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|                                  
|----------------------------------
|UNITED STATES                     
|SECURITIES AND EXCHANGE COMMISSION
|                                  
|Washington, D.C. 20549            
|                                  
|FORM 20-F                         

|                                             |                                                                                                 
|-------------------------------------------- | ------------------------------------------------------------------------------------------------
|(Mark One)                                  
|                                            
|o                                            | REGISTRATION
 STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
 1934
|                                            
|OR                                          
|                                            
|x                                            | ANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934           
|                                             |                                                                                                 
|For the
 fiscal year ended December 31, 2007
|                                            
|OR                                          
|                                            
|o                                            | TRANSITION
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       
|                                             |                                                                                                 
|OR                                          
|                                            
|o                                            | SHELL
 COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 OF 1934   
|                                            
|                                             | Date of
 event requiring this shell company report                                              

Commission file number: 0-29884

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|                                                           
|-----------------------------------------------------------
|BVR SYSTEMS (1998) LTD.                                    
|(Exact
name of Registrant as specified in its charter)     
|Not Applicable                                             
|(Translation
of Registrants Name into English)            
|Israel                                                     
|(Jurisdiction
of incorporation or organization)            
|16 Hamelacha Street, Park Afek, Rosh
 Haayin 48091, Israel
|(Address
of principal executive offices)                   



---

| |                                                                                             |                                           | 
| | ------------------------------------------------------------------------------------------- | ----------------------------------------- | 
| | Securities
 registered or to be registered pursuant to Section 12(b) of the Act:           
| |                                                                                             |                                           | 
| | Title
of each class                                                                         | Name
of each exchange on which registered | 
| |                                                                                             |                                           | 
| | Ordinary
 shares, par value NIS 1.00 per share                                              | OTC
 Bulletin Board                       | 
| |                                                                                             |                                           | 
| | Securities registered or
 to be registered pursuant to Section 12(g) of the Act.           
| |                                                                                             |                                           | 
| | None                                                                                        |                                          
| |                                                                                             |                                           | 
| | Securities for which there
 is a reporting obligation pursuant to Section 15(d) of the Act. |                                          
| |                                                                                             |                                           | 
| | None                                                                                        |                                          

Indicate
the number of outstanding shares of each of the issuers classes of capital or
common stock as of the close of the period covered by the Annual Report.

As of
December 31, 2007, the issuer had 116,863,757 ordinary shares outstanding.


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

Yes o No x


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

Yes o No x


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

Yes x No o


|                                                                                                                                                                                                                                                   |                     |                        
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | -----------------------
|Indicate
 by check mark whether the registrant is a large accelerated filer, an
 accelerated filer, or a non-accelerated filer. See definition of accelerated
 filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
|Large Accelerated Filer o                                                                                                                                                                                                                          | Accelerated Filer o | Non-Accelerated Filer x

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

Item 17 x Item 18 o


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

U.S. GAAPo


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


Other x


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

Item 17 x Item 18 o


If this is an annual report, indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).                                          
                                     
                                     
                               Yes
 o No x

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|                              |                                                                               |     
|----------------------------- | ----------------------------------------------------------------------------- | ----
|                              | TABLE OF
 CONTENTS                                                            |     
|                              |                                                                               |     
|                              |                                                                               | Page
|                              |                                                                               |     
|INTRODUCTION                  | ii                                                                           
|                              |                                                                               |     
|PART I                        |                                                                               | 1   
|Item 1.                       | Identity
 of Directors, Senior Management and Advisors                        | 1   
|Item 2.                       | Offer
 Statistics and Expected Timetable                                      | 1   
|Item 3.                       | Key
 Information                                                              | 2   
|Item 4.                       | Information
 on the Company                                                   | 14  
|Item 5.                       | Operating
 and Financial Review and Prospects                                 | 30  
|Item 6.                       | Directors,
 Senior Management and Employees                                   | 44  
|Item 7.                       | Major
 Shareholders and Related Party Transactions                            | 55  
|Item 8.                       | Financial
 Information                                                        | 59  
|Item 9.                       | Offer and
 Listing                                                            | 59  
|Item 10.                      | Additional
 Information                                                       | 61  
|Item 11.                      | Quantitative
 and Qualitative Disclosures about Market Risk                   | 81  
|Item 12.                      | Description
 of Securities Other than Equity Securities                       | 83  
|                              |                                                                               |     
|PART II                       |                                                                               | 83  
|Item 13.                      | Defaults,
 Dividend Arrearages and Delinquencies                              | 83  
|Item 14.                      | Material
 Modifications to the Rights of Security Holders and Use of Proceeds | 83  
|Item 15.                      | Controls
 and Procedures                                                      | 83  
|Item 16.                      | Reserved                                                                      | 85  
|Item 16A.                     | Audit
 Committee Financial Expert                                             | 85  
|Item 16B.                     | Code of
 Ethics                                                               | 85  
|Item 16C.                     | Principal
 Accountant Fees and Services                                       | 85  
|Item 16D.                     | Exemptions
 from the Listing Standards for Audit Committees                   | 86  
|Item 16E.                     | Purchases
 of Equity Securities by the Issuer and Affiliated Purchasers       | 86  
|                              |                                                                               |     
|PART III                      |                                                                               | 87  
|Item 17.                      | Financial
 Statements                                                         | 87  
|Item 18.                      | Financial
 statements                                                         | 87  
|Item 19.                      | Exhibits                                                                      | 88  
|                              |                                                                               |     
|SIGNATURE                     | 90                                                                           
|                              |                                                                               |     
|INDEX TO FINANCIAL STATEMENTS | F-1                                                                          

---

---





INTRODUCTION

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

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

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

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

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

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

References
in this annual report to the Companies Law refer to the Israel Companies Law,
5759-1999.

Ehud
is a trademark jointly owned by Israel Aircraft Industries and us; and Atas
is our wholly-owned trademark. All other trademarks and trade names appearing
in this annual report are owned by their respective holders.

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---



PART I

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

Not
applicable.

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

Not
applicable.

1

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---



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

A. Selected Consolidated Financial Data

We
derived the following selected consolidated financial data presented below for
each of the years ended December 31, 2005, 2006 and 2007 from our Consolidated
Financial Statements and related notes included in this annual report. The
selected consolidated financial data for the years ended December 31, 2004 and
2003 have been derived from consolidated financial statements not included in
this annual report. Our Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles in Israel, or Israel
GAAP. Israel GAAP, as applicable to our financial statements, differs in
certain significant respects from accounting principles generally accepted in
the United States, or U.S. GAAP. See Note 21 to the Consolidated Financial
Statements included in this annual report for a discussion of certain
differences between Israel GAAP and U.S. GAAP.

You
should read the selected consolidated financial data together with the section
entitled Item 5. Operating and Financial Review and Prospects and our
Consolidated Financial Statements included elsewhere in this annual report.
Please see Note 2 of our Consolidated Financial Statements for an explanation
of share used in computing per share data.

|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|-------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------- | - | ---- | ------ | ---- | - | ------- | - | - | ------- | -
|                                                                                                         |  | Year Ended December 31,
|                                                                                                         |  |                        
|                                                                                                         |  | 2003                    |        | 2004 |   | 2005    |   | 2006 |        | 2007 |  
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |  
|                                                                                                         |  | (In thousands)         
|Statement of Operations Data:                                                                            |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Revenues                                                                                                 |  | $                       | 14,467 |      | $ | 12,684  |   | $    | 19,196 |      | $ | 10,103  |   | $ | 13,106  |  
|Cost of sales:                                                                                           |  |                         | 13,625 |      |   | 10,291  |   |      | 14,806 |      |   | 7,866   |   |   | 10,719  |  
|Inventory write off                                                                                      |  |                         | -      |      |   | -       |   |      | -      |      |   | -       |   |   | 699     |  
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Gross profit                                                                                             |  |                         | 842    |      |   | 2,393   |   |      | 4,390  |      |   | 2,237   |   |   | 1,688   |  
|Operating expenses:                                                                                      |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Research and development                                                                                 |  |                         | 693    |      |   | 294     |   |      | 614    |      |   | 615     |   |   | 959     |  
|Selling and marketing                                                                                    |  |                         | 1,778  |      |   | 1,139   |   |      | 1,356  |      |   | 1,430   |   |   | 2,232   |  
|General and administrative                                                                               |  |                         | 4,016  |      |   | 1,822   |   |      | 2,117  |      |   | 2,155   |   |   | 2,343   |  
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Total operating expenses                                                                                 |  |                         | 6,487  |      |   | 3,255   |   |      | 4,087  |      |   | 4,200   |   |   | 5,534   |  
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Operating profit (loss)                                                                                  |  |                         | (5,645 | )    |   | (862    | ) |      | 303    |      |   | (1,963  | ) |   | (3,846  | )
|Financial expenses, net                                                                                  |  |                         | (707   | )    |   | (496    | ) |      | (187   | )    |   | (185    | ) |   | (18     | )
|Other Income (expenses), net                                                                             |  |                         | 55     |      |   | 192     |   |      | (2     | )    |   | -       |   |   | -       |  
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Profit (loss) before income taxes                                                                        |  |                         | (6,297 | )    |   | (1,166  | ) |      | 114    |      |   | (2,148  | ) |   | (3,864  | )
|Income tax expense                                                                                       |  |                         | (249   | )    |   | (59     | ) |      | -      |      |   | (75     | ) |   | -       |  
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Net profit (loss)                                                                                        |  |                         | (6,546 | )    |   | (1,225  | ) |      | 114    |      |   | (2,223  | ) |   | (3,864  | )
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Basic and diluted earning (loss) per share                                                               |  |                         | (0.61  | )    |   | (0.01   | ) |      | 0.00   |      |   | (0.02   | ) |   | (0.03   | )
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  
|Weighted average number of ordinary shares used in computing basic and
 diluted earning (loss) per share |  |                         | 10,661 |      |   | 106,342 |   |      | 95,528 |      |   | 112,361 |   |   | 116,864 |  
|                                                                                                         |  |                         |        |      |   |         |   |      |        |      |   |         |   |   |         |  

2

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|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------- | - | - | ------- | -
|                                                                                                                                                  |  | Year Ended December 31,
|                                                                                                                                                  |  |                        
|                                                                                                                                                  |  | 2003                    |        | 2004 |   | 2005   |   | 2006 |        | 2007 |  
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |  
|                                                                                                                                                  |  | (In thousands)         
|Reconciliation to U.S. GAAP:                                                                                                                      |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Net profit (loss)                                                                                                                                 |  | $                       | (6,546 | )    | $ | (1,225 | ) | $    | 114    |      | $ | (2,223  | ) | $ | (3,864  | )
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Reversal of restatement according to Standard No. 24                                                                                              |  |                         | -      |      |   | -      |   |      | 7      |      |   | -       |   |   | -       |  
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Allocation of share expense issued to service providers under the fair
 value based method                                                        |  |                         | -      |      |   | (40    | ) |      | (14    | )    |   | -       |   |   | -       |  
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Compensation expense for all stock-based awards using the modified
 prospective method                                                            |  |                         | -      |      |   | -      |   |      | -      |      |   | *(596   | ) |   | (601    | )
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Profit (loss) under U.S. GAAP                                                                                                                     |  |                         | (6,546 | )    |   | (1,265 | ) |      | 107    |      |   | *(2,819 | ) |   | (4,465  | )
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Basic and diluted net profit (loss) per share under U.S.
GAAP                                                                                     |  |                         | (0.61  | )    |   | (0.02  | ) |      | 0.00   |      |   | *(0.03  | ) |   | (0.04   | )
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Weighted average number of ordinary shares outstanding (in thousands)
 used in basic profit (loss) per share calculation according to U.S. GAAP   |  |                         | 10,661 |      |   | 75,962 |   |      | 95,528 |      |   | 112,361 |   |   | 116,864 |  
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  
|Weighted average number of ordinary shares outstanding (in thousands)
 used in diluted profit (loss) per share calculation according to U.S. GAAP |  |                         | 10,661 |      |   | 75,962 |   |      | 96,921 |      |   | 112,361 |   |   | 116,864 |  
|                                                                                                                                                  |  |                         |        |      |   |        |   |      |        |      |   |         |   |   |         |  

|                                                                                                                                                                                                 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
|* Restated
 in order to reflect a correction relating to compensation expenses due to
 calculation error. See Note 21B to the Consolidated Financial Statements
 included in this annual report.

|                                  |  |                    |         |      |   |        |  |      |        |      |   |         |  |   |        | 
|--------------------------------- |  | ------------------ | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------- |  | - | ------ | 
|                                  |  | As of December 31,
|                                  |  |                   
|                                  |  | 2003               |         | 2004 |   | 2005   |  | 2006 |        | 2007 |  
|                                  |  |                    |         |      |   |        |  |      |        |      |  
|                                  |  | (In thousands)    
|Consolidated
 Balance Sheet Data: |  |                    |         |      |   |        |  |      |        |      |   |         |  |   |        | 
|Israeli GAAP:                     |  |                    |         |      |   |        |  |      |        |      |   |         |  |   |        | 
|Cash and cash equivalents         |  | $                  | 1,627   |      | $ | 2,664  |  | $    | 3,057  |      | $ | 3,421   |  | $ | 1,520  | 
|Total assets                      |  |                    | 11,403  |      |   | 13,683 |  |      | 10,111 |      |   | 13,293  |  |   | 10,160 | 
|Short-term bank credit and
 loans |  |                    | 10,116  |      |   | 637    |  |      | 637    |      |   | 636     |  |   | 1,086  | 
|Share capital                     |  |                    | 2,529   |      |   | 21,247 |  |      | 21,306 |      |   | 25,861  |  |   | 25,861 | 
|Shareholders equity
 (deficit)    |  |                    | (10,176 | )    |   | 3,609  |  |      | 3,777  |      |   | 5,
 406 |  |   | 1,560  | 
|U.S. GAAP:                        |  |                    |         |      |   |        |  |      |        |      |   |         |  |   |        | 
|                                  |  |                    |         |      |   |        |  |      |        |      |   |         |  |   |        | 
|Total assets                      |  |                    | 12,372  |      |   | 14,791 |  |      | 11,244 |      |   | 14,604  |  |   | 11,922 | 
|                                  |  |                    |         |      |   |        |  |      |        |      |   |         |  |   |        | 
|Shareholders equity
 (deficit)    |  | $                  | (10,176 | )    | $ | 3,609  |  | $    | 3,777  |      | $ | 5,406   |  | $ | 1,560  | 

3

---

---



B. Capitalization and Indebtedness

Not
applicable.

C. Reasons for the Offer and Use of Proceeds

Not
applicable.

D. Risk Factors

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

Risks Related to our Business

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

We
commenced operations in 1998. We reported a net loss of $ 3.9 million for the
year ended December 31, 2007, a net loss of $2.2 million for the year ended
December 31, 2006, a net profit of $0.1million for the year ended December 31,
2005 and a net loss of $1.2 million for the year ended December 31, 2004. We
can offer no assurance that we will achieve profitable operations or that any
profitable operations will be sustained. Future profitability will depend on
our ability to develop new products, the degree of market acceptance of our
existing and new products and the level of competition in the markets in which
we operate.

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

As
of December 31, 2007, our shareholders equity was $ 1.6 million. We expect
that our existing cash balance, together with our forecasted cash flows from
operating activities for fiscal 2008, including orders forecasted in the budget
approved by our Board of Directors, will be sufficient for finance operations
in the future. If our operations do not generate cash to the extent currently
anticipated or if any of the risk factors discussed in this annual report
materialize, we may need to raise additional funds in the future for a number
of uses, including:

|  |                                                     
|- | ----------------------------------------------------
| | implementing further marketing and sales activities;
|  |                                                     
| | hiring additional qualified personnel; and          
|  |                                                     
| | expanding
 research and development programs.       

4

---

---



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

|  |                                                                  | 
|- | ---------------------------------------------------------------- | 
| | maintain the
 level of our current operations;                  
|  |                                                                  | 
| | develop new
 products;                                          
|  |                                                                  | 
| | enhance our
 existing products;                                 
|  |                                                                  | 
| | remain
 current with evolving defense technologies;             
|  |                                                                  | 
| | take
 advantage of future opportunities; or                     
|  |                                                                  | 
| | respond to
 competitive pressures or unanticipated requirements.

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

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

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

We
sell the majority of our products through individual purchase orders. Many of
our customers have the right to terminate orders by paying the cost of work in
process plus a related profit factor. Customers may cancel orders due to the
cancellation of a budget or for other reasons. As of December 31, 2007,
purchase orders and contractual arrangements amounted to approximately $ 51
million, compared with $22 million as of December 31, 2006. If we experience
cancellations of pending contracts, terminations or reductions of contracts in
progress, we may not be able to convert our entire backlog into revenue. Any
reduction in backlog will adversely affect our business, financial condition,
results of operations and cash flows.

5

---

---



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

Three
of our customers, located in Europe, South America and the government of an
Asian Pacific country, respectively, that awarded us several projects,
accounted for 66% of our revenues in fiscal 2007. We cannot be certain that
these and other customers will maintain the size of their respective purchase
orders, or will not reschedule or cancel existing purchase orders. We expect
that sales of our products to relatively few customers will account for a
significant portion of our net revenues for the foreseeable future.
Consequently, the cancellation of an order from any one customer may have a
material adverse effect on our business, financial condition, results of
operations and cash flows.

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

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

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

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

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

6

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

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

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

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

7

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International
political and economic uncertainty could have an adverse impact on our business
and on our operating results.

In
fiscal 2007, 97% of our total revenues came from foreign customers. The
international political and economic uncertainty and the ongoing war on
terrorism may adversely impact our ability to maintain the level of our sales
to our existing customers located abroad and to develop new business in these
and other foreign countries.

We are exposed to
general, global economic and market conditions.

Our
business is subject to the effects of general economic conditions globally,
and, in particular, conditions in the market for simulation systems for
military and civilian applications. Our sales efforts can be adversely affected
as a result of unfavorable economic conditions. We may experience material
adverse impacts on our business, operating results, and financial condition.

