuming such a decrease in the dollar exchange rate, the
fair value of our accounts payable would increase by $125,000. As of December 31, 2008, we
had long-term payable in New Israeli Shekels (NIS) or in funds linked thereto in the
amount of $77,000. Market risk is estimated as the potential increase in fair value
resulting from a hypothetical 10% decrease in the year-end dollar exchange rate. Assuming
such a decrease in the dollar exchange rate, the fair value of our accounts payable would
increase by $7,000.

As of December 31, 2008, we had cash
and cash equivalents in Singapore dollars or SGD or in funds linked thereto in the
aggregate amount of $143,000. Market risk is estimated as the potential decrease in fair
value resulting from a hypothetical 10% increase in the year-end dollar/SGD exchange rate.
Assuming such an increase in the dollar/SGD exchange rate, the fair value of our SGD
accounts receivable would decrease by $13,000. As of December 31, 2008 we had accounts
payable in SGD or in funds linked thereto in the amount of $14,000. Market risk is
estimated as the potential decrease in fair value resulting from a hypothetical 10%
increase in the year-end dollar/SGD exchange rate. Assuming such an increase in the
dollar/SGD exchange rate, the results of operations of the Company would not have any
material effect.

80

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As of December 31, 2008 we had other
receivable and other payable in SGD or in funds linked thereto in the aggregate same
amount of $11,000. Market risk is estimated as the potential decrease in fair value
resulting from a hypothetical 10% increase in the year-end dollar/SGD exchange rate.
Assuming such an increase in the dollar/SGD exchange rate, the results of operations of
the Company would not have any material effect.

As of December 31, 2008, we had cash
and cash equivalents in Euro or in funds linked thereto in the aggregate amount of
$381,000. Market risk is estimated as the potential increase in fair value resulting from
a hypothetical 10% decrease in the year-end dollar/Euro exchange rate. Assuming such a
decrease in the dollar/Euro exchange rate, the fair value of our other payables in Euro
would increase by $35,000. As of December 31, 2008, we had accounts receivable in Euro or
in funds linked thereto in the aggregate amount of $450,000. Market risk is estimated as
the potential decrease in fair value resulting from a hypothetical 10% increase in the
year-end dollar/ Euro exchange rate. Assuming such an increase in the dollar/Euro exchange
rate, the fair value of our Euro accounts receivable would decrease by $41,000. As of
December 31, 2008, we had account payables in Euro or in funds linked thereto in the
aggregate amount of $31,000. Market risk is estimated as the potential increase in fair
value resulting from a hypothetical 10% decrease in the year-end dollar/Euro exchange
rate. Assuming such a decrease in the dollar/Euro exchange rate, the fair value of our
other payables in Euro would increase by $2,800.

|ITEM 12. |  | Description of Securities Other Than Equity Securities
|-------- |  | ------------------------------------------------------

Not applicable.

# PART II

|ITEM 13. |  | Defaults, Dividend Arrearages And Delinquencies
|-------- |  | -----------------------------------------------

Not applicable.

81

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

Not applicable.

|ITEM 15. |  | Controls and Procedures
|-------- |  | -----------------------

Not applicable.

|ITEM 15T. |  | Controls and Procedures
|--------- |  | -----------------------

Disclosure Controls and
Procedures

We maintain disclosure controls and
procedures that are designed to ensure that information required to be disclosed in our
Exchange Act reports 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 our chief executive officer and
chief financial officer to allow timely decisions to be made regarding required
disclosure. Our management, including our chief executive officer and chief financial
officer, conducted an evaluation of our disclosure controls and procedures, as defined
under Exchange Act Rule 13a-15(e), as of the end of the period covered by this Annual
Report on Form 20-F. Based upon that evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our disclosure controls and
procedures were effective.

Managements Annual
Report on Internal Control over Financial Reporting

Our management, including our chief
executive officer and chief financial officer, is responsible for establishing and
maintaining adequate internal control over financial reporting, as defined under Exchange
Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a
process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance
with International Financial Reporting Standards (IFRS). Internal control over financial
reporting includes those policies and procedures that: (1) pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets, (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use of disposition of the companys assets
that could have a material effect on the financial statements.

82

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Our management assessed the
effectiveness of our internal control over financial reporting as of the end of the period
covered by this annual report. In making this assessment, it used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Their assessment included an evaluation of the design of our
internal control over financial reporting and testing of the operational effectiveness of
our internal control over financial reporting. Based on that assessment, our management
concluded that as of December 31, 2008 the Companys internal control over financial
reporting was effective.

Firm Report of the
Registered Public Accounting Firm

This annual report does not include
an attestation report of our independent registered public accounting firm regarding
internal control over financial report. Managements report was not subject to
attestation by our independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit us to provide only
managements report in this annual report.

|ITEM 16. |  | Reserved
|-------- |  | --------

|ITEM 16A. |  | Audit Committee Financial Expert
|--------- |  | --------------------------------

Our board of directors has determined
that Orit Stav is our audit committee financial expert.

|ITEM 16B. |  | Code of Ethics
|--------- |  | --------------

On May 13, 2004, our company adopted
a code of ethics, which applies to all of our employees, officers and directors, including
our chief executive officer, our chief financial officer and our principal accounting
officer or controller or other persons performing similar functions.

Copies of our code of ethics are
available free of charge at our executive offices upon request.

|ITEM 16C. |  | Principal Accountant Fees and Services
|--------- |  | --------------------------------------

The following table presents fees
for professional audit services rendered by Somekh Chaikin, a member of KPMG
International (Independent Registered Public Accounting Firm) for the audit of the Companys
consolidated annual financial statements for the years ended December 31, 2008 and 2007,
and for other services rendered.

83

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|                      | 2008 | 2007
|--------------------- | ---- | ----
|
|
|
|
|Audit Fees(1)         |      |     
|Audit-Related Fees(2) |      |     
|Tax Fees(3)           |      |     
|All Other Fees(4)     |      |     

|(1) | Audit
fees consist of fees for professional services rendered for the audit of
               the Companys Consolidated Financial Statements and review of
financial                statements and services normally provided by the independent
auditor in                connection with statutory and regulatory filings or
engagements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Audit-related
fees are fees principally for assurance and related services that                are not
reported under Audit Fees.
|--- | ---------------------------------------------------------------------------------------------------------------------------------

|(3) | Tax
fees consist of tax compliance fees for the preparation of original and
               amended tax returns, claims for refunds and tax advice.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In
2007-2008: Fees regarding the rendering of advisory services with respect to
               section 404 of the Sarbanes-Oxley Act.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

Pre-approval Policies and
procedures

The audit committee approves all
audit, audit-related services, tax services and other services provided by KPMG Somekh
Chaikin. Any services provided by KPMG Somekh Chaikin that are not specially included
within the scope of the audit must be pre-approved by our audit committee prior to any
engagement.

|ITEM 16D. |  | Exemptions from the Listing and Standards of Audit Committees
|--------- |  | -------------------------------------------------------------

Not applicable.

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

For information relating to the
purchase of our securities by Chun LP see Item 7  Major Shareholders and
Related Party Transactions  B. Related Party Transactions.

|Item 16F. |  | Change in Registrants Certifying Accountant
|--------- |  | --------------------------------------------

Not applicable.

84

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|Item 16G. |  | Corporate Governance
|--------- |  | --------------------

As a foreign private issuer we are
entitled to follow our home country practice in lieu of compliance with the Nasdaq rule
that requires adoption of a formal written charter or board resolution addressing the
nominations process. Under the Companies Law, the nominations process is conducted by the
full board of directors, and there is no requirement to adopt a formal written charter or
board resolution addressing a companys nomination process.

As a foreign private issuer we are
entitled to follow our home country practice in lieu of compliance with the Nasdaq rule
that requires that the compensation of the chief executive officer and all other executive
officers of the company be determined, or recommended to the board for determination,
either by a majority of the independent directors, or by a compensation committee
comprised solely of independent directors. Under the Companies Law, the compensation of
such officers is determined by the full board of directors, and there is no requirement
for a recommendation or determination by independent directors or a compensation
committee. If the chief executive officer or any other executive officer is also a
director, then the Companies Law requires that the terms of compensation of the officer
must be approved by the audit committee, board of directors and shareholders of a company
and that the officer may not be present when the audit committee or board of directors
discusses or acts upon the terms of his or her compensation.

As a foreign private issuer we are
entitled to follow our home country practice in lieu of compliance with the Nasdaq rule
that requires disclosure of the compensation of our directors and members of our
administrative, supervisory or management bodies. Since under the Companies Law such
disclosure is not required on an individual basis, the compensation of our executive
officers is provided on an aggregate basis.

# PART III

|ITEM 17 |  | Financial Statements
|------- |  | --------------------

The Financial Statements required by
this item are found at the end of this Annual Report, beginning on page F-1.

|ITEM 18 |  | Financial Statements
|------- |  | --------------------

See Item 17.

85

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|ITEM 19 |  | EXHIBITS
|------- |  | --------

The exhibits filed with or
incorporated into this annual report are listed on the index of exhibits below.

|Exhibit No. | Description
|----------- | -----------

|1.1* | Memorandum
of Association of Registrant
|---- | ---------------------------------------

|1.2* | Form
of Articles of Association
|---- | -------------------------------

|4.1** | Management
Services Agreement, dated March 18, 2002, between the Registrant and Elisra
                   Electronic System Ltd. (an English summary accompanied by Hebrew
original)
|----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.2*** | Management
Services Agreement, dated April 6, 2003, between the Registrant and Elisra
                   Electronic System Ltd. (an English summary accompanied by Hebrew
original)
|------ | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.3 | Lease
Agreement, dated September 14, 1999, as amended, between BVR Technologies Ltd.
                   and Minrav Holdings Ltd. (an English summary accompanied by Hebrew
original)
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.4 | Lease
Agreement, dated August 29, 1999, between the Registrant and Electra Real Estate Ltd.(an
English summary accompanied by Hebrew original)
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------

|4.5**** | Share
Purchase Agreement, dated March 1, 2004 between the Registrant and the
                   purchasers identified therein
|------- | -----------------------------------------------------------------------------------------------------------------------------

|4.6**** | Cooperation
Agreement, dated August 11, 2005, between the Registrant and Israel Aircraft Industries
on behalf of MLM. As this addendum is written in Hebrew, a translation of the principal
terms is attached hereto.
|------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|4.7**** | Share
Purchase Agreement, dated March 5, 2006 between the Registrant and Nir Dor on
                   behalf of H.S.N General Managers Holdings L.P., an Israeli Limited
Partnership.
|------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|8 | Subsidiaries
of the Registrant
|-- | ------------------------------

|10.1 | Consent
of Independent Registered Public Accounting firm.
|---- | ---------------------------------------------------------

|12.1 | Certification
by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley
                   Act of 2002
|---- | ---------------------------------------------------------------------------------------------------------------------

|12.2 | Certification
by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley
                   Act of 2002
|---- | ---------------------------------------------------------------------------------------------------------------------

|13.1 | Certification
by Chief Executive Officer pursuant to 18 U.S.C., Section 1350, as
                   adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

86

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|Exhibit No. | Description
|----------- | -----------

|13.2 | Certification
by Chief Financial Officer pursuant to 18 U.S.C., Section 1350, as
                   adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | Incorporated
by reference to the annual report on Form 20-F for the year ended December 31, 2000.
|- | -------------------------------------------------------------------------------------------------

|* | Incorporated
by reference to the Registration Statement on Form 20-F (Commission File No. 0-29884).
|- | ---------------------------------------------------------------------------------------------------

|** | Incorporated
by reference to the annual report on Form 20-F for the year ended December 31, 2001.
|-- | -------------------------------------------------------------------------------------------------

|*** | Incorporated
by reference to the annual report on Form 20-F for the year ended December 31, 2002.
|--- | -------------------------------------------------------------------------------------------------

|**** | Incorporated
by reference to the annual report on Form 20-F for the year ended December 31, 2000.
|---- | -------------------------------------------------------------------------------------------------

87

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SIGNATURE

The registrant hereby certifies that
it meets all of the requirements for filing on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.

| |  | B.V.R. SYSTEMS (1998) LTD.By: /s/ Ilan Gillies 
Ilan GilliesChief Executive Officer
| |  | -------------------------------------------------------------------------------------------------

| |  | By: /s/ Reuven Shahar  
Reuven Shahar  Chief Financial Officer
| |  | ----------------------------------------------------------------------------

Date: June 4, 2009

88

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# B.V.R. Systems (1998) Ltd. and Subsidiary

Financial StatementsAs
of and for the Year Ended December 31, 2008



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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Consolidated Financial Statements as of December 31, 2008
|---------------------------------------------------------

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# Contents

Page

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|Report of Independent Registered Public Accounting Firm                                                 | F - 2
|                                                                                                       
|Consolidated Balance Sheets as of December 31, 2008 and 2007                                            | F - 3
|                                                                                                       
|Consolidated Statements of Operations for the years ended December 31, 2008 and 2007                    | F - 5
|                                                                                                       
|Consolidated Statement of Recognized Income and Expense for the years  ended December 31, 2008 and 2007 | F - 6
|                                                                                                       
|Consolidated Statements of Cash Flows for the years ended December 31, 2008 and 2007                    | F - 7
|                                                                                                       
|Notes to Consolidated Financial Statements                                                              | F - 9



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[Letterhead of KPMG Somekh Chaikin]

# Report of Independent
Registered Public Accounting FirmTo the Shareholders of B.V.R. Systems (1998) Ltd.

We have audited the accompanying
consolidated balance sheets of B.V.R. Systems (1998) Ltd. and its subsidiary (the Company)
as of December 31, 2008 and 2007, and the related consolidated statements of operations,
of recognized income and expense and cash flows for each of the years in the two-year
period ended December 31, 2008. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. 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 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
financial position of the Company as of December 31, 2008 and 2007, and the results of its
operations, recognized income and expenses and its cash flows for the years then
ended, in conformity with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board (IASB).

