UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 20-F/A

                                 AMENDMENT NO. 1

|_|        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, 2002
                                     -----------------

                                       OR

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

           FOR THE TRANSITION PERIOD FROM __________ TO __________

                         COMMISSION FILE NUMBER 0-29884

                           B.V.R. SYSTEMS (1998) LTD.
                           --------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

                                     ISRAEL
                                     ------
                 (JURISDICTION OF INCORPORATION OR ORGANIZATION)

           16 HAMELACHA STREET, PARK AFEK, ROSH HA'AYIN 48091, ISRAEL
           ----------------------------------------------------------
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)

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

           NONE                                       NONE

 SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:

                  ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
                  --------------------------------------------

                                (TITLE OF CLASS)

 SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
 OF THE ACT:

                                      NONE
                                      ----

                                (TITLE OF CLASS)

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:

             10,660,874 ORDINARY SHARES, NIS 1.0 PAR VALUE PER SHARE
             -------------------------------------------------------

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.

                                                                |X| Yes   |_| No

Indicate by check mark which financial statement item the registrant has elected
to follow.

                                                       |_| Item 17   |X| Item 18



<PAGE>
                                EXPLANATORY NOTE

           B.V.R. Systems (1998) Ltd. ("Company") has determined that it is
necessary to correct multiple inadvertent typographical errors found in its
consolidated financial statements filed as Item 18 under the Company's annual
report on form 20-F for the year ended December 31, 2002, as filed on May 13,
2003 (the "Form 20-F").

           Item 18 is amended by including the Company's consolidated financial
statements for the fiscal year ended December 31, 2002.



                                       1
<PAGE>
ITEM 18    FINANCIAL STATEMENTS

           The Financial Statements required by this item are found at the end
of this amendment to the Form 20-F, beginning on page F-1.



                                       2
<PAGE>
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

        3.1+        Voting Agreement, dated July 19, 2000, between Clal
                    Industries and Investment Ltd., Clal Industries and
                    Technologies (1997) Ltd., Koonras Technologies Ltd., Polar
                    Communication Ltd., Elisra Electronic Systems Ltd. and Yaron
                    Sheiman. 4.1+ Management Services Agreement, dated March 29,
                    2001, between the Registrant and Elisra Electronic System
                    Ltd.(an English summary accompanied by Hebrew original)

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

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

       4.4+         Share Purchase Agreement, dated June 25, 2000, between the
                    Registrant and Elisra Electronic Systems Ltd.

        4.5+        Warrant, dated June 25, 2000, issued by the Registrant to
                    Elisra Electronic Systems Ltd.

        4.6+        Lease agreement, dated September 14, 1999, as amended,
                    between BVR Technologies Ltd. and Minrav Holdings Ltd. (an
                    English summary accompanied by Hebrew original)

        4.7+        Lease agreement, dated August 29, 1999, between the
                    Registrant and Electra Real Estate Ltd.(an English summary
                    accompanied by Hebrew original)

         8+         Subsidiaries of the Registrant

       10.1***      Consent of Somekh Chaikin, a member of KPMG International

        10.2        Certification pursuant to 18 U.S.C.ss. 1350

        10.3        Certification pursuant to 18 U.S.C.ss. 1250

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



                                       3

<PAGE>
** 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.




                                       4
<PAGE>
                                    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/ Yoel Katzir
                                          --------------------------------------
                                          Name:  Yoel Katzir
                                          Title: President and Chief Executive
                                                 Officer


                                       By: /s/ Reuven Shahar
                                            ------------------------------------
                                            Name:  Reuven Shahar
                                            Title: Chief Financial Officer


Date:  May 28, 2003



                                       5
<PAGE>
                                 CERTIFICATIONS
                                 --------------

I, Yoel Katzir, certify that:

1. I have reviewed this amendment to annual report on Form 20-F/A of B.V.R.
Systems (1998) Ltd;

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

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

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

          a.   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

          b.   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c.   presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

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

          a.   all significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b.   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and


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

 Date: May 28, 2003


                                         /s/ Yoel Katzir
                                         ---------------------------------------
                                         President and Chief Executive Officer


                                       6
<PAGE>
                                 CERTIFICATIONS
                                 --------------

I, Reuven Shahar, certify that:

1. I have reviewed this amendment to annual report on Form 20-F/A of B.V.R.
Systems (1998) Ltd;

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

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

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

          a.   designed such disclosure controls and procedures to ensure that
               material information relating to the registrant, including its
               consolidated subsidiaries, is made known to us by others within
               those entities, particularly during the period in which this
               annual report is being prepared;

          b.   evaluated the effectiveness of the registrant's disclosure
               controls and procedures as of a date within 90 days prior to the
               filing date of this annual report (the "Evaluation Date"); and

          c.   presented in this annual report our conclusions about the
               effectiveness of the disclosure controls and procedures based on
               our evaluation as of the Evaluation Date;

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

          a.   all significant deficiencies in the design or operation of
               internal controls which could adversely affect the registrant's
               ability to record, process, summarize and report financial data
               and have identified for the registrant's auditors any material
               weaknesses in internal controls; and

          b.   any fraud, whether or not material, that involves management or
               other employees who have a significant role in the registrant's
               internal controls; and

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

Date: May 28, 2003


                                 /s/ Reuven Shahar
                                 -----------------------------------------------
                                 Chief Financial Officer and Vice President,
                                 Finance


                                      7
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------


CONTENTS


                                                                          PAGE

Report of Independent Auditors                                            F- 2

Consolidated Balance Sheets as of December 31, 2002 and 2001       F- 3 - F- 4

Consolidated Statements of Operations for the years
  ended December 31, 2002, 2001 and 2000                                  F- 5

Statements of Changes in Shareholders' Equity for the years
  ended December 31, 2002, 2001 and 2000                                  F- 6

Consolidated Statements of Cash Flows for the years
  ended December 31, 2002, 2001 and 2000                                  F- 7

Notes to Consolidated Financial Statements                         F- 9 - F- 53




                                      F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT TO THE
SHAREHOLDERS OF B.V.R. SYSTEMS (1998) LTD.

We have audited the accompanying consolidated balance sheets of B.V.R. Systems
(1998) Ltd. (the Company) and its subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of operation, changes in shareholders'
equity and cash flows for each of the years in the three years ended December
31, 2002. These consolidated financial statements are the responsibility of the
Company's Board of Directors and of its Management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 Board of Directors and by Management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2002 and 2001 and the
consolidated results of their operations, changes in shareholders' equity and
cash flows for each of the years in the three years ended December 31, 2002, in
conformity with accounting principles generally accepted (GAAP) in Israel.

Accounting principles generally accepted in Israel vary in certain significant
respects from accounting principles generally accepted in the United States of
America. Application of accounting principles generally accepted in the United
States of America would have affected results of operations for each of the
years in the three years ended December 31, 2002 and shareholders' equity as of
December 31, 2002 and 2001 to the extent summarized in Note 22 to the
consolidated financial statements.

/s/ Somekh Chaikin
Certified Public Accountants (Isr.)
A member of KPMG International

March 26, 2003



                                      F-2
<PAGE>
<TABLE>
<CAPTION>

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
--------------------------------------------------------------------------------------------------------------------------


                                                                                   2002                    2001
                                                                               -------------           -------------
                                                                    NOTE       US$ THOUSANDS           US$ THOUSANDS
                                                                    ----       -------------           -------------
<S>                                                           <C>          <C>                    <C>
ASSETS

CURRENT ASSETS
Cash and cash equivalents                                             3               860                   1,390
Restricted bank deposits                                              4             4,266                   4,253
Trade receivables                                                     5            15,700                  20,149
Work in progress                                                      6               328                    * 19
Other receivables and prepaid expenses                                7               827                 * 1,062
Inventories                                                           8             1,817                   1,376
                                                                               -----------              ----------

Total current assets                                                               23,798                  28,249
                                                                               -----------              ----------

INVESTMENTS, LOANS AND LONG-TERM RECEIVABLES                          9               584                   1,260
                                                                               -----------              ----------

FIXED ASSETS                                                         10

Cost                                                                                9,380                   8,807
Less - accumulated depreciation                                                     7,724                   6,864
                                                                               -----------              ----------

Fixed assets, net                                                                   1,656                   1,943
                                                                               -----------              ----------


TOTAL ASSETS                                                                       26,038                  31,452
                                                                               ===========              ==========
</TABLE>

*          Reclassified

/s/ Yuval Yanai
------------------------------------
Yuval Yanai
Director

/s/ Yoel Katzir
-------------------------------------
Yoel Katzir
President and Chief Executive Officer

Date of approval of the financial statements:  March 26, 2003

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




                                      F-3
<PAGE>
<TABLE>
<CAPTION>

                                                                                                         B.V.R. Systems (1998) Ltd.
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31
------------------------------------------------------------------------------------------------------------------------------------


                                                                                           2002                     2001
                                                                           NOTE       US$ THOUSANDS             US$ THOUSANDS
                                                                           ----       -------------             -------------
<S>                                                                    <C>          <C>                       <C>
LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES
Short-term bank credit                                                      11              15,083                    12,002
Trade payables                                                              12               8,461                     8,513
Excess of advances from customers over amounts
 recognized as revenue                                                      13               1,290                   * 3,897
Other payables and accrued expenses                                         14               4,325                   * 4,294
                                                                                          ---------                 ---------

Total current liabilities                                                                   29,159                    28,706
                                                                                          ---------                 ---------

LONG-TERM LIABILITIES
Liability for employee severance benefits, net                              15                 509                       584
                                                                                          ---------                 ---------


COMMITMENTS AND CONTINGENCIES                                               17


SHAREHOLDERS' EQUITY (DEFICIT)                                              16
Share capital                                                                                2,529                     2,529
Additional paid-in capital                                                                  21,408                    21,408
Accumulated deficit                                                                        (27,567)                  (21,775)
                                                                                          ---------                 ---------

                                                                                            (3,630)                    2,162
                                                                                          ---------                 ---------
                                                                                          ---------                 ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                                                  26,038                    31,452
                                                                                          =========                 =========
</TABLE>


*          Reclassified.


                                      F-4
<PAGE>
<TABLE>
<CAPTION>
                                                                                                         B.V.R. Systems (1998) Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
------------------------------------------------------------------------------------------------------------------------------------


                                                                                2002                  2001                2000
                                                                               -------               -------             -------
                                                                   NOTE                         US$THOUSANDS
                                                                   ----        -----------------------------------------------------
<S>                                                          <C>          <C>                  <C>                  <C>
Income from sales                                                  20A         26,295                 42,550               23,308
Income from royalties and commissions                              20B          1,995                  1,451                2,061
                                                                              --------              ---------             --------

                                                                               28,290                 44,001               25,369

Cost of sales                                                      20C         23,715                 35,845               25,971
                                                                              --------              ---------             --------

Gross profit (loss)                                                             4,575                  8,156                 (602)
                                                                              --------              ---------             --------

Operating expenses:
Research and development                                                        1,554                  1,081                2,870
Selling and marketing                                                           2,363                  1,915                2,194
General and administrative                                                      4,577                  5,029                4,676
                                                                              --------              ---------             --------

Operating profit (loss)                                                        (3,919)                   131              (10,342)


Financing expenses                                                 20D         (1,036)                (1,443)              (1,724)
Financing income                                                   20D            181                    701                  787
Other expenses, net                                                20E           (140)                  (319)                 (31)
                                                                              --------              ---------             --------

Loss before income taxes                                                       (4,914)                  (930)             (11,310)
Income tax expense                                                 18            (878)                     -               (1,974)
                                                                              --------              ---------             --------

Loss after income taxes                                                        (5,792)                  (930)             (13,284)
                                                                              --------              ---------             --------

Net loss for the year                                                          (5,792)                  (930)             (13,284)
Loss per share:                                                               ========              =========             ========
Basic and diluted loss per share
 (in US $)                                                                      (0.54)                 (0.09)               (1.32)
Loss per share:                                                               ========              =========             ========

Weighted average number of ordinary shares outstanding
(in thousands) used in basic and diluted loss per share
 calculation                                                                   10,660                 10,705               10,062
Loss per share:                                                               ========              =========             ========

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

</TABLE>

                                      F-5
<PAGE>
<TABLE>
<CAPTION>

                                                                                                          B.V.R. Systems (1998) Ltd.
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
------------------------------------------------------------------------------------------------------------------------------------



                                 NUMBER OF                                                          RETAINED              TOTAL
                              ORDINARY SHARES                                                       EARNINGS           SHAREHOLDERS'
                                (NIS 1                                       ADDITIONAL           (ACCUMULATED             EQUITY
                                PAR VALUE)             SHARE CAPITAL        PAID-IN CAPITAL          DEFICIT)            (DEFICIT)
                                ----------             -------------        ---------------      -------------          ------------
                                                       US$ THOUSANDS        US$ THOUSANDS        US$ THOUSANDS         US$ THOUSANDS
                                                       -------------        -------------        -------------         -------------

<S>                          <C>                     <C>                  <C>                   <C>                   <C>
BALANCE AS AT
 JANUARY 1, 2000                 9,636,365                 2,275               16,667                (7,561)               11,381

CHANGES DURING 2000
Issuance of ordinary                                                                                      -
 shares                          1,000,000                   248            (1) 4,701                                       4,949
Exercise of stock options           23,336                     6                   40                     -                    46
Net loss for the year                    -                     -                    -               (13,284)              (13,284)

BALANCE AS AT
DECEMBER 31, 2000               10,659,701                 2,529               21,408               (20,845)                3,092

CHANGES DURING 2001
Net loss for the year                    -                     -                    -                  (930)                 (930)
                                -----------            ----------           ----------             ----------           ----------

BALANCE AS AT
 DECEMBER 31, 2001              10,659,701                 2,529               21,408               (21,775)                2,162

CHANGES DURING 2002
Issuance of ordinary
 shares                              1,173                 (2) -                    -                     -                     -
Net loss for the year                    -                     -                    -                (5,792)               (5,792)
                                -----------            ----------           ----------             ----------           ----------

BALANCE AS AT
 DECEMBER 31, 2002              10,660,874                 2,529               21,408               (27,567)               (3,630)
                                ===========            ==========           ===========            ===========          ===========

</TABLE>


(1) Net of issuance expenses of US$ 50 thousand.