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

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

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

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

8

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

We are controlled by
Chun Holdings LP which, in the aggregate, beneficially owns approximately 49.71%
of our outstanding Ordinary Shares as of March 31, 2008. Therefore, Chun is
able to elect the majority of our directors and exercise control over the
outcome of matters requiring shareholders approval.

As
of March 31, 2008, Chun Holdings L.P., an Israeli limited partnership
beneficially owned an aggregate of 58,142,608 of our ordinary shares
representing approximately 49.71% of our currently outstanding ordinary shares.
As a result, Chun controls the outcome of various actions that require our
shareholder approval. For example, Chun could elect most of our directors,
delay or prevent a transaction in which shareholders might receive a premium
over the prevailing market price for their shares and prevent changes in
control or management.

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

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

|  |                                                               
|- | --------------------------------------------------------------
| | economic and
  political instability;                         
|  |                                                               
| | import or
  export licensing requirements;                    
|  |                                                               
| | difficulties
  in collecting accounts receivable;             
|  |                                                               
| | longer payment
  cycles;                                      
|  |                                                               
| | unexpected
  changes in regulatory requirements and tariffs;  
|  |                                                               
| | fluctuations
  in exchange rates;                             
|  |                                                               
| | potentially
  adverse tax consequences; and                   
|  |                                                               
| | potentially
  weak protection of intellectual property rights.

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

9

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

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

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

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

Risks Relating to Our Location in Israel

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

We
are incorporated under Israeli law and our principal offices, research and
development and manufacturing facilities are located in the State of Israel.
Political, economic and military conditions in Israel directly affect our
operations. Since the establishment of the State of Israel in 1948, a number of
armed conflicts have taken place between Israel and its Arab neighbors, and the
continued state of hostility, varying in degree and intensity, has led to
security and economic problems for Israel. During the summer of 2006, Israel
was engaged in an armed conflict with Hezbollah, a Lebanese Islamist Shiite
militia group and political party. This conflict involved missile strikes
against civilian targets in northern Israel, and negatively affected business
conditions in Israel. In addition, Israel and companies doing business with
Israel have, in the past, been the subject of an economic boycott. Although
Israel has entered into various agreements with Egypt, Jordan and the
Palestinian Authority, Israel has been and is subject to civil unrest and
terrorist activity, with varying levels of severity, since September 2000.
Hamas, an Islamist movement, responsible for many attacks, including missile
strikes, against Israelis, won the majority of seats in the Palestinian
Legislative and took control of the entire Gaza Strip, by force, in June 2007.
These developments have further strained relations between Israel and the
Palestinian Authority. Any future armed conflicts or political instability in
the region may negatively affect business conditions and adversely affect our
results of operations. Parties with whom we do business have sometimes declined
to travel to Israel during periods of heightened unrest or tension, forcing us
to make alternative arrangements when necessary. In addition, the political and
security situation in Israel may result in parties with whom we have agreements
involving performance in Israel claiming that they are not obligated to perform
their commitments under those agreements pursuant to force majeure provisions
in the agreements. To date, we do not believe that the political and security
situation has had a material adverse impact on our business but we cannot give
any assurance that this will continue to be the case. However, if there were to
be emergency conditions, some of our key employees may be called to active duty
for extended periods of time and could adversely affect our operations. Any
hostilities involving Israel or the interruption or curtailment of trade
between Israel and its present trading partners could also adversely affect our
operations and could make it more difficult for us to raise capital.

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

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

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

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

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

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

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

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

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We have tax benefits
that may be discontinued or reduced.

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

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

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

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

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

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

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

13

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

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

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

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

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

Capital Expenditures

Since
January 1, 2005, our capital expenditures amounted to approximately 1 million.
The focus of our capital expenditure program primarily included investment in
computers and electronic equipment.

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

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

General

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

Live and
Embedded Training Systems:

|  |                                                                                                                                                                                  
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On-Board,
 Combat Training Systems such as the Ehud; Air Combat Maneuvering
 Instrumentation, or ACMI, Naval Combat Instrumentation System, or NCMI; and                      
|  |                                                                                                                                                                                  
| | Embedded
 simulation systems such as Embedded Virtual Avionics or EVA, In-Flight
 Electronic Warfare Simulation, or IFEWS, Hybrid Air Defense Embedded
 Simulation System (HADES)
|  |                                                                                                                                                                                  
| | Virtual and
 Constructive Training Systems:                                                                                                                                      
|  |                                                                                                                                                                                  
| | Flight
 simulators for fighter aircraft, helicopters, trainer aircraft, unmanned
 aerial vehicles;                                                                               
|  |                                                                                                                                                                                  
| | Armored
 & Gunnery Simulators and Infantry Simulators; Infantry and Special forces
 Simulators; and                                                                              

Naval Tactical
Trainers, or NTT, and Action Speed Tactical Trainers, or ASTT.

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

Our Product Offerings

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

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Live and Embedded Training

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

Ehud ACMI

Air Combat Maneuvering Instrumentation

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

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

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

Naval Combat Instrumentation System

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

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

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

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

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Embedded Simulation

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

Embedded Virtual Avionics Suite, or EVA

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

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

In
2006, we received two orders for the integration of EVA within the avionics
suite of two trainer aircrafts. In addition, in December 2006, we signed a
license agreement with a European aircraft manufacturer that entitles BVR to
receive royalties for each aircraft which includes embedded simulation sold by
this licensee.

In-Flight Electronic Warfare Simulation, or
IFEWS

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

17

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

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

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

In
2005, we received an order from the Israel Air Force for the installation of
IFEWS systems on its CH-53 and C-130 Fleets.

In
2006, we received an order from a European NATO country for the installation of
IFEWS on part of its helicopters fleets.

Hybrid Air Defense Embedded Simulation System
(HADES)

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

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

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

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

In
2007, we received our first order for the provision of HADES to an
international customer, as the main sub-contractor of a large scale integrator.

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

18

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Virtual and Constructive Training

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

|  |                                           
|- | ------------------------------------------
| | Flight
 Simulators;                       
|  |                                           
| | Ground
 Forces Simulators;                
|  |                                           
| | Naval
 Simulators;                        
|  |                                           
| | Weapon and
 Electronic Systems Simulators;
|  |                                           
| | Air and
 Missile Defense Simulators       

Flight Simulators

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

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

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

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

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

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

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

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

Ground Forces Simulation Systems

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

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

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

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

| |   |                                                                                                                                         
| | - | ----------------------------------------------------------------------------------------------------------------------------------------
| |  | Supports
 several types of AFV per cabin, with full scale authentic replica of the
 driving cabin;                                      
| |   |                                                                                                                                         
| |  | Driving in
 any given arena (terrain, weather, etc.), and participating in a range of
 contemporary combat and non-combat scenarios; and
| |   |                                                                                                                                         
| |  | Provides
 basic and advanced driving courses with real-time, trouble-shooting training.                                                 

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

| |   |                                                                                                                                                                                                    
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Supports all
 operationally standard-issue weapons (pistols, rifles & machine guns) and
 mortars, with recoil effects and additional systems (C2, optics, robots);                                 
| |   |                                                                                                                                                                                                    
| |  | Features
 unlimited tactically diverse training scenarios with real-life 3D
 audio-visual environment and user-definable Computer Generated Forces;                                              
| |   |                                                                                                                                                                                                    
| |  | Includes
 fire analysis: Hit/miss, hit location, weapon movement during the firing
 process, scoring mechanism;                                                                                    
| |   |                                                                                                                                                                                                    
| |  | A laser
 based hit detection system with high detection accuracy; and                                                                                                                              
| |   |                                                                                                                                                                                                    
| |  | Saves time
 and material expenses (with proven ROI) by user- friendly calibration
 procedure, customizable user interface, PC-based scalable and modular system,
 and network based architecture.

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

| |   |                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------
| |  | Video and/or
 graphic real-life 3D audio-visual environment for challenging
 decision-making scenarios;                       
| |   |                                                                                                                                 
| |  | Supports
 military operation in urban terrain; and                                                                              
| |   |                                                                                                                                 
| |  | Proven ROI
 as it is able to provide any-time any-place activation, no ammunition
 consumption and reduced maintenance manpower.

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

| |   |                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------
| |  | Perfects the
 combined arms training with opposing forces, friendly forces and large scale
 multi-site exercises;                
| |   |                                                                                                                                  
| |  | Participants
 operate as virtual entities with unlimited functionality and tasks (infantry,
 vehicles, AFV, helicopters & boats);
| |   |                                                                                                                                  
| |  | Robust 3D
 mission-planning module, briefing/debriefing tools and performance evaluation
 activities;                            
| |   |                                                                                                                                  
| |  | Supports all
 levels of operational expertise and requirements for the solider, commander
 and unit level; and                   
| |   |                                                                                                                                  
| |  | A
 cost-saving standard PC net-class architecture and an off-the-shelf gaming
 engine.                                           

Air and Missile
Defense Simulators

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

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

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

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In
2007 we received our first order for the provision of a re-configurable,
multi-weapon air defense simulator to an international customer.

Naval Simulators

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

Naval Tactical Trainer

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

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

Raw Materials

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

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

|                                     |  |      |     |      |  |      |   |      |     |      |  |     |   |  |     |  
|------------------------------------ |  | ---- | --- | ---- |  | ---- | - | ---- | --- | ---- |  | --- | - |  | --- | -
|                                     |  | 2003 |     | 2004 |  | 2005 |   | 2006 |     | 2007 | 
|                                     |  |      |     |      |  |      |   |      |     |      | 
|                                    
|Live and
 Embedded Training Systems  |  |      | 46  | %    |  | 45   | % |      | 64  | %    |  | 56  | % |  | 56  | %
|Virtual and
 constructive Simulators |  |      | 54  | %    |  | 55   | % |      | 36  | %    |  | 44  | % |  | 44  | %
|Total                                |  |      | 100 | %    |  | 100  | % |      | 100 | %    |  | 100 | % |  | 100 | %
|                                     |  |      |     |      |  |      |   |      |     |      |  |     |   | 

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Strategic Relationships

Israel Aircraft Industries Ltd

From
1992 to 1997, we developed, manufactured and marketed the Ehud ACMI systems
pursuant to a joint venture agreement entered into in 1992 with MLM Systems
Engineering & Integration, or MLM, a division of Israel Aircraft Industries
Ltd., or IAI. Pursuant to this agreement, IAI and us agreed to jointly develop,
manufacture and market the Ehud ACMI systems, with IAI subcontracting some of
the manufacturing and integration work with respect to the Ehud product.
Following the expiration of the term of the agreement, various claims were
alleged by both IAI and us regarding the performance of mutual obligations
pursuant to the agreement and thereafter. In an ex parte proceeding filed by
IAI, the District Court of Tel Aviv issued in February 1999 a temporary
injunction preventing us from replacing IAI as our subcontractor in a project
for the German Air Force.

In
August 1999, we entered into a cooperation agreement with MLM, which brought an
end to these legal proceedings and established terms for cooperation between
the two companies with respect to the marketing of the Ehud ACMI systems; and
in August 2005, we entered into an additional cooperation agreement with MLM to
resolve all other outstanding disagreements that had remained prior to the
signing of this agreement.

The
cooperation agreement of 2005 relates to cooperation with respect to the
worldwide marketing and sale of the Ehud System, R/C and LDN systems, the NCMI
System and Electronic Warfare Training Ranges.

EhudTM System.The agreement
provides for specific
territories in which either we or MLM shall have the exclusive right to act as
the leading party and the other party shall not compete with the leading party
in such territories. The leading party shall pay royalties to the other party
at a rate of 5% of the total consideration it receives for EhudTM System projects in such
territories. In other territories the parties have agreed to a cooperation
arrangement pursuant to which one party shall act as the prime contractor and
the other shall act as subcontractor, and each party shall provide its own
proposal relating to its part of the project. Any difference in price above the
joint proposal shall be equally shared between the parties. The royalties
arrangement shall apply in territories not specifically mentioned and agreed
upon between the parties.

R/C and LDN. In the event of agreements in
connection with our R/C
system or MLMs LDN system to a specific customer, the relevant party shall pay
the other party royalties at the rate of 5% of the total consideration. The
parties have agreed not to compete with each other with the R/C system and the
LDN system in respect of such customer.

24

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NCMI System. We have agreed to provide
MLM, within a reasonable time after the execution of the agreement, with our
existing NCMI infrastructure as a technological base in order to enable MLM to
continue the development of the NCMI system, in consideration for royalties at
the rate of 4% of the consideration of any agreement entered into between MLM
and a customer in respect of a NCMI system. We have also granted MLM a non
transferable license, for the term of the agreement for use of our NCMI
infrastructure in certain territories we will provide up to 30% of the scope of
work in such projects. In other territories we have agreed on a cooperation
arrangement in which the prime contractor shall receive 70% of the
consideration and the subcontractor 30% of the consideration and in the event
the subcontractor is granted less than 30% it is compensated at a rate of 1% of
the total consideration for each 4% of the total consideration not
subcontracted to the other party.

Electronic Warfare Training Range. It was
agreed that in agreements for the supply of Electronic Warfare Training Ranges
in specific agreed territories MLM shall serve as the prime contractor and
shall enter into a subcontracting agreement with us providing us 30% of the
scope of work.

The
cooperation agreement is valid for ten years and replaced all prior agreements
between the parties relating to its subject matters.

Other Strategic Agreements

In
2006, we entered into a settlement agreement with a European aircraft company
pursuant to claims made by us of potential patent infringements by the aircraft
company. Under the settlement agreement, we waived all claims against the
aircraft company and granted it a non-exclusive license to certain of our
patents in exchange for royalty payments. The aircraft company shall pay us an
agreed royalty payment for each aircraft sold which includes embedded
simulation by it or any of its affiliates that use any of the licensed patents.

Marketing

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

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

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

|             |  |                         |        |      |                             |        |  |      |        |      |   |        |  |   |        | 
|------------ |  | ----------------------- | ------ | ---- | --------------------------- | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|             |  | Year Ended December 31, |       
|             |  |                         |       
|             |  | 2003                    |        | 2004 |                             | 2005   |  | 2006 |        | 2007 |  
|             |  |                         |        |      |                             |        |  |      |        |      |  
|             |  |                         |        |      | (U.S. Dollars in thousands) |        |  |      |       
|            
|Sales        |  |                         |        |      |                             |        |  |      |       
|Israel       |  | $                       | 1,181  |      | $                           | 824    |  | $    | 1,068  |      | $ | 2,284  |  | $ | 398    | 
|Asia Pacific |  |                         | 10,391 |      |                             | 4,596  |  |      | 6,274  |      |   | 2,120  |  |   | 5,926  | 
|Europe       |  |                         | 2,041  |      |                             | 2,710  |  |      | 8,358  |      |   | 4,557  |  |   | 5,120  | 
|America      |  |                         | 854    |      |                             | 4,554  |  |      | 3,099  |      |   | 1,142  |  |   | 1,662  | 
|Africa       |  |                         | -      |      |                             | -      |  |      | 397    |      |   | -      |  |   | -      | 
|             |  |                         |        |      |                             |        |  |      |        |      |   |        |  |   |        | 
|Total        |  | $                       | 14,467 |      | $                           | 12,684 |  | $    | 19,196 |      | $ | 10,103 |  | $ | 13,106 | 
|             |  |                         |        |      |                             |        |  |      |        |      |   |        |  |   |        | 
|             |  |                         |        |      |                             |        |  |      |        |      |   |        |  |  

Customers

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

Although
the composition of our customers has changed from year to year, and revenues
from individual customers are subject to material increases and decreases
depending on customer requirements, a customer located in Asia Pacific
accounted for approximately 32% of our revenues in fiscal 2007, 12% in fiscal
2006, 15% of our revenues in fiscal 2005, and represented approximately 48% of
our backlog as of December 31, 2007. A customer located in Europe accounted for
approximately 21% of our revenues in fiscal 2007, 16% of our revenues in 2006,
2% in 2005 and represented 1% of our backlog as of December 31, 2007. A
customer located in Latin America accounted for approximately 13% of our
revenues in fiscal 2007, 5% in 2006 and 11% of our revenues in 2005, and
represented approximately 2% of our backlog as of December 31, 2007. Another
customer located in Asia Pacific accounted for approximately 6% of our revenues
in fiscal 2007, 2% in 2006 and 14% of our revenues in fiscal 2005 and also
represented approximately 2% of our backlog as of December 31, 2007. Another
customer located in Europe accounted for approximately 4% of our revenues in
fiscal 2007, 18% of our revenues in 2006, 5% in 2005 and represented 0% of our
backlog as of December 31, 2007. A customer located in Israel accounted for
approximately 1% of our
revenues in fiscal 2007, 17% of our revenues in 2006, 2% in 2005 and
represented 1% of our backlog as of December 31, 2007. We expect that sales of
our products to a small number of customers will continue to account for a
substantial percentage of our net revenue in the foreseeable future.

General Financial Considerations for Projects

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

26

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

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

Manufacturing and Suppliers

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

27

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Competition

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

Research and Development

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

Our
internally financed expenditures for all research and development programs
during fiscal 2007, 2006 and 2005 totaled approximately $1 million, $0.6
million and $0.6 million, respectively, which represented 7%, 6% and 3% of our
revenue, respectively. We expect that we will continue to commit resources to
research and development in the future.

Intellectual Property

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

28

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

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

As
part of our cooperation agreement with IAI, IAI and us have each granted the
other party a license to use all patents and other intellectual property rights
owned by the other party relating to the Ehud ACMI system, as is required to
enable such party to exercise its rights under the cooperation agreement. We
further agreed to jointly own with IAI the trade name Ehud. See Item 4 
Information on the Company  B. Business Overview  Strategic Relationship.

C. Organizational Structure

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

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

D. Property, Plant and Equipment

Our
executive offices and research and development facilities are located in Rosh
Haayin, Israel. At this location, in 2007, we leased approximately 2,539
square meters of office space at a monthly rent of approximately $23,000. This
lease will expire on September 14, 2009. See also Note 16B to our Consolidated
Financial Statements.