The Companys annual
consolidated financial statements for 2007 were previously prepared in conformity with
Israeli generally accepted accounting principles. As more fully described in Note 2V to
the consolidated financial statements, the Company elected in 2008, to change the basis of
accounting used in preparing its financial statements for it to be in conformity with IFRS
as issued by the IASB. Consequently, the Companys annual prior year financial
statements for 2007, referred to above, are now being presented in accordance with IFRS as
issued by the IASB.

/s/ Somekh ChaikinSomekh Chaikin Certified Public
Accountants (Isr.) Member Firm of KPMG International

Tel Aviv, Israel

June 4, 2009

F - 2

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Consolidated Balance Sheets as of December 31
|---------------------------------------------

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|                              |  | 2008 | 2007
|----------------------------- |  | ---- | ----
|
|
|
|
|Assets                        |  |      |     
|                              |  |     
|Current assets                |  |     
|Cash and cash equivalents     |  |      |     
|Restricted bank deposits      |  |      |     
|Trade receivables             |  |      |     
|Other receivables             |  |      |     
|Inventories                   |  |      |     
|                              |  |      |     
|                              |  |     
|Total current assets          |  |      |     
|                              |  |      |     
|                              |  |     
|Other non-current assets      |  |      |     
|Property, plant and equipment |  |      |     
|Intangible assets             |  |      |     
|                              |  |     
|                              |  |     
|                              |  |     
|                              |  |      |     
|Total assets                  |  |      |     
|                              |  |      |     

|                                              |                                                |                                                
|--------------------------------------------- | ---------------------------------------------- | -----------------------------------------------
|
|
|
|
|__________________________________Aviv Tzidon | __________________________________Ilan Gillies | __________________________________Reuven Shahar
|Chairman of the Board of Directors            | Chief Executive Officer                        | Chief Financial Officer                        

Approval date of the financial
statements:  June 4, 2009

F - 3

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Consolidated Balance Sheets as of December 31
|---------------------------------------------

---

|                                                |  | 2008 | 2007
|----------------------------------------------- |  | ---- | ----
|
|
|
|
|Liabilities and Shareholders' Equity            |  |      |     
|                                                |  |     
|Current liabilities                             |  |     
|Bank overdraft                                  |  |      |     
|Short-term loans from bank and others           |  |      |     
|Trade payables                                  |  |      |     
|Deferred revenue                                |  |      |     
|Provisions                                      |  |      |     
|Other payables                                  |  |      |     
|                                                |  |      |     
|                                                |  |     
|Total current liabilities                       |  |      |     
|                                                |  |      |     
|                                                |  |     
|Post employment long-term benefits              |  |      |     
|                                                |  |      |     
|                                                |  |     
|Total non-current liabilities                   |  |      |     
|                                                |  |      |     
|                                                |  |     
|Total liabilities                               |  |      |     
|                                                |  |      |     
|                                                |  |     
|Shareholders' equity                            |  |      |     
|Share capital:                                  |  |     
|Ordinary shares, NIS 1.00 par value             |  |     
|400,000,000 shares authorized,                  |  |     
|116, 970,535 and 116, 860,535 shares issued and |  |     
|outstanding as of December 31, 2008 and 2007    |  |      |     
|Share premium                                   |  |      |     
|Accumulated deficit                             |  |      |     
|                                                |  |      |     
|                                                |  |     
|Total shareholders' equity                      |  |      |     
|                                                |  |      |     
|                                                |  |     
|Total liabilities and shareholders' equity      |  |      |     
|                                                |  |      |     

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

F - 4

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Consolidated Statements of Operations for the Year Ended December 31
|--------------------------------------------------------------------

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|                                                |  | 2008 | 2007
|----------------------------------------------- |  | ---- | ----
|
|
|
|
|Revenues:                                       |  |      |     
|Sales                                           |  |      |     
|Royalties, commissions and others               |  |      |     
|                                                |  |      |     
|Total revenues                                  |  |      |     
|                                                |  |      |     
|Cost of revenues                                |  |      |     
|Inventory write-off                             |  |      |     
|                                                |  |      |     
|Total cost of revenues                          |  |      |     
|                                                |  |      |     
|                                                |  |     
|Gross profit                                    |  |      |     
|                                                |  |      |     
|                                                |  |     
|Operating expenses:                             |  |     
|Research and development                        |  |      |     
|Selling and marketing                           |  |      |     
|General and administrative                      |  |      |     
|                                                |  |      |     
|Total operating expenses                        |  |      |     
|                                                |  |      |     
|Operating profit (loss)                         |  |      |     
|                                                |  |      |     
|Financial income                                |  |      |     
|Financial expenses                              |  |      |     
|                                                |  |      |     
|Financial expenses, net                         |  |      |     
|                                                |  |      |     
|Profit (loss) before taxes on income            |  |      |     
|Income tax expense                              |  |      |     
|                                                |  |      |     
|Net profit (loss) for the year                  |  |      |     
|                                                |  |      |     
|                                                |  |     
|Earnings (loss) per share                       |  |     
|Basic earnings (loss) per share                 |  |      |     
|                                                |  |      |     
|Diluted earnings (loss) per share               |  |      |     
|                                                |  |      |     
|Weighted-average number of ordinary shares      |  |     
|of nominal NIS 1.00 par value outstanding       |  |     
|(in thousands) used in calculation of the basic |  |     
|earnings (loss) per share                       |  |      |     
|                                                |  |      |     
|Weighted-average number of ordinary shares      |  |     
|of nominal NIS 1.00 par value outstanding       |  |     
|(in thousands) used in calculation of diluted   |  |     
|earning (loss) per share                        |  |      |     
|                                                |  |      |     

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

F - 5

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Consolidated Statements of Recognized Income and Expense for the Year Ended December 31
|---------------------------------------------------------------------------------------

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|                                                        |  | 2008 | 2007
|------------------------------------------------------- |  | ---- | ----
|
|
|
|
|Defined employees benefit plan actuarial gains (losses) |  |      |     
|Profit (loss) for the year                              |  |      |     
|                                                        |  |      |     
|                                                        |  |     
|Total recognized income and expense for the period      |  |      |     
|                                                        |  |      |     

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

F - 6

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Consolidated Statements of Cash Flows
|-------------------------------------

---

|                                                            | Year ended
December 31
2008 | Year ended
December 31
2007
|----------------------------------------------------------- | --------------------------- | ---------------------------
|
|
|
|
|Cash flows from operating activities                        |                             |                            
|Net profit (loss) for the period                            |                             |                            
|                                                            |                             |                            
|Adjustment to reconcile net profit (loss) to funds          |                             |                            
|generated from operations:                                  |                             |                            
|Depreciation and amortization                               |                             |                            
|Stock based compensation                                    |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|Change in trade receivables                                 |                             |                            
|Change in other receivables                                 |                             |                            
|Change in deferred revenue                                  |                             |                            
|Change in Inventories                                       |                             |                            
|Change in trade payables                                    |                             |                            
|Change in other payables (short-term and long-term)         |                             |                            
|Change in provisions                                        |                             |                            
|Change in post employment long-term benefits                |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|Net cash provided by (used in) operating activities         |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|Cash flows from investing activities                        |                             |                            
|Purchases of property, plant and equipment                  |                             |                            
|Purchases of Intangible assets                              |                             |                            
|Interest received                                           |                             |                            
|Increase in restricted bank deposits                        |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|Net cash used in investing activities                       |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|Cash flows from financing activities                        |                             |                            
|                                                            |                             |                            
|Bank overdraft                                              |                             |                            
|Receipt (repayment) of short-term loans from bank           |                             |                            
|Repayment of long-term loans from banks                     |                             |                            
|Issuance of shares upon exercise of options                 |                             |                            
|                                                            |                             |                            
|Net cash provided by (used in) financing activities         |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|Net increase (decrease) in cash and cash equivalents        |                             |                            
|Cash and cash equivalents as at the beginning of the period |                             |                            
|Effect of exchange rate fluctuations on cash and            |                             |                            
|cash equivalents                                            |                             |                            
|                                                            |                             |                            
|                                                            |                             |                            
|Cash and cash equivalents as at the end of the period       |                             |                            
|                                                            |                             |                            

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

F - 7

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

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Note 1  General

| | A. | B.V.R.
Systems (1998) Ltd. (Company) is an Israeli resident company
          incorporated in Israel. The address of the Companys registered office is
          16 Hamelacha St., Afek Industrial Park, Rosh HaAyin. The Company was
          formed on January 6, 1998 in order to receive all of the assets and liabilities
          of the defense-related business of B.V.R. Technologies Limited (BVR
          Tech), a company formed in 1986, which were spun off to the Company on
          October 23, 1998 in exchange for the Companys shares issued to the then
          shareholders of BVR Tech. In June 1998, the Company formed a subsidiary in
          Singapore, BVR-S Pacific PTE, which operates in Singapore. The Company is
          engaged in developing, manufacturing and marketing advanced training and
          computer-based simulation systems for military applications.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | During
the year ended December 31, 2008, the Company had positive cash flows           from
operations of $9.6 million, as compared to negative cash flows of $513           thousand
for the year ended December 31, 2007. The Companys revenues           during 2008
totaled $31.6 million, compared to $13.1 million during 2007.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the requirements of certain revenue contracts, the Company deposits funds
(including the insurance rights attached thereto) with financial institutions that have
issued guarantees on its behalf in favor of its customers. At December 31, 2008, there
are $9.0 million in current and non-current restricted bank deposits (as of December 31,
2007  $3.5 million current and non-current restricted bank deposits). The Companys
growth is expected to involve additional guarantees provided on the Companys behalf
for new and existing projects with customers, and this could require additional liquidity
resources. Based on current forecasts, management believes that the Company has
sufficient liquidity, based on its current position and its forecasted revenues, to
finance its operations for the next twelve months. In addition, subsequent to the balance
sheet date, the Company signed an investment agreement in the amount of $3 million, for
details refer to Note 23.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Note 2  Significant Accounting
Policies

| | The
consolidated financial statements have been prepared in accordance with International
Financial Reporting Standards (IFRSs) and its interpretations adopted by the
International Accounting Standards Board (IASB) for the first year. The consolidated
financial statements were authorized for issue by the Board of Directors on June 4, 2009.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Financial
statements in US dollars
| | -- | ----------------------------------

| | The
currency of the primary economic environment in which the operations of the Company and
its subsidiary are conducted is the US dollar (dollar or $). The
majority of the Companys sales are transacted outside Israel in dollars, and a
substantial portion of the Companys costs are incurred in dollars. Accordingly, the
Company has determined that the dollar is the currency of its primary economic
environment and thus its functional currency.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 8

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant Accounting
Policies (contd)

| | A. | Financial
statements in US dollars (contd)
| | -- | -------------------------------------------

| | The
Companys transactions and balances denominated in dollars are presented at their
original amounts. Transactions denominated in currencies other than dollars are
translated into dollars. Monetary assets and liabilities denominated in foreign
currencies at the reporting date are remeasured into to the functional currency at the
exchange rate at that date. Non-monetary assets and liabilities denominated in foreign
currencies that are measured at fair value are remeasured into the functional currency at
the exchange rate at the date that the fair value was determined. All foreign currency
transaction gains and losses are reflected in the statements of operations as financial
income or expenses, as appropriate.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Basis
of consolidation
| | -- | ----------------------

| | The
consolidated financial statements include the accounts of the Company and its wholly
owned subsidiary. All intercompany transactions and balances were eliminated in
consolidation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Use
of estimates and judgments
| | -- | ------------------------------

| | The
preparation of financial statements in conformity with IFRSs requires management to make
judgments, estimates and assumptions that affect the application of accounting policies
and the reported amounts of assets, liabilities, income and expenses. Actual results may
differ from these estimates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
preparation of accounting estimates used in the preparation of the Companys
financial statements requires management to make assumptions regarding circumstances and
events that involve considerable uncertainty. Management of the Company prepares the
estimates on the basis of past experience, various facts, external circumstances, and
reasonable assumptions according to the pertinent circumstances of each estimate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Estimates
and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting
estimates are recognized in the period in which the estimates are revised and in any
future periods affected.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Presented
hereunder is information about critical estimates, made while implementing Company
accounting policies and which have a most significant effect on the financial statements:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revenue
recognition- The Company examines on every balance sheet date whether there have been any
events or changes in circumstances which would influence on the stage of completion of
the work performed and/or provision for profit or loss from long-term contracts. The
effect of such changes in estimates is recognized in the statement of operations at the
time of their identification.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Share
based payments  Options granted to employees are measured using the Black-Sholes
model. The expected life used in the model has been adjusted, based on managements
best estimate, for the effects of non-transferability, exercise restrictions and
behavioral considerations. The amount recognized as an expense is adjusted to reflect the
actual number of share options that vest. See also Note 16.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Actuarial
calculation of defined employees benefit plan  At each reporting date, the Company
examines whether there have been any event or change in circumstances which could affect
actuarial calculations, such as future salary increases and employee churn rate. The
effect of such changes in estimates is recognized as actuarial gains/losses in equity.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant Accounting
Policies (contd)