(2) Represents an amount less than US$ 1 thousand.


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



                                      F-6
<PAGE>
<TABLE>
<CAPTION>
                                                                                                        B.V.R. Systems (1998) Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------



                                                                                           YEAR ENDED DECEMBER 31
                                                                         -----------------------------------------------------------
                                                                            2002                  2001                  2000
                                                                         ------------          ------------          ------------
                                                                                              US$ THOUSANDS
                                                                         -----------------------------------------------------------

<S>                                                                     <C>                 <C>                  <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss for the year                                                         (5,792)                 (930)              (13,284)
Adjustments to reconcile net income to net cash used in
 operating activities (A)                                                      2,728               (11,032)               10,949
                                                                         ------------          ------------          ------------

Net cash used in operating activities                                         (3,064)              (11,962)               (2,335)
                                                                         ------------          ------------          ------------

CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of fixed assets                                                       (535)                 (324)                 (689)
Proceeds from sale of fixed assets                                                 3                     -                    74
Increase in long-term deposits                                                    (8)                    -                   (30)
Withdrawal of long-term deposits                                                   -                    47                    24
Decrease (increase) in restricted bank deposits                                  (13)                3,324                (2,333)
Changes in loans to employees                                                      6                    (9)                    2
                                                                         ------------          ------------          ------------

Net cash provided by (used in) investing activities                             (547)                3,038                (2,952)
                                                                         ------------          ------------          ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Short-term loan from B.V.R. Technologies Ltd., net                                 -                  (642)               (2,168)
Short-term bank credit, net                                                    3,081                (1,269)                6,897
Proceeds from issuance of shares (net of
 issuance expenses)                                                                -                     -                 4,949
Proceeds from exercise of share options                                            -                     -                    46
                                                                         ------------          ------------          ------------

Net cash (used in) provided by financing activities                            3,081                (1,911)                9,724
                                                                         ------------          ------------          ------------

Increase (decrease) in cash and cash equivalents                                (530)              (10,835)                4,437
Cash and cash equivalents at the beginning of the year                         1,390                12,225                 7,788
                                                                         ------------          ------------          ------------

Cash and cash equivalents at the end of the year                                 860                 1,390                12,225
                                                                         ============          ============          ============

</TABLE>

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



                                      F-7
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
------------------------------------------------------------------------------------------------------------------------------------



                                                                                               YEAR ENDED DECEMBER 31
                                                                            --------------------------------------------------------
                                                                                 2002                 2001                 2000
                                                                            ------------          ------------          ------------
                                                                                                    US$ THOUSANDS
                                                                            --------------------------------------------------------
A.         ADJUSTMENTS TO RECONCILE NET INCOME TO NET
           CASH USED IN OPERATING ACTIVITIES

<S>                                                                       <C>                  <C>                  <C>
Income and expenses not involving cash flows:
Write down of investment in non-traded securities                                 -                     -                    50
Loss (gain) on sale of fixed assets                                              (1)                    2                   (19)
Erosion of long-term deposits                                                    28                     -                     -
Depreciation and amortization                                                   882                   903                   906
Increase (decrease) in liability for employee
 severance benefits, net                                                        (75)                  137                   (54)
Write down of investment in marketable securities                               141                   317                     -
Deferred income taxes, net                                                      318                  (318)                1,063
                                                                           ---------              --------              --------
                                                                              1,293                 1,041                 1,946
                                                                           ---------              --------              --------

Changes in operating asset and liability items:
Decrease (increase) in trade receivables                                      4,449                (4,515)               (8,966)
Decrease (increase) in other receivables and
 prepaid expenses                                                              (160)                 (135)                  598
Decrease (increase) in work in progress                                        (309)                    7                 9,011
Decrease in excess of advances from customers
 over amount recognized as revenue                                           (2,607)               (7,590)                    -
Decrease (increase) in inventory                                               (441)                 (454)                2,577
Increase (decrease) in trade payables                                          (114)                1,397                (7,936)
Increase (decrease) in other payables and accrued
 expenses                                                                        97                (1,141)               13,623
Decrease in non-current receivables                                             520                   358                    96
                                                                           ---------              --------              --------
                                                                              1,435               (12,073)                9,003
                                                                           ---------              --------              --------

                                                                              2,728               (11,032)               10,949
                                                                           =========              ========              ========

B.         NON-CASH OPERATIONS
           Purchases of fixed assets on credit                                   62                     -                     -
                                                                           =========              ========              ========

</TABLE>



                                      F-8
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 1 -   GENERAL

     A.   B.V.R. Technologies Limited ("B.V.R."), an Israeli company formed in
          1986, has been engaged in the development, manufacture and marketing
          of advanced training and computer-based simulation systems for
          military applications, and through its subsidiaries, of commercial
          applications in the fields of telecommunication and entertainment
          based on virtual reality. On October 23, 1998, B.V.R. executed a Plan
          of Arrangement (the "Plan" or "the spin off plan") under Sections 233
          and 234 of the Israeli Companies Ordinance, pursuant to which B.V.R.
          was divided into two separate companies: (i) B.V.R. Systems (1998)
          Ltd. ("The Company"), which owns and operates all of what was B.V.R.'s
          defense-related business and (ii) B.V.R. itself, which owns and
          operates all of its existing commercial businesses. The Company,
          incorporated in Israel, was formed on January 6, 1998 to receive all
          of the assets and liabilities of the defense-related business of
          B.V.R., in accordance with the terms of the Plan.

          The principal markets for the Company's products are mainly Europe and
          the Far East. Most of the Company's customers are either government
          institutions or entities controlled by governments. Approximately 86%
          of the Company's revenues during 2002 were provided by three customers
          and approximately 71% and 77% of the Company's revenues during 2001
          and 2000 respectively, were provided by two customers (see Note 20A).

          The Company's business is exposed to numerous risks including product
          development, technological advancement and the introduction of these
          products to the world's markets. The Companies engaged in this field
          are required to invest significant resources and constantly update
          products. The future success of the Company is dependent upon the
          technological sophistication, price and quality of its products, and
          the provision of solutions to meet customers' needs in comparison to
          competitors.

     B.   As part of the Plan, the Company issued ordinary shares to B.V.R.'s
          shareholders in a manner so that each shareholder of B.V.R. received a
          quantity of the Company's shares equal to the number of B.V.R.'s
          shares held.

          In accordance with the spin-off plan, upon the exercise of options by
          any option holder of B.V.R., the option holder will be issued an equal
          number of shares of the Company, and the exercise price of both such
          options will be allocated between B.V.R. and the Company on a 65% -
          35% basis of the original price.

     C.   In 2000, Elisra Electronic Systems Ltd. ("Elisra") acquired additional
          holdings through purchases from other shareholders and an issue by the
          Company. By December 31, 2000, Elisra had acquired control over the
          Company as a result of a voting agreement executed with the other
          shareholders (see Note 16C).



                                      F-9
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 1 - GENERAL (CON'T)

          D.   During 2002, the Company's income totaled only US$ 28.3 million,
               and it incurred an operating loss of US$ 3.9 million, a net loss
               of US$ 5.8 million and negative cash flows from operating
               activities of US$ 3.1 million. In addition, as of December 31,
               2002 the Company has a deficiency in its shareholders' equity and
               a working capital deficit of US$ 3.6 million and US$ 5.4 million,
               respectively. On the same date, the Company's cash balance was
               US$ 860 thousand, short-term bank credit totaled US$ 15.1 million
               and the Company's backlog of orders, which has not yet been
               recognized as income in the statement of operations, was US$ 26.1
               million. Subsequent to balance sheet date, the Company reached
               agreements with two of its principal bank lenders according to
               which the repayment date of short-term loans in the aggregate
               principal amount of US$ 9.0 million, which were scheduled for
               repayment through November 2003, was deferred until June 30,
               2004.

               The Company is confident that the rescheduling of the above
               mentioned loans together with meeting forecasted cash flows from
               operating activities for 2003, as well as obtaining orders
               forecasted in the budget approved by the Board of Directors will
               enable it to meet its anticipated commitments for at least 12
               months following the date of approval of these financial
               statements.

NOTE 2 -   SIGNIFICANT ACCOUNTING POLICIES

               The financial statements have been prepared in accordance with
               generally accepted accounting principles in Israel.

          A.   USE OF ESTIMATES

               The preparation of financial statements in conformity with
               generally accepted accounting principles requires management to
               make estimates and assumptions that affect the reported amounts
               of assets and liabilities and disclosure of contingent assets and
               liabilities at the date of the financial statements and the
               reported amount of revenues and expenses during the reporting
               period. These are management's best estimates based on experience
               and historical data. Actual results could differ from those
               estimates.

          B.   FINANCIAL STATEMENTS

          1.   Financial statements in U.S. dollars

               The majority of the Company's sales are made outside Israel in
               U.S. dollars, and a substantial portion of the Company's costs
               are incurred in U.S. dollars. Accordingly, the Company has
               determined that the U.S. dollar is the currency of its primary
               economic environment and thus its functional currency. The
               Company's reporting currency is also the U.S. dollar.


                                      F-10
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

               The Company's transactions and balances denominated in U.S.
               dollars are presented at their original amounts. Transactions
               denominated in currencies other than U.S. dollars are translated
               into U.S. dollars using current exchange rates. All foreign
               currency transaction gains and losses are reflected in the
               Statements of Operations as financial income or expenses, as
               appropriate.


          2.   The  financial  statements  of  the  Company's  subsidiaries  are
               remeasured  into  the  Company's   functional   currency  in  the
               following manner:

                    NON-MONETARY BALANCE SHEET ITEMS - according to the
                    historical exchange rates prevailing on the date of
                    transaction.

                    MONETARY BALANCE SHEET ITEMS - according to exchange rates
                    prevailing at the balance sheet date.

                    ITEMS IN THE STATEMENTS OF INCOME - according to average
                    exchange rates.

                    Translation gains or losses are recorded in the Statements
                    of Operations.

          C.   PRINCIPLES OF CONSOLIDATION

               The consolidated financial statements include the accounts of the
               Company and its subsidiaries B.V.R. Pacific Pte. Ltd. a wholly
               owned subsidiary, ("Pacific") and Inch Inver Invest B.V. (a
               holding company in the Netherlands which held Pacific).
               Inter-company transactions and balances, including profits from
               inter-company sales not yet realized outside the group, have been
               eliminated in consolidation. During December 2002, Inch Inver
               Invest B.V. transferred all its assets and liabilities to the
               Company, including its shares in Pacific.

          D.   CASH EQUIVALENTS

               Cash equivalents are short-term, highly liquid investments
               originally purchased with maturities of three months or less and
               that are readily convertible to cash.



                                      F-11
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

          E.   INVENTORIES

               Inventories (raw materials and components) are stated at the
               lower of cost or market value. Cost is determined as follows:

               Raw materials and components   - on the "first-in, first-out"
                                                method

               Labor and overhead component   - on the basis of direct and
                                                allocable indirect manufacturing
                                                cost.

          F.   WORK IN PROGRESS AND ADVANCES FROM CUSTOMERS

               Work in progress is stated at cost which includes direct
               identified costs and indirect joint costs. Direct costs are
               charged to a project by identification and indirect joint costs
               are divided between projects based on the ratio of costs. The net
               balance of costs stated in the balance sheet as part of current
               assets is after the deduction of those accumulated costs, which
               were included in the statement of operations on the basis of the
               percentage of completion (see Note 2K).