We
lease approximately 875 square meters of manufacturing facilities in Ashdod,
Israel for a monthly rent of approximately $12,000. This lease expired will
expire on October 31, 2009 with an option to be renewed for an additional two
years.

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

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

The
following discussion of our financial condition and results of operations
should be read in conjunction with Item 3A. Key InformationA. Selected
Financial Data and the Consolidated Financial Statements and the related notes
included elsewhere in this annual report.This discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results may differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including,
but not limited to, those set forth in Item 3. Key Information D. Risk
Factors.

In
accordance with the instructions of the Israeli Accounting Standard No. 29,
Adoption of International Financial Reporting Standards (IFRS), which was
published in July 2006, we have adopted IFRS as issued by the International
Accounting Standards Board, based upon the guidance in IFRS 1, First-time
adoption of IFRSs, and we will prepare our financial statements in accordance
with IFRS as of the period beginning on January 1, 2008. Following the adoption
of IFRS, in our financial statements for the year 2008, we will be required to
present comparative financial statements as at and for the year ended December
31, 2007, prepared in accordance with IFRS. In addition, we are required to
disclose in our financial statements as of December 31, 2007 included elsewhere
in this annual report, the balance sheet for that date and the income statement
for the year then ended prepared in accordance with IFRS. For further details, see
Note 2T to our consolidated financial statements included elsewhere in this
annual report.

General

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

Most
of our revenues are generated in U.S. Dollars, and a significant proportion of
our expenses is incurred in U.S. Dollars, or is linked to the U.S. Dollar.
Consequently, we use the U.S. Dollar as our functional currency. Transactions
and balances originally denominated in U.S. Dollars are presented in the
financial statements in their original amounts, and non-dollar transactions and
balances have been translated into U.S. Dollars using the exchange rates in
effect on the date of a transaction or balance. Our Consolidated Financial
Statements have been prepared in accordance with Israel GAAP. Israel GAAP, as
applicable to our financial statements, differs in certain significant respects
from U.S. GAAP. See Note 21 to our Consolidated Financial Statements.

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

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

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

Revenues
related to work in progress under long-term contracts are recognized according
to the percentage of completion method. The percentage of completion method is
computed based on the projects total execution costs which reflect the
progress of its completion, and which include salaries, material costs and
subcontractor charges. Revenues ascribed to each period are the amounts of
gross profits earned on such contracts during such period plus the costs
incurred during such period, excluding cost of materials that have not yet been
used and costs incurred for subcontracted work that is still to be performed.

With
respect to the sale of products acquired from third parties as shelf products
and where the cost of adaptation thereof for a customers specific needs is not
material, the related revenue is recognized after completion and delivery.
Provision for estimated losses on uncompleted contracts are made in the period
in which such losses are first determined in the amount of the estimated loss
on the entire contract. Royalty revenues are generally recorded on a cash
basis.

Critical Accounting Policies

The
preparation of our financial statements, in conformity with Israel GAAP,
requires us 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 our managements best estimates
based on experience and historical data. Actual results could differ from those
estimates.

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

Adoption of International Financial Reporting
Standards (IFRS)

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

Stock-Based Compensation

Until December
31, 2005 we recorded expenses with respect to stock options granted to
employees and service providers that provide similar services to those provided
by employees, in accordance with the intrinsic value method described in United
States Accounting Principles Board Opinion No. 25 (APB No. 25) Accounting for
Stock Issued to Employees. Shares issued to service providers were recorded
based on the cost of service provided at the grant date of the shares issued.

As of January
1, 2006, our financial statements comply with Accounting Standard No. 24,
Share-Based Payments which requires our share-based payment transactions,
including transactions with employees or other parties that are to be settled
by equity instruments, cash or other assets, to be recognized in our financial
statements. Standard No. 24 requires the restatement of comparative data
relating to periods after March 15, 2005. As of December 31, 2005, the charge
for equity-settled share-based payments in the consolidated income statement is
approximately $7,000.

Going Concern

The
application of the going concern basis of accounting involves a range of
subjective judgments, principally in relation to the sufficiency of our
resources to allow us to continue to operate in the ordinary course and thereby
realize our assets and discharge our liabilities in the normal course of
business for a period of 12 months following the approval date of the
consolidated financial statements. These resources are derived from working
capital, cash flow, volume of orders obtained, backlog of orders, existing cash
balances together with meeting forecasted cash flows from operating activities,
as well as obtaining orders forecasted in the budget.

Revenue Recognition

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

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

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

Impairment in value of assets

We
apply Israeli Accounting Standard No. 15 - Impairment in Value of Assets.
This standard provides procedures that a company must apply in order to ensure
that its assets presented in the consolidated balance sheet (to which the
standard applies), are not presented at an amount that is in excess of their
recoverable value, which is the higher of the net selling price and the use
value (the present value of the estimated future cash flows expected to be
derived from use and disposal of the asset). This standard applies to all the
assets except inventory, deferred tax assets and monetary assets. We apply
Israeli Accounting Standard No. 26, that provides guidelines for determining
the cost of inventory and its subsequent recognition as an expense as well as
for determining impairment in value of inventory written down to net realizable
value.

Income Taxes

As
part of the process of preparing our consolidated financial statements, we are
required to estimate our income taxes in each of the jurisdictions in which we
operate. This process requires us to estimate our actual current tax exposure
and make an assessment of temporary differences resulting from differing
treatment of items for tax and accounting purposes. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and, to the extent we believe that recovery is not likely, we must
establish a valuation allowance. To the extent that we establish a valuation
allowance or increase this allowance in a period, we must include an expense
within the tax provision in the statement of operations. Significant management
judgment is required in determining our deferred tax assets and liabilities and
any valuation allowance recorded against our net deferred tax assets.

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We
have a valuation allowance of $15 million as of December 31, 2007, which is
relates mostly to the value of the deferred tax asset of our net operating loss
carryforwards. This indicates our managements current assessment that because
we are yet to generate taxable income, we cannot determine whether it is likely
that we will be able to use this asset in the future. In the event that we
generate taxable income in a particular jurisdiction in which we operate and in
which we have net operating loss carryforwards, we may be required to adjust
our valuation allowance.

A. Results of Operations

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

|                                              |  |                              |     |      |  |      |    |      |     |      |  |     |    |  |     |   
|--------------------------------------------- |  | ---------------------------- | --- | ---- |  | ---- | -- | ---- | --- | ---- |  | --- | -- |  | --- | --
|                                              |  | For Years Ended December 31, |    
|                                              |  |                              |    
|                                              |  | 2003                         |     | 2004 |  | 2005 |    | 2006 |     | 2007 | 
|                                              |  |                              |     |      |  |      |    |      |     |      | 
|                                              |  |                              |     |      |  |      |    |      |     |      | 
|Revenues                                      |  |                              | 100 | %    |  | 100  | %  |      | 100 | %    |  | 100 | %  |  | 100 | % 
|Cost of sales                                 |  |                              | 94  | %    |  | 81   | %  |      | 77  | %    |  | 78  | %  |  | 82  | % 
|Inventory Write Off                           |  |                              | -   |      |  | -    |    |      | -   |      |  | -   |    |  | 5   | % 
|Gross profit                                  |  |                              | 6   | %    |  | 19   | %  |      | 23  | %    |  | 22  | %  |  | 13  | % 
|Research and development                      |  |                              | 5   | %    |  | 2    | %  |      | 3   | %    |  | 6   | %  |  | 7   | % 
|Selling, general and administrative
 expenses |  |                              | 40  | %    |  | 23   | %  |      | 18  | %    |  | 35  | %  |  | 35  | % 
|Operating profit (loss)                       |  |                              | (39 | %)   |  | (6   | %) |      | 2   | %    |  | (19 | %) |  | (29 | %)
|Financing expenses, net                       |  |                              | 5   | %    |  | 4    | %  |      | 1   | %    |  | 2   | %  |  | -   |   
|Other income (expenses), net                  |  |                              | -   |      |  | 2    | %  |      | -   |      |  | -   |    |  | -   |   
|Profit (loss) before income taxes             |  |                              | (43 | %)   |  | (10  | %) |      | 1   | %    |  | (21 | %) |  | (29 | %)
|Income tax (expenses) benefits                |  |                              | (2  | %)   |  | -    |    |      | -   |      |  | (1  | %) |  | -   |   
|Net Profit (loss)                             |  |                              | (45 | %)   |  | (10  | %) |      | 1   | %    |  | (22 | %) |  | (29 | %)

Our order
backlog as of December 31, 2007 was $51 million.

Subsequent Events

There are no
substantial events subsequent to December 31, 2007.

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Year Ended December 31, 2007 Compared to Year
Ended December 31, 2006

Revenues.

Revenues
in fiscal 2007 were $13.1 million, an increase of 30% compared to revenues of
$10.1 million in fiscal 2006. The increase was primarily attributed to the
progress achieved during 2007 in significant new projects that were received in
the end of fiscal 2006, which contributed $4 million to the revenues of fiscal
2007. Revenues from sales of our live and embedded training systems products in
fiscal 2007 accounted for 56% as in fiscal 2006. Revenues derived from our
virtual and constructive simulator products accounted for 44% of our revenues
in fiscal 2007 as in fiscal 2006. The geographical breakdown of our revenues in
fiscal 2007 was as follows: approximately 45% of our revenues were in Asia Pacific,
39% in Europe, 13% in America and 3% in Israel. In fiscal 2006, approximately
45% of our revenues were in Europe, 23% in Israel, 21% in Asia Pacific and 11%
in America. The fluctuations in the proportion of our revenues attributed to
geographic areas are the result of the completion of several contracts, which
we had with various countries. Our agreements are multi-year contracts, and we
generally recognize revenues on the percentage of completion method,
recognizing expenses when incurred.

In
fiscal 2007, we recognized income and commissions from royalties in the amount
of $559,000 pursuant to the cooperation agreement with MLM signed in August
2005, compared to income from royalties in fiscal 2006 of $276,000.

Gross Profit (Loss).

Gross
profit in fiscal 2007 was approximately $1.7 million, a decrease of $0.5
million from a gross profit of $2.2 million in fiscal 2006. The decrease in
gross profit was primarily due to an inventory write-off of $0.7 million,
following re-evaluation of the existing products in the inventory, taking into
account market price and products conditions. As a percentage of revenues,
gross margin (not including the inventory write-off) did not change
significantly from an overall gross margin of 22% in fiscal 2006 to an overall
gross margin of 18% in fiscal 2007. Our gross margin is influenced by various
factors, such as the type and size of a project, and the portion of projects
performed by subcontractors.

Research and
Development Costs.

Research
and development expenditures consist primarily of salaries, subcontractors and
other personnel related expenses related to design, development and enhancement
of our products and, to a lesser extent, depreciation and other expenditures.
Research and development expenses in fiscal 2007 were $1 million, an increase
of $0.4 million from fiscal 2006. Research and development expenses were
primarily increased due to continuing the development of new products and the
training of new employees.

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Selling and
Marketing Expenses.

Selling
and marketing expenditures consist primarily of costs relating to payroll
expenses, sales commissions, subcontractors and consultants, travel expenses,
demonstrations, exhibitions and participation in trade shows. Selling and
marketing expenditures in fiscal 2007 were $2.2 million, an increase of $0.8
million, or 56%, from $1.4 million in fiscal 2006. The increase in selling and
marketing expenses was primarily attributed to the fact that there was an
increase in the number of employees which caused an increase in the salaries
expenses and the related expenses, from increasing our marketing activities for
our EVA and IFEWS products and from an increase in delivering new proposals.

General and
Administrative Expenses.

General
and administrative expenses consist primarily of salaries and related costs of
welfare and administration, finance and general management personnel,
professional fees, office, vehicle and rental expenses. General and
administrative expenses in fiscal 2007 were $2.3 million, an increase of $
188,000, or 9%, from $2.2 million in fiscal 2006. The increase in general and
administrative expenses was primarily attributed to an increase in our
workforce and related expenses.

Operating Profit (Loss).

As
a result of the foregoing, we had an operating loss of ($3.8) million in fiscal
2007, compared to an operating loss of ($2.0) million in fiscal 2006. As a
percentage of revenues, operating loss increased from an operating loss of (19%)
in fiscal 2006, to an operating loss of (29%) in fiscal 2007.

Financial Expenses,
Net.

Financial
expenses, net consist primarily of interest paid on loans and bank charges, net
of income from interest earned on short-term deposits and interest on
non-current receivables, gains or losses from derivatives instruments and gains
or losses arising from foreign exchange erosion of monetary balances. Financial
expenses, net in fiscal 2007 were approximately $18,000 compared to $185,000 in
fiscal 2006. The decrease in financial expenses, net were primarily attributed
to a decrease in interest on loans received from banks due to reduced amounts
of loans pursuant to the completion of the repayment of bank loans during the
beginning of fiscal 2007 and to a decrease in interest on long-term tax
assessment due to reduced amounts of tax liability pursuant to the repayment of
most of our tax liability in fiscal 2005-2007. The changes were also attributed
to an increase in interest income received from cash deposits due to higher
amounts deposited during the year, gains from derivative instruments and
foreign exchange gains offset by an increase in bank charges relating to
guarantees due to an increase in guarantees performed by the company.

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Year Ended December 31, 2006 Compared to Year
Ended December 31, 2005

Revenues.

Revenues
in fiscal 2006 were $10.1 million, a decrease of 47% compared to revenues of
$19.2 million in fiscal 2005. The decrease was primarily attributed to the
completion of several significant projects in 2005, particularly to the
progress achieved during 2005 in one significant project in Europe, which
contributed $6.0 million to the revenues of fiscal 2005. In addition, according
to the agreement signed with IAI on August 2005, we have received royalties
from IAI amounting to $1.7 million during 2005. Revenues from sales of our live
and embedded training systems products in fiscal 2006 accounted for 56%,
compared to 64% of our revenues in fiscal 2005. Revenues derived from our virtual
and constructive simulator products accounted for 44% of our revenues in fiscal
2006, compared to 36% of our revenues in fiscal 2005. The geographical
breakdown of our revenues in fiscal 2006 was as follows: approximately 45% of
our revenues were in Europe, 23% in Israel, 21% in Asia Pacific and 11% in
America. In fiscal 2005, approximately 43% of our revenues were in Europe, 33%
in Asia Pacific , 16% in America, 6% in Israel and 2% in Africa. The
fluctuations in the proportion of our revenues attributed to geographic areas
are the result of the completion of several contracts, which we had with
various countries. Our agreements are multi-year contracts, and we generally
recognize revenues on the percentage of completion method, recognizing expenses
when incurred.

In
fiscal 2005, income from royalties and commissions was $1.7 million pursuant to
the cooperation agreement with MLM signed in August 2005 which resolved past
disagreements. During 2006, we recognized income from royalties in the amount
of $276,000.

Gross Profit (Loss).

Gross
profit in fiscal 2006 was approximately $2.2 million, a decrease of $2.2
million from a gross profit of $4.4 million in fiscal 2005. The decrease in
gross profit was primarily due to royalties revenues from IAI amounting to $1.7
million in 2005, together with a $0.8 million decrease in cost of revenue in
2005 as result of a reversal of certain previously accrued liabilities that are
no longer payable as a result of the new agreement signed with IAI in 2005.
Royalties from IAI in 2006 were $0.3 million. In addition, the decrease in
revenues in 2006 in comparison to revenues in 2005 contributed to the decrease
in gross profit. As a percentage of revenues, gross margin did not change
significantly from an overall gross margin of 23% in fiscal 2005, to an overall
gross margin of 22% in fiscal 2006. The gross margin from projects improved in
2006 due to higher gross margins in projects received during the end of 2005
and during 2006. The increase in gross margin in 2006 was offset by increased
costs in one of our projects for the completion of the project. Our gross
margin is influenced by various factors, such as the type and size of a
project, and the portion of projects performed by subcontractors.

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Research and
Development Costs.

Gross
research and development expenditures consist primarily of salaries,
subcontractors and other personnel related expenses related to design,
development and enhancement of our products and, to a lesser extent,
depreciation and other expenditures. Gross research and development expenses in
fiscal 2006 were $0.6 million, the same as in fiscal 2005. Gross research and
development expenses were primarily attributed to continuing the development of
the EVA and its derivatives.

Selling and
Marketing Expenses.

Selling
and marketing expenditures consist primarily of costs relating to payroll
expenses, sales commissions, subcontractors and consultants, travel expenses,
demonstrations, exhibitions and participation in trade shows. Selling and
marketing expenditures in fiscal 2006 were $1.4 million, an increase of $0.1
million, or 5%, from $1.3 million in fiscal 2005. The increase in selling and
marketing expenses was primarily attributed to the fact that we participated in
2006 in several exhibitions, including the Asian Aerospace Show, the
Farnborough Airshow and IITSEC, and from increasing our marketing activities
for our EVA and IFEWS products.

General and
Administrative Expenses.

General
and administrative expenses consist primarily of salaries and related costs of
welfare and administration, finance and general management personnel,
professional fees, office, vehicle and rental expenses. General and
administrative expenses in fiscal 2006 were $2.2 million, an increase of
$38,000, or 2%, from $2.1 million in fiscal 2005. The small increase in general
and administrative expenses was primarily attributed to an increase in legal
fees, professional fees and travel costs relating to our inquiries into a
potential acquisition of a company. This increase was offset by a decrease in
other professional fees, including market analysis of the training military
market and management skills improvement, which took place in 2005.

Operating Profit
(Loss).

As
a result of the foregoing, we had an operating loss of ($2.0) million in fiscal
2006, compared to an operating profit of $0.3 million in fiscal 2005. As a
percentage of revenues, operating profit decreased from an operating profit of
2% in fiscal 2005, to an operating loss of (19%) in fiscal 2006.

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Financial Expenses,
Net.