| | D. | Cash,
cash equivalents and restricted bank deposits
| | -- | ---------------------------------------------------

| | The
Company considers all highly liquid investments with a maturity of three months or less
from date of purchase, to be cash equivalents.
| | ------------------------------------------------------------------------------------------------------------------------------------------

| | Restricted
bank deposits are comprised of cash deposited in banks in respect of bank guarantees
granted to the Companys customers as partial collateral for the continued
performance of work and advances received from the customers. The release of these
deposits is based on the progress of the work and is subject to customer approval. The
Company recorded liens on these deposits in favor of the banks that granted the
guarantees. The restricted deposits are linked to the dollar and bear weighted-average
annual interest rate of 1.1%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Inventories
| | -- | -----------

| | Inventories
are measured at the lower of cost and net realizable value. The cost of includes
expenditure incurred in acquiring the inventories, production or conversion costs and
other costs incurred in bringing them to their existing location and condition.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Net
realizable value is the estimated selling price in the ordinary course of business, less
the estimated costs of completion and selling expenses.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | The
inventory is comprised of items for which the sales cycle is lengthy. At December 31,
2008, there were several outstanding offers for certain inventory, the outcome of which
is still uncertain. The Companys estimate of the recoverability of the inventory
takes into consideration the successful outcome of these or future prospective offers.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | Trade
receivables
| | -- | -----------------

| | Open
accounts include amounts billed to customers relating to transactions arising in the
ordinary course of business. Customers of the Company in the context of long-term
contracts are billed in accordance with milestones determined in the agreements. In
respect of the majority of the contracts, advances are paid upon the signing of the
contract.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | Allowance
for doubtful accounts
| | -- | -------------------------------

| | The
financial statements include an allowance which management believes adequately reflects
the loss inherent in receivables for which collection is in doubt. In determining the
adequacy of the allowance, management based its estimate on information at hand about
specific debtors, including their financial situation, aging of the receivable and
evaluation of the security received from them or their guarantors, if any.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant Accounting
Policies (contd)

| | H. | Property,
plant and equipment
| | -- | -----------------------------

| | Recognition
and measurement
| | ---------------------------

| | Property,
plant and equipment are measured at cost less accumulated depreciation and accumulated
impairment losses.
| | -------------------------------------------------------------------------------------------------------------------

| | Cost
includes expenditure that is directly attributable to the acquisition of the asset. When
parts of an item of property, plant and equipment have different useful lives, they are
accounted for as separate items (major components) of property, plant and equipment.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Gains
and losses on disposal of property, plant and equipment are determined by comparing the
proceeds from disposal with the carrying amount of property, plant and equipment, and are
recognized net within other income in the statement of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Depreciation
| | ------------

| | Depreciation
is recognized in the statement of operations on a straight-line basis over the estimated
useful lives of each part of an item of property, plant and equipment. Land is not
depreciated.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
estimated useful lives for the current and comparative periods are as follows:
| | ----------------------------------------------------------------------------------

| |                                    | %                                                                                    
| | ---------------------------------- | -------------------------------------------------------------------------------------
|
|
|
|
| | Computers and electronic equipment | 20 - 33.3                                                                            
| | Manufacturing equipment            | 10 - 15                                                                              
| | Office furniture and equipment     | 6 - 15                                                                               
| | Leasehold improvements             | The shorter of the estimated useful lives and the lease term of the related leasehold

| | Depreciation
methods, useful lives and residual values are reviewed at each reporting date.
| | -------------------------------------------------------------------------------------------

| | I. | Revenue
recognition
| | -- | -------------------

| | 1. | Construction
contracts
| | -- | ----------------------

| | a. | Contract
revenue includes the initial amount agreed in the contract plus any
               variations in contract work, claims and incentive payments to the extent
that it                is probable that they will result in revenue and can be measured
reliably. As                soon as the outcome of a construction contract can be
estimated reliably,                contract revenue and expenses are recognized in profit
or loss in proportion to                the percentage of completion of the contract.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | When
the outcome of a construction contract cannot be estimated reliably, contract revenue is
recognized only to the extent of contract costs incurred that are likely to be
recoverable. An expected loss on a contract is recognized immediately in profit or loss.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant Accounting
Policies (contd)

| | I. | Revenue
recognition (contd)
| | -- | ----------------------------

| | 1. | Construction
contracts (contd)
| | -- | -------------------------------

| | b. | The
percentage of completion is measured on the basis of cost (the ratio of the
               costs incurred to the total estimated costs). Work in progress under
long-term                contracts is stated at cost less amounts charged to cost of
revenues in the                statement of operations and associated with revenue
recognized on the basis of                the percentage-of-completion method.
Cost includes direct costs of                materials, labor, subcontractor and other
direct costs and allocated indirect                manufacturing costs.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | c. | Estimated
profit or loss from long-term contracts may change due to changes in
               estimates resulting from differences between actual performance and
original                forecasts. The effect of such changes in estimates is recognized
in the                statement of operations at the time of their identification.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | d. | The
Company provides warranties on sales of systems to certain customers for
               periods of up to 24 months. The expenses related to the warranty period
are                taken into consideration in the direct cost of the contracts, based on
               managements estimation and in accordance with the Companys
prior                experience.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Revenue
from royalties and commissions
| | -- | --------------------------------------

| | Royalties
and commission revenues resulting from the cooperation agreement with Israel Aircraft
Industries Ltd. (IAI), are recognized when the related payments are received
by IAI. The Company determines such revenues by receiving confirmation of payments
subject to royalties and commissions from IAI.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Revenue
from services
| | -- | ---------------------

| | Revenue
from services rendered is recognized in profit or loss in proportion to the stage of
completion of the transaction at the reporting date. The stage of completion is assessed
by reference to surveys of work performed.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | J. | Research
and development costs
| | -- | ------------------------------

| | Research
and development costs are charged to the statement of operations, as incurred, see Note
2Q with respect to development costs.
| | --------------------------------------------------------------------------------------------------------------------------------------

| | K. | Finance
income and expenses
| | -- | ---------------------------

| | Finance
income is comprised of interest income on cash deposits. Interest income is recognized as
it accrues in profit and loss.
| | --------------------------------------------------------------------------------------------------------------------------------

| | Finance
expenses are comprised of interest on loans and bank commission linked to bank guarantee.
| | -------------------------------------------------------------------------------------------------

| | Foreign
currency gain and losses that are recognized in profit or loss are reported on a net
basis.
| | ---------------------------------------------------------------------------------------------------

F - 12

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B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant Accounting
Policies (contd)

| | L. | Income
taxes expenses
| | -- | ---------------------

| | Income
tax expense comprises current and deferred tax. Income tax expense is recognized in
profit or loss except to the extent that it relates to items recognized directly in
equity, in which case it is recognized in equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Current
tax is the expected tax payable on the taxable income for the year, using tax rates
enacted or substantively enacted at the reporting date, and any adjustment to tax payable
in respect of previous years.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax is recognized using the balance sheet method, providing for temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes. Deferred tax is not recognized for the
following temporary differences: the initial recognition of assets or liabilities in a
transaction that is not a business combination and that affects neither accounting nor
taxable profit or loss, and differences relating to investments in subsidiary and jointly
controlled entities to the extent that it is probable that they will not reverse in the
foreseeable future. In addition, deferred tax is not recognized for taxable temporary
differences arising on the initial recognition of goodwill. Deferred tax is measured at
the tax rates that are expected to be applied to temporary differences when they reverse,
based on the laws that have been enacted or substantively enacted by the reporting date.
Deferred tax assets and liabilities are offset if there is a legally enforceable right to
offset current tax liabilities and assets, and they relate to income taxes levied by the
same tax authority on the same taxable entity, or on different tax entities, but they
intend to settle current tax liabilities and assets on a net basis or their tax assets
and liabilities will be realized simultaneously.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
deferred tax asset is recognized to the extent that it is probable that future taxable
profits will be available against which the temporary difference can be utilised.
Deferred tax assets are reviewed at each reporting date and are reduced to the extent
that it is no longer probable that the related tax benefit will be realized.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
such, the Company has not recorded a tax asset in regard to all tax loss carryforwards as
well as for other temporary differences (See Note 18F).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | M. | Impairment
in value of assets
| | -- | -----------------------------

| | 1. | Financial
assets
| | -- | ----------------

| | Financial
asset are assessed at each reporting date to determine whether there is any objective
evidence that it is impaired. A financial asset is considered to be impaired if objective
evidence indicates that one or more events have had a negative effect on the estimated
future cash flows of that asset.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | An
impairment loss in respect of a financial asset measured at amortized cost is calculated
as the difference between its carrying amount, and the present value of the estimated
future cash flows discounted at the original effective interest rate.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant Accounting
Policies (contd)

| | M. | Impairment
in value of assets (contd)
| | -- | --------------------------------------

| | 1. | Financial
assets (contd)
| | -- | -------------------------

| | Individually
significant financial assets are tested for impairment on an individual basis. The
remaining financial assets are assessed collectively in groups that share similar credit
risk characteristics. All impairment losses are recognized in profit or loss.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Non-financial
assets
| | -- | --------------------

| | At
each balance sheet date, the Company reviews the carrying amounts of non-financial
assets, other than inventories and deferred tax assets, to determine whether there is any
indication that those assets have suffered an impairment loss. If any such indication
exists, the recoverable amount of the asset is estimated in order to determine the extent
of the impairment loss (if any). Where it is not possible to estimate the recoverable
amount of an individual asset, the Company estimates the recoverable amount of the
cash-generating unit to which the asset belongs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
recoverable amount of an asset or cash-generating unit is the greater of its value in use
and its net selling price (fair value less costs to sell). In assessing value in use, the
estimated future cash flows are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of the time value of money and the
risks specific to the asset. For the purpose of impairment testing, assets are grouped
together into the smallest group of assets that generates cash inflows from continuing
use that are largely independent of the cash inflows of other assets or groups of assets
(the cash-generating unit).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
the recoverable amount of an asset (or cash-generating unit) is estimated to be less than
its carrying amount, the carrying amount of the asset (or cash-generating unit) is
reduced to its recoverable amount. An impairment loss is recognized immediately in profit
and loss.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impairment
losses recognized in prior periods are assessed at each reporting date for any
indications that the loss has decreased or no longer exists.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | Where
an impairment loss subsequently reverses, the carrying amount of the asset (or
cash-generating unit) is increased to the revised estimate of its recoverable amount, not
to exceed the carrying amount that would have been determined had no impairment loss been
recognized for the asset (or cash-generating unit) in prior years. A reversal of an
impairment loss will be recognized immediately in profit and loss.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | N. | Provisions
| | -- | ----------

| | A
provision is recognized in the balance sheet when the Company has a present legal or
constructive obligation as a result of a past event, and it is probable that an outflow
of economic benefits will be required to settle the obligation. Provisions are measured
at managements best estimate of the expenditure required to settle the obligation
at the balance sheet date.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant Accounting
Policies (contd)

| | O. | Earnings
per share
| | -- | ------------------

| | The
Company presents basic and diluted earnings per share (EPS) data for its ordinary shares.
Basic EPS is calculated by dividing the profit or loss attributable to ordinary
shareholders of the Company by the weighted average number of ordinary shares outstanding
during the period. Diluted EPS is determined by adjusting the profit or loss attributable
to ordinary shareholders and the weighted average number of ordinary shares outstanding
for the effects of all dilutive potential ordinary shares, which comprise share options
granted to employees and others.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Post-
employment benefits
| | -- | -------------------------

| | 1. | Post
employment benefits
| | -- | ------------------------

| | The
Companys liability for post employment benefits for certain employees is covered by
a defined contribution plan financed by deposits with insurance companies or with funds
managed by a trustee. Obligations for contributions to defined contribution pension plans
are recognized as an expense in profit and loss when they are due.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Actuarial
gains and losses resulting from an adjustment of the discount rate or from a difference
between actual and expected return on plan assets, are recognized directly in equity and
are presented as part of the statement of recognized income and expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Companys liability for post employment benefits for all remaining employees is
covered by a defined benefit plan.
| | ----------------------------------------------------------------------------------------------------------------------

| | 2. | Short-term
benefits
| | -- | -------------------

| | Short-term
employee benefit obligations are measured on an undiscounted basis and are expensed as
the related service is provided. A liability is recognized for the amount expected to be
paid if the Company has a present legal or constructive obligation to pay this amount as
a result of a past service provided by the employee and the obligation can be estimated.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Share
based payments
| | -- | --------------------

| | The
grant date fair value of options granted to employees is recognized as a salary expense,
with a corresponding increase in equity, over the period that the employees become
unconditionally entitled to the options. The amount recognized as an expense is adjusted
to reflect the actual number of share options that are expected to vest. The fair value
of stock options is measured using the Black-Scholes model. Measurement inputs include
share price on measurement date, exercise price of the instrument, expected volatility
(based on weighted-average historic volatility adjusted for changes expected due to
publicly available information), weighted-average expected life of the instruments (based
on historical experience and general option holder behavior), expected dividends, and the
risk-free interest rate (based on government bonds). Service and non-market performance
conditions attached to the transactions are not taken into account in determining fair
value.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant Accounting
Policies (contd)