               The excess of accumulated revenues included in the statement of
               operations over advances from customers in respect of the
               completed part of the project is classified as trade receivables.

               Excess advances received from customers, after deduction of
               revenues included in the statement of operation by the percentage
               of completion method, are classified as current liabilities.

          G.   PROVISION FOR DOUBTFUL DEBTS

               The financial statements include specific provisions for doubtful
               debts, which, in Management's opinion, adequately reflect the
               loss inherent in those debts. Management's determination of the
               adequacy of the provision is based, inter alia, on an evaluation
               of the risk, by considering the available information on the
               financial position of the debtors, the volume of their business
               and an evaluation of the security received from them.

               Doubtful debts which, in the opinion of management, are unlikely
               to be collected, are written off, based on a Management
               resolution or if they exceed a specified amount.

          H.   FIXED ASSETS

               Fixed assets are stated at cost less accumulated depreciation.
               Depreciation is calculated using the straight-line method over
               the estimated useful lives of the assets.




                                      F-12
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

               Annual rates of depreciation are as follows:

                                                                          %
                                                  ---------------------------
               Computers                                            20 - 33.3
               Motor vehicles                                              15
               Manufacturing equipment                                10 - 15
               Office furniture and equipment                          6 - 15
               Leasehold improvements              Over the term of the lease


          I.   PROVISION FOR WARRANTIES

               The Company provides warranties on sales of systems to certain
               customers for periods of up to 24 months. The provision is
               computed on the basis of specific management evaluations.

          J.   MARKETABLE SECURITIES

               Investments in marketable securities that are not designated for
               sale in the short-term are carried at cost, except where market
               value is lower than cost and the impairment in value is deemed to
               be other than temporary. An impairment in the value of marketable
               securities is charged to earnings and a new cost basis for the
               security is established.

          K.   REVENUE RECOGNITION

               The Company follows the requirements defined in Israel Accounting
               Standard No.4 ("the Standard"). The Standard requires that income
               from the execution of long-term contract work should be
               recognized according to the "percentage of completion" method.
               The percentage of completion is computed based on the project's
               total execution costs which reflect the progress of its
               completion, and which mainly include: salaries, material costs
               and subcontractor charges.

               Revenues ascribed to each period are the amounts of gross profits
               earned on such contracts during the period plus the costs
               incurred during the period (excluding cost of materials that have
               not yet been used and costs incurred for subcontracted work that
               is still to be performed).

               In accordance with the Standard, the accumulated results of
               project execution work are recorded currently. The periodic
               report of income and expenses from project execution work covers
               the full turnover, including such turnover in respect of which an
               earnings forecast cannot be estimated at the time of reporting,
               but from which it can be determined that the recovery of expenses
               incurred is probable. In such cases, full expenses incurred are
               currently charged against income at the level of such expenses
               ("nil net margin presentation").


                                      F-13
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

          The initial  adoption of the  Standard by the Company had no effect on
          the Company's financial statements as at January 1, 2000.

          Provisions 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.

          Royalty revenues are recorded mainly on the cash basis.

          As to management's estimates and assumptions - see Note 2A above.

          L.   RESEARCH AND DEVELOPMENT COSTS

               Research and development costs are charged to the Statement of
               Operations, as incurred.

          M.   SELLING AND MARKETING COSTS

               Selling and marketing costs which can be identified clearly and
               unmistakably with the individual project and with it alone are
               charged to the costs of work in progress.

               Costs that cannot be so identified are charged to selling and
               marketing expenses in the statement of operations.

          N.   INCOME TAXES

               Taxes on income for all periods presented have been computed on
               the basis of income tax rates applicable to the Company as a
               separate stand-alone entity.

               The Company accounts for income taxes under the liability method
               of accounting for income taxes.

               Under the liability method, deferred tax assets and liabilities
               are determined based on differences between financial reporting
               and tax bases of assets and liabilities as well as losses carried
               forward, and are measured using the prevailing tax rates and laws
               that will be in effect when the differences are expected to be
               utilized. The main factors, in respect of which deferred taxes
               were not calculated, are as follows:

          1.   Adjustments relating to the change in the purchasing power of the
               shekel (which is the basis for computation of taxable income of
               the Company), in respect of private motor vehicles, according to
               the rules determined by the Israeli Institute of Certified Public
               Accountants.

          2.   Realization of investment in a subsidiary that management intends
               to retain. Similarly, deferred taxes have not been provided for
               future taxable distribution from a subsidiary, since it is group
               policy not to initiate a distribution of dividend that involves
               additional tax liability.




                                      F-14
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

               Deferred tax assets for future tax benefits from  realization are
               not included  where their  realization  is less than "more likely
               than  not".  As  such,  the  Company  has  recorded  a  valuation
               allowance in regard of all its tax losses carried forward as well
               as for other temporary differences. (See Note 18G)

          O.   BASIC AND DILUTED LOSS PER SHARE

               Basic earnings per share are computed based on the weighted
               average number of ordinary shares outstanding during each year,
               plus the effect of options and warrants outstanding at year-end
               the exercise of which is probable. Diluted loss per share is
               computed based on the weighted average number of ordinary shares
               used for computing the basic loss per share plus options and
               warrants which were not included in the basic loss per share
               calculation and which do not have an anti-dilutive effect.

          P.   ACCOUNTING FOR STOCK-BASED COMPENSATION

               The Company has elected to follow Accounting Principles Board
               Opinion No. 25, "Accounting for Stock Issued to Employees" (APB
               25") and related interpretations, including the FASB
               Interpretation No. 44, "Accounting for Certain Transactions
               Involving Stock Compensation" and interpretation of APB 25 issued
               in March 2000 (FIN No. 44) in accounting for its fixed employee
               stock options plans. Under APB 25, when the exercise price of the
               Company's employee stock options equals or is above the market
               price of the underlying stock on the date of grant, no
               compensation expense is recognized. The pro-forma information
               with respect to the fair value of the options is provided in
               accordance with the provisions of Statement No. 123 (see Note
               22). The effect of the spin-off on employee options was accounted
               for in accordance with the guidelines in Emerging Issues Task
               Force Issue No. 90-9.

          Q.   CONCENTRATION OF CREDIT RISK

               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, 2002 and 2001, 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 and various
               amounts due from transactions arising in the ordinary course of
               business. 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.


                                      F-15
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

               The Company operates on the basis of agreements it signs with its
               customers.  The Company  manages a limited  number of projects at
               the same time,  so that a delay in the execution of a project may
               have a material effect on the financial results. Furthermore, the
               majority of the Company's transactions in progress are with major
               customers, see Note 1A.

          R.   FAIR VALUE OF FINANCIAL INSTRUMENTS

               The fair market value of the Company's financial instruments,
               which are cash and cash equivalents, restricted bank deposits,
               accounts receivable, and short and long-term debt approximate
               their carrying value as of December 31, 2002 and 2001. The
               carrying amounts of the Company's borrowings under its short loan
               agreements approximate their fair value, since they bear interest
               that changes according to the LIBOR rate.

          S.   DERIVATIVE FINANCIAL INSTRUMENTS

               Derivative financial instruments, held for hedging, are deferred
               and recognized when the hedged transactions occur.

               Derivative financial instruments, not held for hedging, are
               stated in the financial statements at their fair value. Changes
               in fair value are recognized as they occur.

               The fair value of derivative financial instruments is determined
               based on their market value and, when there is no market value,
               then according to a valuation model.

          T.   NEW ACCOUNTING STANDARDS

          1.   In February 2003, the Israel Accounting Standards Board published
               Accounting Standard No. 15 - Decline in Value of Assets. The
               Standard provides procedures which a company must apply in order
               to ensure that its assets in the consolidated balance sheet, are
               not presented at an amount which is in excess of their
               recoverable value, which is the higher of the net selling price
               or the present value of the estimated future cash flows expected
               to be derived from use and disposal of the asset. In addition,
               the Standard provides rules for presentation and disclosure with
               respect to assets whose value has declined.

               The Standard applies to financial statements for periods
               beginning January 1, 2003. The Standard provides that in most
               cases the transition will be effected by means of the "from here
               on" method, however a loss from decline in value of an asset, in
               the amount of the difference between the book value on the
               commencement date of the Standard and the recoverable amount as
               at that date, shall be charged to the statement of operations in
               the category "cumulative effect as at beginning of the year of
               change in accounting method" if and only if, the said loss was
               not recognized in the past solely due to the fact that the net
               non-discounted future cash flows were greater than the book



                                      F-16
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT'D)

               value. In the opinion of management, adoption of this
               Standard is not expected to have any material effect on its
               financial position and/or operating results.

          2.   In August 2002, the Israel Accounting Standards Board published
               Standard No. 14, "Interim Financial Reporting". The standard
               prescribes the minimum content of an interim financial report,
               including the disclosure required in the notes, and also
               prescribes the accounting recognition and measurement principles
               that should be applied in an interim financial report. Standard
               No. 14 will become effective for financial statements covering
               periods beginning on or after January 1, 2003.

               The standard does not require that comparative data for interim
               periods prior to the date of effect be restated, but if the
               financial statements include comparative data for interim periods
               prior to the date of effect, which is not in compliance with the
               provisions of the standard, a description of the principal
               differences between the provisions of this standard and the
               principles by which the comparative data was prepared should be
               included in the notes to the financial statements.

NOTE 3 -   CASH AND CASH EQUIVALENTS

<TABLE>
<CAPTION>


                                                                                               DECEMBER 31,
                                                                              -----------------------------------------------
                                                                                        2002                      2001
                                                                              ----------------------      -------------------
                                                                                   US$ THOUSANDS             US$ THOUSANDS
                                                                              ----------------------      -------------------
<S>                                                                         <C>                         <C>
           Linked to the U.S. dollar                                                             13                      308
           In New Israeli Shekels                                                               760                      988
                                                                             -----------------------      -------------------
           Linked to other foreign currencies                                                    87                       94
                                                                             -----------------------      -------------------
                                                                                                860                    1,390
                                                                             =======================      ===================

</TABLE>

NOTE 4 -   RESTRICTED BANK DEPOSITS

        A.     Cash was deposited in banks in respect of bank guarantees granted
               to the Company's customers as collateral for the continued
               performance of work and advances received from the customers. The
               withdrawal of these deposits is based on the progress in the work
               and is subject to customer approval. The Company recorded charges
               on these deposits in favor of the banks that granted the
               guarantees.


                                      F-17
<PAGE>
<TABLE>
<CAPTION>

                                                                                                        B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 4 -   RESTRICTED BANK DEPOSITS (CONT'D)

                                                                EFFECTIVE       ----------------------------------------------------
                                                           INTEREST RATE AS AT                     DECEMBER 31,
                                                                                ----------------------------------------------------


                                                                      2002                     2002                     2001
                                                                    ------------           -------------            -------------
                                                                               %           US$ THOUSANDS            US$ THOUSANDS
                                                                    ------------           -------------            -------------

<S>                                                               <C>                  <C>                      <C>
        B. Composed as follows:
                      Linked to the U.S. dollar                            1.16%                  4,266                    4,253
                                                                                           -------------              -----------

                                                                                                  4,266                    4,253
                                                                                           -------------               -----------
           As for charges, see Note 17D.


NOTE 5 -   TRADE RECEIVABLES

           Open accounts include amounts billed to customers and various amounts
           due from transactions arising in the ordinary course of business.
           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.

           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.

                                                                                                       DECEMBER 31
                                                                                           -----------------------------------
                                                                                                2002                 2001
                                                                                           -------------         -------------
                                                                                           US$ THOUSANDS         US$ THOUSANDS
                                                                                           -------------         -------------
         Open accounts                                                                            8,118                4,300
         Income receivable (1)                                                                    6,992               15,329
         Current maturities of long-term trade receivables                                          520                  520
         Elisra Electronic Systems Ltd. Related party (see
          Note 21A)                                                                                  70                    -
                                                                                           -------------         ------------
                                                                                                 15,700               20,149
                                                                                           =============         ============


           (1)       Income receivable represents the excess of the accumulated
                     revenues included in the statement of operation over
                     advances from customers in respect of the completed part of
                     the project or amounts billed which are reflected as open
                     accounts.