Financial
expenses, net consist primarily of interest paid on loans and bank charges, net
of income from interest earned on short-term deposits and interest on non-current
receivables, gains or losses from derivatives instruments and gains or losses
arising from foreign exchange erosion of monetary balances. Financial expenses,
net in fiscal 2006 were approximately $0.19 million, similar to fiscal 2005.
The changes in financial expenses, net were primarily attributed to a decrease
in interest on loans received from banks due to reduced amounts of loans
because of the repayment of loans during fiscal 2005 and fiscal 2006. The
changes were also attributed to an increase in interest income received from
cash deposits due to higher amounts deposited during the year, a decrease in
bank charges relating to guarantees due to a decreased commission rate on
guarantees amount, offset by losses from derivative instruments and foreign
exchange losses.

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

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

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

|                        |  |                           |  |                                 |  |                                               
|----------------------- |  | ------------------------- |  | ------------------------------- |  | ----------------------------------------------
|Year ended
 31 December |  | Israeli inflation %
 rate |  | Devaluation of the
 NIS
 % rate |  | Israeli inflation
 adjusted for
 devaluation %
|                        |  |                           |  |                                 |  |                                               
|                        |  |                           |  |                                 |  |                                               
|2003                    |  | (1.9)                     |  | (7.6)                           |  | 5.7                                           
|2004                    |  | 1.2                       |  | (1.6)                           |  | 2.8                                           
|2005                    |  | 2.4                       |  | 6.8                             |  | (4.4)                                         
|2006                    |  | (0.1)                     |  | (8.2)                           |  | 8.1                                           
|2007                    |  | 3.4                       |  | (8.97)                          |  | 12.37                                         

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

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Because
exchange rates between the NIS and the dollar fluctuate continuously, exchange
rate fluctuations as recently experienced in Israel and, particularly larger
periodic devaluations or revaluations, will have an impact on our profitability
and period-to-period comparisons of our results. In 2007, the devaluation of
the dollar against the NIS exceeded the rate of inflation in Israel, and we
have experienced an increase in the dollar cost of our operations in Israel.
The effects of foreign currency re-measurements are reported in our
consolidated financial statements in the statement of operations.

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

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

As
of December 31, 2007, we had an obligation to sell $250,000 for a total amount
of NIS 979,000. The fair value of this derivative financial instrument was
$5,000.

Effective Corporate Tax Rate

Generally,
Israeli companies were subject to corporate tax on their taxable income at the
rate of 35% for the 2004 tax year and 34% for the 2005 tax year. Following an
amendment to the Israeli Income Tax Ordinance [New Version], 1961, which came
into effect on January 1, 2006, the corporate tax rate was decreased to 31% for
the 2006 tax year, 29% in 2007, 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter.

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

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B. Liquidity and Capital Resources

Historically
we have met our financial requirements primarily through the private sale of
equity securities, customer payments and advances and the utilization of bank
credit lines. In addition, we raised capital through equity financings in 2004
and in 2006. As of December 31, 2007, we had cash and cash equivalents of
approximately $1.5 million and a negative working capital of approximately $1.5
million.

On
October 1, 2003, shareholders of the Company (at that date) granted loans in
the total amount of $601,000 for a period of two years, bearing no interest. On
March 2, 2004, loans in the amount of $100,000 were converted into shares of
the Company, at a price per share of $0.18. On April 20, 2004, the Company
reached an agreement for the repayment of $204,000 and a waiver of $177,000
thousand out of the then outstanding loan amount. As of December 31, 2007, a
loan in the amount of $120,000 thousand is outstanding, bearing no interest.
The Company expects to repay this loan within twelve months of the balance
sheet date.

Pursuant
to these transactions, the banks agreed to postpone repayment of $ 1.5 million
in short-term credit, such that $0.5 million is repayable in each of the years
2005, 2006 and 2007. The first payment was paid in January 2005, the second
payment was paid in January 2006, and the third payment was made in January
2007. There are no restrictions on the use of the credit lines with our banks.
The banks may terminate our credit lines at any time, and the banks may demand
repayment in full of any indebtedness then outstanding.

In
addition, we have obtained bank guarantees to secure our performance of certain
obligations, including under our leases and contracts with customers. Of these
guarantees, which amounted to an aggregate of $ 18.7 million on December 31,
2007, guarantees in an aggregate of $18.1 million are to be released by our
obtaining specific performance milestones, which are scheduled to be completed through
November 2012.

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

Our
operating cash flow is influenced by cash provided from our customers as an
advance and by cash used in the performance of ongoing projects. Operating
activities for the year 2007, 2006 and 2005, provided (or used) cash of
approximately ($0.5) million, ($2.4) million and $ 1.0 million, respectively. For
fiscal 2007, cash derived from changes in assets and liabilities of 2.1 million
primarily consisted of a decrease in trade receivables of 1.9 million.
Additionally, there was an increase in excess of advances from customers over
amounts recognized as revenues of $0.6 million and increase in trade payables
of $0.4 million.

For
fiscal 2006, cash provided from changes in assets and liabilities of ($0.8)
million primarily consisted of an increase in trade receivables of ($2.9)
million. Additionally, there was an increase in excess of advances from
customers over amounts recognized as revenues of $2.1 million.

41

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For
fiscal 2005, cash provided from changes in assets and liabilities of $0.5
million primarily consisted of a decrease in trade receivables of $2.4 million.
Additionally, there was a decrease in excess of advances from customers over
amounts recognized as revenues of $(2.4) million, a decrease in inventory of $1.2
 million, a decrease in trade payables of ($0.6) million and a decrease in
other payables and accrued expenses of $(0.2) million.

Investing
activities for fiscal 2007, fiscal 2006 and fiscal 2005 used cash of
approximately (1.8) million, ($0.2) million and ($0.1) million, respectively.
Cash flows used in investing activities in fiscal 2007 consisted primarily of a
purchase of fixed assets in the amount of $0.3 million and an increase in
restricted bank deposits of $1.5 million. The increase in restricted bank
deposits was due to an increase in advanced payments and performance
guarantees.

Cash
flows used in investing activities in fiscal 2006 consisted primarily of a
purchase of fixed assets in the amount of $0.3 million and a decrease in
restricted bank deposits of $0.3 million and an increase in other assets in the
amount of $0.3 million. The decrease in restricted bank deposits was due to a
decrease in advanced payments and performance guarantees.

Cash
flows used in investing activities in fiscal 2005 consisted primarily of a
purchase of fixed assets in the amount of $0.3 million and a decrease in
restricted bank deposits of $0.2 million. The decrease in restricted bank
deposits was due to a decrease in advanced payments and performance guarantees.

Financing
activities for fiscal 2007, fiscal 2006 and fiscal 2005 provided (or used) cash
of approximately $0.4 million, $3.1 million and ($0.5) million, respectively.

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

Cash
flows provided in financing activities in fiscal 2006 consisted primarily of
share and warrant issuances in the amount of $3.6 million and the net repayment
of long-term loans from banks of $0.5 million.

Cash
flows used in financing activities in fiscal 2005 consisted primarily of the
net repayment of long-term loans from banks of $0.5 million.

Our
current liabilities exceed our current assets. We believe that the existing
cash balances together with meeting forecasted cash flows from operating
activities for fiscal 2008, as well as obtaining orders forecasted in the
budget approved by the Board of Directors, will be sufficient to meet our
capital expenditure needs in the future.

42

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C. Research and Development, Patents and
Licenses

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

D. Trend Information

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

E. Off-Balance Sheet Arrangements

The
premises occupied by the Company are rented under various operating leases expiring at the
end of September 2009. On October 30, 2007, the Company signed an extension to one of its
operating leases that expires at the end of October 2009. The future minimum annual rental
payments as of December 31, 2007 are $ 424,000 and $321,000 for the years ending December
31, 2008 and 2009, respectively.

F. Tabular Disclosure of Contractual
Obligations

Our
significant financial and contractual obligations as of December 31, 2007, and
the periods in which such obligations are due are as follows:

|                                    | 
|----------------------------------- | 
|Payments and Amount of
  Commitment | 
|Expiration
  Per Period             | 
|(U.S.
  Dollars in Thousands)       | 

|                               |  |                             |        |                    |  |          |  |           |        |  |  |       | 
|------------------------------ |  | --------------------------- | ------ | ------------------ |  | -------- |  | --------- | ------ |  |  | ----- | 
|Contractual
  Obligations(1)   |  | Total
  Amounts
  Committed |        | Less than
  1 Year |  | 1-3Years |  | 3-5 Years |       
|                               |  |                             |        |                    |  |          |  |           |       
|                               |  |                             |        |                    |  |          |  |           |        |  |  |       | 
|Borrowed Lines of credit       |  |                             | 1,086  |                    |  | 1,086    |  |           |        |  |  |       | 
|                               |  |                             |        |                    |  |          |  |           |        |  |  |       | 
|Guarantees:                    |  |                             |        |                    |  |          |  |           |        |  |  |       | 
|Performance guarantees         |  |                             | 3,118  |                    |  | 222      |  |           | 1,984  |  |  | 912   | 
|Advance payment guarantees     |  |                             | 15,035 |                    |  | 1,954    |  |           | 12,828 |  |  | 253   | 
|Other bank guarantees          |  |                             | 571    |                    |  | 571      |  |           |        |  |  |       | 
|                               |  |                             |        |                    |  |          |  |           |        |  |  |       | 
|Total Guarantees               |  |                             | 18,724 |                    |  | 2,747    |  |           | 14,812 |  |  | 1,165 | 
|                               |  |                             |        |                    |  |          |  |           |        |  |  |       | 
|Operating lease
  commitments  |  |                             | 745    |                    |  | 424      |  |           | 321    |  |  |       | 
|                               |  |                             |        |                    |  |          |  |           |        |  |  |       | 
|Total commercial
  commitments |  |                             | 20,555 |                    |  | 4,257    |  |           | 15,133 |  |  | 1,165 | 
|                               |  |                             |        |                    |  |          |  |           |        |  |  |       | 

(1) Excludes liability for
employee severance benefits, net in the amount of $189,000.

G. Safe Harbor

Not
applicable.

43

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

A. Directors and Senior Management

The
following table lists the name, age and position held by each of our executive
officers and directors, as of may 31, 2008:

|                 |  |     |  |                                                         |          |  | 
|---------------- |  | --- |  | ------------------------------------------------------- | -------- |  | 
|Name             |  | Age |  |                                                         | Position | 
|                 |  |     |  |                                                         |          |  | 
|                
|Aviv Tzidon      |  | 52  |  | Director and
  Chairman of the Board of Directors      
|Uri Manor        |  | 65  |  | Director                                               
|Avraham
  Gilat  |  | 61  |  | Director                                               
|Rimon Ben-Shaoul |  | 63  |  | Director                                               
|Orit Stav        |  | 37  |  | Director*                                              
|Amnon Harari     |  | 57  |  | Director*                                              
|Ken Lalo         |  | 50  |  | Director                                               
|Nir Dor          |  | 44  |  | Director                                               
|Eival Gilady     |  | 57  |  | Director                                               
|Ilan Gillies     |  | 39  |  | Chief
  Executive Officer                              
|Reuven
  Shahar  |  | 49  |  | Vice
  President of Finance and Chief Financial Officer
|Dekel Tzidon     |  | 48  |  | Vice
  President of Development and Chief              
|                 |  |     |  | Technological
  Officer                                
|Shuki
  Carpassi |  | 35  |  | Vice
  President of Engineering                        
|Yoav
  Ben-Shem  |  | 40  |  | Vice
  President of Marketing                          

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

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

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

44

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

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

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

Amnon Harari has been one of our external
directors
since July 2002. Mr. Harari currently serves as the Vice President of R&D
in Lumenis Ltd. From August 2004 until August 2006 Mr. Harari served as the VP
of sales and service for EMEA in Lumenis Ltd, From March 2002 until August
2004, Mr. Harari served as the Chief Executive Officer of Advanced Heating
Technologies Ltd. From May 2000 to March 2002, Mr. Harari served as Chief
Executive Officer of Partner Future Communication Ltd. From April 1999 to April
2000, Mr. Harari served as General Manager of Alcatel Israel. From April 1997
to April 1999, Mr. Harari served as Corporate Vice-President and General
Manager of the Public Switching Division of Tadiran Telecommunication Ltd that
was later acquired by Alcatel to become Alcatel Israel. From 1992 to 1996, Mr.
Harari served as the head of the Israel Air Force Material Directorate. From
February 1997 to February 2002, Mr. Harari served as an External Director of
Elbit Systems Ltd. Mr. Harari is a Brigadier-General in the Israel Air Force.
Mr. Harari holds a B.Sc. in Physics from the Tel Aviv University.

45

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

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

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

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

46

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

Dekel
Tzidon has been our Chief Technology Officer and
Vice President of Research & Development since January 1, 2004. From 1995
to 1997, Mr. Tzidon was employed by RTSET as an R&D engineer and IP
manager. In 1997, Mr. Tzidon joined BVR as a senior systems engineer, IP
manager and head of the technology group. In 2001, Mr. Tzidon served as a
senior systems engineer in Comview. Since 2002, Mr. Tzidon has been employed as
an IP consultant for a number of hi-tech companies including BVR. Mr. Tzidon
has a B.Sc. in computer engineering. Mr. Tzidon is the brother of Mr. Aviv
Tzidon, the Chairman of our Board of Directors.

Shuki
Carpassi has been our Vice President of
Engineering since November 20, 2007. Mr. Carpassi joined BVR in 1993 and served
in different positions in the company. From 2004, he has served as BVRs
Engineering Department Director. Mr. Carpassi has over 14 years experience in
real-time/embedded software and systems engineering in the areas of simulation,
avionics and mission-critical applications. Mr. Carpassi is the inventor of one
of BVR patents in the field avionic communication protocol. Mr. Carpassi holds
a B.A. in Management and Computer Science from the Open University, Israel.

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

No term of our external directors has expired, in accordance with the
provisions of the Israel Companies Law  1999, as amended from time to time
(the Companies Law).

B. Compensation

The
aggregate remuneration we paid for the year ended December 31, 2007 to all
executive officers as a group (5 persons) was approximately $605,000 in
salaries, fees, commissions and bonuses. This amount includes approximately
$75,000 set aside to provide for pension, retirement or similar benefits
provided to our directors and executive officers.

47

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Members
of our board of directors, other than our external directors, do not receive
cash compensation for their service on the board of directors or any committee
of the board of directors. However, all of our directors are reimbursed for
their expenses for each board of directors meeting attended. Our external
directors received an aggregate of approximately $14,000 for the year ended
December 31, 2007.

At
the meeting of our shareholders held on March 1, 2004, a special majority of
our shareholders who voted at that meeting, approved the grant of an option to
purchase 72,000 of our Ordinary Shares to each of our nine directors serving on
our Board of Directors at the time, with the exception of Aviv Tzidon, the
Chairman of our Board of Directors. The options vested with the following
Directors upon their completion of one full year of service on our board
following the March 1, 2004 shareholders meeting: Yaron Sheinman (formerly, a
member of our board of directors), Avi Leumi (formerly, a member of our board
of directors), Uri Manor, Eric Chan, Gadi Aviram (formerly, a member of our
board of directors), Rimon Ben-Shaoul, Orit Stav and Amnon Harari and are
exercisable at a price of $0.18 per share for a period of three years. All
unexercised options expired in March 2008.

At
the meeting of our shareholders held on March 1, 2004, a majority of our
shareholders who voted at that meeting also approved the grant of an option to
purchase 9,000,000 of our Ordinary Shares to Mr. Aviv Tzidon. One fifth of the
options will vest upon the completion of each full year of service on our
board, which commenced on November 24, 2003, for a period of five years and
will be exercisable at a price of $0.18 per share for a period of three years.

Taking
into account the option grants described in the preceding two paragraphs above,
as of March 31, 2008, options to purchase 9,310,000 Ordinary Shares granted to
our directors and executive officers under our option plans were outstanding.
The exercise price of these options was $0.18 per share. Of these options,
options to purchase 7,020,000 Ordinary Shares are currently exercisable or will
become exercisable within 60 days of such date.

C.
Board Practices

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

48

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

External Directors

Under
the Companies Law, companies incorporated under the laws of Israel whose shares
have been offered to the public in or outside of Israel are required to appoint
no less than two external directors. The Companies Law provides that a person
may not be appointed as an external director if the person or the persons
relative, partner, employer or any entity under the persons control, has, as
of the date of the persons appointment to serve as external director, or had,
during the two years preceding that date, any affiliation with the company, any
entity controlling the company or any entity controlled by the company or by this
controlling entity. The term affiliation includes:

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

49

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No
person can serve as an external director if the persons position or other
business creates, or may create, conflict of interests with the persons
responsibilities as an external director. A person shall be qualified to serve
as an external director only if he or she possesses accounting and financial
expertise or professional qualifications. At least one external director must
posses accounting and financial expertise and the other external directors are
to possess professional qualifications as promulgated by regulations to the
Companies Law; these regulations provide that financial and accounting
expertise require such external director to possess a high level of
understanding in business matters, such that he or she can read and understand
financial statements in depth and be able to raise issues with respect to the
manner in which the financial data is presented therein. The companys board of
directors is to determine such candidates qualifications based on his or her
education, experience and skills regarding financial and control matters in
companies of similar size and in a similar industry and knowledge of
preparation and approval of financial statements under the Companies Law and
Israeli securities laws. These requirements do not apply to external directors
appointed before the recent amendment to the Companies Law but will apply to
their reappointment for an additional term. Until the lapse of two years from
termination of office, a company may not engage an external director to serve
as an office holder and cannot employ or receive services from that person,
either directly or indirectly, including through a corporation controlled by
that person. External directors are to be elected by a majority vote at a
shareholders meeting, provided that either:

|  |                                                                                                                                                                                                                                                            
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | the
 total number of votes for the appointment of the external directors shall
 include the votes of at least one third of the shares represented at the
 meeting in person or by proxy, which are not held by controlling shareholders
 of the company; or
|  |                                                                                                                                                                                                                                                            
| | the
 total number of votes against the appointment of the external directors,
 among the non-controlling shareholders of the company, shall not exceed 1% of
 the aggregate voting rights in the company.                                                  

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

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

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

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

50

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Exculpation, Insurance and Indemnification of
Directors and Officers

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

Office Holder Insurance

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

|  |                                                                                                                                                                                    
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a
 breach of his duty of care to us or to another person;                                                                                                                          
|  |                                                                                                                                                                                    
| | a
 breach of his duty of loyalty to us, provided that the office holder acted in
 good faith and had reasonable cause to assume that his act would not
 prejudice our interests; or
|  |                                                                                                                                                                                    
| | a
 financial liability imposed upon him in favor of another person concerning an
 act performed by him in his capacity as an office holder.                                        

Indemnification of Office Holders

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

|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a
 financial liability imposed on him in favor of another person by any
 judgment, including a settlement or an arbitrators award approved by a court
 concerning an act performed in his capacity as an office holder; and                                                                                                                                                                                                                                           
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | reasonable litigation expenses, including attorneys fees,
 expended by the office holder or charged to him by a court, in proceedings we
 institute against him or instituted on our behalf or by another person, or in
 a criminal charge from which he was acquitted, or a criminal charge in which
 he was convicted for a criminal offense that does not require proof of
 intent, in each case relating to an act performed in his capacity as an
 office holder.