| | Q. | Intangible
assets
| | -- | -----------------

| | 1. | Intangible
assets include computer software and capitalized development costs.           Expenditure
on research activities, undertaken with the prospect of gaining new           scientific
or technical knowledge and understanding, is recognized in profit or           loss when
incurred.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Development
activities involve a plan or design for the production of new or substantially improved
products and processes. Development expenditure is capitalized only if development costs
can be measured reliably, the product or process is technically and commercially
feasible, future economic benefits are probable, and the Company intends to and has
sufficient resources to complete development and to use or sell the asset. The
expenditure capitalized includes the cost of materials, direct labor and overhead costs
that are directly attributable to preparing the asset for its intended use. Other
development expenditure is recognized in profit or loss as incurred.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Amortization
| | -- | ------------

| | Amortization
is recognized in profit or loss on a straight-line basis over the estimated useful lives
of intangible assets, from the date that they are available for use. The estimated useful
lives for the current and comparative periods are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Computer
software | 3 years
| | ----------------- | -------

| | Capitalized development costs | 3 years
| | ----------------------------- | -------

| | Amortization
expenses for the years ended December 31, 2008 and 2007 were $158 and $132 thousand
respectively.
| | --------------------------------------------------------------------------------------------------------------

| | R. | Concentration
of credit risk
| | -- | ----------------------------

| | Credit
risk is the risk of financial loss to the Company if a customer or counterparty to a
financial instrument fails to meet its contractual obligations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| | Financial
instruments that potentially subject the Company to concentration of credit risk consist
mainly of cash and cash equivalents, restricted bank deposits and trade receivables. At
December 31, 2008 and 2007, the Company had cash and cash equivalents, and restricted
bank deposits which were deposited 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 include amounts billed to customers. Management periodically evaluates the
collectibility of these trade receivables and adjusts the allowance for doubtful accounts
to reflect the amounts estimated to be doubtful of collection.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | S. | Fair
value of financial instruments
| | -- | -----------------------------------

| | The
fair market value of the Companys financial instruments, which are cash and cash
equivalents, restricted bank deposits, loans from bank, trade receivables, other
receivables, short-term debt, trade payables and other payables approximate their
carrying value as of December 31, 2008 and 2007, due to their short-term nature.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 2 
Significant Accounting Policies (contd)

| | T. | Derivative
financial instruments
| | -- | --------------------------------

| | The
fair value of forward exchange contracts is estimated by discounting the difference
between the contractual forward price and the current forward price for the residual
maturity of the contract using a risk-free interest rate (based on government bonds).
Those quotes are tested for reasonableness by discounting estimated future cash flows
based on the terms and maturity of each contract and using market interest rates for a
similar instrument at the measurement date.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Derivatives
are recognized initially at fair value; attributable transaction costs are recognized in
operations when incurred. Subsequent to initial recognition, derivatives are measured at
fair value, and gain and losses are recognized in operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | U. | New
standards and interpretations not yet adopted
| | -- | -------------------------------------------------

| | A
number of new standards, amendments to standards and interpretations are not yet
effective for the year ended December 31, 2008, and have not been applied in preparing
these consolidated financial statements:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revised
IAS 1 Presentation of Financial Statements. The revised IAS 1 was issued in September
2007 and becomes effective for financial years beginning on or after January 1, 2009. The
Standard separates owner and non-owner changes in equity. The statement of changes in
equity will include only details of transactions with owners, with all non-owner changes
in equity presented as a single line. In addition, the Standard introduces the statement
of comprehensive income: it presents all items of income and expense recognized in
operations, together with all other items of recognized income and expense, either in one
single statement, or in two linked statements. Once implemented, the Company will present
separate statements of comprehensive income and in addition statement of changes in
equity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amendments
to IAS 32 Financial Instruments: Presentation and IAS 1 Presentation of Financial
Statements  Puttable Financial Instruments and Obligations arising on Liquidation,
were issued in February 2008 and become effective for annual periods beginning on or
after January 1, 2009. The amendment to IAS 32 requires certain puttable financial
instruments and obligations arising on liquidation to be classified as equity if certain
criteria are met. The amendment to IAS 1 requires disclosure of certain information
relating to puttable instruments classified as equity. The Company does not expect these
amendments to impact its financial statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Revised
IFRS 2 Share-Based Payment (hereinafter  the Standard) provides that vesting
conditions are conditions that determine whether the Company is receiving the services
that entitle the other party to a share-based payment, and they are restricted to service
and performance conditions. Non-vesting conditions will be reflected in the fair value of
the share-based payment on the grant date, and after the grant date the Company shall not
adjust the fair value in respect of these conditions. Furthermore, the Standard specifies
the accounting treatment of non-compliance with non-vesting conditions. The Standard
shall apply retroactively to annual periods beginning after January 1, 2009 and permits
early adoption along with disclosure.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

B.V.R.  Systems (1998) Ltd.  and Subsidiary

|Notes to the Consolidated Financial Statements
|----------------------------------------------

---

Note 2  Significant
Accounting Policies (contd)

| | U. | New
standards and interpretations not yet adopted (contd)
| | -- | ----------------------------------------------------------

| | In
the context of the Improvements to IFRSs project, in May 2008 the IASB published and
approved 35 amendments to various IFRS on a wide range of accounting issues. The
amendments are divided into two parts: (1) Amendments that result in accounting changes
for presentation, recognition or measurement purposes and (2) Terminology or editorial
amendments that are expected to have either no or only minimal effects on accounting. Most
of the amendments shall apply to periods beginning on or after January 1, 2009 and permit
early adoption, subject to the specific conditions of each amendment and subject to the
transitional provisions relating to a first-time adopter of IFRS.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | IFRS
8 Operating Segments introduces the management approach to segment reporting.
IFRS 8, which becomes mandatory for the Companys 2009 consolidated financial
statements, will require the disclosure of segment information based on the internal
reports regularly reviewed by the Companys Chief Operating Decision Maker in order
to assess each segments performance and to allocate resources to them. It is not
expected to have a material impact on the consolidated financial statements.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amendments
to IFRS 7 Improving Disclosures about Financial Instruments. The amendments requires
improving disclosures regarding fair value measurements relating to financial instruments,
specifically in relation to disclosures over the inputs used in valuations techniques and
the uncertainty associated with such valuations. In addition, the amendments require to
improve disclosures over liquidity risk. The amendments shall apply to periods beginning
on or after January 1, 2009 and permit early adoption, subject to the specific conditions
of each amendment and subject to the transitional provisions relating to a first-time
adopter of IFRS. The adoption of these amendments is adoption of these amendments will not
materially impact the financial statement amounts but might require additional disclosure.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 18

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 2 
Significant Accounting Policies (contd)

| | V. | Adoption
of International Financial Reporting Standards (IFRS)
| | -- | ----------------------------------------------------------------

| | Reconciliation
of balance sheet
| | -------------------------------

| |                                    |  | January 1, 2007 | December 31, 2007
| | ---------------------------------- |  | --------------- | -----------------
|
|
|
|
| | Assets                             |  |                 |                  
| | Cash and cash equivalents          |  |                 |                  
| | Restricted bank deposits           |  |                 |                  
| | Trade receivables                  |  |                 |                  
| | Other receivables                  |  |                 |                  
| | Inventories                        |  |                 |                  
| |                                    |  |                 |                  
| | Total current assets               |  |                 |                  
| |                                    |  |                 |                  
| |                                    |  |                
| | Other non-current assets           |  |                 |                  
| | Property, plant and equipment, net |  |                 |                  
| | Intangible assets                  |  |                 |                  
| |                                    |  |                 |                  
| | Total non-current assets           |  |                 |                  
| |                                    |  |                 |                  
| |                                    |  |                
| | Total assets                       |  |                 |                  
| |                                    |  |                 |                  
| |                                    |  |                 |                  

F - 19

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 2 
Significant Accounting Policies (contd)

| | V. | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -- | -------------------------------------------------------------------------

| | Reconciliation
of balance sheet (contd)
| | ----------------------------------------

| |                                             |  | January 1, 2007 | December 31, 2007
| | ------------------------------------------- |  | --------------- | -----------------
|
|
|
|
| | Liabilities                                 |  |                 |                  
| | Current maturities of long-term bank loans  |  |                 |                  
| | Bank overdraft                              |  |                 |                  
| | Short-term loan from bank and others        |  |                 |                  
| | Trade payables                              |  |                 |                  
| | Deferred revenue                            |  |                 |                  
| | Other payables                              |  |                 |                  
| | Income taxes payable                        |  |                 |                  
| | Provisions                                  |  |                 |                  
| |                                             |  |                 |                  
| | Total current liabilities                   |  |                 |                  
| |                                             |  |                 |                  
| |                                             |  |                
| | Long-term payables in respect of income tax |  |                 |                  
| | Post employment long-term benefits          |  |                 |                  
| |                                             |  |                 |                  
| | Total non-current liabilities               |  |                 |                  
| |                                             |  |                 |                  
| | Total liabilities                           |  |                 |                  
| |                                             |  |                 |                  
| |                                             |  |                
| | Shareholders' equity                        |  |                
| | Share capital                               |  |                 |                  
| | Share premium                               |  |                 |                  
| | Accumulated deficit                         |  |                 |                  
| |                                             |  |                 |                  
| | Total shareholders' equity                  |  |                 |                  
| |                                             |  |                 |                  
| | Total liabilities and shareholders' equity  |  |                 |                  
| |                                             |  |                 |                  

F - 20

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 2 
Significant Accounting Policies (contd)

| | V. | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -- | -------------------------------------------------------------------------

| | Adjustment
of earnings
| | ----------------------

| |                                 |  | Year ended December 31, 2007
| | ------------------------------- |  | ----------------------------
|
|
|
|
| | Revenues:                       |  |                             
| | Sales                           |  |                             
| |                                 |  |                             
| | Royalties and commissions       |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Total revenues                  |  |                             
| |                                 |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Cost of sales                   |  |                             
| |                                 |  |                             
| | Inventory write-off             |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Total cost of revenues          |  |                             
| |                                 |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Gross profit (loss)             |  |                             
| |                                 |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Operating expenses:             |  |                             
| | Research and development        |  |                             
| |                                 |  |                             
| | Selling and marketing           |  |                             
| |                                 |  |                             
| | General and administrative      |  |                             
| |                                 |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Total operating expenses        |  |                             
| |                                 |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Operating loss                  |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Financial income                |  |                             
| |                                 |  |                             
| | Financial expenses              |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Financial costs, net            |  |                             
| |                                 |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Loss before income taxes        |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Income tax expense              |  |                             
| |                                 |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Net loss for the period         |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Loss per share:                 |  |                             
| | Basic loss per share (in US$)   |  |                             
| |                                 |  |                             
| |                                 |  |                             
| | Diluted loss per share (in US$) |  |                             
| |                                 |  |                             
| |                                 |  |                             

F - 21

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 2 
Significant Accounting Policies (contd)

| | V. | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -- | -------------------------------------------------------------------------

| | Effects
that were reflect upon the adoption of new Israeli accounting standards in 2007:
| | ----------------------------------------------------------------------------------------

| | A. | In
accordance with Israeli GAAP, current and non-current provisions were
                    classified as other payables and accrued expenses according to the
nature of the                     provision. In accordance with IFRS, provisions are
presented as a separate item                     in liabilities. Therefore, upon applying
IFRS, as of January 1, 2007 and                     December 31, 2007 other payables and
accrued expenses decreased in the amount of                     $156 thousand and $84
thousand, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | In
accordance with Israeli GAAP, expenses recognized in respect of share-based
                    payment transactions were recorded against additional paid-in capital
in the                     shareholders equity. According to IFRS 1, share-based
payment granted                     prior to November 7, 2002 or vested until January 1,
2007 are not recorded as                     share-based payments under IFRS 2.
Therefore, in accordance with IFRS, and on                     the basis of the
accounting policy applied by the Company, the effect was a
                    reclassification of additional paid-in capital to accumulated
deficit.                     Accordingly, the balance of the additional paid-in capital
decreased as of                     January 1, 2007 and December 31, 2007 in the amount
of $38 thousand and $56                     thousand, with a corresponding amount to
accumulated deficit. In addition the                     operating loss increased for the
year ended December 31, 2007 in the amount of                     $220 thousand.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | In
accordance with IFRS, an asset is classified as current if it is expected to
                    be realized in, or is held for sale or consumption in, the entitys
normal                     operating cycle. The Companys operating cycle is
generally 24 months.                     Under Israeli GAAP the reclassification between
current and non-current assets                     did not consider the operating cycle
of the Company. The effect of adoption of                     IFRS as of January 1, 2007
and December 31, 2007 is a reclassification of $106                     thousand at both
dates, from non-current bank deposits to restricted bank                     deposits.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | In
accordance with Israeli GAAP, liabilities in respect of employee benefits
                    were recognized according to the full amount of the liability as at
balance                     sheet date using the shut down method without
taking into                     consideration a discount rate, future salary raises and
future termination of                     employment. As from the transition date, a net
liability is measured in respect                     of employee benefits in accordance
with IAS 19 on the basis of evaluations that                     are based, inter alia,
on actuarial assumptions.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effect of the transition to IFRS as of January 1, 2007, is a reduction in the liability
against accumulated deficit in the amount of $111 thousand as a result of the adjustment
in actuarial assumptions. In the year ended December 31, 2007, the Company recorded a $40
thousand reduction; the Company recognized a $21 thousand through equity and $19 thousand
through profit and loss.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has chosen to recognize actuarial gains and losses directly in equity in the
statement of recognized income and expense in the year in which they occur in accordance
with the alternatives provided in IAS 19. In the year ended December 31, 2007, the
Company recognized a $21 thousand through equity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 2 
Significant Accounting Policies (contd)