                                                                                                     DECEMBER 31
                                                                                         ------------------------------------
                                                                                                2002                 2001
                                                                                          -------------        --------------
                                                                                          US$ THOUSANDS         US$ THOUSANDS
                                                                                          -------------        --------------
         Accumulated amounts recognized as revenues                                              78,797               54,602
         Less - advances from customers and open accounts                                        72,332               40,481
                                                                                          --------------         ------------

                                                                                                  6,465               14,121
         Other income receivable                                                                    527                1,208
                                                                                          --------------         ------------

                                                                                                  6,992               15,329
                                                                                          ==============         ============
</TABLE>



                                      F-18
<PAGE>
<TABLE>
<CAPTION>

                                                                                                        B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 6 -   WORK IN PROGRESS

                                                                                                  DECEMBER 31,
                                                                                   -----------------------------------
                                                                                        2002                 2001
                                                                                   -------------         -------------
                                                                                   US$ THOUSANDS         US$ THOUSANDS
                                                                                   -------------         -------------
<S>                                                                               <C>                   <C>
         Costs with respect to work-in-progress                                         121,820              125,714
         Less - amounts charged to statement of income                                 (121,492)            (125,695)

                                                                                            328                   19


NOTE 7 -   OTHER RECEIVABLES AND PREPAID EXPENSES

                                                                                               DECEMBER 31,
                                                                                   -------------------------------------
                                                                                        2002                    2001
                                                                                   -------------          -------------
                                                                                   US$ THOUSANDS          US$ THOUSANDS
                                                                                   -------------          -------------
         Government authorities                                                             158                    298
         Employees                                                                           18                     29
         Prepaid expenses                                                                   337                    133
         Deferred income taxes                                                                -                    384
         Others                                                                             565                    440

                                                                                          1,078                  1,284
         Allowance for doubtful accounts                                                   (251)                  (222)

                                                                                            827                  1,062


</TABLE>
                                      F-19
<PAGE>
<TABLE>
<CAPTION>

                                                                                                        B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 8 -   INVENTORIES

                                                                                               DECEMBER 31,
                                                                                   --------------------------------------
                                                                                        2002                    2001
                                                                                    -------------          -------------
                                                                                    US$ THOUSANDS          US$ THOUSANDS
                                                                                    -------------          -------------
<S>                                                                              <C>                  <C>
         Components for systems manufacturing                                             1,765                  1,325
         Raw materials                                                                       52                     51

                                                                                          1,817                  1,376



</TABLE>









                                      F-20
<PAGE>
<TABLE>
<CAPTION>
                                                                                                        B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 9 - INVESTMENTS, LOANS AND LONG-TERM RECEIVABLES



                                                                                              DECEMBER 31,
                                                                                 -------------------------------------
                                                                                      2002                    2001
                                                                                 -------------           -------------
                                                                                 US$ THOUSANDS           US$ THOUSANDS
                                                                                 -------------           -------------
<S>                                                                            <C>                    <C>
         Long-term trade receivables (1)(2)                                            1,040                    1,560
         Less - current maturities                                                      (520)                    (520)
                                                                                 -------------           -------------
                                                                                         520                    1,040

         Marketable securities                                                            31                      172
         Loans to employees                                                                -                        2
         Long term deposit                                                                33                       46
                                                                                 -------------           -------------

                                                                                         584                    1,260
                                                                                 =============           =============


          (1)  Linked to the U.S. dollar and bearing interest at the rate of
               7.8% per year.

          (2)  Aggregate maturities are as follows:

                                                                                                           DECEMBER 31
                                                                                                              2002
                                                                                                          ------------
                                                                                                          US$ THOUSANDS
                                                                                                          ------------
                    First year (current maturities)                                                               520
                    Second year                                                                                   520
                                                                                                          ------------

                                                                                                                1,040
                                                                                                          ============


</TABLE>



                                      F-21
<PAGE>
<TABLE>
<CAPTION>
                                                                                                        B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 10 - FIXED ASSETS



                       COMPUTERS                                                 OFFICE
                     AND ELECTRONIC         MANUFACTURING        MOTOR           FURNITURE AND       LEASEHOLD
                      EQUIPMENT             EQUIPMENT           VEHICLES         EQUIPMENT           IMPROVEMENTS         TOTAL
                     -------------         -------------      -------------     -------------        -------------     -------------
                     US$ THOUSANDS         US$ THOUSANDS      US$ THOUSANDS     US$ THOUSANDS        US$ THOUSANDS     US$ THOUSANDS
                     -------------         -------------      -------------     -------------        -------------     -------------
<S>               <C>                   <C>               <C>                <C>                 <C>                <C>
COST
Balance as at
 December 31,
 2001                     5,694                1,959                 50               852                   252            8,807
Additions                   555                   15                  -                27                     -              597
Disposals                     -                    -                (24)                -                     -              (24)
                     -------------         -------------      -------------     -------------        -------------     -------------
Balance as at
 December 31,
 2002                     6,249                1,974                 26               879                   252            9,380
                     -------------         -------------      -------------     -------------        -------------     -------------

ACCUMULATED
 DEPRECIATION
Balance as at
 December 31,
 2001                     4,627                1,808                 23               339                    67            6,864
Additions                   673                  118                  5                60                    26              882
Disposals                     -                    -                (22)                -                     -              (22)
                     -------------         -------------      -------------     -------------        -------------     -------------
Balance as at
 December 31,
 2002                     5,300                1,926                  6               399                    93            7,724
                     -------------         -------------      -------------     -------------        -------------     -------------

NET BOOK VALUE
 AS AT DECEMBER
 31, 2002                   949                   48                 20               480                   159            1,656
                     =============         =============      =============     =============        =============     =============
NET BOOK VALUE
 AS AT DECEMBER
 31, 2001                 1,067                  151                 27               513                   185            1,943
                     =============         =============      =============     =============        =============     =============


</TABLE>


                                      F-22
<PAGE>
<TABLE>
<CAPTION>
                                                                                                        B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 11 - SHORT-TERM BANK CREDIT

           The weighted average interest rates on short-term bank credit (linked
           to the U.S. dollar) as at December 31, 2002 and 2001, are 3.7% and
           3.8%, respectively. As of December 31, 2002, the Company has utilized
           all its available credit lines which are due for payment through
           November 2003. Subsequent to balance sheet date, the Company reached
           an agreement with its principal bank lenders to reschedule the
           repayment of short-term loans in the amount of US$ 9 million to June
           2004.

NOTE 12 -  TRADE PAYABLES

                                                                                                     DECEMBER 31,
                                                                                     ---------------------------------------
                                                                                           2002                      2001
                                                                                      -------------            -------------
                                                                                      US$ THOUSANDS            US$ THOUSANDS
                                                                                      -------------            -------------
<S>                                                                                  <C>                    <C>
           Tadiran Spectralink Ltd., related party (see Note 21A)                               27                       6
           Post-dated checks                                                                 1,313                     669
           Others                                                                            7,121                   7,838
                                                                                       -------------           -------------

                                                                                             8,461                   8,513
                                                                                       =============           =============


NOTE 13 -  EXCESS OF ADVANCES FROM CUSTOMERS OVER AMOUNTS RECOGNIZED AS REVENUE

                                                                                                    DECEMBER 31,
                                                                                       -------------------------------------
                                                                                           2002                     2001
                                                                                       -------------           -------------
                                                                                       US$ THOUSANDS           US$ THOUSANDS
                                                                                       -------------           -------------

           Advances from customers                                                           3,819                  51,467
           Less - accumulated amounts recognized as revenue                                 (2,529)                (47,570)
                                                                                       -------------           -------------

                                                                                             1,290                   3,897
                                                                                       =============           =============
NOTE 14 -  OTHER PAYABLES AND ACCRUED EXPENSES

                                                                                                    DECEMBER 31,
                                                                                       -------------------------------------
                                                                                           2002                     2001
                                                                                       -------------           -------------
                                                                                       US$ THOUSANDS           US$ THOUSANDS
                                                                                       -------------           -------------

           Payroll and related accruals                                                      1,323                   1,407
           Provision for warranty and completion                                               455                     150
           Income taxes payable                                                                966                     892
           Deferred income taxes                                                                 -                      66
           Elisra Electronic Systems Ltd. - related party (see Note 21A)                        68                      52
           Other accrued expenses and accounts payable                                       1,513                   1,727
                                                                                       -------------           -------------

                                                                                             4,325                   4,294
                                                                                       =============           =============

</TABLE>



                                      F-23
<PAGE>
<TABLE>
<CAPTION>
                                                                                                        B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 15 -  LIABILITY FOR EMPLOYEE SEVERANCE BENEFITS, NET

          A.   Under Israeli law, the Company is required to make severance
               payments to dismissed employees and to employees terminating
               employment under certain other circumstances. The Company's
               liability for severance pay is fully provided for through
               insurance policies and by accrual.

               Due to a reduction in salaries effective from October 1, 2002 and
               in accordance with an agreement between the Company and its
               employees, the liability for severance pay calculation is divided
               into two periods, until the salary reduction and onwards. The
               calculation was based on the number of years of employment until
               September 30, 2002 multiplied by the latest salary paid as of
               September, 2002, plus the number of years of employment
               commencing October 1, 2002 multiplied by the latest salary paid.


                                                                                                   DECEMBER 31,
                                                                                       -------------------------------------
                                                                                           2002                    2001
                                                                                       -------------           -------------
                                                                                       US$ THOUSANDS           US$ THOUSANDS

<S>                                                                              <C>                     <C>
                     Severance pay                                                          2,096                   1,696

                     Less - amounts funded*                                                (1,587)                 (1,112)
                                                                                       -------------           -------------

                                                                                              509                     584
                                                                                       =============           =============


     * The Company may only withdraw amounts funded for the purpose of severance
     pay disbursement.

          B.   Severance pay expenses (income) recorded for the years ended
               December 2002, 2001 and 2000 were $(54) thousand, $163 thousand
               and $247 thousand, respectively.

NOTE 16 -  SHAREHOLDERS' EQUITY

          A.   On February 14, 2003, the Company transferred the ordinary shares
               quote from the Nasdaq SmallCap Market to the Over the Counter
               Bulletin Board (OTCBB) under the symbol BVRSF.

          B.

                                                               AUTHORIZED                            ISSUED AND OUTSTANDING
                                                       ------------------------------              ----------------------------
                                                              DECEMBER 31,                                DECEMBER 31,
                                                       ------------------------------              ----------------------------
                                                          2002                   2001                 2002                  2001
                                                       -----------           -----------           ----------           ----------
                    Ordinary shares of
                    NIS 1.00 par value                 20,000,000            20,000,000            10,660,874           10,659,701
                                                       ===========           ===========           ===========          ===========

</TABLE>



                                      F-24
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDERS' EQUITY (CONT.)

          C.   In June 2000, the Company reached agreement with one of its
               shareholders, Elisra Electronic Systems Ltd. ("Elisra"), a wholly
               owned subsidiary of Koor Industries Ltd. Under the agreement (the
               "Share Purchase Agreement"), the Company issued Elisra one
               million B.V.R. ordinary shares at US$ 5.00 per share on August
               29, 2000, for an aggregate purchase price of US$ 5.0 million. The
               Company also granted Elisra an option to purchase up to an
               additional 1.5 million ordinary shares at a price of US$ 6.00 per
               share which is subject to adjustments if there will be any change
               in the number of the Company's shares. The option will be valid
               for three years until June 25, 2003 and may be exercised
               partially or in whole. Under certain conditions, Elisra will be
               entitled to a dividend (if distributed), to be paid when the
               options are exercised.

               The Share Purchase Agreement includes an indemnification
               provision pursuant to which the Company undertakes to indemnify
               Elisra for any liability greater than US$ 2.5 million, arising as
               a result of claims against the Company on part of the Israeli
               Aircraft Industry Ltd. ("IAI"), relating to the period prior to
               the cooperation agreement between the Company and IAI (see Note
               17A). The Company shall only be obliged to indemnify Elisra for
               amounts which the Company shall have to compensate IAI in
               accordance with Elisra's added percentage of holding in the
               Company as results from the Share Purchase Agreement (not
               including any increase in the holdings resulting from the
               exercise of the option granted to Elisra as mentioned above). As
               at December 31, 2002 and for the three years then ended, no
               expenses and/or liabilities were recorded by the Company.
               Management believes that the resolving of disagreements with IAI
               will not have additional implications on the financial results or
               the Company's financial situation.

               In addition to the above, during July 2000, Elisra also signed a
               purchase agreement with Mr. Aviv Tzidon, one of B.V.R.'s
               founders, for the purchase of all of Mr. Tzidon's shares in the
               Company and entered into a voting agreement with all other major
               shareholders pursuant to which Elisra shall have the right to
               nominate the majority of the members of the Board of Directors of
               the Company, effective as of August 29, 2000 (the closing date of
               the above-mentioned transactions) and therefore Elisra has
               control of the Company. As of December 31, 2002 Elisra holds
               46.15% of the Company's shares.

          D.   In June 2000, the Board of Directors of the Company approved a
               plan to grant options for the purchase of up to 1,200,000
               ordinary shares to the Company's employees. Each option is
               exercisable into one ordinary share of the Company at an exercise
               price equal to the market price of the share on the date of
               issuance.