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

51

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Limitations on Insurance and Indemnification

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

|  |                                                                                                                                                                                         
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a
 breach by the office holder of his duty of loyalty unless the office holder
 acted in good faith and had a reasonable basis to believe that the act would
 not prejudice the company;
|  |                                                                                                                                                                                         
| | a
 breach by the office holder of his duty of care if the breach was done
 intentionally or recklessly;                                                                                 
|  |                                                                                                                                                                                         
| | any
 act or omission done with the intent to derive an illegal personal benefit;
 or                                                                                                    
|  |                                                                                                                                                                                         
| | any
 fine levied against the office holder.                                                                                                                                             

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

We
have obtained liability insurance for our directors and officers.

Audit Committee

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

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

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

52

---

---



Management Employment Agreements

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

Employee Share Option Plans

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

On
January 4, 2004, our board of directors adopted a new share option plan under
which options for the purchase of 5,000,000 Ordinary Shares of the Company may
be granted to our employees and consultants. In 2006, our Board of Directors
approved an increase to the total option program to 5,200,000 Ordinary Shares.
Under this plan, as of March 31, 2008, 4,052,200 options were granted to
employees and consultants of the Company, at an exercise price ranging between
$0.145 and $0.65 per share. These options will vest over five years with
one-fifth vesting each year, and each increment expiring three years after
vesting. As of March 31, 2008 one fifth of these options had expired. Moreover,
as of March 31, 2008, an additional 1,147,800 Ordinary Shares of the Company
were reserved for issuance pursuant to options issuable under this share option
plan.

As
of March 31, 2008, we had outstanding options for the purchase of an aggregate
of 4,056,200 Ordinary Shares of the Company.

Employees

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

|                                       |  |                         |     |      |  |      |  |  |    |  |  | 
|-------------------------------------- |  | ----------------------- | --- | ---- |  | ---- |  |  | -- |  |  | 
|                                       |  | Year ended December 31,
|                                       |  |                        
|Activity                               |  | 2007                    |     | 2006 |  | 2005
|                                       |  |                         |     |      |  |     
|Production
 & Research and Development |  |                         | 98  |      |  | 66   |  |  | 53
|Marketing
 and Sales                   |  |                         | 7   |      |  | 4    |  |  | 3 
|Administration
 and Management         |  |                         | 12  |      |  | 10   |  |  | 10
|                                       |  |                         |     |      |  |      |  |  |   
|Total                                  |  |                         | 117 |      |  | 80   |  |  | 66
|                                       |  |                         |     |      |  |      |  |  |   

53

---

---



As
of May 31, 2008, we employed approximately 102 employees in research and
development operations and productions, both internally financed and pursuant
to contracts with our customers performed an integral role in our various
projects

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

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

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

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

54

---

---



D. Share Ownership

As
of March 31, 2008, Aviv Tzidon beneficially owned an option to purchase
7,200,000 Ordinary Shares, (for further information, see item 6B) exercisable
at a price of $0.18 per share for three years. Assuming the exercise of such
options and no other exercise of our convertible securities, Mr. Tzidon will
hold 4.92% of our then outstanding Ordinary Shares. In addition, Mr. Tzidon
holds 50% of Chun LP, which beneficially owned, as of March 31, 2008,
58,142,608 Ordinary shares, amounting to 49.71% of our outstanding Ordinary
Shares.

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

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

A. Major Shareholders

The
following table sets forth certain information regarding the beneficial
ownership of our Ordinary Shares as of, March 31, 2008, by each person or
entity known to own beneficially more than 5% of our outstanding Ordinary
Shares based on information provided to us by the holders or disclosed in
public filings with the Securities and Exchange Commission.

|                                                                                                    |  |                                                  |            |                                                |  |  |       |  
|--------------------------------------------------------------------------------------------------- |  | ------------------------------------------------ | ---------- | ---------------------------------------------- |  |  | ----- | -
|Name                                                                                                |  | Number of Ordinary
 Shares Beneficially Owned(1) |            | Percentage of
 Outstanding Ordinary
 Shares(2)
|                                                                                                    |  |                                                  |            |                                               
|                                                                                                    |  |                                                  |            |                                                |  |  |       |  
|CHUN Holdings Limited Partnership (3) c/o Yigal Arnon
 & Co. 1 Azrieli Center Tel-Aviv 67021 Israel |  |                                                  | 58,142,608 |                                                |  |  | 49.71 | %
|                                                                                                    |  |                                                  |            |                                                |  |  |       |  
|H.S.N General Managers Holdings LP 7 Berkowitz St. Tel Aviv
Israel                                  |  |                                                  | 38,000,000 | (4)                                            |  |  | 28.15 | %
|                                                                                                    |  |                                                  |            |                                                |  |  |       |  
|Polar Investments House Platinum House 21 Haarbah St. Tel Aviv
64731
 Israel                       |  |                                                  | 6,252,207  | (5)                                            |  |  | 5.34  | %
|                                                                                                    |  |                                                  |            |                                                |  |  |       |  
|Bank Leumi Le-Israel B.M. 24-32 Yehuda Halevi St. Tel Aviv 63432
 Israel                            |  |                                                  | 6,111,111  |                                                |  |  | 5.22  | %

|    |                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Except as otherwise noted
 and pursuant to applicable community property laws, each person named in the
 table has sole voting and investment power with respect to all ordinary
 shares listed as owned by such person. Shares beneficially owned include
 shares that may be acquired pursuant to options that are exercisable within
 60 days of March 31, 2008.

55

---

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Ordinary shares deemed
 beneficially owned by virtue of the right of any person or group to acquire
 these ordinary shares within 60 days of March 31, 2008 are treated as
 outstanding only for the purposes of determining the percent owned by such
 person or group. The percentage of outstanding ordinary shares is based on 116,973,757 Ordinary Shares outstanding
 as of March 31, 2008.
|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|(3) | Based on information
 reported by Chun LP in its Schedule 13D, the general partner of Chun LP is
 Chun Holdings Ltd., a private Israeli company jointly held by Aviv Tzidon
 (50%), and Portal Marketing SA (50%).                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|(4) | Includes three separate
 warrants for the purchase of 6,000,000 ordinary shares per each warrant, with
 exercise prices of $0.36, $0.54 and $1.00, exercisable for a period of three
 years, with a mandatory exercise mechanism under certain conditions.                                                                                                                                       
|    |                                                                                                                                                                                                                                                                                                                                                                                                  
|(5) | Includes 3,181,807
 Ordinary Shares held by Koonras Technologies Ltd., a wholly-owned subsidiary
 of Polar Investments Ltd.                                                                                                                                                                                                                                                                      

As
of March 31, 2008, there were a total of four holders of record of our ordinary
shares with addresses in the United States. Such United States holders were, as
of such date, the holders of record of 223,875 ordinary shares representing
approximately 0.2% of our outstanding share capital The number of record
holders in the United States is not representative of the number of beneficial
holders nor is it representative of where such beneficial holders are resident
since many of these ordinary shares were held of record by brokers or other
nominees (including one U.S. nominee company, CEDE & Co., which held
approximately 11.2% of our outstanding ordinary shares as of said date).

B. Related Party Transactions

Agreement with Consult Wise Pte Ltd.

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

On
January 1, 2007, following the expiration of the above agreement, we entered into
a new agreement with Consult Wise Pte Ltd. Pursuant to this agreement, we
agreed to pay Consult Wise $3,500 per month for the provision of its marketing
services and $3,500 per month for supporting our operating programs in
Singapore, for a period of two years commencing January 1, 2007; furthermore,
Consult Wise is entitled to commissions on purchase orders issued by customers
introduced to us pursuant to its marketing services. For further information
see Note 16 to the Consolidated Financial Statements included in this annual
report.

56

---

---



Agreement with Eyepoint Ltd.

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

Sale of Shares to Principal Shareholders

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

In
March 2006, H.S.N General Managers Holdings L.P. (or HSN), an Israeli limited
partnership led by Mr. Nir Dor invested $3.6 million in our share capital in
consideration for the issuance of 20,000,000 Ordinary Shares, representing
approximately 17% of our issued share capital, at a price per share of $0.18.
In connection with this investment, HSN was issued three separate warrants for
the purchase of 6,000,000 of our Ordinary Shares per each warrant, with
exercise prices of $0.36, $0.54 and $1.00, exercisable for a period of three
years, with a mandatory exercise mechanism under certain conditions. As of
March 2006, Mr. Dor serves as a member of our board of directors.

Sale of Shares to and Issue of Warrants to
Chun

On
November 21, 2003, Chun Holdings Ltd., or Chun, issued a tender offer to
purchase all of our outstanding shares for a purchase price of $0.18 per share.
Pursuant to the tender offer, which expired on December 30, 2003, some of our
shareholders, including Clal Industries Ltd. and our former controlling
shareholder Elisra Electronics Systems Ltd., or Elisra, tendered an aggregate
of 7,142,608 of their shares, constituting 67% of our issued and outstanding
share capital. Upon the request of Chun, all of the tendered shares were
registered in the name of its affiliate Chun Holdings L.P., or Chun LP which
became our controlling shareholder. As of, March 31, 2008 Chun was holding an
aggregate of 49.71% of our outstanding shares.

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

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

57

---

---



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

Options
issued to the Chairman of the Board of Directors

On January 1,
2004, Aviv Tzidon received an option to purchase 9,000,000 of our Ordinary
Shares issued for services rendered as Chairman of our Board of Directors. One
fifth of the options will vest upon completion of each full year of service on
our Board of Directors, which commenced on November 24, 2003. Each option is
exercisable for three years following vesting and is exercisable at a price per
share of $0.18.

Sale of Shares and Issuance of Warrants to
Investors

On
March 3, 2004, a group of investors entered into an investment agreement to
purchase 22,428,225 of our Ordinary Shares at a price per share of $0.18 for an
aggregate purchase price of $4,037,080. Two of the investors, Polar
Communications Ltd. and Koonras Technologies Ltd., who were also existing
security holders of the Company prior to the March 2004 investment, were issued
additional shares in consideration for their agreement to convert an aggregate
debt owed to them of $100,000 into 555,556 of our Ordinary Shares at a price
per share of $0.18. Pursuant to this investment agreement, the investors were
also issued four-year warrants to purchase an aggregate of 10,000,000 of our
Ordinary Shares with an exercise price of $0.18 per share; Chun LP was
initially granted these warrants, but subsequently waived its rights to receive
such warrants in favor of the investors, pro rata to their investments.

Convertible Loan Agreements

On
March 3, 2004, three of our banks, namely Bank Leumi Le-Israel B.M., Bank Hapoalim
B.M. and the Industrial Development Bank Ltd., agreed to convert existing loans
in the amount of $1.1 million, $700,000 and $200,000, respectively, into
6,111,111; 3,888,889; and 1,111,111 of our Ordinary Shares, respectively.

58

---

---



Employment Agreements

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

C. Interests of Experts and Counsel

Not
applicable.

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

A. Consolidated Statements and Other
Financial Information

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

Legal Proceedings

We
are not a party to any material legal proceedings.

B. Significant Changes

There
have been no material changes in our financial position since December 31,
2007.

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

A. Offer and Listing Details

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

59

---

---



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

|                               |  |   |      |  |   |      | 
|------------------------------ |  | - | ---- |  | - | ---- | 
|                               |  |   | High |  |   | Low  | 
|                               |  |   |      |  |  
|2003                           |  |   |      |  |   |      | 
|Year ending
 December 31, 2003 |  | $ | 1.10 |  | $ | 0.75 | 
|                               |  |   |      |  |   |      | 
|2004                           |  |   |      |  |   |      | 
|Year ending
 December 31, 2004 |  | $ | 1.10 |  | $ | 0.40 | 
|                               |  |   |      |  |   |      | 
|2005                           |  |   |      |  |   |      | 
|Year ending
 December 31, 2005 |  | $ | 0.72 |  | $ | 0.20 | 
|                               |  |   |      |  |   |      | 
|2006                           |  |   |      |  |   |      | 
|First
 Quarter                 |  | $ | 0.28 |  | $ | 0.16 | 
|Second
 Quarter                |  | $ | 0.27 |  | $ | 0.22 | 
|Third
 Quarter                 |  | $ | 0.24 |  | $ | 0.18 | 
|Fourth
 Quarter                |  | $ | 0.22 |  | $ | 0.15 | 
|                               |  |   |      |  |   |      | 
|2007                           |  |   |      |  |   |      | 
|First
 Quarter                 |  | $ | 0.24 |  | $ | 0.19 | 
|Second
 Quarter                |  | $ | 0.21 |  | $ | 0.17 | 
|Third
 Quarter                 |  | $ | 0.19 |  | $ | 0.16 | 
|Fourth
 Quarter                |  | $ | 0.20 |  | $ | 0.14 | 
|October                        |  | $ | 0.20 |  | $ | 0.15 | 
|November                       |  | $ | 0.20 |  | $ | 0.19 | 
|December                       |  | $ | 0.19 |  | $ | 0.14 | 
|                               |  |   |      |  |   |      | 
|2008                           |  |   |      |  |   |      | 
|January                        |  | $ | 0.19 |  | $ | 0.16 | 
|February                       |  | $ | 0.18 |  | $ | 0.16 | 
|March                          |  | $ | 0.20 |  | $ | 0.15 | 
|April                          |  | $ | 0.19 |  | $ | 0.17 | 
|May                            |  | $ | 0.19 |  | $ | 0.16 | 

B. Plan of Distribution

Not
applicable.

C. Markets

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

D. Selling Shareholders

Not
applicable.

E. Dilution

Not
applicable.

60

---

---



F. Expenses of the Issue

Not
applicable.

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

A. Share Capital

Not
applicable.

B. Memorandum and Articles of Association

Objects and Purposes

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

Transactions Requiring Special Approval

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

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

| |                                                                                                                               |                                                                                                                                    | 
| | ----------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------- | 
| |                                                                                                                              | information
 on the appropriateness of a given action brought for his approval or
 performed by him by virtue of his position; and
| |                                                                                                                               |                                                                                                                                    | 
| |                                                                                                                              | all
 other important information pertaining to the previous actions.                                                              
| |                                                                                                                               |                                                                                                                                    | 
| | The duty of
 loyalty requires an office holder to act in good faith for the interests of
 the company and includes a duty to:
| |                                                                                                                               |                                                                                                                                    | 
| |                                                                                                                              | refrain from
 any conflict of interest between the performance of his duties in the company
 and his personal affairs;            
| |                                                                                                                               |                                                                                                                                    | 
| |                                                                                                                              | refrain from
 any activity that is competitive with the company;                                                                  

61

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| |   |                                                                                                                                                                      | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | refrain from
 exploiting any business opportunity of the company to receive a personal gain
 for himself or others; and                                             
| |   |                                                                                                                                                                      | 
| |  | disclose to
 the company any information or documents relating to a companys affairs
 which the office holder has received due to his position as an office holder.

Each
person listed in the table under Item 6  Directors, Senior

Management and
Employees  A. Directors and Senior Management is an office holder.

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

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

| |   |                                                                                          | 
| | - | ---------------------------------------------------------------------------------------- | 
| |  | not in the
 ordinary course of business;                                                
| |   |                                                                                          | 
| |  | not on market
 terms; or                                                                
| |   |                                                                                          | 
| |  | likely to
 have a material impact on the companys profitability, assets or liabilities.

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

62

---

---



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

| |   |                                                                                                                                                                                                                                                                                                                      | 
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  | the majority
 of the votes for the approval includes the votes of at least one-third of the
 total votes of shareholders who are present at the meeting and who have no
 personal interest in the transaction; the votes of abstaining shareholders
 shall not be included in the number of the said total votes; or
| |   |                                                                                                                                                                                                                                                                                                                      | 
| |  | the total
 number of votes against the approval, among the shareholders who are present
 at the meeting and who have no personal interest in the transaction shall not
 exceed 1% of the aggregate voting rights in the company.                                                                                    

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

Directors Compensation

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

Directors Borrowing Powers

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

Rights attached to our Shares

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

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

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

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

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

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

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

Modification of Rights

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

Shareholders Meetings and Resolutions

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

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

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

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

| |   |                                                                                  | 
| | - | -------------------------------------------------------------------------------- | 
| |  | any
 amendment to the articles of association;                                  
| |   |                                                                                  | 
| |  | an increase
 of our authorized share capital;                                   
| |   |                                                                                  | 
| |  | a merger; or                                                                    
| |   |                                                                                  | 
| |  | approval of certain actions and transactions that require
 shareholder approval.