| | V. | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -- | -------------------------------------------------------------------------

| | Effects
that were reflect upon the adoption of new Israeli accounting standards in 2007: (contd)
| | -------------------------------------------------------------------------------------------------

| | E. | In
accordance with Israeli GAAP, current taxation liabilities were presented
                    within other liabilities. In accordance with IFRS, taxation
liabilities are                     presented as a separate item in liabilities.
Therefore, upon applying IFRS,                     taxation liabilities as of January 1,
2007, in the amount of $654 thousand, were                     reclassified from the item
of other current liabilities under current                     liabilities to the item of
current taxation liabilities under current                     liabilities.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | The
effect of the aforementioned adjustments on accumulated deficit:
| | -- | --------------------------------------------------------------------

| |                      |  | December 31
2007 | January 1
2007
| | -------------------- |  | ---------------- | --------------
|
|
|
|
| | Share based payments |  |                  |               
| | Employee benefits    |  |                  |               
| |                      |  |                  |               
| |                      |  |                 
| |                      |  |                  |               
| |                      |  |                  |               
| |                      |  |                  |               

| | Explanation
of material adjustments to the statement of cash flows for the year ended December 31,
2007:
| | --------------------------------------------------------------------------------------------------------

| | (1) | Interest
received
| | --- | -----------------

| | In
accordance with Israeli GAAP interest received were classified as operating cash flows. In
accordance with IFRS and on the basis of the accounting policy adopted by the Company,
interest received was classified as investing cash flows.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Interest
paid
| | --- | -------------

| | In
accordance with Israeli GAAP, interest paid was classified as operating cash flows. In
accordance with IFRS and on the basis of the accounting policy adopted by the Company,
interest was classified as financing cash flows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Exchange
rate differences
| | --- | -------------------------

| | In
accordance with Israeli GAAP, the effects of exchange rate fluctuations on cash flows were
presented as operating cash flows. In accordance with IFRS, the effects of exchange rate
fluctuations on cash balances were classified as a separate item.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 3  Cash and
Cash Equivalents

| |                                                         | December 31
| | ------------------------------------------------------- | -----------
|
|
|
|
| | In dollars                                              |            
| | In New Israel Shekels                                   |            
| | In other foreign currencies (Euro and Singapore Dollar) |            
| |                                                         |            
| |                                                         |            
| |                                                         |            
| |                                                         |            
| |                                                         |            

# Note 4  Restricted
Bank Deposits

| | The
Company has several restricted bank deposits bearing interest at an annual rate of
between 0.1% and 1.7%.
| | -------------------------------------------------------------------------------------------------------------

| | The
restricted deposits are with certain financial institutions that have issued guarantees
on behalf of the Company in favor of its customers.
| | -----------------------------------------------------------------------------------------------------------------------------------------------

# Note 5  Trade
Receivables

| |                                     | December 31
| | ----------------------------------- | -----------
|
|
|
|
| | Open accounts                       |            
| | Unbilled revenue                    |            
| | Receivables from IAI (see Note 17A) |            
| |                                     |            
| |                                     |            
| |                                     |            
| |                                     |            
| |                                     |            

| | * | Unbilled
revenue is comprised as follows:
| | - | -----------------------------------------

| |                                                     | December 31
| | --------------------------------------------------- | -----------
|
|
|
|
| | Accumulated amounts recognized as revenues          |            
| | Less - advances from customers and progress billing |            
| |                                                     |            
| |                                                     |            
| | Unbilled revenue                                    |            
| |                                                     |            
| |                                                     |            

F - 24

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 6  Other Receivables

| |                            | December 31
| | -------------------------- | -----------
|
|
|
|
| | Prepaid expenses           |            
| | Prepaid commissions        |            
| | Loans to employees         |            
| | Prepaid subcontractors fee |            
| | Government authorities     |            
| | Others                     |            
| |                            |            
| |                            |            
| |                            |            
| |                            |            
| |                            |            

# Note 7  Inventories

| |                | December 31
| | -------------- | -----------
|
|
|
|
| | Finished goods |            
| | Raw materials  |            
| |                |            
| |                |            
| |                |            
| |                |            
| |                |            

| | Inventories
are measured at their net realizable value, and are presented net of any inventory
write-offs.
| | ----------------------------------------------------------------------------------------------------------

# Note 8  Other
Non-Current Assets

| |                                      | December 31
| | ------------------------------------ | -----------
|
|
|
|
| | Non-current restricted bank deposits |            
| | Non-current prepaid expenses         |            
| |                                      |            
| |                                      |            
| |                                      |            
| |                                      |            
| |                                      |            

| | The
average interest rate of the non-current restricted bank deposits as of December 31, 2008
and 2007 are 1.1% and 4.2% respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 9  Property,
Plant and Equipment

| |                                 | Computers
and
electronic
equipment | Manufacturing
equipment | Office
furniture and
equipment | Leasehold
improvements | Total
| | ------------------------------- | ---------------------------------- | ----------------------- | ------------------------------ | ---------------------- | -----
|
|
|
|
| | Cost                            |                                    |                         |                                |                        |      
| | Balance as at January 1, 2007   |                                    |                         |                                | 7,104                  |      
| | Additions                       |                                    |                         |                                | 359                    |      
| | Disposals                       |                                    |                         |                                | -                      |      
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                        
| | Balance as at December 31, 2007 |                                    |                         |                                | 7,463                  |      
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                        
| | Balance as at January 1, 2008   |                                    |                         |                                | 7,463                  |      
| | Additions                       |                                    |                         |                                | 269                    |      
| | Disposals                       |                                    |                         |                                | (68                    | )    
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                        
| | Balance as at December 31, 2008 |                                    |                         |                                | 7,664                  |      
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                        
| | Depreciation                    |                                    |                        
| | Balance as at January 1, 2007   |                                    |                         |                                | 6,690                  |      
| | Depreciation for the year       |                                    |                         |                                | 283                    |      
| | Disposals                       |                                    |                         |                                | -                      |      
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                        
| | Balance as at December 31, 2007 |                                    |                         |                                | 6,973                  |      
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                        
| | Balance as at January 1, 2008   |                                    |                         |                                | 6,973                  |      
| | Depreciation for the year       |                                    |                         |                                | 294                    |      
| | Disposals                       |                                    |                         |                                | (68                    | )    
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                        
| | Balance as at December 31, 2008 |                                    |                         |                                | 7,199                  |      
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                        
| | Carrying amounts                |                                    |                        
| | As at January 1, 2007           |                                    |                         |                                | 414                    |      
| |                                 |                                    |                         |                                |                        |      
| | As at December 31, 2007         |                                    |                         |                                | 490                    |      
| |                                 |                                    |                         |                                |                        |      
| | As at December 31, 2008         |                                    |                         |                                | 465                    |      
| |                                 |                                    |                         |                                |                        |      
| |                                 |                                    |                         |                                |                        |      

| | Acquisition
of property, plant and equipment on credit
| | ------------------------------------------------------

| | During
the year ended December 31, 2008, the Company acquired property, plant and equipment in
the amount of $42 thousand which are still not paid as of December 31, 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 10 
Intangible Assets

| |                                 | Capitalized
development
cost | Computer
software | Total
| | ------------------------------- | ---------------------------- | ----------------- | -----
|
|
|
|
| | Cost                            |                              |                   |      
| | Balance as at January 1, 2007   |                              |                   |      
| | Additions                       |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                  
| | Balance as at December 31, 2007 |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                  
| | Balance as at January 1, 2008   |                              |                   |      
| | Additions                       |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                  
| | Balance as at December 31, 2008 |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                  
| | Accumulated amortization        |                              |                  
| | Balance as at January 1, 2007   |                              |                   |      
| | Amortization for the year       |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                  
| | Balance as at December 31, 2007 |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                  
| | Balance as at January 1, 2008   |                              |                   |      
| | Amortization for the year       |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                  
| | Balance as at December 31, 2008 |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                  
| | Carrying amounts                |                              |                  
| | As at January 1, 2007           |                              |                   |      
| |                                 |                              |                   |      
| | As at December 31, 2007         |                              |                   |      
| |                                 |                              |                   |      
| | As at December 31, 2008         |                              |                   |      
| |                                 |                              |                   |      
| |                                 |                              |                   |      

# Note 11 
Short-Term Loan from Bank and Others

| | As
of December 31, 2008 and 2007, a loan in the amount of $120 thousand is outstanding,
bearing no interest. The loan is payable on demand.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2007, the Company had an outstanding loan from the bank in the amount of $500
thousand bearing an interest of 7.45% for a period of one year. As at December 31, 2008
this loan was fully repaid.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 12  Trade
Payables

| |                         | December 31
| | ----------------------- | -----------
|
|
|
|
| | Open accounts           |            
| | Sub-contractor payables |            
| |                         |            
| |                         |            
| |                         |            
| |                         |            
| |                         |            

# Note 13  Deferred
Revenue

| |                                                 | December 31
| | ----------------------------------------------- | -----------
|
|
|
|
|
| | Advances from customers                         |            
| | Less - Cumulative amounts recognized as revenue |            
| |                                                 |            
| |                                                 |            
| |                                                 |            
| |                                                 |            
| |                                                 |            

# Note 14  Other
Payables

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

F - 28

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 15  Post
Employment Benefits

| | The
Company has two primary post employment benefit plans for employees:
| | ------------------------------------------------------------------------

| | For
certain employees, all of the Companys liability for post employment benefits is
covered by a defined contribution plan financed by deposits with insurance companies or
with funds managed by a trustee. Obligations for contributions to defined contribution
pension plans are recognized as an expense in profit and loss when they are due; all of
these employees are under Section 14 of the Israeli Severance Law  1963, which
limits the Companys liability for post-employment benefits to the amounts funded
with the abovementioned insurance companies or funds.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, all remaining employees are under a defined benefit plan which determines the
entitlements of their beneficiaries. An employees final benefit entitlement at
regular retirement age may be higher than the fixed benefits at the balance sheet date due
to future compensation or benefit increases. The net present value of this ultimate future
benefit entitlement for service already rendered is represented by the Defined Benefit
Obligation (DBO), which is actuarially calculated with consideration for future
compensation increases.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
recognized expense in the consolidated statements of operations related to the post
employment plan commitments is referred to as net periodic benefit cost (NPBC) and
consists of several separately calculated and presented components. NPBC is regularly
comprised of the service cost, which is the actuarial net present value of the part of the
DBO for the service rendered in the respective fiscal year; the interest cost for the
expense derived from the addition of accrued interest on the DBO at the end of the
preceding fiscal year on the basis of the identified discount rate; and the expected
return on plan assets.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the consolidated statements of operations the components of NPBC are allocated among
functional costs (cost of revenues, research and development,selling and marketing and general and administrative), according to the
function of the employee groups accruing benefits.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Actuarial
gains and losses resulting from an adjustment of the discount rate or from a difference
between actual and expected return on plan assets, are recognized directly in equity and
are presented as part of the statement of recognized income and expenses.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 15  Post
Employment Benefits (contd)

| |                                                      | December 31
| | ---------------------------------------------------- | -----------
|
|
|
|
| | Total present value of obligations                   |            
| | Fair value of plan assets                            |            
| |                                                      |            
| | Recognized liability for defined benefit obligations |            
| |                                                      |            
| |                                                      |            
| | Presented under the following items:                 |            
| | Post employment benefits                             |            
| |                                                      |            
| |                                                      |            
| |                                                      |            
| |                                                      |            

| | A. | Post-employment
benefit plans
| | -- | -----------------------------

| | (1) | Movement
in the present value of the defined benefit obligations
| | --- | ----------------------------------------------------------------

| |                                              | 2008 | 2007
| | -------------------------------------------- | ---- | ----
|
|
|
| | Defined benefit obligation as at January 1   |      |     
| | Benefits paid                                |      |     
| | Current service costs and interest costs     |      |     
| | Actuarial losses recognized in equity        |      |     
| |                                              |      |     
| |                                              |      |     
| | Defined benefit obligation as at December 31 |      |     
| |                                              |      |     
| |                                              |      |     

| | (2) | Movement
in plan assets
| | --- | -----------------------

| |                                             | 2008 | 2007
| | ------------------------------------------- | ---- | ----
|
|
|
| | Fair value of plan assets as at January 1   |      |     
| | Contributions paid into the plan            |      |     
| | Benefits paid by the plan                   |      |     
| | Expected return on plan assets              |      |     
| | Actuarial gains recognized in equity        |      |     
| |                                             |      |     
| |                                             |      |     
| | Fair value of plan assets as at December 31 |      |     
| |                                             |      |     
| |                                             |      |     