               At December 31, 2002, there are 856 thousand options outstanding,
               after cancellation of those options held by employees who are no
               longer employed by the Company. The options are exercisable at
               prices of US$ 1.188 to US$ 4.125 per share. The aforesaid options
               are exercisable in three equal increments (one third per year)
               commencing one year after their issuance.



                                      F-25
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDER'S EQUITY (CONT'D)

               Within the framework of the above plan, in July 2000, the Company
               issued to Mr. Avner Raz, Chairman of the Board of Directors and
               former CEO, options to purchase 60,000 ordinary shares of the
               Company, at an exercise price of US$ 4.25 per each share. The
               vesting dates of the options are as follows: options to purchase
               20,000 ordinary shares of the Company on July 24, 2001; options
               to purchase 20,000 ordinary shares of the Company on July 24,
               2002, and options to purchase 20,000 ordinary shares of the
               Company on July 24, 2003.

               In August 2001, the Board of Directors resolved to cancel the
               remaining balance of options that were available for issuance
               from that option plan.

               For details of employee stock options of the Company, see Note
               22.

          E.   In February 2000, the Company's Board of Directors approved the
               grant of up to 300 thousand options to employees of the Company.
               The options were issued in March 2000 and will be exercisable,
               after a vesting period, until March 2005 at the price of US$
               7.125 in cash per option. Each option is exercisable into one
               ordinary share of the Company.

               At December 31, 2002, there are 163 thousand options outstanding,
               after cancellation of those options held by employees who are no
               longer employed by the Company.

               For details of employee stock options of the Company, see Note
               22.

          F.   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 an exercise price equal to the market
               price of the share on the date of issuance.

               At December 31, 2002, there are 666 thousand options outstanding
               after cancellation of those options held by employees who are no
               longer employed by the Company.

               Within the framework of the above plan, in September 2001, the
               Company issued to Mr. Avner Raz, Chairman of the Board of
               Directors, options to purchase 60,000 ordinary shares of the
               Company, at an exercise price of US$ 2.03 per each share.

               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 will
               expire after three years from the vesting date of each increment.

               For details of employee stock options of the Company, see Note
               22.



                                      F-26
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 16 - SHAREHOLDER'S EQUITY (CONT'D)

          G.   Any dividend distributed by the Company will be declared in NIS
               and paid in U.S. dollars on the basis of the exchange rate
               prevailing at the date of payment.



NOTE 17 -  COMMITMENTS AND CONTINGENT LIABILITIES

          A.   COOPERATION AGREEMENT

          1.   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. ("IAI")
               (the "IAI Agreement"). Pursuant to the IAI Agreement, the Company
               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 Company.
               The IAI Agreement expired pursuant to its terms in October 1997.

               During August 1999, the Company signed a new agreement with MLM
               (MLM Agreement) which governs a joint venture between them and
               which also provides guidelines for fair competition between them,
               this without adversely impacting existing agreements previously
               signed with third parties.

          2.   The parties have agreed that the "Ehud" system will be marketed
               by each of the parties, in various territories, in consideration
               of the payment of various royalties to the other parties. As part
               of the MLM Agreement, the following worldwide territories have
               been delineated:

               a.   A territory in which one party  operates  exclusively  while
                    paying the other party  royalties at the rate of 4.75%-12.5%
                    of the  contract  consideration  with  respect to  contracts
                    executed in such countries  until 2008. The party  receiving
                    the  royalty  shall not  operate  in this  territory  in any
                    manner whatsoever.

               b.   A  territory  in which the  parties  may  compete,  with the
                    successful  party  paying the other party  royalties  at the
                    rate of 4%-8% of the contract consideration, with respect to
                    contracts executed in such countries until 2008.

               c.   Countries not included in a. and b., above, shall be covered
                    by a separate arrangement.

               The agreement, whose terms are set forth above, shall apply to
               the sale of the "Ehud" systems. With regard to other product,
               separate royalty payment instructions were set up.

               There are still outstanding disagreements between the parties
               relating to projects performed prior to entering into the MLM
               agreement. The MLM agreement provides for a resolution mechanism
               of such disputes, including by arbitration in case the parties
               can not reach a mutually agreed resolution. Management believes
               that the resolving of outstanding disagreements will not have
               additional implications on the financial results or the Company's
               financial situation.


          3.   In April 1998, the Company signed a teaming agreement with Metric
               Systems Corporation ("Metric"), pursuant to which Metric shall be
               a licensed manufacturer of the Company for the fourth-generation
               Ehud systems, to the global market.



                                      F-27
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)

               Pursuant to this agreement, the parties mutually agreed to
               provide each other with components, engineering or manufacturing
               services, regarding the Ehud systems. This agreement expired in
               April 2001, except for certain provisions concerning cooperation
               in a specific country, which will remain effective until May
               2003.

          4.   During November 2001, the Company and Smiths Aerospace signed a
               Memorandum of Understanding to pursue an integrated Smiths
               Airborne Video Solid State Recorder (AVSR) with the Company's
               airborne embedded training suite ("the Product"). The parties
               agreed to work towards a teaming agreement that will define the
               roles of the parties and terms of a program or programs relating
               to the said Product.

          B.   LEASE COMMITMENTS

               The premises occupied by the Company are rented under various
               operating leases expiring at the end of September 2009. The
               future minimum annual rental payments as of December 31, 2002 are
               as follows:

                     YEAR ENDING DECEMBER 31,                US$ THOUSANDS
                     ------------------------                -------------

                     2003                                             454
                     2004                                             467
                     2005                                             467
                     2006                                             467
                     2007 and after                                 1,046
                                                             -------------

                                                                    2,901
                                                             -------------

          C.   SPIN-OFF

               In connection with the spin-off plan ("plan") the Company
               completed several agreements with B.V.R. for the purpose of
               giving effect to the plan and defining the Company's and B.V.R.'s
               working relationship, as follows:

          1.   The Company and B.V.R. each undertook to indemnify and/or
               compensate the other (the "Injured Party") for any amount, damage
               or expense that the Injured Party incurs in consequence of a
               third-party claim relating to a field of activity of the
               indemnifying party, concerning events occurring before the
               effective date of the spin-off, provided that the Injured Party
               has notified the indemnifying party of the third-party claim and
               has allowed the indemnifying party to manage and defend such
               claim. As at December 31, 2002 and for the three years then
               ended, no expenses and/or liabilities were recorded by the
               Company. The Company has no information that would indicate that
               any material payments will be required in respect of this
               agreement.



                                      F-28
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)

          2.   The Company and B.V.R. entered into an agreement concerning
               technology transfers and cross licenses between each of the
               parties (the "Agreement"). Under this agreement, B.V.R.
               transferred to the Company the rights to co-ownership of B.V.R.'s
               intellectual property as related to the defense-related
               operations transferred to the Company pursuant to the spin-off
               agreement.

          3.   B.V.R. will only be entitled to exploit such intellectual
               property rights for its activities that do not conflict with the
               Company's activities as conducted at the time of consummation of
               the Plan other than with respect to applications relating to
               simulation and training systems for commercial applications which
               shall be exploited solely by the Company. The Company and B.V.R.
               further agreed not to compete with each other's business
               activities.

          D.   CHARGES 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 money
               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.   The Company has deposited cash and cash equivalents with certain
               financial institutions that have issued guarantees on behalf of
               the Company in favor of its customers. In order to fulfill the
               above-mentioned commitment, the Company placed a charge on its
               bank deposits (including the insurance rights attached thereto),
               which amounted to US$ 4,266 thousand at balance sheet date.

          3.   The secured liabilities and guarantees (secured by a debenture)
               are as follows:

                                                              DECEMBER 31,
                                               ---------------------------------
                                                    2002                2001
                                               ---------------     -------------
                                                US$ THOUSANDS      US$ THOUSANDS
                                               ---------------     -------------

          Short-term credit from banks                 15,083            12,002
                                                ==============     =============

          Performance guarantees (1)                    6,732            12,680
                                                ==============     =============


          Advance payment guarantees (1)               16,378            15,464
                                                ==============     =============

          Other bank guarantees (1)                     4,414            4,937
                                                ==============     =============

          (1)  The guarantees are provided by banks in favor of the Company.


               The expiration dates of the guarantees are from January 31, 2003
               to December 31, 2006.

               Bank charges on those guarantees are attributed to financial
               expenses.




                           F-29
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)

          E.   LIABILITY FOR WARRANTY AND COMPLETION

               The Company has made provision for warranty and completion for
               some of its completed projects, in accordance with management
               judgment and based on past experience. The changes in this
               Provision during 2002 are as follows:


                                                                 US$ THOUSANDS
                                                                 -------------

                     Balance at December 31, 2001                          150
                     Changes during year                                   305
                                                                 -------------
                     Balance at December 31, 2002                          455
                                                                 =============
          F.   MANAGEMENT AGREEMENT WITH THE SHAREHOLDERS

               The Company reached an agreement with Elisra concerning
               management services to be provided to the Company by Elisra.

               For each of the three years ended December 31, 2002, the Company
               paid to Elisra US$ 200 thousand.

          G.   COMMITMENT TO INDEMNIFY SHAREHOLDERS

               Regarding the Company's commitment to indemnify Elisra for
               amounts which the Company shall have to compensate IAI, See Note
               16C.

          H.   DERIVATIVE FINANCIAL INSTRUMENTS

               The Company enters, from time to time, into foreign currency
               future contracts and put and call options contracts to reduce the
               impact of fluctuations of certain currencies against the U.S.
               dollar resulting primarily from firm commitments not denominated
               in U.S. dollars. Gains or losses resulting from qualified hedges
               of firm commitments are deferred and recognized when the hedged
               transactions occur, while results of transactions which do not
               meet all the criteria specified in SFAS No. 52 and SFAS No. 80
               are recorded as financial income or expense.


               As at December 31, 2002, the Company has an obligation to sell
               US$ 151 thousand for a total amount of (pound) 108 thousand
               (recorded as a hedge).

               The fair value of this off-balance sheet instrument amounted to a
               net asset of US$ 22 thousand as of December 31, 2002.



                                      F-30
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)

I.         INFORMATION ON CONTRACTS FOR LONG-TERM PROJECTS

<TABLE>
<CAPTION>

                                                                               DECEMBER 31          DECEMBER 31        DECEMBER 31
                                                                             2002 AND THE         2001 AND THE       2000 AND THE
                                                                            YEAR THEN ENDED      YEAR THEN ENDED    YEAR THEN ENDED
                                                                            ---------------      ---------------    ---------------
                                                                              CONTRACTS FOR        CONTRACTS FOR      CONTRACTS FOR
                                                                                PROJECTS             PROJECTS           PROJECTS
                                                                            ---------------       --------------    ---------------
                                                                             US$ THOUSANDS        US$ THOUSANDS      US$ THOUSANDS
                                                                            ---------------       --------------     --------------

<S>                                                                      <C>                  <C>                 <C>
           Amount of contracts for long-term projects
            signed during the year                                                6,123              12,291              20,801
                                                                            ===========           =========          ==========

           Portion of the accumulated amount of contracts for long-term
             projects not yet recognized as income at the year end               20,225              38,152              65,845
                                                                            ===========           =========          ==========


</TABLE>

NOTE 18 -  INCOME TAXES

          A.   TAX BENEFITS UNDER THE 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 Inflationary
               Adjustments Law (see Note 18C hereunder), the right to claim
               public issuance expenses and amortization of patents and other
               intangible property rights as a deduction for tax purposes.

          B.   TAX BENEFITS UNDER THE LAW FOR THE ENCOURAGEMENT OF CAPITAL
               INVESTMENTS, 1959 ("THE LAW")

               According to the law the Company's production facilities in
               Jerusalem have been granted "approved enterprise" status.
               Pursuant to the aforementioned law, the Company was entitled to
               tax benefits on its undistributed income arising from the
               "approved enterprise", for a period of seven years ended 1995.

               In addition, 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.

               Pursuant to the aforementioned law the Company will be entitled
               to a full exemption on its taxable income arising from the second
               and third plan 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 Company has
               taxable income as defined by the law.


                                      F-31
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT'D)

          The benefits to which the Company will be 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 plan is limited to 2012 and 2016, respectively.

          As of  December  31,  2002,  due to losses,  the  Company  had not yet
          utilized the tax benefits provided in the second plan.

          The tax exempt income attributable to the "Approved Enterprise" can be
          distributed to  shareholders  without  subjecting the Company to taxes
          only upon the complete liquidation of the Company. The Company'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  Company's  "Approved
          Enterprise".

          If the retained  tax exempt  income is  distributed  in a manner other
          than the complete liquidation of the Company, it would be taxed at the
          corporate  tax rate  applicable  to such profits as if the Company had
          not chosen the  alternative  tax  benefits  (currently  - 25%).  As at
          December 31, 2002 the Company has accumulated losses.