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

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

Limitation on Owning Securities

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

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Mergers and Acquisitions under Israeli Law

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

The
Companies Law also provides that an acquisition of shares of a public company
must be made by means of a tender offer if as a result of the acquisition the
purchaser would become a 25% shareholder of the company and there is no
existing 25% or greater shareholder in the company. If there is no existing 45%
or greater shareholder in the company, the Companies Law provides that an
acquisition of shares of a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would become a 45%
shareholder of the company. Regulations adopted under the Companies Law provide
that these tender offer requirements do not apply to companies whose shares are
listed for trading outside of Israel if, according to the laws of the country
in which the shares have been offered to the public or in which the shares are
listed for trading on an exchange, including the rules and regulations of such exchange,
there is either a restriction upon any acquisition of control to any extent, or
the acquisition of control to any extent requires the purchaser to make a
tender offer to the public.

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

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C. Material Contracts

In
September 2001, we entered into an agreement with Aermacchi S.P.A., a leading
manufacturer and producer of modern military training aircraft in Europe, for
the supply of an MB339 training aircraft full mission simulator and three years
of logistical support. The contract price is $ 7.1 million, which, as in
substantially all of our contracts, is payable in accordance and subject to
timely achievement of specific milestones during the lifetime of the project.
We completed this project during the second quarter of 2003 and enter into the
logistical support period. We completed this project during the second quarter
of 2006.

In July 2004, we entered into a follow on contract with a customer in Asia for
the provision of integrated logistic support services for a period of three
years for a training system that was previously provided by us. The contract
price is approximately $ 1.6 million. We completed this project during the first
quarter of 2007.

In
October 2004, we entered into a contract with Boeing for the integration of
EHUD ACMI systems on Boeings new F-15K aircraft, to be supplied to the
Republic of Korea Air Force. The contract price is approximately $ 1.5 million,
which, as in substantially all of our contracts, is payable in accordance and
subject to timely achievement of specific milestones during the lifetime of the
project. We completed this project during the fourth quarter of 2006.

In
November 2004, we entered into a contract with Systex Corporation, a leading
Asian system integration company for the supply of an infantry multi-weapon
firing simulation system. The contract price is approximately $ 2.6 million,
which, as in substantially all of our contracts, is payable in accordance and
subject to timely achievement of specific milestones during the lifetime of the
project. The contract value increased during 2007 by $ 0.6 million to new total
of $ 3.2 million. We expect to complete this updated project during the third
quarter of 2008. As of March 31, 2008, we received $ 1.8 million under this
contract.

In
January 2005, we entered into an additional contract with Systex Corporation
for the supply of a tank simulation system. The contract price is approximately
$ 1.4 million, which, as in substantially all of our contracts, is payable in
accordance and subject to timely achievement of specific milestones during the
lifetime of the project. We completed this project during the fourth quarter of
2006.

In
September 2005, we entered into a contract with Elbit Systems for the supply of
work-share in a new F-16I simulator for the Israel Air Force. The contract
price is approximately $ 2.2 million, which, as in substantially all of our
contracts, is payable in accordance and subject to timely achievement of
specific milestones during the lifetime of the project. We expect to finish
this project until the end of the third quarter of 2008

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In
January 2006, we entered into an agreement with Aermacchi S.p.A., a leading
manufacturer and producer of modern military training aircraft in Europe, for
the upgrade of two MB339a training aircraft simulators. The contract price is
approximately $ 4.5 million, which, as in substantially all of our contracts, is
payable in accordance and subject to timely achievement of specific milestones
during the lifetime of the project. We expect to finish this project until
the end of the third quarter of 2008.

In
March 2006, we entered into a contract with an international customer for the
provision of an F-16 MLU Improved Unit Line Trainer. The contract price is $ 2.7
million, which, as in substantially all of our contracts, is payable in
accordance and subject to timely milestones during the lifetime of the project.
We expect to complete this project during the second quarter of 2008. As of
March 31, 2008, we received all the payments of $ 2.7 million under this
contract.

In
May 2006, we entered into an agreement with a leading European company for the
provision of In-Flight Electronic Warfare Simulator (IFEWS). The contract price
is approximately $ 1.7 million while increased in the first quarter of 2007 by
$ 0.2 million, which, as in substantially all of our contracts, is payable in
accordance and subject to timely achievement of specific milestones during the
lifetime of the project. We completed this project during the second quarter of
2007.

In
September 2006, we entered into a major contract with an international customer
for the supply of a distributed naval embedded training system. The contract
price is $ 11.9 million, which, as in substantially all of our contracts, is
payable in accordance and subject to timely milestones during the lifetime of
the project. We expect to complete this project during the fourth quarter of
2010. As of March 31, 2008, we received $ 5.3 million under this contract.

In
December 2006, we entered into an agreement with a European customer, for the
Embedded Virtual Avionics (EVA) solution. The contract price is approximately
$ 1.2 million, which, as in substantially all of our contracts, is payable in
accordance and subject to timely achievement of specific milestones during the
lifetime of the project. We completed this project during the first quarter of
2007.

In
January 2007, we entered into Licenses agreement with an aircraft manufacturer,
for the Embedded Virtual Avionics EVA patent. As of March 31, 2008, we received
$ 0.25 million under this agreement.

In
March 2007, we entered into a three year maintenance contract for a naval
embedded training system supplied by BVR to an international customer. The
contract price is approximately $ 1.1 million, which is payable in accordance to
timely milestones during the lifetime of the project. We expect to complete
this project during the first quarter of 2010. As of March 31, 2008, we
received $ 0.34 million under this agreement.

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In
March 2007, we entered into an agreement with a European customer, for the
Embedded Virtual Avionics EVA solution for a leading jet trainer. The contract
price is approximately $ 1.1 million, which, as in substantially all of our
contracts, is payable in accordance and subject to timely achievement of
specific milestones during the lifetime of the project. We expect to complete
this project during the second quarter of 2008. As of March 31, 2008, we
received $ 0.21 million under this agreement.

In
August 2007, we entered into an agreement with an international customer, for
the Embedded Virtual Avionics EVA solution for a trainer aircraft. The contract
price is approximately $ 0.6 million, which, as in substantially all of our
contracts, is payable in accordance and subject to timely achievement of
specific milestones during the lifetime of the project. We expect to complete
this project during the second quarter of 2008. As of March 31, 2008, we
received all the payments of $ 0.6 million under this agreement.

In
August 2007, we entered into a major contract with an international customer
for the supply of Air Defense Simulator. The contract price is $ 10.1 million,
which, as in substantially all of our contracts, is payable in accordance and
subject to timely milestones during the lifetime of the project. We expect to
complete this project during the first quarter of 2009. As of March 31, 2008,
we received $ 3.1 million under this contract.

In
September 2007, we entered into a two years maintenance agreement, for training
system. The contract price is approximately $ 0.7 million, which is payable in
accordance to timely milestones during the lifetime of the project. We expect
to complete this project during the third quarter of 2009. As of March 31,
2008, we received $0.04 million under this agreement.

In
September 2007, we entered into a maintenance agreement to support airborne
ACMI products. The contract price is approximately $ 0.9 million, which is
payable in accordance with fulfillment of support activities during the
lifetime of the project. We expect to complete this project during the fourth
quarter of 2009.

In
October 2007, we entered into a major contract with an international customer
for the supply of an air defense embedded simulator. The contract price is $
5.8 million, which, as in substantially all of our contracts, is payable in accordance
and subject to timely milestones during the lifetime of the project. We expect
to complete this project during the first quarter of 2010. As of March 31,
2008, we received $ 1.5 million under this contract.

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In
October 2007, we entered into a major contract with an Asian customer for the
supply of ACMI systems. The contract price is $19.5 million, which, as in
substantially all of our contracts, is payable in accordance and subject to
timely milestones during the lifetime of the project. We expect to complete
this project during the fourth quarter of 2009. As of March 31, 2008, we
received $2.9 million under this contract.

In
January 2008, we entered into a major contract with an international customer
for the supply of ACMI systems. The contract price is $18.4 million, which, as
in substantially all of our contracts, is payable in accordance and subject to
timely milestones during the lifetime of the project. We expect to complete
this project during the fourth quarter of 2009. As of March 31, 2008, we
received $7.7 million under this contract.

In
January 2008, we entered into a major contract with an international customer
for the supply of Naval Tactical Trainer systems. The contract price is $3.2
million, which, as in substantially all of our contracts, is payable in
accordance and subject to timely milestones during the lifetime of the project.
We expect to complete this project during the fourth quarter of 2009. As of
March 31, 2008, we received $0.6 million under this contract.

In
June 2008, we entered into a major contract with an international customer for
the supply of a Trainer Aircraft Full Mission Simulator FMS. The contract price
is $5 million, which, as in substantially all of our contracts, is payable in
accordance and subject to timely milestones during the lifetime of the project.
We expect to complete this project during the fourth quarter of 2009.

For
a summary of our other material contracts, see:

| |   |                                                                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Item 4 
 Information on the Company  B. Business Overview  Strategic Relationships,
 including a description of the Cooperation Agreement entered into with MLM in
 August 2005.
| |   |                                                                                                                                                                                      
| |  | Item 6 
 Directors, Senior Management and Employees  B. Compensation                                                                                                             
| |   |                                                                                                                                                                                      
| |  | Item 7 
 Major Shareholders and Related Party Transactions  B. Related Party
 Transactions.                                                                                      

D. Exchange Controls

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

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

E. Taxation

Israeli Tax Considerations and Government
Programs

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

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

General Corporate Tax Structure

Generally,
Israeli companies were subject to corporate tax at the rate of 29% in the 2007
tax year. The rate was reduced to 27% in 2008 and is expected to be reduced in
accordance with the new legislation to 26% in 2009 and 25% in 2010 and
thereafter. However, the effective tax rate payable by a company which derives
income from an Approved Enterprise (as further discussed below) may be
considerably less.

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

On
March 30, 2005, the Knesset approved a reform of the Encouragement of Capital
Investments Law  1959 (the Encouragement Reform).

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Following
in Section A is the outline of The Investment Law before the Encouragement
Reform. Section B notes several of the significant changes in the Investment
Law which are relevant to our company.

The
Investment Law provides that terms and benefits included in any certificate of
approval that was granted before the Encouragement Reform came into effect will
remain subject to the provisions of the Investment Law as they were on the date
of such approval. Therefore the Encouragement Reform will not apply to any of our
programs approved under the Investment Law before the Encouragement Reform.

A. The Investment Law before the
Encouragement Reform

The
Investment Law provides that a proposed capital investment in eligible
facilities may, upon application to the Investment Center of the Ministry of
Industry and Commerce of the State of Israel, be designated as an Approved
Enterprise. Each certificate of approval for an Approved Enterprise relates to
a specific investment program delineated both by its financial scope, including
its capital sources, and by its physical characteristics, e.g., the equipment
to be purchased and utilized pursuant to the program. The tax benefits derived
from any such certificate of approval relate only to taxable income attributable
to the specific Approved Enterprise. If a company has more than one approval or
only a portion of its capital investments are approved, its effective tax rate
is the result of a weighted combination of the applicable rates. The tax
benefits under the law are not generally available with respect to income
derived from products manufactured outside of Israel.

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

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

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

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

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

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

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

B. Outline of the primary changes of the
Encouragement Reform

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

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

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

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

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

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

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

Under
the Law for the Encouragement of Industrial Research and Development, 1984,
research and development programs which meet certain criteria and are approved
by the Research Committee, a governmental committee of the Office of the Chief
Scientist are eligible for grants of up to 50% of the projects expenditure, as
determined by the Research Committee, in return for the payment of royalties
from the sale of the product developed in accordance with the program.
Regulations promulgated under the Research Law generally provide for the
payment of royalties to the Chief Scientist ranging from 3% to 5% or in some
cases, such as ours, ranging from 4% to 6%, on revenues from products developed
using such grants until 100% of the dollar-linked grant is repaid. Following
the full repayment of the grant, there is no further liability for payment. See
Item 5Operating and Financial Review and Prospects and Note 18 to the
Consolidated Financial Statements.

The
terms of the Israeli government participation also require that the manufacture
of products developed with government grants be performed in Israel. However,
under the regulations promulgated under the Research Law, in the event that any
of the manufacturing is performed outside Israel by any entity other than us,
if approval is received from the Office of the Chief Scientist for such foreign
manufacturing and the identity of the foreign manufacturers, we may be required
to pay increased royalties unless the proportion of manufacturing rights
remaining in Israel is only decreased by 10% or less. If the manufacturing
volume that is performed outside of Israel is less than 50%, the total amount
to be repaid to the Office of the Chief Scientist may be adjusted to 120% of
the grant. If the manufacturing volume that is performed outside of Israel is
between 50% and 90% the total amount may be adjusted to 150% of the grant and
if it is more than 90%, the total amount may be adjusted to 300% of the grant.
Since our manufacturing activities are performed by subcontractors outside of
Israel, the consent of the Office of the Chief Scientist is required for these
activities and additional consents will be required in connection with the
manufacturing of products developed in the future with Office of the Chief
Scientist grants. The letters of approval under which we received the grants do
not specifically refer to our manufacturing activities outside of Israel;
however, we believe that the Office of the Chief Scientist has adequately
expressed its consent to such activities. There can be no assurance that the
consents granted to date by the Office of the Chief Scientist will be deemed to
be adequate under applicable laws and regulations or that such consents will
not be reversed or modified in any way or that we will obtain consents for such
activities at all from the Office of the Chief Scientist in the future. Failure
to comply with the requirements for consents for manufacturing outside of
Israel could result in penalties, cancellation of grants and denial of any
future applications for grants or for these consents. If the consents obtained
from the Office of the Chief Scientist to manufacture our products outside of
Israel are terminated or if we are unable to obtain similar consents in the
future, our business could be harmed. A transfers of the technology developed
pursuant to the terms of these grants may be transferred outside of Israel only
subject to the payments promulgated under the Research Law and subject to the
prior approval of the Research Committee; technology transfers within Israel
are also subject to the prior approval of the Research Committee. Such approval
is not required for the export of any products resulting from such research or
development. Approval of the transfer of technology in Israel may be granted
only if the recipient abides by all the provisions of the Research Law and regulations
promulgated thereunder, including the restrictions on the transfer of know-how
and production and the obligation to pay royalties in an amount that may be
increased. There can be no assurance that such consent, if requested, will be
granted under reasonable commercial terms. See Item 5Operating and Financial
Review and ProspectsGovernment Grants.

75

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

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

Tax Benefits and Grants for Research and
Development

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

76

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

According
to the Law for the Encouragement of Industry (Taxes), 1969, or the Industry
Encouragement Law, an Industrial Company is a company resident in Israel, at
least 90% of the income of which, in any tax year, determined in Israeli
currency (exclusive of income from certain government loans, capital gains,
interest and dividends), is derived from an Industrial Enterprise owned by
it. An Industrial Enterprise is defined as an enterprise whose major activity
in a given tax year is industrial production activity. We believe that we
currently qualify as an Industrial Company within the definition of the
Industry Encouragement Law.

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

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

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

(c)          accelerated
depreciation rates on equipment and buildings;

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

Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt
of prior approval from any governmental authority. No assurance can be given
that we qualify or that we will continue to qualify as an Industrial Company
or that the benefits described above will be available in the future.

Special Provisions Relating to Taxation under
Inflationary Conditions

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

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

77

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

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

Capital Gains Tax on Sales of Our Ordinary
Shares

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

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

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

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

With
respect to gains accrued before January 1, 2003, regulations promulgated under
the Israeli Income Tax Ordinance provided for an exemption from Israeli capital
gains tax on gains that were derived from the sale of shares of an Industrial
Company, as defined by the Industry Encouragement Law. This exemption only
applied to shares that were traded on specified non-Israeli markets, including
the NASDAQ National Market, provided that the sellers purchased their shares
either in the companys initial public offering or in public market
transactions thereafter. The exemption did not apply to shareholders who are in
the business of trading securities, or to shareholders that are Israeli
resident companies and subject to the Income Tax Law (Inflationary Adjustments)
- 1985. We believe that we are currently an Industrial Company, as defined by
the Industry Encouragement Law. There can be no assurance that the Israeli tax
authorities will not deny our status as an Industrial Company, possibly with
retroactive effect.

78

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Non-Israeli
residents are exempt from Israeli capital gains tax on any gains derived from
the sale of shares in an Israeli corporation publicly traded on the TASE and/or
on a foreign stock exchange, provided such gains do not derive from a permanent
establishment of such shareholders in Israel and that such shareholders did not
acquire their shares prior to the issuers initial public offering. However,
non-Israeli corporations will not be entitled to such exemption if an Israeli
resident (i) has a controlling interest of 25% or more in such non-Israeli
corporation, or (ii) is the beneficiary of or is entitled to 25% or more of the
revenues or profits of such non-Israeli corporation, whether directly or
indirectly.

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

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

Taxation of Dividends

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

79

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Foreign Exchange Regulations

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

F. Dividends and Paying Agents

Not
applicable.

G. Statements by Experts.

Not
applicable.

H. Documents on Display

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

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

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I. Subsidiary Information

Not
applicable.

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

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

Interest Rate Risk

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

The
weighted average interest rates on short-term bank credit (linked to the U.S.
dollar) as at December 31, 2007, 2006 and 2005 are 7.45%%, 6.9% and 5.4%,
respectively. As of December 31, 2007, the interest expenses we attributed to
the utilization of our credit lines amounted to $22,000. Interest risk is
estimated as the potential increase in interest expenses from a hypothetical
10% increase in the interest rates. Assuming a hypothetical 10% increase, our
interest expenses would increase by $2,000

Equity Price Risk

As of December
31, 2007, we did not have any marketable securities that were recorded at a
fair value; hence there was no exposure to equity price risk.