F - 30

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 15  Post
Employment Benefits (contd)

| | A. | Post-employment
benefit plans  defined benefit plan (contd)
| | -- | -------------------------------------------------------------

| | (3) | Expense
recognized in operations
| | --- | --------------------------------

| |                                | Year ended December 31
| | ------------------------------ | ----------------------
|
|
|
|
|
| | Current service costs          |                       
| | Interest costs                 |                       
| | Expected return on plan assets |                       
| |                                |                       
| |                                |                       
| |                                |                       
| |                                |                       
| |                                |                       

| | The
expense is recognized in the following line items in the income statement:
| | ------------------------------------------------------------------------------

| |                                     | Year ended December 31
| | ----------------------------------- | ----------------------
|
|
|
|
|
| | Cost of sales                       |                       
| | Selling and marketing expenses      |                       
| | General and administrative expenses |                       
| |                                     |                       
| |                                     |                       
| |                                     |                       
| |                                     |                       
| |                                     |                       

| | (4) | Actuarial
gains and losses recognized directly in equity
| | --- | --------------------------------------------------------

| |                                      | 2008 | 2007
| | ------------------------------------ | ---- | ----
|
|
|
|
| | Cumulative amount as at January 1    |      |     
| | Recognized amount during the period  |      |     
| |                                      |      |     
| |                                      |      |     
| | Cumulative amounts as at December 31 |      |     
| |                                      |      |     
| |                                      |      |     

F - 31

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 15  Post
Employment Benefits (contd)

| | A. | Post-employment
benefit plans  defined benefit plan (contd)
| | -- | -------------------------------------------------------------

| | (5) | Actuarial
assumptions
| | --- | ---------------------

| | Principal
actuarial assumptions at the reporting date (expressed as weighted averages):
| | ---------------------------------------------------------------------------------------

| |                                                | 2008 | 2007
| | ---------------------------------------------- | ---- | ----
|
|
|
|
| | Discount rate as at December 31                |      |     
| | Expected return on plan assets as at January 1 |      |     
| | Future salary increases                        |      |     
| |                                                |      |     

| | Assumptions
regarding future mortality are based on published statistics and mortality tables.
| | ----------------------------------------------------------------------------------------------

| | The
overall expected long-term rate of return on assets is 6%.The expected long-term rate of
return is based on the portfolio as a whole and not on the sum of the returns on
individual asset categories. The return is based exclusively on historical returns,
without adjustments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Post-employment
benefit plans  defined contribution plan
| | -- | ---------------------------------------------------------

| |                                                                      | Year ended December 31
| | -------------------------------------------------------------------- | ----------------------
|
|
|
|
| | Amount recognized as expense in respect of defined contribution plan |                       
| |                                                                      |                       

F - 32

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 16 
Shareholders Equity

| | A. | Reconciliation
of movement in capital and reserves
| | -- | --------------------------------------------------

| |                                 | Share capital | Share
premium | Accumulated
deficit | Total
shareholders'
equity
| | ------------------------------- | ------------- | ------------- | ------------------- | --------------------------
|
|
|
|
| | Balance as of                   |               |               |                     |                           
| | January 1, 2007                 |               |               |                     | 25,861                    
| |                                 |               |              
| | Total recognized                |               |              
| | Income and expense for the year |               |               |                     | -                         
| | Stock based compensation        |               |               |                     | -                         
| |                                 |               |               |                     |                           
| |                                 |               |              
| | Balance as of                   |               |              
| | January 1, 2008                 |               |               |                     | 25,861                    
| |                                 |               |              
| | Total recognized                |               |              
| | Income and expense for the year |               |               |                     | -                         
| | Stock based compensation        |               |               |                     | -                         
| | Exercise of options             |               |               |                     | 30                        
| |                                 |               |               |                     |                           
| |                                 |               |              
| | Balance as of                   |               |              
| | December 31, 2008               |               |               |                     | 25,891                    
| |                                 |               |               |                     |                           
| |                                 |               |               |                     |                           

| | B. | The
Companys ordinary shares are traded in the United States on the Over
                    the Counter Bulletin Board (OTCBB) under the symbol BVRSF.OB.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

F - 33

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 16 
Shareholders Equity (contd)

| | C.
| | --

| |                           | Issued and Outstanding
| | ------------------------- | ----------------------
|
|
|
|
| | On issue at 1 January     |                       
| | Exercise of share options |                       
| |                           |                       
| | On issue at 31 December   |                       
| |                           |                       

| | Ordinary
shares of NIS 1.00 par value  each
| | -------------------------------------------

| | The
authorized share capital of the Company as of December 31, 2008 and 2007 was NIS 400,000,000,
divided into 400,000,000 shares.
| | ----------------------------------------------------------------------------------------------------------------------------------

| | D. | In
December 2003, Chun Holding L.P. (Chun), a limited partnership,
                    gained control of the Company by purchasing the Companys shares
through a                     tender offer, and through a share issuance performed on
March 1, 2004 and during                     2004, in which the Company completed the
issuance of 66,872,669 shares, in the                     amount of $11.8 million, of
which $9.8 million was issued in exchange for cash                     and $2.1 million
was issued in exchange for the conversion of loans from banks                     and
from a controlling shareholder.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, Chun was granted an option (the Options) to purchase 40,000,000
ordinary shares of the Company, for an additional investment amount of up to $7.2 million
at an exercise price per share of $0.18, for a period of four years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Chun
has resolved, and instructed the Company accordingly, that even though the shareholders
of the Company have voted for the grant of all of the options to Chun, Chun shall only be
entitled to 28,531,111 of the options and the remaining 11,468,889 options shall be
distributed as follows: 10,000,000 among the other shareholders of the Company, pro-rata
to the cash invested by them during 2004, and 1,468,889 to the Companys principal
banks.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the third quarter of 2004, Chun exercised 17,666,667 options into shares for the amount
of $3,180 thousand. As of December 31, 2007 there were 22,333,333 options outstanding
which expired in March 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | On
March 21, 2006, the Company issued to a group of new investors 20,000,000
                    ordinary shares for a total consideration of $3.6 million, together
with three                     separate warrants for the purchase of 6,000,000 ordinary
shares per each                     warrant, with exercise prices of $0.36, $0.54 and
$1.00, exercisable for a                     period of three years, with a mandatory
exercise mechanism under certain                     conditions. These options expired in
March 2009.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | On
January 1, 2006, the Company signed an addendum to the agreement signed with
                    Electra Real-Estate Ltd. (Electra) during August 1999.
According to                     the addendum, the Company issued to Electra 1,000,000
ordinary shares of the                     Company in consideration for part of the lease
payments for the premises                     occupied by the Company.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 16 
Shareholders Equity (contd)

| | G. | Share-based
compensation
| | -- | ------------------------

| | 1. | In
August 2001, the Board of Directors of the Company approved an option plan to
                    grant options for the purchase of up to 707,900 ordinary shares to
the                     Companys employees, directors and subcontractors. Each
option is                     exercisable into one ordinary share of the Company at
exercise prices of $0.90                      $2.69, equal to the market price of
the share on the date of issuance.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aforesaid options are exercisable in two increments, one third after one year from the
date of issuance and two thirds after two years from the date of issuance. The options
expire after three years from the vesting date of each increment. As of December 31, 2007
there were 4,000 options outstanding which expired in May 2008. No other options are
available for additional grants under this plan.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
2004, the Company granted Aviv Tzidon, the Chairman of the Board of
                    Directors, an option to purchase 9,000,000 ordinary shares of the
Company,                     vesting in five equal increments subject to his serving as
an active Chairman of                     the Board of Directors .One fifth of the
options will vest upon the completion                     of each full year of service,
which commenced on November 24, 2003. The exercise                     price per share
shall be $0.18. The options expire after three years from the                     vesting
date of each installment. As of December 31, 2008, 3,600,000 options had
                    expired and there are 5,400,000 options outstanding and exercisable.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the same date, the Company also granted to each of the Companys directors (not
including Aviv Tzidon), options to purchase 72,000 shares of the Company (total of
648,000 shares), at an exercise of $0.18 per share. The options were subject to the
completion of a full year of service. As of December 31, 2007, there were 576,000
options outstanding and exercisable, after the cancellation of 72,000 options of one
director who did not complete a full year of service. In March 2008 all the options
expired.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
January 2004, the Companys Board of Directors approved the grant of up
                    to 5,000,000 options to the Companys employees and service
providers. In                     2006, the Companys Board of Directors approved an
increase to 5,200,000                     options in the total option program. Each
option is exercisable into one                     ordinary share of the Company. As of
December 31, 2008, there are 3,566,200                     employee options outstanding
and there are 1,206,000 options outstanding for                     service providers,
2,246,200 and 594,000 of which are exercisable for employees                     and
service providers, respectively. The options are exercisable at prices of
                    $0.145 to $0.65 per share, and are exercisable in five equal
increments                     commencing one year after their issuance. The options
expire after three years                     from the vesting date of each increment.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cost of the benefit inherent in the options based on the fair value on the day of their
grant in accordance with the provisions of IFRS2 Share Based Payment amounted to
approximately $81 thousand and $23 thousand for 2008 and 2007, respectively. This amount
will be recognized as an expense over the vesting period of each portion. An expense in
the amount of $141 thousand and $238 thousand was recorded in the year ended December 31,
2008 and 2007, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 35

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 16 
Shareholders Equity (contd)

| | G. | Share-based compensation (contd)
| | -- | ---------------------------------

| | 4. | Option
plan information
| | -- | -----------------------

| | a. | A
summary of the status of the Companys stock option plans as of December
                    31, 2008 and 2007 and changes during the years then ended, is as
follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                            | As of December 31,
| | -------------------------- | ------------------
|
|
|
|
| | Options outstanding at the |                   
| | beginning of the year      |                   
| | Granted                    |                   
| | Exercised                  |                   
| | Forfeited                  |                   
| | Expired                    |                   
| |                            |                   
| |                            |                   
| | Outstanding at the end of  |                   
| | the year                   |                   
| |                            |                   
| |                            |                   
| | Options exercisable at the |                   
| | end of the year            |                   
| |                            |                   
| |                            |                   

| | The
options outstanding at December 31, 2008 and 2007 have an exercise price in the range of $
0.145 to $ 0.65 and contractual life in the range of 0.17 to 7.41 years.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
share price at the date of exercise for share options exercised in 2008 was$ 0.17.
| | --------------------------------------------------------------------------------------

| | b. | The
following table summarizes information relating to stock options at December
          31, 2008:
| | -- | ----------------------------------------------------------------------------------------------------

| |                    | Number of Options
| | ------------------ | -----------------
|
|
|
|
| | Exercise price ($) |                  
| |                    |                  
| | 0.2                |                  
| | 0.19               |                  
| | 0.65               |                  
| | 0.55               |                  
| | 0.23               |                  
| | 0.185              |                  
| | 0.18               |                  
| | 0.17               |                  
| | 0.145              |                  
| |                    |                  
| |                    |                  
| |                    |                  
| |                    |                  
| |                    |                  

F - 36

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary

|Notes
to the Consolidated Financial Statements
|----------------------------------------------

---

# Note 16 
Shareholders Equity (contd)

| | G. | Share-based
compensation (contd)
| | -- | ---------------------------------

| | c. | Outstanding
options as of December 31, 2008 may be exercised as follows:
| | -- | ------------------------------------------------------------------------

| |                           | Number
of options | Weighted
average
exercise
price ($)
| | ------------------------- | ----------------- | -----------------------------------
|
|
|
|
| | Immediately               |                   |                                    
| | First year                |                   |                                    
| | Second year or thereafter |                   |                                    
| |                           |                   |                                    
| |                           |                   |                                    
| |                           |                   |                                    
| |                           |                   |                                    
| |                           |                   |                                    

| | d. | The
fair value of the options granted and accounted for under IFRS No. 2 was
          calculated on the basis of the Black & Scholes model for the pricing of
          options. The parameters that were used in order to implement the model are as
          follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                       | Option grant date
| | --------------------- | -----------------
|
|
|
|
| | Share price (in $)    |                  
| | Exercise price        |                  
| | (in $)                |                  
| | Expected              |                  
| | volatility            |                  
| | Life of options       |                  
| | (in years)            |                  
| | Risk-free             |                  
| | interestInterest rate |                  
| | Rate of               |                  
| | anticipated           |                  
| | dividends             |                  
| |                       |                  

| | The
expected volatility was determined on the basis of the historical volatility in the
Companys share prices.
| | ---------------------------------------------------------------------------------------------------------------

| | The
life of the option warrants was determined on the basis of managements estimate of
the period the employees will hold the options, taking into consideration their position
with the Company and the Companys experience regarding the turnover of employees.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
risk-free interest rate was determined on the basis of the yield to maturity of
$-denominated Government debentures with a remaining life equal to the anticipated life
of the option warrants.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 37