          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 the date of the financial  statements,  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

               Under this law, taxable income is measured in real terms, in
               accordance with the changes in the Israeli CPI.

          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 rates of 36% for 2002, 2001 and for 2000.

          E.   TAXATION OF FOREIGN SUBSIDIARIES

               The subsidiaries in the Netherlands and the Far East are taxed
               under the tax laws in force in those countries.





                                      F-32
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT'D)

          F.   ISRAEL TAX REFORM WITH EFFECT FROM JANUARY 1, 2003

               During the year 2002, tax reform legislation was enacted with
               effect from January 1, 2003, which significantly changed the
               taxation basis of corporate and individual taxpayers from a
               territorial basis to a worldwide basis. From such date an Israel
               resident taxpayer will be taxed on income produced and derived
               both in and out of Israel. The main provisions of the tax reform
               that may affect the Company are as follows:

          1.   Transfer pricing of international transactions with related
               parties.

               The Income Tax Ordinance was amended to include provisions
               concerning transfer pricing between related parties, where one of
               the parties is situated abroad. Detailed provisions are to be
               included in Income Tax Regulations that have yet to be issued.
               Although the Company considers that the transfer pricing policy
               adopted with foreign affiliates is economically fair, an
               adjustment may be required following the issue of the said
               Regulations.

          2.   Employee stock incentive plans.

               The tax reform codified past practice and determined three
               alternative tracks for taxing employee stock option plans. Where
               a trustee arrangement is in place, the employer can either claim
               an expense for tax purposes while the employee will be fully
               taxed up to the maximum marginal tax rate of 50% or the Company
               can waive the tax expense and the employee will pay a reduced tax
               rate of 25%. Where there is no trustee arrangement, the employee
               is fully taxable and no expense is allowed to the Company. There
               are detailed provisions for implementing these tracks. The
               Company is considering the alternatives.

          3.   Controlled foreign company (CFC).

               The amendment to the law introduced Controlled Foreign Company
               (CFC) provisions, which, in certain circumstances, will lead to
               the Israeli company being charged to tax on passive income of
               foreign affiliates as if it had received a dividend from such
               companies.

          4.   Capital gains tax is reduced to 25% from 36%, except with respect
               to capital gains from marketable securities, with transitional
               provisions for assets acquired prior to January 1, 2003.

          5.   The seven year limit for carrying forward of capital losses has
               been removed with respect to capital losses arising from 1996 and
               thereafter.

          G.   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


                                      F-33
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT'D)

          income tax purposes. Deferred tax assets for future tax benefits from
          realization are included where their realization is "more likely than
          not". As such, the Company has recorded a valuation allowance in
          regard of all its tax losses carried forward as well as for other
          temporary differences.

          Significant components of the Company's deferred tax liabilities and
          assets are as follows:

<TABLE>
<CAPTION>

                                                                                              DECEMBER 31,
                                                                                   -----------------------------------
                                                                                        2002                  2001
                                                                                   --------------        -------------
                                                                                   US$ THOUSANDS         US$ THOUSANDS
                                                                                   --------------        -------------
<S>                                                                            <C>                   <C>
         Deferred tax assets:
             Provision for vacation                                                         175                   177
             Liability for employees severance pay                                          183                   210
             Net operating loss carryforwards                                            11,524                 9,020
             Research and development costs, net                                            469                   537
                                                                                   --------------        -------------
                                                                                         12,351                 9,944
                                                                                   --------------        -------------

         Deferred tax liabilities
             Deferred financing income                                                       -                    (66)
             Others                                                                         (18)                  (24)
                                                                                   --------------        -------------
                                                                                            (18)                  (90)
                                                                                   --------------        -------------

                                                                                         12,333                 9,854
         Less: Valuation allowance                                                      (12,333)               (9,536)
                                                                                   --------------        -------------

         Deferred tax asset                                                                  -                    318
                                                                                   ==============        =============

</TABLE>


                                      F-34
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT'D)

                                                                                                           DECEMBER 31,
                                                                                              -----------------------------------
                                                                                                    2002                  2001
                                                                                               -------------         -------------
                                                                                               US$ THOUSANDS         US$ THOUSANDS
                                                                                               -------------         --------------
<S>                                                                                         <C>                <C>
         The deferred tax asset reported at the balance sheet date is presented
          as follows:
         Current assets                                                                                  -                    384
         Current liabilities                                                                             -                    (66)
                                                                                               -------------         --------------
                                                                                                         -                    318

</TABLE>

          If the undistributed earnings of the Singapore subsidiary of
          approximately US $ 136 thousand were distributed as a dividend,
          additional taxes of approximately US$ 34 thousand will be payable (see
          Note 2N2).





                                      F-35
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 18 - INCOME TAXES (CONT'D)

H.                           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:


                                                                                                   DECEMBER 31,
                                                                          ----------------------------------------------------------
                                                                              2002                 2001                2000
                                                                          -------------        -------------       -------------
                                                                          US$ THOUSANDS        US$ THOUSANDS       US$ THOUSANDS
                                                                          -------------        -------------       -------------
<S>                                                                   <C>                  <C>                 <C>
         Loss before taxes on income                                           (4,914)               (930)            (11,310)

         Statutory tax rate in Israel                                              36%                 36%                 36%
                                                                          -------------        -------------       -------------

         Theoretical tax benefit                                               (1,769)               (335)             (4,072)
         Losses deductions and expenses in respect of which deferred tax
         assets were not recorded                                               1,863                  73               4,128
         Taxes in respect of previous years                                       128                 218                 903
         Non-deductible expenses                                                  107                 101                  88
         Deductible expenses                                                       (5)               (123)               (136)
         Change in beginning-of-year valuation allowance                          318                   -               1,063
         Taxes in respect of subsidiaries                                         236                  66                   -
                                                                          -------------        -------------       -------------

         Actual tax expense                                                       878                   -               1,974
                                                                          =============        =============       =============

</TABLE>

          I.   INCOME TAX ASSESSMENTS

          The Company has not received any final tax assessments since
          incorporation.

          J.   NET OPERATING LOSSES CARRYFORWARD

           Net operating loss carryforwards as of December 31, 2002 totaled
           approximately US$ 32 million. The net operating loss carryforwards
           have no expiration date.



                                      F-36
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 19 -  MONETARY BALANCES IN OR LINKED TO CURRENCIES OTHER THAN THE U.S. DOLLAR


                                        DECEMBER 31, 2002                                       DECEMBER 31, 2001
                        -----------------------------------------------------   ----------------------------------------------------
                                 ISRAELI CURRENCY                  FOREIGN              ISRAELI CURRENCY                  FOREIGN
                                                                  CURRENCIES                                             CURRENCIES
                        ---------------------------------       -------------   --------------------------------       -------------
                            LINKED             UNLINKED                            LINKED             UNLINKED
                        -------------       -------------                       -------------      -------------
                        US$ THOUSANDS       US$ THOUSANDS       US$ THOUSANDS   US$ THOUSANDS      US$ THOUSANDS       US$ THOUSANDS
                        -------------       -------------       -------------   -------------      -------------       -------------

<S>                   <C>                <C>                   <C>             <C>               <C>                 <C>
    ASSETS

    Current assets                17               1,418                 452             29               1,885                 233

    Long-term assets               -                  33                   -              2                  46                   -
                        -------------       -------------       -------------   -------------      -------------       -------------

                                  17               1,451                 452             31               1,931                 233
                        =============       =============       =============   =============      =============       =============

    LIABILITIES

    Current
     liabilities                 966               2,933               1,940            889               4,490                 631

    Long-term
     liabilities                   -                 509                   -              -                 584                   -
                        -------------       -------------       -------------   -------------      -------------       -------------

                                 966               3,442               1,940            889               5,074                 631
                        =============       =============       =============   =============      =============       =============


</TABLE>



                                      F-37
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 20 - SUPPLEMENTARY STATEMENT OF OPERATION INFORMATION

          A.   SUMMARY INFORMATION ABOUT BUSINESS SEGMENTS AND GEOGRAPHICAL
               AREAS:

               The Company manages its business on a basis of one reportable
               segment. See Note 1 for a brief description of the Company's
               business.

               Total revenues are attributed to geographic areas based on the
               location of the customers. Long lived assets are not presented in
               the table below because all long-lived assets are located in
               Israel.


                                                                                              YEAR ENDED DECEMBER 31,
                                                                                  -------------------------------------------------
                                                                                   2002              2001              2000
                                                                                  -------------     -------------     -------------
                                                                                  US$ THOUSANDS     US$ THOUSANDS     US$ THOUSANDS
                                                                                  -------------     -------------     -------------
<S>                                                                             <C>               <C>                <C>
         1. Total revenues:
                   Israel                                                                 406              1,892              311
                   Far East                                                            19,462             31,890           19,572
                   Italy                                                                5,108              2,582              609
                   Rest of Europe                                                       2,738              4,188            4,404
                   America                                                                  -                163              473
                   Africa                                                                 576              3,286                -
                                                                                  -------------     -------------     -------------

                                                                                       28,290             44,001           25,369
                                                                                  =============     =============     =============

         2. Major customers data as a percentage of the total revenues:

                   Customer A                                                             41%                26%              29%
                   Customer B                                                             27%                45%              48%
                   Customer C                                                             18%                 *-              *-
                                                                                  -------------     -------------     -------------


            Actual tax expense                                                            86%                71%              77%
                                                                                  =============     =============     =============

</TABLE>


                   *          Less than 10%

          B.   INCOME FROM ROYALTIES AND COMMISSIONS

               In the Cooperation agreement the Company signed with MLM, it was
               provided that in respect of those territories in which the
               project is carried out by one party, royalties will be paid to
               the other party. The rate of royalties is mainly 8%-12.5% of the
               contract price (see Note 17A1).


                                      F-38
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 20 - SUPPLEMENTARY STATEMENT OF OPERATION INFORMATION (CONT'D)


                                                                                         YEAR ENDED DECEMBER 31,
                                                                      --------------------------------------------------------------
                                                                          2002                     2001                    2000
                                                                      -------------            -------------           -------------
                                                                      US$ THOUSANDS            US$ THOUSANDS           US$ THOUSANDS
                                                                      -------------            -------------           -------------

         C.        COST OF SALES

<S>                                                             <C>                        <C>                    <C>
         Raw materials                                                       6,481                  16,843                   9,734
         Salaries, wages and employee's benefits                             6,071                   5,101                   4,427
         Subcontractors                                                      5,778                   7,538                   6,459
         Agents fees                                                         1,818                   3,713                   2,545
         Depreciation                                                          652                     636                     692
         Other manufacturing costs                                           2,915                   2,014                   2,114
                                                                      -------------            -------------           -------------

                                                                            23,715                  35,845                  25,971
                                                                      =============            =============           =============


         D.         FINANCIAL ITEMS
                                                                                         YEAR ENDED DECEMBER 31,
                                                                      --------------------------------------------------------------
                                                                          2002                     2001                    2000
                                                                      -------------            -------------           -------------
                                                                      US$ THOUSANDS            US$ THOUSANDS           US$ THOUSANDS
                                                                      -------------            -------------           -------------

         Financial income:
         Interest on short-term deposits                                        83                     563                     592
         Interest on loans to others and interests from non-current
             receivables                                                        98                     138                     195
                                                                      -------------            -------------           -------------

                                                                               181                     701                     787
                                                                      =============            =============           =============

         Financial expenses:
         Bank charges and interest on short-term credit                        878                   1,213                   1,442
         Interest on loan from B.V.R.                                            -                       -                     147
         Interest to Elisra                                                      9                       -                       -
         Other                                                                 149                     230                     135
                                                                      -------------            -------------           -------------

                                                                             1,036                   1,443                   1,724
                                                                      =============            =============           =============

</TABLE>



                                      F-39
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 20 - SUPPLEMENTARY STATEMENT OF OPERATION INFORMATION (CONT'D)


         E.         OTHER EXPENSES, NET

                                                                          2002                     2001                    2000
                                                                      -------------            -------------           -------------
                                                                      US$ THOUSANDS            US$ THOUSANDS           US$ THOUSANDS
                                                                      -------------            -------------           -------------

<S>                                                                <C>                    <C>                      <C>
         Write-down of investment in marketable securities                     141                     317                       -
         Others                                                                 (1)                      2                      31
                                                                      -------------            -------------           -------------

                                                                               140                     319                      31
                                                                      =============            ==============          =============


         F.         SUPPLEMENTARY INFORMATION ON
                    STATEMENTS OF OPERATIONS

         Rent                                                                  574                     542                     499
                                                                      =============            ==============          =============

         Advertising costs                                                     100                      54                     140
                                                                      =============            ==============          =============

         Royalties expenses                                                    671                   1,482                   1,160
                                                                      =============            ==============          =============


</TABLE>



                                      F-40
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 21 - RELATED PARTIES

          A.   BALANCES

               Related parties are comprised of principal shareholders (10%
               holding of the Company's share capital) and their subsidiaries
               and affiliates as well as affiliates of the Company. Transactions
               with related parties are mainly as follows:

          1.   Sales of the Company's products and expenses related to such
               sales.

          2.   Interest payable on loans received.

          3.   Payment of Management fees.

          4.   Purchases of services and products.

               All transactions, and terms with related parties were identical
               to those applied to transactions with other customers or
               suppliers.