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Foreign Currency Exchange Risk

As
of December 31, 2007, we had cash and cash equivalents in New Israeli Shekels
(NIS) or in funds linked thereto in the amount of $1,085,000(out of $1,500,000
in cash and cash equivalents that we had in total). Market risk is estimated as
the potential decrease in fair value resulting from a hypothetical 10% increase
in the year-end dollar exchange rate. Assuming such increase in the dollar
exchange rate, the fair value of our cash and cash equivalents would decrease
immaterially by $99,000. As of
December 31, 2007, we had accounts receivable in New Israeli Shekels (NIS) or
in funds linked thereto in the amount of $339,000. Market risk is estimated as
the potential decrease in fair value resulting from a hypothetical 10% increase
in the year-end dollar exchange rate. Assuming such increase in the dollar
exchange rate, the fair value of our accounts receivable would decrease by
$31,000. As of December 31, 2007, we had other receivables in New Israeli
Shekels (NIS) or in funds linked thereto in the amount of $32,000. Market risk
is estimated as the potential decrease in fair value resulting from a
hypothetical 10% increase in the year-end dollar exchange rate. Assuming such
increase in the dollar exchange rate, the fair value of our accounts receivable
would decrease by $3,000.As of
December 31, 2007, we had accounts payable in New Israeli Shekels (NIS) or in
funds linked thereto in the amount of $1,062,000. Market risk is estimated as
the potential increase in fair value resulting from a hypothetical 10% decrease
in the year-end dollar exchange rate. Assuming such a decrease in the Dollar
exchange rate, the fair value of our accounts payable would increase by
$97,000. As of December 31, 2007, we had other payable in New Israeli Shekels
(NIS) or in funds linked thereto in the amount of $1,628,000. Market risk is
estimated as the potential increase in fair value resulting from a hypothetical
10% decrease in the year-end dollar exchange rate. Assuming such a decrease in
the dollar exchange rate, the fair value of our accounts payable would increase
by $148,000. As of December 31, 2007, we had long-term payable in New Israeli
Shekels (NIS) or in funds linked thereto in the amount of $189,000. Market risk
is estimated as the potential increase in fair value resulting from a
hypothetical 10% decrease in the year-end dollar exchange rate. Assuming such a
decrease in the dollar exchange rate, the fair value of our accounts payable
would increase by $17,000.

As
of December 31, 2007, we had cash and cash equivalents in Singapore dollars or
SGD or in funds linked thereto in the aggregate amount of $81,000. Market risk
is estimated as the potential decrease in fair value resulting from a
hypothetical 10% increase in the year-end dollar/SGD exchange rate. Assuming
such an increase in the dollar/SGD exchange rate, the fair value of our SGD accounts
receivable would decrease by $7,400. As of December 31, 2007 we had accounts
receivable and accounts payable in SGD or in funds linked thereto in the
aggregate same amount of $3,000. Market risk is estimated as the potential
decrease in fair value resulting from a hypothetical 10% increase in the
year-end dollar/SGD exchange rate. Assuming such an increase in the dollar/SGD
exchange rate, the results of operations of the Company would not have any
material effect.

As
of December 31, 2007 we had other receivable and other payable in SGD or in
funds linked thereto in the aggregate amount of $7,000 and $11,000,
respectively. Market risk is estimated as the potential decrease in fair value
resulting from a hypothetical 10% increase in the year-end dollar/SGD exchange
rate. Assuming such an increase in the dollar/SGD exchange rate, the results of
operations of the Company would not have any material effect.

82

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As
of December 31, 2007, we had cash and cash equivalents in Euro or in funds
linked thereto in the aggregate amount of $286,000. Market risk is estimated as
the potential increase in fair value resulting from a hypothetical 10% decrease
in the year-end dollar/Euro exchange rate. Assuming such a decrease in the
dollar/Euro exchange rate, the fair value of our other
payables in Euro would increase by $26,000. As of December 31, 2007, we had
accounts receivable in Euro or in funds linked thereto in the aggregate amount
of $497,000. Market risk is estimated as the potential decrease in fair value
resulting from a hypothetical 10% increase in the year-end dollar/ Euro
exchange rate. Assuming such an increase in the dollar/SGD exchange rate, the
fair value of our Euro accounts receivable would decrease by $45,000. As of
December 31, 2007, we had account payables in Euro or in funds linked thereto
in the aggregate amount of $41,000. Market risk is estimated as the potential
increase in fair value resulting from a hypothetical 10% decrease in the
year-end dollar/Euro exchange rate. Assuming such a decrease in the dollar/Euro
exchange rate, the fair value of our other payables in Euro would increase by
$3,700.

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

Not
applicable.

PART II

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

Not
applicable.

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

Not
applicable.

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

Disclosure Controls
and Procedures

Our
management, with the participation of our Chief Executive Officer and our Chief Financial
Officer, has evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the Act) as of the end of the period covered by this annual
report on Form 20-F. Based on their evaluation, our principal executive and principal
financial officers have concluded that, as of December 31, 2007, our disclosure
controls and procedures were not effective due to the material weaknesses in our internal
controls over financial reporting described below in Managements Report on Internal
Control over Financial Reporting.

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

83

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Managements Annual Report on Internal
Control Over Financial Reporting

Management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f)
and 15d-15(f). The Companys internal control over financial reporting is
designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles.

Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.

A
material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the companys annual or interim
financial statements will not be prevented or detected on a timely basis.

Management
assessed the effectiveness of the internal control over financial reporting as of
December 31, 2007 based on criteria established in the Internal Control
Integrated Framework, issued by the Committee of Sponsoring Organizations of the
Treadway Commission, or COSO. Based on its assessment and the COSO criteria, management
identified as of December 31, 2007 the following material weakness in internal
control over financial reporting:

There
was inadequate level of management review of calculations maintained in manual
spreadsheets related to the reporting of non-cash stock based compensation in
accordance with US GAAP. As a result, audit adjustments were needed to correct
errors resulting from this internal control deficiency, which manifested itself
in the failure to record adequate non-cash stock compensation expenses. These
adjustments are reflected in our audited financial statements for the year
ended December 31, 2006.

Because
of the material weakness described above as of December 31, 2007 related to the accounting
for non- cash stock based compensation in accordance with US GAAP, based on its assessment
and the criteria set forth in Internal Control-Integrated Framework issued by COSO,
management have concluded that, as of December 31, 2007, we did not maintain effective
internal control over financial reporting.

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

84

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Remediation of Material Weaknesses in
Internal Control over Financial Reporting

Managements
remediation efforts of the material weakness identified above have been
accomplished by implementing the necessary review controls over the accuracy of
the calculations generated by the underlying manual spreadsheets.

Changes in Internal
Control over Financial Reporting

The
management concluded that there were no changes in connection with the
evaluation required by Rule 13a-15(d) in the Companys internal control over
financial reporting that occurred during the year ended December 31, 2007, that
have materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting.

|                                                                                                |                                 
|----------------------------------------------------------------------------------------------- | --------------------------------
|ITEM 16                                                                                         | Reserved                        
|                                                                                                |                                 
|ITEM 16A                                                                                        | Audit Committee Financial Expert
|                                                                                                |                                 
|Our
 board of directors has determined that Orit Stav is our audit committee
 financial expert.
|                                                                                                |                                 
|ITEM 16B                                                                                        | Code of Ethics                  

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

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

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

The
following table presents fees for professional audit services rendered by
Somekh Chaikin, a member of KPMG International (independent auditors) for the
audit of the Companys consolidated annual financial statements for the years
ended December 31, 2007 and 2006, and fees billed for other services rendered
by Somekh Chaikin, a member of KPMG International (independent auditors).

85

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|                       |  |                |     |      |   |    | 
|---------------------- |  | -------------- | --- | ---- | - | -- | 
|                       |  | 2007           |     | 2006 |  
|                       |  | (In thousands) |    
|                       |  |                |    
|Audit Fees(1)          |  | $              | 125 |      | $ | 89 | 
|Audit-Related
 Fees(2) |  |                | -   |      |   | -  | 
|Tax Fees(3)            |  |                | 5   |      |   | 6  | 
|All Other
 Fees(4)     |  |                | 17  |      |   | 15 | 

|    |                                                                                                                                                                                                                                                                                                    
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Audit fees
 consist of fees for professional services rendered for the audit of the
 Companys Consolidated Financial Statements and review of financial
 statements and services normally provided by the independent auditor in
 connection with statutory and regulatory filings or engagements.
|    |                                                                                                                                                                                                                                                                                                    
|(2) | Audit-related
 fees are fees principally for assurance and related services that are not
 reported under Audit Fees.                                                                                                                                                                               
|    |                                                                                                                                                                                                                                                                                                    
|(3) | Tax fees
 consist of tax compliance fees for the preparation of original and amended
 tax returns, claims for refunds and tax advice.                                                                                                                                                              
|    |                                                                                                                                                                                                                                                                                                    
|(4) | In 2006: Fees regarding due diligence
of a company BVR considered acquiring. In 2007: Fees regarding the rendering of advisory
services with respect to section 404 of the Sarbanes-Oxley Act.                                                                                                     

Pre-approval Policies and procedures

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

|                 |                                                                        
|---------------- | -----------------------------------------------------------------------
|ITEM 16D         | Exemptions from the Listing and Standards of Audit Committees          
|                 |                                                                        
|Not
 applicable.
|                 |                                                                        
|ITEM 16E         | Purchases of Equity Securities by the Issuer and Affiliated
 Purchasers

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

86

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PART III

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

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

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

See
Item 17.

87

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

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

|             |  |                                                                                                                                                                                                  
|------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit
 No. |  | Description                                                                                                                                                                                      
|             |  |                                                                                                                                                                                                  
|1.1*         |  | Memorandum
 of Association of Registrant                                                                                                                                                         
|             |  |                                                                                                                                                                                                  
|1.2*         |  | Form of
 Articles of Association                                                                                                                                                                 
|             |  |                                                                                                                                                                                                  
|4.1**        |  | Management
 Services Agreement, dated March 18, 2002, between the Registrant and Elisra
 Electronic System Ltd. (an English summary accompanied by Hebrew original)                              
|             |  |                                                                                                                                                                                                  
|4.2***       |  | Management
 Services Agreement, dated April 6, 2003, between the Registrant and Elisra
 Electronic System Ltd. (an English summary accompanied by Hebrew original)                               
|             |  |                                                                                                                                                                                                  
|4.3         |  | Lease
 Agreement, dated September 14, 1999, as amended, between BVR Technologies
 Ltd. and Minrav Holdings Ltd. (an English summary accompanied by Hebrew
 original)                             
|             |  |                                                                                                                                                                                                  
|4.4         |  | Lease
 Agreement, dated August 29, 1999, between the Registrant and Electra Real
 Estate Ltd. (an English summary accompanied by Hebrew original)                                                
|             |  |                                                                                                                                                                                                  
|4.5****      |  | Share
 Purchase Agreement, dated March 1, 2004 between the Registrant and the
 purchasers identified therein                                                                                     
|             |  |                                                                                                                                                                                                  
|4.6****      |  | Cooperation
 Agreement, dated August 11, 2005, between the Registrant and Israel Aircraft
 Industries on behalf of MLM. As this addendum is written in Hebrew, a
 translation is attached hereto.
|             |  |                                                                                                                                                                                                  
|4.7****      |  | Share
 Purchase Agreement, dated March 5, 2006 between the Registrant and Nir Dor on
 behalf of H.S.N General Managers Holdings L.P., an Israeli Limited
 Partnership.                           
|             |  |                                                                                                                                                                                                  
|8           |  | Subsidiaries
 of the Registrant                                                                                                                                                                  
|             |  |                                                                                                                                                                                                  
|10.1         |  | Consent of
 Independent Registered Public Accounting firm.                                                                                                                                       
|             |  |                                                                                                                                                                                                  
|12.1         |  | Certification
 by Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act
 of 2002                                                                                             
|             |  |                                                                                                                                                                                                  
|12.2         |  | Certification
 by Chief Financial Officer pursuant to section 302 of the Sarbanes-Oxley Act
 of 2002                                                                                             
|             |  |                                                                                                                                                                                                  
|13.1         |  | Certification
 by Chief Executive Officer pursuant to 18 U.S.C., Section 1350, as adopted
 pursuant to section 906 of the Sarbanes-Oxley Act of 2002                                             

88

---

---



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

|                                                                                                        
|--------------------------------------------------------------------------------------------------------
|                                                                                                        
| Incorporated by
 reference to the annual report on Form 20-F for the year ended December 31,
 2000.   
|                                                                                                        
|* Incorporated by
 reference to the Registration Statement on Form 20-F (Commission File No.
 0-29884). 
|                                                                                                        
|** Incorporated by
 reference to the annual report on Form 20-F for the year ended December 31,
 2001.  
|                                                                                                        
|*** Incorporated by
 reference to the annual report on Form 20-F for the year ended December 31,
 2002. 
|                                                                                                        
|**** Incorporated by
 reference to the annual report on Form 20-F for the year ended December 31,
 2000.

89

---

---



SIGNATURE

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

|                     |                             |                                  
|-------------------- | --------------------------- | ---------------------------------
|                     | B.V.R.
 SYSTEMS (1998) LTD.
|                     |                             |                                  
|                     | By:                         | /s/
 Ilan Gillies                
|                     |                             |                                  
|                     |                             | Name: Ilan
 Gillies              
|                     |                             | Title:   Chief
 Executive Officer
|                     |                             |                                  
|                     |                             |                                  
|                     | By:                         | /s/
 Reuven Shahar               
|                     |                             |                                  
|                     |                             | Name: Reuven
 Shahar             
|                     |                             | Title:   Chief
 Financial Officer
|                     |                             |                                  
|Date: June
 30, 2008 |                             |                                  

90

---

---

B.V.R. Systems (1998) Ltd.
and Subsidiary
Financial Statements
As of and for the Year Ended December 31, 2007



---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary                 
|---------------------------------------------------------
|                                                         
|Consolidated Financial Statements as of December 31, 2007
|                                                         
|                                                         

# Contents

|                                                             | Page
|------------------------------------------------------------ | ----
|
|
|
|
|Report of Independent Registered Public Accounting Firm      | F-2 
|                                                            
|Consolidated Balance Sheets as of December 31, 2007 and 2006 | F-3 
|                                                            
|Consolidated Statements of Operations for the years         
|ended December 31, 2007, 2006 and 2005                       | F-5 
|                                                            
|Statement of Changes in Shareholders' Equity for the years  
|ended December 31, 2007, 2006 and 2005                       | F-6 
|                                                            
|Consolidated Statements of Cash Flows for the years         
|ended December 31, 2007, 2006 and 2005                       | F-7 
|                                                            
|Notes to Consolidated Financial Statements                   | F-9 



---

---

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

We have audited the accompanying
consolidated balance sheets of B.V.R. Systems (1998) Ltd. (the Company) and its subsidiary
as of December 31, 2007 and 2006, and the related consolidated statements of operations,
changes in shareholders equity and cash flows for each of the years in the
three-year period ended December 31, 2007. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by the Companys management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiary as of December 31, 2007
and 2006, and the consolidated results of their operations, changes in shareholders
equity and their cash flows for each of the years in the three-year period ended December
31, 2007, in conformity with generally accepted accounting principles in Israel.

Accounting principles generally
accepted in Israel vary in certain significant respects from accounting principles
generally accepted in the United States of America. Information relating to the nature and
effect of such differences is presented in Note 21 to the consolidated financial
statements. As described in Note 21B the Company has restated its US GAAP net loss for the
year ended December 31, 2006.

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

Tel Aviv, Israel

June 29, 2008

F - 2

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary     
|---------------------------------------------
|                                             
|Consolidated Balance Sheets as of December 31
|                                             
|                                             

|                                       |  | 2007 | 2006
|-------------------------------------- |  | ---- | ----
|
|
|
|
|Assets                                 |  |      |     
|                                       |  |     
|Current assets                         |  |     
|Cash and cash equivalents              |  |      |     
|Restricted bank deposits               |  |      |     
|Trade receivables                      |  |      |     
|Other receivables and prepaid expenses |  |      |     
|Inventories                            |  |      |     
|                                       |  |      |     
|                                       |  |     
|Total current assets                   |  |      |     
|                                       |  |      |     
|                                       |  |     
|Other non-current assets               |  |      |     
|                                       |  |     
|Fixed assets, net                      |  |      |     
|                                       |  |     
|Other assets, net                      |  |      |     
|                                       |  |      |     
|                                       |  |     
|Total assets                           |  |      |     
|                                       |  |      |     

|
Aviv TzidonChairman of the Board of Directors | 
Ilan GilliesChief Executive Officer | 
Reuven ShaharChief Financial Officer
|---------------------------------------------------------------- | ------------------------------------------------------ | -------------------------------------------------------

Approval date of the financial statements:  June 29, 2008

F - 3

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary     
|---------------------------------------------
|                                             
|Consolidated Balance Sheets as of December 31
|                                             
|                                             

|                                               |  | 2007 | 2006
|---------------------------------------------- |  | ---- | ----
|
|
|
|
|Liabilities and Shareholders' Equity           |  |      |     
|                                               |  |     
|Current liabilities                            |  |     
|Current maturities of long-term bank loans     |  |      |     
|Bank overdraft                                 |  |      |     
|Short-term loans from bank and others          |  |      |     
|Trade payables                                 |  |      |     
|Excess of advances from customers over amounts |  |     
|recognized as revenue                          |  |      |     
|Other payables and accrued expenses            |  |      |     
|                                               |  |      |     
|                                               |  |     
|Total current liabilities                      |  |      |     
|                                               |  |      |     
|                                               |  |     
|Long-term liabilities                          |  |     
|Long-term payable in respect of income tax     |  |      |     
|Liability for employee severance benefits, net |  |      |     
|                                               |  |      |     
|                                               |  |     
|Total long-term liabilities                    |  |      |     
|                                               |  |      |     
|                                               |  |     
|Total liabilities                              |  |      |     
|                                               |  |      |     
|                                               |  |     
|Commitments and contingencies                  |  |      |     
|                                               |  |     
|Shareholders' equity                           |  |      |     
|Share capital:                                 |  |     
|Ordinary shares, NIS 1.00 par value            |  |     
|400,000,000 shares authorized,                 |  |     
|116,863,757 shares issued and outstanding      |  |     
|as of December 31, 2007 and 2006               |  |      |     
|Additional paid-in capital                     |  |      |     
|Accumulated deficit                            |  |      |     
|                                               |  |      |     
|                                               |  |     
|Total shareholders' equity                     |  |      |     
|                                               |  |      |     
|                                               |  |     
|Total liabilities and shareholders' equity     |  |      |     
|                                               |  |      |     