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 17 
Commitments and Contingent Liabilities

| | A. | Cooperation
agreement
| | -- | ---------------------

| | The
predecessor of the Company developed, manufactured and marketed the Ehudsystem
pursuant to a joint venture agreement entered into in 1992 with the MLM division of
Israel Aircraft Industries Ltd. (the IAI Agreement). Pursuant to the IAI
Agreement, the predecessor and IAI agreed to jointly develop, manufacture and market the
Ehud, with IAI subcontracting certain of the manufacturing and integration
work with respect to the Ehud product to the predecessor. The Company and IAI
currently operate in accordance with an amendment to the IAI agreement executed in August
2005 that amended a prior agreement entered into in 1999.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
2005 agreement expands cooperation between the parties in the marketing of Naval Combat
Maneuvering Instrumentation Systems in various countries worldwide through the transfer
of work share from the leading party to the other. The 2005 Agreement also sets the rate
of royalties in all territories to 5% with respect to Ehud Systems. In
addition, the 2005 Agreement resolved all disagreements between the parties prior to
January 1, 2005. The term of the 2005 Agreement is for ten years.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years ended December 31, 2008 and 2007, the Company recognized royalty revenue from
IAI in the amount of $ 1.6 and $0.3 million, respectively. Furthermore, the Company
recorded royalty fees to IAI in the amount of $0.6 and 0.3 million for the years ended
December 31, 2008 and 2007, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Lease
commitments
| | -- | -----------------

| | The
premises occupied by the Company are rented under various operating leases expiring at the
end of September 2009. On November 6, 2008 and on September 28, 2008 the Company signed
extensions to two of its operating leases that will expire at the end of September 2014
and at end of September 2011, respectively. The future minimum annual rental payments as
of December 31, 2008 are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, | $ thousand
| | ------------------------ | ----------
|
|
|
|
| | 2009                     |           
| | 2010                     |           
| | 2011-2014                |           
| |                          |           
| |                          |           
| |                          |           
| |                          |           

F - 38

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 17 
Commitments and Contingent Liabilities (contd)

| | C. | Liabilities
and guarantees
| | -- | --------------------------

| | 1. | In
order to provide security for the credit received from banks and for the bank
                    guarantees provided in favor of the Company, the Company registered
first degree                     fixed and floating liens on monetary deposits, a
floating lien on all its                     property, assets and related insurance
benefits and a floating lien on its                     unpaid share capital, its
goodwill and its plant, assets and rights.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
certain occasions the Company deposits cash and cash equivalents (including
                    the insurance rights attached thereto) with certain financial
institutions that                     have issued guarantees on behalf of the Company in
favor of its customers. At                     December 31, 2008, there are $9,008
thousand in current and non-current                     restricted bank deposits (as of
December 31, 2007  $3,541 thousand current                     and non-current
restricted bank deposits).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Guarantees
issued by banks in favor of the Company are as follows:
| | -- | ------------------------------------------------------------------

| |                            | December 31
| | -------------------------- | -----------
|
|
|
|
| | Performance guarantees     |            
| |                            |            
| |                            |            
| | Advance payment guarantees |            
| |                            |            
| |                            |            
| | Other bank guarantees      |            
| |                            |            

| | The
expiration dates of the guarantees are through October 31, 2013. Bank charge guarantees
are recorded as financial expenses, during the life guarantee.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | The
Company started during 2008 the development of a personal location tracking
                    and monitoring solution for firefighters and other first responder
personnel.                     The product, named First responders Independent Navigation
Device, or FIND, aims                     to develop a way to track emergency workers on
a given site without GPS                     receiving capabilities. The Company
developing FIND together with the US based                     precision motion
technology developer InterSense Inc. of Bedford, MA and the                     activity
is partially funded by the Binational Industrial Research and
                    Development Foundation (BIRD), which supports development cooperation
between US                     and Israeli companies. The Company is committed to pay
royalties to the BIRD                     Foundation at a rate of 5% of sales proceeds
generating from projects for which                     the BIRD Foundation provided
funding up to 150% of the sum financed by the BIRD                     Foundation. The
obligation to pay these royalties is contingent on actual sales                     of
the products and in the absence of such sales, no payment is required. The
                    Companys total obligation for royalties, net of royalties paid
or accrued,                     totaled approximately $65 thousands as of December 31,
2008.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 39

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 17 
Commitments and Contingent Liabilities (contd)

| | D. | In
November 2006, the Board of Directors approved a new service agreement signed
                    with Wise, a company under control of Aviv Tzidons brother,
effective as                     of January 1, 2007. According to the agreement, Wise
will provide marketing and                     support services in Singapore in exchange
for a gross monthly fee of $3,500 for                     marketing services and a gross
monthly fee of $3,500 for support services. In                     the event that, during
the term of the new agreement, the Company receives a                     purchase order
for its products or services based on the marketing services,                     Wise
shall be entitled to a commission as follows: (a) on the first $1,000,000
                    received from a purchase order  a commission equal to 3%; (b)
on amounts                     between $1,000,000 and up to $3,000,000  a
commission equal to 2%; (c) on                     amounts over $3,000,000  a
commission equal to 1%.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
new agreement is for a period of two years from the effective date. As of April 19, 2009
this agreement was renewed for an additional period of two years, retroactively from
January 1, 2009 until December 31, 2010
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Derivative
financial instruments
| | -- | --------------------------------

| | From
time to time, the Company enters into foreign currency future contracts and put and call
options contracts to reduce the impact of fluctuations of certain currencies against the
dollar resulting primarily from firm commitments not denominated in dollars.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
derivative financial instruments of the Company as of December 31, 2008 are as follows:
| | -------------------------------------------------------------------------------------------

| |                          | Currency
receivable | Currency
payable | Date of
expiration/
maturity/
sale | Amounts
receivable | Amounts
payable | Fair
value | Book
value
| | ------------------------ | ------------------- | ---------------- | ---------------------------------- | ------------------ | --------------- | ---------- | ----------
|
|
|
|
| | Future currency contract |                     |                  |                                    | NIS                |                 |            | Dollar    
| | Future currency contract |                     |                  |                                    | NIS                |                 |            | Dollar    
| | Future currency contract |                     |                  |                                    | NIS                |                 |            | Dollar    

# Note 18  Income
Taxes

| | A. | Tax
benefits under the Israeli Law for the Encouragement of Industry (Taxes),           1969
| | -- | --------------------------------------------------------------------------------------------

| | The
Company is an industrial company, as defined by this law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation of machinery and
equipment, as prescribed by regulations published under the Israeli Income Tax
(Inflationary Adjustments) Law, 1985 (see Note 18C), the right to claim public issuance
expenses and amortization of patents and other intangible property rights as a deduction
for tax purposes.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 40

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 18  Income
Taxes (contd)

| | B. | Tax
benefits under the Israeli Law for the Encouragement of Capital
                    Investments, 1959(the Law)
| | -- | --------------------------------------------------------------------------------------------------------------------

| | Pursuant
to the Law, the Company was awarded Approved Enterprise status under the
government alternative benefits track. The main benefits to which the Parent is entitled
is a full exemption on its taxable income arising from two Approved Enterprise plans for
a period of two years and a reduced tax rate of 25% for an additional five years from the
date on which the investments are significantly completed and the Parent has taxable
income as defined by the Law.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1998, the Company applied for approval of the expansion of its facilities in Rosh Haayin
(the second plan).
| | -----------------------------------------------------------------------------------------------------------------

| | In
addition, in 2001 the Company filed a request for an additional new plan to expand its
production facilities in Rosh Haayin (the third plan). The request was
approved in 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
benefits, to which the Company is entitled will be granted on the proportionate part of
the income deriving from a future increase in its income in excess of the base turnover
which is not entitled to benefits. The utilization of the seven years of benefits for the
second and third plans is limited to 2012 and 2016, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, due to accumulated tax losses, the Company had not yet utilized the
tax benefits provided in the second and third plans.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | If
the retained tax-exempt income is distributed in a manner other than the complete
liquidation of the Parent, it would be taxed at the corporate tax rate applicable to such
profits as if the Parent had not chosen the alternative tax benefits (currently  25%
after the amendment to reduce tax rates described in D below). As of December 31, 2008,
the Company has accumulated losses (see Note 18I).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Parents Board of Directors has determined that such tax-exempt income will not be
distributed as dividends. Accordingly, no deferred income taxes have been provided on
income attributable to the Parents Approved Enterprise.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aforementioned benefits are conditional upon compliance with the terms and regulations as
prescribed by law, and the approvals according to which the investments were carried out.
Non-compliance with the terms may result in the cancellation of the benefits, in whole, or
in part, and the refund of the benefit amounts in addition to accrued interest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2008, the Company s management is of the opinion that it is in
compliance with all of the aforementioned terms.
| | -----------------------------------------------------------------------------------------------------------------------------------

| | C. | Measurement
of taxable income under the Income Tax (Inflationary Adjustments)Law, 1985 (The
Inflationary Adjustments Law)
| | -- | ---------------------------------------------------------------------------------------------------------------------------

| | Under
the Inflationary Adjustments Law, results for tax proposes are measured in real terms,
taking into consideration the change in the Israeli Consumer Price Index (CPI).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 26, 2008 the Income Tax Law (Inflationary Adjustments) (Amendment No. 20)
(Restriction of Period of Application)  2008 (the Amendment) was passed
by the Knesset. According to the Amendment, the Adjustments Law will no longer be
applicable subsequent to the 2007 tax year, except for the transitional provisions whose
objectives are to prevent distortion of the taxation calculations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 18  Income
Taxes (contd)

| | D. | Tax
rates applicable to income from other sources in Israel
| | -- | -----------------------------------------------------------

| | Income
derived from sources other than the Approved Enterprise is not eligible for the
aforementioned benefits and is taxed at the regular tax rates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 25, 2005, the Knesset passed the Israeli Law for the Amendment of the Income
Tax Ordinance (147 and Temporary Order)  2005 (hereinafter  the
Amendment). The Amendment provides for a gradual reduction in the corporate tax rate in
the following manner: in 2006 a rate of 31%, in 2007  29%, in 2008  27%, in
2009 - 26% and from 2010 onward 25%. Furthermore, as from 2010, upon reduction
of the corporate tax rate to 25%, real capital gains will be subject to tax of 25%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Taxation
of foreign subsidiary
| | -- | ------------------------------

| | The
Companys subsidiary in Singapore is taxed under the tax laws in force in that
country.
| | -------------------------------------------------------------------------------------------

| | F. | Deferred
income taxes
| | -- | ---------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
assessing the realization of deferred tax assets, management considers whether it is more
likely than not that some or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets depends on the generation of future taxable
income during the periods in which those temporary differences are deductible. Management
considers projected taxable income and tax planning strategies in making this assessment.
In order to fully realize the deferred tax asset, the Company will need to generate future
taxable income prior to the expiration of the deferred tax assets governed by the tax
code. Based on the level of historical taxable losses, management can not determine
whether it is likely that they will be able to use the tax asset of the company net
operating loss carry forwards in the future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | A
reconciliation of the theoretical tax expense, assuming all income is taxable
                    at the statutory rates applicable in Israel, and the actual tax
expense, is as                     follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                               | Year ended December 31
| | --------------------------------------------- | ----------------------
|
|
|
|
| | Profit (loss) before taxes on income          |                       
| |                                               |                       
| | Statutory tax rate in Israel                  |                       
| |                                               |                       
| | Theoretical tax cost (benefit)                |                       
| | Losses, deductions and expenses in respect of |                       
| | which deferred tax assets were not recorded   |                       
| | Non-deductible expenses                       |                       
| |                                               |                       
| |                                               |                       
| | Actual tax expense                            |                       
| |                                               |                       

F - 42

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 18  Income
Taxes (contd)

| | H. | Income
tax assessments
| | -- | ----------------------

| | Final
tax assessment has been received by the Company up to and including 2004.
| | -------------------------------------------------------------------------------

| | I. | Net
operating loss carry forwards
| | -- | ---------------------------------

| | Net
operating loss carry forwards of the Company as of December 31, 2008, totaled
approximately $56 million. The net operating loss carry forwards have no expiration date.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 19 
Supplementary Statement of Operation Information

| | A. | Summary
information about geographical areas:
| | -- | ---------------------------------------------

| | Total
revenues are attributed to geographic areas based on the location of the customers.
| | -----------------------------------------------------------------------------------------

| |                      | Year ended December 31
| | -------------------- | ----------------------
|
|
|
|
| | Total revenues from: |                       
| | Israel               |                       
| | Far East             |                       
| | Europe               |                       
| | Africa               |                       
| | South America        |                       
| |                      |                       
| |                      |                       
| | Total revenues       |                       
| |                      |                       

| | B. | Major
customers data as a percentage of the total revenues:
| | -- | ------------------------------------------------------------

| |            | Year ended December 31
| | ---------- | ----------------------
|
|
|
|
| | Customer A |                       
| | Customer B |                       
| | Customer C |                       
| | Customer D |                       
| | Customer E |                       
| |            |                       
| |            |                       
| |            |                       
| |            |                       

| | * Less than 10%
| | ---------------

F - 43

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 19 
Supplementary Statement of Operation Information (contd)

| | C. | Cost
of revenues
| | -- | ----------------

| |                                         | Year ended December 31
| | --------------------------------------- | ----------------------
|
|
|
|
| | Raw materials and components            |                       
| | Salaries, wages and employees' benefits |                       
| | Subcontractors                          |                       
| | Agents fees                             |                       
| | Depreciation and amortization           |                       
| | Other manufacturing costs               |                       
| | Inventory write-off                     |                       
| |                                         |                       
| |                                         |                       
| |                                         |                       
| |                                         |                       

| | D. | Financial
expenses, net
| | -- | -----------------------

| |                                                    |  | Year ended December 31
| | -------------------------------------------------- |  | ----------------------
|
|
|
|
| | Financial income:                                  |  |                       
| | Interest on short-term deposits                    |  |                       
| | Changes in respect of foreign exchange differences |  |                       
| | Other                                              |  |                       
| |                                                    |  |                       
| |                                                    |  |                       
| |                                                    |  |                       
| |                                                    |  |                       
| |                                                    |  |                       
| | Financial expenses:                                |  |                       
| | Bank charges and interest on long-term loan        |  |                       
| | Changes in respect of foreign exchange differences |  |                       
| | Other                                              |  |                       
| |                                                    |  |                       
| |                                                    |  |                       
| |                                                    |  |                       
| |                                                    |  |                       
| |                                                    |  |                       
| | Total financial expenses, net                      |  |                       
| |                                                    |  |                       