<TABLE>
<CAPTION>

                                                                                            DECEMBER 31,
                                                                                --------------------------------------
                                                                                       2002                  2001
                                                                                   -------------         -------------
                                                                                   US$ THOUSANDS         US$ THOUSANDS
                                                                                   -------------         -------------
<S>                                                                             <C>                   <C>
         Due from:
             Trade receivables -   Elisra Electronic Systems Ltd.                          70                     -
                                   Israel Aircraft Industries Ltd.(*)                     354                     -
         Due to:
             Trade payable -       Tadiran Spectralink Ltd.                                27                     6
                                   Israel Aircraft Industries Ltd.(*)                     885                     -
             Other payable -       Elisra Electronic Systems Ltd.                          68                    52
                                   Israel Aircraft Industries Ltd.(*)                     177                     -

         (*) A related party from December 2002.

B.         TRANSACTIONS WITH RELATED PARTIES

                                                                                         YEAR ENDED DECEMBER 31,
                                                                        ---------------------------------------------------------
                                                                             2002                 2001                    2000
                                                                        -------------           -------------        -------------
                                                                        US$ THOUSANDS           US$ THOUSANDS        US$ THOUSANDS
                                                                        -------------           -------------        -------------

         Income from sales(1)                                                  70                       -                    -
         Cost of sales(2)                                                     245                   1,699                1,239
         General and administrative expenses(1)(3)                            363                     362                  343
         Interest expense, net(4)                                               9                       -                    -

</TABLE>

           (1) To Elisra.
           (2) To Tadiran Spectralink.
           (3) Including the salary of the CEO and fees paid to directors.





                                      F-41
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 21 - RELATED PARTIES (CONT'D)

     (4)  On May 15, 2002, the Company obtained a US$ 4.0 million credit line
          from Elisra Electronics Systems Ltd. ("Elisra") of which $500,000 were
          not utilized, which bears interest at the rate of three months LIBOR
          plus 1%. The proceeds of this loan were used to finance the Company's
          operation until receiving, in the third quarter of 2002, a payment of
          approximately US$ 12.5 million, following which the loan was repaid to
          Elisra.

NOTE 22 -  EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP

     A.   THE CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY CONFORM WITH
          GENERALLY ACCEPTED ACCOUNTING PRINCIPLES IN ISRAEL ("ISRAELI GAAP"),
          WHICH DIFFER IN CERTAIN SIGNIFICANT RESPECTS FROM THOSE FOLLOWED IN
          THE UNITED STATES ("U.S. GAAP"), AS DESCRIBED BELOW:

     1.   DEFERRED INCOME TAXES

          Under Israeli GAAP, deferred taxes are recognized on temporary
          differences that result from changes in exchange rates or indexing
          when the reporting and local currency is the U.S. dollar or a currency
          linked thereto.

          Under U.S. GAAP, deferred taxes are not recognized for temporary
          differences that result from changes in exchange rates or indexation
          for tax purposes related to non-monetary assets and liabilities that
          are remeasured using historical exchange rates when the functional
          currency is the reporting currency.

     2.   DERIVATIVE FINANCIAL INSTRUMENTS

          Under Israeli GAAP, derivative financial instruments (the
          "derivatives") held for hedging are deferred and recognized when the
          hedged transactions occur. Derivative financial instruments not held
          for hedging are stated in the financial statements at their fair
          value. Changes in fair value are recognized as they occur.

          Under U.S. GAAP, SFAS No. 133 "Accounting for Derivative Instruments
          and Hedging Activities" (the "Standard") requires that all derivatives
          will be classified on the balance sheet as assets or as liabilities at
          their fair value. The change in the fair value of derivatives which
          are not designated as a hedging instrument will be recognized in the
          statement of operations in the period of the change. If the nature and
          characteristics of a derivative meet the definition of a "hedge", the
          changes in the fair value of the derivative will be offset from the
          changes in the fair value of the hedged item (assets, liabilities or
          firm commitments) and will be recognized in the statement of
          operations or as part of comprehensive income until the hedged item is
          recognized in the statement of operations. The ineffective part of the
          hedging derivative will be reported in the statement of operations on
          a current basis.


                                      F-42
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

     3.   COMPREHENSIVE INCOME

          Israeli GAAP does not require disclosure of comprehensive income.

          Under U.S. GAAP, SFAS No. 130 "Reporting Comprehensive Income"
          requires that an enterprise (a) classify items of other comprehensive
          income by their nature in a financial statement and (b) display the
          accumulated balance of other comprehensive income separately from
          retained earnings and additional paid in capital in the equity section
          of the statement of financial position.

     4.   TREATMENT OF MARKETABLE SECURITIES

          a)   According to Israeli GAAP

               Marketable securities not designated for sale in the short-term
               are carried at cost (regarding debentures, including accumulated
               interest), except where market value is lower and the decline in
               value is deemed to be permanent.

          b)   According to Israeli GAAP

               In accordance with SFAS 115 unrealized gains and losses on
               investments in available-for-sale securities (purchase and sales
               transactions which are not carried out on an active and frequent
               basis) are reported as a separate component of shareholders'
               equity. Permanent decline in market value is recorded to the
               statement of operations.

               For U.S. GAAP purposes, the Company has determined, as of the
               purchase date and as of the balance sheets date that its equity
               securities should be classified as available-for-sale securities
               and stated at fair value, with unrealized gains and losses, net
               of tax, reported as other Comprehensive Income.

               The effect of the above-mentioned difference on the Statement of
               Changes in Shareholders' Equity for each of the three years ended
               December 31, 2002 is reported as part of the Other Comprehensive
               Income.

     5.   EARNINGS PER SHARE

          a)   According to Israeli GAAP


               The effect of options and warrants is included in the computation
               of basic earnings per share only if their exercise is considered
               probable, based on the ordinary relationship between the market
               price of the shares stemming from the



                                      F-43
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

               exercise of the warrants and the discounted present value of the
               future proceeds derived from the exercise of the options and
               warrants.

               The effect of convertible debentures is taken into account in the
               computation of basic earnings per share only if their conversion
               is considered probable, based on the relationship between the
               market price of the shares stemming from the conversion and the
               discounted present value of the convertible debentures.


               Diluted earnings (losses) per share are computed based on the
               weighted average number of ordinary shares used for computing the
               basic earnings per share plus options, warrants and convertible
               debentures which were not included in the basic earnings per
               share calculation and which are not anti dilutive.

     b)   According to U.S. GAAP

               U.S. GAAP also requires dual presentation of basic and diluted
               earnings per share for entities with complex capital structures
               as well as a reconciliation of the basic EPS computation to the
               diluted EPS computation. Basic EPS is calculated by dividing net
               income available to ordinary stockholders, by the weighted
               average number of common shares outstanding. The computation of
               diluted EPS assumes the issuance of common shares for all
               dilutive-potential common shares outstanding during the reporting
               period. The dilutive effect of stock options is considered in
               earnings per share calculations if dilutive, using the "if
               converted" treasury stock method.

     6.   LIABILITY FOR TERMINATION OF EMPLOYER-EMPLOYEE RELATIONS

     a)   According to Israeli GAAP

               Amounts funded by purchase of insurance policies are deducted
               from the related severance pay liability.

     b)   According to U.S. GAAP


          According to U.S. GAAP, the amounts funded should be presented as
          long-term investments and the gross amount of the liability should be
          presented as a long-term liability.



                                      F-44
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

          B.   THE EFFECT OF THE DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP OF
               THE AFOREMENTIONED ITEMS ON THE FINANCIAL STATEMENTS IS AS
               FOLLOWS:

     1.   ON STATEMENTS OF INCOME


<TABLE>
<CAPTION>
                                                                                                  YEAR ENDED DECEMBER 31,
                                                                                ----------------------------------------------------
                                                                                  2002                     2001              2000
                                                                                -------------       -------------      -------------
                                                                                US$ THOUSANDS       US$ THOUSANDS      US$ THOUSANDS
                                                                                -------------       -------------      -------------

<S>                                                                           <C>                <C>                <C>
         NET LOSS AS REPORTED, ACCORDING TO ISRAELI GAAP                              (5,792)                (930)          (13,284)

         Income tax benefit (expenses) on income                                            -                    -             (121)
                                                                                -------------       -------------      -------------

         Net loss under U.S. GAAP                                                     (5,792)                (930)          (13,405)
                                                                                =============        =============     =============

         BASIC AND DILUTED NET (LOSS) INCOME PER SHARE (IN U.S. $)

         As reported, according to Israeli GAAP                                        (0.54)               (0.09)            (1.32)
                                                                                =============        =============     =============

         According to U.S. GAAP                                                        (0.54)               (0.09)            (1.34)
                                                                                =============        =============     =============

         WEIGHTED AVERAGE NUMBER OF ORDINARY SHARES OUTSTANDING (IN THOUSANDS)
         USED IN BASIC AND DILUTED LOSS PER SHARE CALCULATION
         UNDER U.S. GAAP                                                              10,660               10,660             9,989
                                                                                =============        =============     =============


</TABLE>



                                      F-45
<PAGE>
<TABLE>
<CAPTION>

                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

2. ON BALANCE SHEET ITEMS


                                                                                    DECEMBER 31,
                                 -------------------------------------------------   ------------------------------------------
                                                       2002                                                   2001
                                 -------------------------------------------------   ------------------------------------------
                                                                               US$ THOUSANDS
                                         AS                          AS PER              AS                          AS PER
                                      REPORTED    ADJUSTMENT        US GAAP          REPORTED        ADJUSTMENT     US GAAP
                                      --------    ----------        -------          --------        ----------     -------

<S>                                 <C>          <C>             <C>              <C>            <C>             <C>
Severance pay fund                           -         1,587          1,587                -             1,112        1,112
Investment, loans and long-term
  receivables                                -             -              -            1,260               (61)       1,199
Derivative financial instruments             -            22             22                -                23           23
Total assets                            26,038         1,609         27,647           31,452             1,074       32,526
Liability for employee severance
  benefits, net                            509         1,587          2,096              584             1,112        1,696
                                     ----------    ----------     ---------        ----------        ----------    ---------


Total shareholders equity (deficit)    (3,630)            22        (3,608)            2,162             (38)         2,124
                                     ==========    ==========     =========         =========       ==========     =========


3. ON STATEMENTS OF CASH FLOW

           According to U.S. GAAP, supplemental disclosures is required as
follows:


                                                                                YEAR ENDED DECEMBER 31,
                                                              --------------------------------------------------------------
                                                                  2002                     2001                    2000
                                                              -------------            -------------           -------------
                                                              US$ THOUSANDS            US$ THOUSANDS           US$ THOUSANDS
                                                              -------------            -------------           -------------

         Income tax paid                                                 85                      121                      24
                                                              =============            =============           =============
         Interest paid                                                  468                      797                     802
                                                              =============            =============           =============

</TABLE>




                                      F-46
<PAGE>
<TABLE>
<CAPTION>

                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

4.         ON STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY


                                                 SHARE CAPITAL                      ACCUMULATED
                                  ----------------------------                        OTHER
                                    NUMBER OF                     ADDITIONAL      COMPREHENSIVE      ACCUMULATED
                                     SHARES         AMOUNT      PAID-IN CAPITAL   INCOME (LOSS)       DEFICIT             TOTAL
                                  -----------    -------------  ---------------   -------------    -------------     -------------
                                                 US$ THOUSANDS    US$ THOUSANDS   US$ THOUSANDS    US$ THOUSANDS     US$ THOUSANDS
                                  -----------    -------------  ---------------   -------------    -------------     -------------

<S>                              <C>            <C>            <C>               <C>             <C>               <C>
BALANCE AS OF JANUARY 1, 2000       9,636,365            2,275           16,667            135           (7,440)            11,637

CHANGES DURING 2000:
Net loss for the year                       -                -                -              -           (13,405)           (13,405)
Unrealized loss on available for
    sale securities                         -                -                -           (470)                -              (470)
                                                                                                                     --------------
Comprehensive loss                                                                                                         (13,875)
                                                                                                                     --------------
Issuance of ordinary shares         1,000,000              248         (1)4,701              -                 -             4,949
Exercise of stock options              23,336                6               40              -                 -                46
                                   -----------   -------------  ---------------   -------------    -------------     --------------

BALANCE AS OF DECEMBER 31, 2000    10,659,701            2,529           21,408           (335)         (20,845)             2,757

CHANGES DURING 2001:
Net loss for the year                       -                -                -              -             (930)             (930)
Unrealized loss on available for
    sale securities                         -                -                -            (43)               -              (43)
Realized loss on investment in
    available for sale securities           -                -                -             317               -               317
Unrealized profit deriving from
    financial instruments                   -                -                -              23               -                23
                                                                                                                     --------------
Comprehensive loss                                                                                                            (633)
                                   -----------    -------------  ---------------   -------------    -------------    --------------

BALANCE AS OF DECEMBER 31, 2002    10,659,701            2,529           21,408            (38)         (21,775)             2,124

CHANGES DURING 2002:
Net loss for the year                       -                -                -              -           (5,792)            (5,792)
Realized loss on investment in
    available for sale securities           -                -                -             61                -                61
Realization of profit deriving
    from financial instruments              -                -                -             (1)               -                (1)
                                                                                                                     --------------
Comprehensive loss                                                                                                          (5,732)

Issuance of ordinary shares             1,173              (2)                -              -                -                 -
                                   -----------   -------------  ---------------   -------------    -------------     --------------

BALANCE AS OF DECEMBER 31, 2002    10,660,874           2,529            21,408             22          (27,567)             3,608
                                   ===========   =============  ===============   =============    =============     ==============

</TABLE>
           (1) Net of issuance expenses of US$ 50 thousand.

           (2) Represents an amount less than US$ 1 thousand.




                                      F-47
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

C.         STOCK BASED COMPENSATION

           The Company applies APB Opinion No. 25 and related interpretations in
           accounting for its stock compensation programs. Had the Company
           determined compensation cost based on the fair value at the grant
           date for its stock options under Statement 123, the Company's net
           income available to common stockholders and diluted earnings per
           share would have been reduced to the pro forma amounts indicated
           below.


                                                                                               YEAR ENDED DECEMBER 31,
                                                                                 ---------------------------------------------------
                                                                                      2002               2001              2000
                                                                                 -------------      -------------     -------------
                                                                                 US$ THOUSANDS      US$ THOUSANDS     US$ THOUSANDS
                                                                                 -------------      -------------     -------------
<S>                                                                           <C>                  <C>               <C>
         Net loss attributable to ordinary shareholders under U.S. GAAP:
           As reported                                                                 (5,792)              (930)          (13,405)
         Deduct:
         Total stock-based employee compensation expense determined under the
           fair value based method for all amounts, net of related
           tax effects                                                                 (1,046)            (1,501)             (772)
                                                                                 -------------      -------------     -------------

         Pro-forma                                                                     (6,838)            (2,431)          (14,177)
                                                                                 =============      =============     =============

         Basic and diluted loss per share under U.S. GAAP in U.S. dollars:
           As reported                                                                  (0.54)             (0.09)            (1.34)
           Pro-forma                                                                    (0.64)             (0.24)            (1.42)



</TABLE>



                                      F-48
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

     The fair value of each option grant is estimated on the date of grant using
     the Black & Scholes option-pricing model, with the following assumptions
     used for grants during the years 2000, 2001 and 2002:

                                                                             OPTIONS                              OPTIONS
                                                     2002               GRANTED DURING 2001                  GRANTED DURING 2000
                                               -----------------   ---------------------------------------  ----------------------
                                                FEBRUARY     MAY   FEBRUARY  AUGUST   SEPTEMBER   NOVEMBER  MARCH   JULY  DECEMBER
                                               --------- -------   --------  ------   ---------   --------  -----   ----  --------
<S>                                          <C>         <C>       <C>      <C>       <C>         <C>       <C>    <C>    <C>
       Dividend yield (%)                              0       0          0       0           0          0      0      0         0

       Expected volatility (%)                       110     106        117     118         118        109     45     54        72

       Risk-free interest rate (%)                     2       2          5     3.5         2.5          2    6.5    6.5       6.5

       Weighted average expected life (years)        4.7     4.7        5.0     5.0         5.0        5.0    5.0    5.0       5.0

       Average fair value of options granted
        to Company's employees (US$)                2.08    1.56       2.32    1.68        1.96       2.05   3.49   2.23       1.0

</TABLE>




                                      F-49
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

D.         DATA IN RESPECT OF THE OPTION PLANS

           As of December 31, 2002, 1,791,086 options were outstanding. The
           options are each exercisable for one ordinary share at exercise price
           ranging between US$ 1.188 and US $ 7.875 per share.

          1.   A summary of status of the company's stock option plans as of
               December 31, 2002, 2001 and 2000, and changes during the years
               then ended, is as follows:


                                                                          AS AT DECEMBER 31,
                                   -------------------------------------------------------------------------------------------------
                                              2002                             2001                              2000
                                   -----------------------------   ------------------------------   --------------------------------
                                                WEIGHTED AVERAGE                 WEIGHTED AVERAGE                  WEIGHTED AVERAGE
                                    NUMBER OF    EXERCISE PRICE    NUMBER OF      EXERCISE PRICE     NUMBER OF      EXERCISE PRICE
                                     OPTIONS          (US$)         OPTIONS            (US$)          OPTIONS            (US$)
                                   ----------   ---------------    ---------     ----------------   -----------    ----------------

<S>                             <C>            <C>               <C>            <C>               <C>             <C>
Options outstanding at the
    beginning of the year          1,781,786              3.89    1,200,186               4.79         132,118             7.62
Granted during the year               77,700              2.54      639,600               2.35       1,093,636             4.49
Exercised during the year                  -              -               -                  -         (23,336)            5.375
Forfeited during the year            (68,400)             3.05      (58,000)              5.73          (2,232)            7.875
                                   ----------   ---------------   ----------     ----------------   -----------    ----------------
Outstanding at the end of the
    year                           1,791,086              3.86    1,781,786               3.89       1,200,186             4.79
                                   ==========   ===============   ==========     =================  ===========    ================

Options exercisable at year-end    1,069,386              4.50      439,186               4.98          99,278             7.875
                                   ==========   ===============   ==========     =================  ===========    ================


</TABLE>


                                      F-50
<PAGE>
<TABLE>
<CAPTION>
                                                                                                          B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

2. The following table summarizes information relating to stock options at
December 31, 2002:


                                                                                  OPTIONS                   OPTIONS
                                                                                OUTSTANDING               EXERCISABLE
                                                                              -----------------         -----------------
                                                                                 NUMBER AT                 NUMBER AT
                          EXERCISE PRICE (US$)                                DECEMBER 31, 2002         DECEMBER 31, 2002
                                                                              -----------------         -----------------

<S>                                                                       <C>                          <C>
         7.875                                                                          106,550                   106,550
         7.125                                                                          162,636                   162,636
         4.25                                                                            60,000                    40,000
         4.125                                                                          714,000                   504,000
         4                                                                                3,000                     3,000
         2.69                                                                            55,500                         -
         2.6                                                                             39,000                    13,000
         2.5                                                                             18,000                     6,000
         2.36                                                                           492,800                   172,200
         2.25                                                                            16,000                    12,000
         2.06                                                                            18,600                         -
         2.03                                                                            60,000                    20,000
         1.188                                                                           45,000                    30,000
                                                                              -----------------         -----------------

                                                                                      1,791,086                 1,069,386
                                                                              =================         =================


3. Outstanding options as at December 31, 2002 may be exercised as follows:


                                                                                                          WEIGHTED
                                                                                  NUMBER                  AVERAGE
                                                                                OF OPTIONS           EXERCISE PRICE (US$)
                                                                              -----------------      --------------------

         Immediately                                                                  1,069,386                       4.5
         First year or thereafter                                                       666,300                      2.94
         Second year or thereafter                                                       55,400                      2.53
                                                                              -----------------       -------------------

                                                                                      1,791,086
                                                                              =================

</TABLE>



                                      F-51
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
--------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

          E.   IMPACT OF RELEVANT RECENTLY ISSUED ACCOUNTING STANDARDS

          1.   In June 2002, the Financial Accounting Standard Board (FASB)
               issued SFAS 146, Accounting for Costs Associated with Exit or
               Disposal Activities which nullifies EITF 94-3, Liability
               Recognition for Certain Employee Termination Benefit and Other
               Exit Costs to Exit an Activity (including Certain Costs Incurred
               in a Restructuring). The principal difference between Statement
               146 and Issue 94-3 relates to its requirements for recognition of
               a liability for a cost associated with an exit or disposal
               activity. Statement 146 requires that a liability for a cost
               associated with an exit or disposal activity be recognized when
               the liability is incurred. Under Issue 94-3, a liability for an
               exit cost as defined in Issue 94-3 was recognized at the date of
               an entity's commitment to an exit plan. SFAS 146 is required to
               be adopted for exit or disposal activities initiated after
               December 31, 2002. The Company believes that adoption of SFAS 146
               will not have a significant impact on its consolidated financial
               statements.

          2.   In November 2002, the Financial Accounting Standards Board issued
               Interpretation No. 45, "Guarantor's Accounting and Disclosure
               Requirements for Guarantees, Including Indirect Guarantees of
               Indebtedness of Others" (the Interpretation), which addresses,
               among other things, the disclosure to be made by a guarantor in
               its interim and annual financial statements about its obligations
               under guarantee. These disclosure requirements are included in
               footnote 17D to the consolidated financial statement. The
               Interpretation also requires the recognition of a liability by a
               guarantor at the inception of certain guarantees.

               The Interpretation requires the guarantor to recognize a
               liability for the non-contingent component of the guarantee, this
               is the obligation to stand ready to perform in the event that
               specified triggering events or conditions occur. The initial
               measurement of this liability is the fair value of the guarantee
               at inception. The recognition of the liability is required even
               if it is not probable that payments will be required under the
               guarantee or if the guarantee was issued with a premium payment
               or as part of a transaction with multiple elements.

               As noted above, the Company has adopted the disclosure
               requirements of the Interpretation (see Note 17D) and will apply
               the recognition and measurement provisions for all guarantees
               entered into or modified after December 31, 2002.

          3.   In December 2002, the FASB issued SFAS 148, "Accounting for Stock
               Based Compensation - Transition and disclosure - an amendment of
               FASB Statement No. 123" (SFAS 148"). SFAS 148 permits two
               additional methods for entities that adopt the fair value based
               method of accounting for stock-based employee compensation. The
               statement also requires new disclosures about the ramp-up effect
               of stock-based employee compensation on reported results.



                                      F-52
<PAGE>
                                                      B.V.R. Systems (1998) Ltd.
NOTES TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002
-------------------------------------------------------------------------------
NOTE 22 - EFFECT OF MATERIAL DIFFERENCES BETWEEN ISRAELI AND U.S. GAAP (CONT'D)

               The Statement also requires that those effects be disclosed more
               prominently by specifying the form, content, and location of
               those disclosures. The transition guidance and annual disclosure
               provisions of SFAS 148 are effective for fiscal years ending
               after December 15, 2002, with earlier application permitted in
               certain circumstances. The interim disclosure provisions are
               effective for financial reports containing financial statement
               for interim periods beginning after December 15, 2002.

               The Company has decided to continue accounting for its options in
               accordance with APB 25.

               See Note 22C and 22D for the required annual disclosures.

          4.   In November 2002, the Emerging Task-Force issued its consensus on
               EITF 00-21, "Revenue Arrangements with Multiple Deliverables"
               ("EITF 00-21") on an approach to determine whether an entity
               should divide an arrangement with multiple deliverables into
               separate units of accounting. According to the EITF in an
               arrangement with multiple deliverables, the delivered item(s)
               should be considered a separate unit of accounting if all of the
               following criteria are met: (1) The delivered item(s) has value
               to the customer on a standalone basis, (2) There is objective and
               reliable evidence of the fair value of the undelivered item(s),
               (3) If the arrangement includes a general right of return,
               delivery or performance of the undelivered item(s) is considered
               probable and substantially in the control of the vendor. If all
               the conditions above are met and there is objective and reliable
               evidence of fair value for all units of accounting in an
               arrangement, the arrangement consideration should be allocated to
               the separate units of accounting based on their relative fair
               values. However, there may be cases in which there is objective
               and reliable evidence of the fair value(s) of the undelivered
               item(s) in an arrangement but no such evidence for one or more of
               the delivered items. In those cases, the residual method should
               be used to allocate the arrangement consideration. The guidance
               in this Issue is effective for revenue arrangements entered into
               in fiscal beginning after June 15, 2003. Alternatively, entities
               may elect to report the change in accounting as a
               cumulative-effect adjustment in accordance with Opinion 20. If so
               elected, disclosure should be made in periods subsequent to the
               date of initial application of this consensus of the amount of
               recognized revenue that was previously included in the cumulative
               effect adjustment. The Company believes that the adoption of EITF
               00-21 will not have a significant impact on the Company's
               consolidated financial statements.


                                      F-53