F - 44

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 20  Related
Parties

| | A. | Balance
sheet
| | -- | -------------

| |                                | December 31
| | ------------------------------ | -----------
|
|
|
|
| | Chairman of board of directors |            

| | B. | Key
management personnel compensation (including directors)
| | -- | -----------------------------------------------------------

| | The
chairman of the board of directors of Aviv Tzidon, who is considered key management of
the company, participates in the Companys share option program.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------

| |                      | December 31
| | -------------------- | -----------
|
|
|
|
| | Share-based payments |            

| | C. | Agreement
with Eyepoint Ltd.
| | -- | ----------------------------

| | On
March 1, 2004, the Company entered into a consulting agreement with an Israeli company
wholly owned by Dekel Tzidon, brother of Aviv Tzidon, the Chairman of our Board of
Directors. Pursuant to this consulting agreement, Dekel Tzidon continues to serve as the
Companys Vice President of Research & Development and Chief Technological
Officer. The terms of this agreement were approved by the Companys Audit Committee
in July 2004. In 2008, EyepointLtd. provided the Company with consulting services
in the amount of USD 173 thousands. The agreement is renewed every year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Agreement
with Consult Wise Pte Ltd.
| | -- | ------------------------------------

| | On
January 1, 2004, the Company entered into an agreement with Consult Wise Pte Ltd., a
Singaporean company. Maayan Tzidon, the brother of Aviv Tzidon, the Chairman of our Board
of Directors, holds 50% of the issued and outstanding shares of Consult Wise. Pursuant to
this agreement, the Company agreed to pay Consult Wise $3,000 per month for the provision
of its marketing services of our products and services in Korea and Singapore, for a
period of three years commencing January 1, 2004. In lieu of cash, the Company agreed to
pay the monthly fee in the Company Ordinary Shares based on a per share price of $0.18.
In order to facilitate the payment of shares, a trustee was issued 600,000 of the Company
Ordinary Shares and was instructed to release 16,667 of our Ordinary Shares to Consult
Wise each month during the term of the agreement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 1, 2007, following the expiration of the above agreement, the Company entered
into a new agreement with Consult Wise Pte Ltd. Pursuant to this agreement, the Company
agreed to pay Consult Wise $3,500 per month for the provision of its marketing services
and $3,500 per month for supporting the Company operating programs in Singapore;
furthermore, Consult Wise is entitled to commissions on purchase orders issued by
customers introduced to the Company pursuant to its marketing services.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the years 2008 and 2007, Consult Wise Pte Ltd. provided the Company with consulting
services in the amount of $261 thousands and $234 thousands respectively. As of April 19,
2009 this agreement was renewed for an additional period of two years, retroactively from
January 1, 2009 until December 31, 2010
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 45

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 21  Financial
Instruments

| | Credit
risk
| | -----------

| | Exposure
to credit risk
| | -----------------------

| | The
carrying amount of financial assets represents the maximum credit exposure. The maximum
exposure to credit risk at the reporting date was:
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| |                                               | December 31
| | --------------------------------------------- | -----------
|
|
|
|
| | Cash and cash equivalents                     |            
| | Restricted bank deposits                      |            
| | Trade receivables including long-term amounts |            
| | Other receivables                             |            
| | Other non-current assets                      |            
| | Forward exchange contract                     |            
| |                                               |            
| |                                               |            
| |                                               |            
| |                                               |            

| | Impairment
losses
| | -----------------

| | The aging of trade receivables including long term amounts at the reporting date was as follows:
| | ------------------------------------------------------------------------------------------------

| |                                   | Gross | Impairment | Gross | Impairment
| | --------------------------------- | ----- | ---------- | ----- | ----------
|
|
|
|
| | Not past due                      |       |            |       | 2,806     
| | Past due less than six months     |       |            |       | 600       
| | Past due more than six months and |       |           
| | less than one year                |       |            |       | -         
| |                                   |       |            |       |           
| |                                   |       |           
| |                                   |       |            |       | 3,406     
| |                                   |       |            |       |           

| | The
allowance accounts in respect of trade receivables are used to record impairment losses
unless the Company is satisfied that no recovery of the amount owing is possible. At that
point there is no amount considered irrecoverable that was written off against the trade
receivable directly.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 46

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 21  Financial
Instruments (contd)

| | Liquidity
risk
| | --------------

| | The
following are the contractual maturities of financial liabilities, including estimated
interest payments and excluding the impact of netting agreements:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

| | December
31, 2008
| | -----------------

| |                                       | Carrying
amount | Contractual
Cash flows | 1st year
| | ------------------------------------- | --------------- | ---------------------- | --------
|
|
|
|
| | Short-term loans from bank and others |                 |                        |         
| | Trade payables                        |                 |                        |         
| | Other payables                        |                 |                        |         
| |                                       |                 |                        |         
| |                                       |                 |                       
| |                                       |                 |                        |         
| |                                       |                 |                        |         

| | December 31, 2007
| | -----------------

| |                                        | Carrying
amount | Contractual
Cash flows | 1st year
| | -------------------------------------- | --------------- | ---------------------- | --------
|
|
|
|
| | Bank overdraft                         |                 |                        |         
| | Short-term loans  from bank and others |                 |                        |         
| | Trade payables                         |                 |                        |         
| | Other payables                         |                 |                        |         
| |                                        |                 |                        |         
| |                                        |                 |                       
| |                                        |                 |                        |         
| |                                        |                 |                        |         

| | Currency
risk
| | -------------

| | 
| | 

| |                           | December 31, 2008 | December 31, 2007
| | ------------------------- | ----------------- | -----------------
|
|
|
|
| | Cash and cash equivalents |                   |                  
| | Trade receivables         |                   |                  
| | Other receivables         |                   |                  
| | Trade payables            |                   |                  
| | Other payables            |                   |                  

| | The
Company's exposure to foreign currency risk was as follows based on notional amounts:
| | -----------------------------------------------------------------------------------------

F - 47

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 21  Financial
Instruments (contd)

| | Currency
risk (contd)
| | ----------------------

| | Following is data regarding currency exchange rates to the USD:
| | ---------------------------------------------------------------

| |                              | Reporting date spot rate
| | ---------------------------- | ------------------------
|
|
|
| | NIS                          |                         
| | EURO                         |                         
| |                              |                         
| | Change in % :                |                         
| |                              |                         
| | Exchange rate of NIS in US$  |                         
| | Exchange rate of EURO in US$ |                         

| | Sensitivity
analysis
| | --------------------

| | A
change of the NIS as at December 31, 2008 and 2007 would have increased (decreased) equity
and profit or loss by the amounts shown below. This analysis assumes that all other
variables, in particular interest rates, remain constant. The analysis is performed on the
same basis for 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                        | Change | Equity | Net income
| | ---------------------- | ------ | ------ | ----------
|
|
|
|
| | December 31, 2008      |        |        |           
| | Increase in the NIS of |        |        |           
| | Increase in the NIS of |        |        |           
| | Decrease in the NIS of |        |        |           
| | Decrease in the NIS of |        |        |           
| |                        |        |       
| | December 31, 2007      |        |       
| | Increase in the NIS of |        |        |           
| | Increase in the NIS of |        |        |           
| | Decrease in the NIS of |        |        |           
| | Decrease in the NIS of |        |        |           

| | Fair
Values
| | -----------

| | Fair
values versus carrying amounts
| | -----------------------------------

| | The
carrying amounts of the financial assets and liabilities, including cash and cash
equivalents, restricted bank deposits, trade receivables, other receivables, other
non-current assets, short-term loans, trade payables and other payables are same or
proximate to their fair value.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 48

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|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 22  Financial
Risk Management

| | The
Company is exposed to credit, liquidity and market risks as part of its normal course of
business. The Companys risk management objective is to monitor risks and minimize
the possible influence that results from this exposure, according to its evaluations and
expectations of the parameters that affect the risks. The Company uses derivative
instruments in order to partially hedge its exposure to foreign currency exchange rate
and interest rate fluctuations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Liquidity risk
| | --------------

| | Liquidity
risk is the risk that the Company will not be able to meet its financial obligations as
they fall due. The Companys approach to managing liquidity is to ensure, as far as
possible, that it will always have sufficient liquidity to meet its liabilities when due,
under both normal and extreme conditions, without incurring unacceptable losses or
risking damage to the Companys reputation. The Companys policy is to ensure
that it has sufficient cash and cash equivalents to meet expected operational expenses,
including financial obligations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Credit
risk
| | -----------

| | Credit
risk is the risk of financial loss to the Company if a customer or counterparty to a
financial instrument fails to meet its contractual obligations, and arises principally
from the Companys receivables from customers. Management has a credit policy in
place and the exposure to credit risk is monitored on an ongoing basis.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the reporting date, there were no significant concentrations of credit risk. The maximum
exposure to credit risk is represented by the carrying amount of each financial asset,
including derivatives, in the balance sheet. Financial instruments that could potentially
subject the Company to credit risks consist primarily of trade receivables. Credit risk
with respect to these receivables is limited due to the composition of the subscriber
base, which includes a large number of individuals and businesses
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Market
risk
| | -----------

| | Market
risk is the risk that changes in market prices, such as foreign exchange rates and
interest rates will affect the Companys income or the value of its holdings of
financial instruments. The objective of market risk management is to manage and control
market risk exposures within acceptable parameters, while optimizing the return on risk.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Interest
rate risk
| | ------------------

| | The
Company is exposed to fluctuations in the interest rate.
| | ------------------------------------------------------------

| | Currency
risk
| | -------------

| | The
Companys operating income and cash flows are exposed to currency risk, mainly due
to handset and network related acquisitions and its roaming activity. The Company also
manages bank accounts that are denominated in a currency other than its respective
functional currency, primarily NIS and Euro. As part of its risk management policy the
Company uses forward contracts to partially hedge the exposure to fluctuations in foreign
exchange rates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 49

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|B.V.R. Systems (1998) Ltd.and Subsidiary  
|------------------------------------------
|                                          
|Notes to Consolidated Financial Statements
|                                          

# Note 23 
Subsequent Events

| | A. | In
January 2009, the Company entered into a license agreement with a major
                    European defense company (Customer) pursuant to which the Company
granted the                     Customer a worldwide, non exclusive license to for the
Companys Embedded                     Virtual Avionics (EVA) patents. In addition
to this agreement, the Company and                     the Customer will further evaluate
joint business opportunities in the area of                     live and virtual
training. The contract price is approximately $2.9 million, and                     is
payable in accordance with a predetermined payment schedule during the
                    following two years. As of the date of signing these financial
statements, the                     Company has received approximately $0.7 million under
this contract.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | On
March 3, 2009, the Company entered into an Agreement in Principle with
                    Milestones Upgrading & Industries Company Ltd. ( The
investor)                     for the investment of $3 million in the share capital
of the Company, at a price                     per share of $0.156, and the grant of a
convertible loan of $2 million. Pursuant                     to the execution of this
Agreement in Principle, the investor provided the                     Company with a loan
in the amount of $1.5 million, which was to be considered                     part of the
$2 million loan amount to be granted under the definitive                     agreements.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2009, the investor informed the Company that it has encountered technical
difficulties that may come in the way of moving forward with its investment in the
Company and requested an extension of the negotiation period detailed in the Agreement in
Principle entered into in March 2009, in order to ascertain if it is able to resolve
those difficulties. In a letter sent by the Company in May 2009, through its legal
counsel, to the investor, the Company advised the investor that as the investor completed
its due diligence review, did not provide any comments to the Company, and as the parties
reached a form of a definitive agreement acceptable to both parties it is of the position
that a binding agreement was entered into between the parties. The investor responded to
the letter in May 2009, through its legal counsel, disclaiming the Companys claims.
In view of this information the company is considering its further actions.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | In
May 28, 2009, the Company entered into an agreement with Yuval Golan
                    Investments Ltd. and Michael Golan Securities Holdings Ltd., or
collectively                     Golan Investments, to provide to the Company $3.5
million by means of a                     debenture, of which $2 million was provided to
the Company on May 31, 2009 and                     the balance of $1.5 million will be
provided on June 21, 2009. Under the                     agreement Golan Investments also
receives a warrant to purchase 3 million                     ordinary shares of the
Company at an exercise price of $0.18, which is                     exercisable for a
period of five years. The debenture is due twelve months from                     the
issue date in the amount of $3.85 million. The agreement further provides
                    that the debenture will be due upon the occurrence of a merger or
acquisition                     transaction of the Company in the amount of $4.55 million
during the first                     twelve month period after the date of the agreement.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
was further agreed that if the Company shall not repay the debenture 12 months from the
date of its provision then (a) as of the commencement of the second year the debenture
shall bear a return rate of 15% per annum; (b) upon a merger or acquisition transaction
of the Company during the second year as of the provision of the debenture the Company
shall repay to Golan Investments an amount of $5,600,000; and (c) the Company shall issue
to Golan Investments additional warrants to purchase 6,000,000 Ordinary Shares, at an
exercise price per share of $0.18, exercisable for a period of four years commencing as
of the date of entitlement.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 50

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