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

F - 4

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary                             
|---------------------------------------------------------------------
|                                                                     
|Consolidated Statements of Operations for the Years Ended December 31
|                                                                     
|                                                                     

|                                         |  | 2007 | 2006 | 2005
|---------------------------------------- |  | ---- | ---- | ----
|
|
|
|
|Revenues:                                |  |      |      |     
|Sales                                    |  |      |      |     
|Royalties and commissions                |  |      |      | 16A 
|                                         |  |      |      |     
|Total revenues                           |  |      |      | 19A 
|                                         |  |      |      |     
|                                         |  |     
|Cost of sales                            |  |      |      | 19B 
|Inventory write-off                      |  |      |      |     
|                                         |  |      |      |     
|Total cost of revenues                   |  |      |      |     
|                                         |  |      |      |     
|                                         |  |     
|Gross profit                             |  |      |      |     
|                                         |  |      |      |     
|                                         |  |     
|Operating expenses:                      |  |     
|Research and development                 |  |      |      |     
|Selling and marketing                    |  |      |      |     
|General and administrative               |  |      |      |     
|                                         |  |      |      |     
|                                         |  |     
|Operating profit (loss)                  |  |      |      |     
|                                         |  |     
|Financial expenses, net                  |  |      |      | 19C 
|Other expenses, net                      |  |      |      |     
|                                         |  |      |      |     
|                                         |  |     
|Profit (loss) before income taxes        |  |      |      |     
|Income tax expense                       |  |      |      | 17  
|                                         |  |      |      |     
|                                         |  |     
|Net profit (loss) for the year           |  |      |      |     
|                                         |  |      |      |     
|                                         |  |     
|Earnings (loss) per share                |  |     
|Basic earnings (loss) per share (in $)   |  |      |      |     
|                                         |  |      |      |     
|                                         |  |     
|Diluted earnings (loss) per share (in $) |  |      |      |     
|                                         |  |      |      |     
|                                         |  |     
|Weighted-average number of ordinary      |  |     
|shares of nominal NIS 1.00 par value     |  |     
|outstanding (in thousands) used in       |  |     
|calculation of the basic and diluted     |  |     
|earnings (loss) per share                |  |      |      |     
|                                         |  |      |      |     

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

F - 5

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary    
|--------------------------------------------
|                                            
|Statement of Changes in Shareholders' Equity
|                                            
|                                            

|                                | Number of
Ordinary Shares
outstanding
(NIS 1 par value) | Share capital | Additional
paid-in capital | Accumulated
deficit | Total
shareholders'
equity
|------------------------------- | ------------------------------------------------------- | ------------- | -------------------------- | ------------------- | --------------------------
|
|
|
|
|Balance as of December 31,      |                                                         |               |                            |                     |                           
|2004                            |                                                         |               |                            | 95,400,210          |                           
|                                |                                                         |              
|Changes in the year ended       |                                                         |              
|December 31, 2005:              |                                                         |              
|                                |                                                         |              
|Issuance of shares in respect   |                                                         |              
|of services                     |                                                         |               |                            | 263,547             |                           
|                                |                                                         |              
|Employee stock option           |                                                         |              
|compensation                    |                                                         |               |                            | -                   |                           
|                                |                                                         |              
|Net profit for the year         |                                                         |               |                            | -                   |                           
|                                |                                                         |               |                            |                     |                           
|Balance as of December 31,      |                                                         |              
|2005                            |                                                         |               |                            | 95,663,757          |                           
|                                |                                                         |              
|Changes in the year ended       |                                                         |              
|December 31, 2006:              |                                                         |              
|                                |                                                         |              
|Issuance of shares in respect   |                                                         |              
|of services                     |                                                         |               |                            | 1,200,000           |                           
|                                |                                                         |              
|Employee stock                  |                                                         |              
|option compensation             |                                                         |               |                            | -                   |                           
|                                |                                                         |              
|Issuance of shares and warrants |                                                         |               |                            | 20,000,000          |                           
|                                |                                                         |              
|Net loss for the year           |                                                         |               |                            | -                   |                           
|                                |                                                         |               |                            |                     |                           
|                                |                                                         |              
|Balance as of December 31,      |                                                         |              
|2006                            |                                                         |               |                            | 116,863,757         |                           
|                                |                                                         |              
|Changes in the year ended       |                                                         |              
|December 31, 2007:              |                                                         |              
|                                |                                                         |              
|Employee stock option           |                                                         |              
|compensation                    |                                                         |               |                            | -                   |                           
|                                |                                                         |              
|Net loss for the year           |                                                         |               |                            | -                   |                           
|                                |                                                         |               |                            |                     |                           
|                                |                                                         |              
|Balance as of December 31,      |                                                         |              
|2007                            |                                                         |               |                            | 116,863,757         |                           
|                                |                                                         |               |                            |                     |                           

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

F - 6

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary                             
|---------------------------------------------------------------------
|                                                                     
|Consolidated Statements of Cash Flows for the Years Ended December 31
|                                                                     
|                                                                     

|                                                             | 2007 | 2006 | 2005
|------------------------------------------------------------ | ---- | ---- | ----
|
|
|
|
|Cash flows from operating activities                         |      |      |     
|Net profit (loss) for the year                               |      |      |     
|Adjustments to reconcile net profit (loss) to net cash flows |      |     
|from operating activities (A)                                |      |      |     
|                                                             |      |      |     
|                                                             |      |     
|Net cash (used in) provided by operating activities          |      |      |     
|                                                             |      |      |     
|                                                             |      |     
|Cash flows from investing activities                         |      |     
|Purchases of fixed assets                                    |      |      |     
|Proceeds from sale of fixed assets                           |      |      |     
|Decrease (increase) in restricted bank deposits              |      |      |     
|Other assets                                                 |      |      |     
|                                                             |      |      |     
|                                                             |      |     
|Net cash used in investing activities                        |      |      |     
|                                                             |      |      |     
|                                                             |      |     
|Cash flows from financing activities                         |      |     
|Bank overdraft                                               |      |      |     
|Receipt of short-term bank loan                              |      |      |     
|Repayment of long-term loans from banks                      |      |      |     
|Issuance of shares                                           |      |      |     
|                                                             |      |      |     
|                                                             |      |     
|Net cash provided by (used in) financing activities          |      |      |     
|                                                             |      |      |     
|                                                             |      |     
|Increase (decrease) in cash and cash equivalents             |      |      |     
|Cash and cash equivalents at the beginning of the year       |      |      |     
|                                                             |      |      |     
|                                                             |      |     
|Cash and cash equivalents at the end of the year             |      |      |     
|                                                             |      |      |     

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

F - 7

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary                                      
|------------------------------------------------------------------------------
|                                                                              
|Consolidated Statements of Cash Flows for the Years Ended December 31 (cont'd)
|                                                                              
|                                                                              

|                                                              | 2007 | 2006 | 2005
|------------------------------------------------------------- | ---- | ---- | ----
|
|
|
|
|A.     Adjustments to reconcile net profit (loss) to net      |      |      |     
|cash flows from operating activities                          |      |     
|                                                              |      |     
|Income and expenses not involving cash flows:                 |      |     
|Gain on sale of fixed assets                                  |      |      |     
|Depreciation and amortization                                 |      |      |     
|Stock based compensation                                      |      |      |     
|Increase in liability for employee severance                  |      |     
|benefits, net                                                 |      |      |     
|Write-off of inventories                                      |      |      |     
|Services in exchange for shares issuance                      |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|                                                              |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|Changes in operating asset and liability items:               |      |     
|Decrease (increase) in trade receivables                      |      |      |     
|Decrease (increase) in other receivables and prepaid expenses |      |      |     
|Increase (decrease) in excess of advances from customers      |      |     
|over amount recognized as revenue                             |      |      |     
|Decrease in inventories                                       |      |      |     
|Increase (decrease) in trade payables                         |      |      |     
|Decrease in other payables and accrued expenses               |      |     
|(current and non-current)                                     |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|                                                              |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|                                                              |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|B.     Non-cash transactions                                  |      |     
|Accounts payable in respect of fixed assets                   |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|Prepaid expenses in respect of share issuance                 |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|Supplemental information:                                     |      |     
|                                                              |      |     
|Income taxes paid                                             |      |      |     
|                                                              |      |      |     
|                                                              |      |     
|Interest paid                                                 |      |      |     
|                                                              |      |      |     

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

F - 8

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 1  General

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

| | B. | At
December 31, 2007, the Company had negative working capital of $1.5 million           and
cash and cash equivalents of $1.5 million, compared to cash and cash
          equivalents of $3.4 million at December 31, 2006. In addition, during the year
          ended December 31, 2007, the Companys total revenues from sales,
          commissions and royalties totaled $13.1 million compared to $10.1 million
during           2006, with a negative cash flow from operations during 2007 of $0.5
million.           Based on current forecasts, management believes that the Company has
sufficient           liquidity to finance operations for the next twelve months.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 2 
Significant Accounting Policies

| | The
financial statements have been prepared in accordance with generally accepted accounting
principles in Israel (Israeli GAAP) which differ in certain material respects
from generally accepted accounting principles in the United States of America (US
GAAP)  see Note 21.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company will adopt International Financial Reporting Standards (IFRS) as
issued by the International Accounting Standard Board (IASB) for the period
beginning January 1, 2008 (see Note 2T).
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | The
Companys transactions and balances denominated in dollars are presented at their
original amounts. Transactions denominated in currencies other than dollars are
translated into dollars 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 9

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | B. | Principles
of consolidation
| | -- | ---------------------------

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

| | C. | Use
of estimates
| | -- | ----------------

| | 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

| | Restricted
bank deposits are comprised of cash deposited in banks in respect of bank guarantees
granted to the Companys customers as partial collateral for the continued
performance of work and advances received from the customers. The release of these
deposits is based on the progress of the work and is subject to customer approval. The
Company recorded liens on these deposits in favor of the banks that granted the
guarantees. The restricted deposits are linked to the dollar and bear annual interest of
4.2%.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Inventories
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       
|
| | Finished goods               | - on the basis of actual manufacturing cost.

| | As
of January 1, 2007, the Company applies Israeli Accounting Standard No. 26, Inventory.
The standard provides guidelines for determining the cost of inventory and its subsequent
recognition as an expense as well as for determining impairment in value of inventory
written down to net realizable value. The standard also provides guidelines regarding
formulae used to allocate costs to various types of inventory. The implementation of
Accounting Standard No. 26 had no effect on the Companys financial position and
results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

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

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

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

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

| | H. | Fixed
assets
| | -- | ------------

| | Fixed
assets are stated at cost less accumulated depreciation and amortization. Depreciation
and amortization are calculated using straight-line method using annual rates and periods
as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | As
of January 1, 2007, the Company applies Israeli Accounting Standard No. 27, Fixed
Assets. The standard prescribes rules for the presentation, measurement and
derecognizing of property, plant and equipment and for the disclosure required in respect
thereto. The standard provides that at the initial recognition of property, plant and
equipment, the entity should include in the cost of the item all the costs it will be
required to incur in respect of a liability to dismantle and remove the asset and to
restore the site on which it was located. Furthermore, the standard provides that a group
of similar fixed assets shall be measured at cost net of accumulated depreciation, and
less impairment losses, or alternatively, at its revalued amount less accumulated
depreciation, whereas an increase in the value of the asset to above its initial cost as
a result of the revaluation will be directly included in shareholders equity under
a revaluation reserve. Any part of a fixed asset with a cost that is significant in
relation to the total cost of the item shall be depreciated separately, including the
costs of significant periodic examinations. The standard also provides that a fixed asset
that was purchased in consideration for another non-monetary item in a transaction having
a commercial substance shall be measured at fair value. If property, plant and equipment
consist of several components with different estimated useful lives, the individual
significant components should be depreciated over their individual useful lives. The
implementation of Accounting Standard No. 27 had no effect on the Companys
financial position and results of operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

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

| | 1. | Recognition
of revenues and costs from long-term contracts
| | -- | ----------------------------------------------------------

| | Revenue
and costs from work in progress under long-term contracts are recognized in accordance
with Israeli Accounting Standard No. 4 as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------

| | a. | Revenues
and costs from work performed under long-term contracts are recognized
               according to the percentage-of-completion method, if all of
the                following conditions are fulfilled: the revenues are known or capable
of being                reliably estimated, collection of the revenues is probable, the
costs involved                with execution of the work are known or capable of being
reliably estimated,                there is no material uncertainty regarding the ability
to complete the work and                comply with the contractual terms with the
customer and the rate of completion                can be reliably estimated. If the
conditions enumerated above are not met,                income is recognized at the level
of the costs incurred and expected to be                recovered (zero margin).
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | c. | Anticipated
losses on contracts are provided for in full when determined to be
               expected.
| | -- | -------------------------------------------------------------------------------------------------------

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

| | e. | The
Company provides warranties on sales of systems to certain customers for
               periods of up to 24 months, however not beyond the date of sale. The
expenses                related to the warranty period are taken into consideration in
the direct cost                of the contracts, based on managements estimation
and in accordance with                the Companys prior experience.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Royalties
and commission revenues resulting from the cooperation agreement with Israel Aircraft
Industries Ltd. (IAI) (see Note 16A for more details), are recognized when
the related payments are received by IAI. The Company determines such revenues by
receiving confirmation of payments subject to royalties and commissions from IAI.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | Revenue
from services are recognized over the period of the performance of the service if it
certain that the economic benefits attributed to the performance of the service will be
received.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 12

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

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

| | Research
and development costs are charged to the statement of operations, as incurred, except for
software development cost as explained in Note 2P.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | K. | Selling
and marketing costs
| | -- | ---------------------------

| | Selling
and marketing costs are charged to selling and marketing expenses in the statement of operations.
| | ---------------------------------------------------------------------------------------------------------

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

| | As
from January 1, 2005 the Company implements Accounting Standard No. 19 Taxes on
income. Income taxes for all periods presented have been computed on the basis of
income tax rates applicable to the Company and its subsidiary as separate stand-alone
entities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company accounts for income taxes under the balance sheet method of accounting. Under the
balance sheet method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities, as well
as loss carryforwards, 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 item in respect
of which deferred taxes were not calculated is the realization of investment in a
subsidiary that management intends to retain. Similarly, deferred taxes have not been
provided for future taxable distributions from the subsidiary, since it is the Companys
policy not to initiate a distribution of dividends that involves additional tax
liability.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax assets for future tax benefits are not included where their realization is less than
probable. As such, the Company has recorded a full valuation allowance in regard to all
tax loss carryforwards as well as for other temporary differences (see Note 17F).
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | The
Company applies Israeli Accounting Standard No. 15  Impairment 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 (to which the standard applies),
are not presented at an amount which is in excess of their recoverable value, which is
the higher of the net selling price and the use value (the present value of the estimated
future cash flows expected to be derived from use and disposal of the asset).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
standard applies to all the assets in the consolidated balance sheet, except inventory,
deferred tax assets and monetary assets. In addition, the standard provides rules for
presentation and disclosure with respect to assets whose value has been impaired. When
the value of an asset in the consolidated balance sheet is higher than its recoverable
value, the Company recognizes a loss from the impairment in value in the amount of the
difference between the book value of the asset and its recoverable value. The loss thus
recognized will be cancelled only in the event of changes occurring in the estimates that
were used to determine the recoverable value of the asset since the date on which the
most recent loss from the impairment in value was recognized.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 13

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | N. | Basic
and diluted income (loss) per share
| | -- | -----------------------------------------

| | The
Company applies Israeli Accounting Standard No. 21, Earnings per Share. In
accordance with the provisions of the standard, the Company calculates basic income or
loss per share with respect to income or loss, and basic income or loss per share with
respect to income or loss from continuing operations, which is attributable to the
ordinary shareholders. The basic income per share is calculated by dividing the income or
loss attributable to the ordinary shareholders by the weighted average number of ordinary
shares outstanding during the period. In order to calculate the diluted income per share,
the Company adjusts the income or loss attributable to the ordinary shareholders, and the
weighted average number of outstanding ordinary shares, in respect of the effects of all
the dilutive potential ordinary shares (such as options).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | O. | Accounting
for stock-based compensation
| | -- | ---------------------------------------

| | Through
December 31, 2005, the Company recorded expenses with respect to stock options granted to
employees and service providers that provide similar services to those provided by
employees, in accordance with the intrinsic value method described in United States
Accounting Principles Board Opinion No. 25 (APB No. 25) Accounting for Stock Issued
to Employees. Shares issued to service providers were recorded based on the cost of
service provided at the grant date of the shares issued.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2006, the Company applies Israeli Accounting Standard No. 24, Share-Based
Payments which requires that share-based payment transactions, including
transactions with employees or other parties that are to be settled by equity
instruments, cash or other assets, be recognized in the financial statements. In
accordance with Standard No. 24, share-based payment transactions in which goods or
services are received will be recognized at their fair value. The standard applies to
share-based payment transactions conducted after March 15, 2005 that have not yet vested
on January 1, 2006. Furthermore, the standard applies to liabilities deriving from
share-based payment transactions existing on January 1, 2006. The standard requires that
comparative data relating to periods after March 15, 2005 be restated. As of December 31,
2005, the charge for equity-settled share-based payments in the consolidated statement of
operations is $7 thousand.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company records salary expense and an increase in its shareholders equity, over the
vesting periods, based on the fair value of the options on the grant date, using the
Black-Scholes pricing model.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | P. | Other
assets
| | -- | ------------

| | 1. | Other
assets are comprised of costs incurred internally for the development of
          computer software intended for sale, lease or marketing which are reported at
          the lower of unamortized cost or net realizable value in accordance with the
          guidelines prescribed by Statement of Financial Accounting Standard           (SFAS)
86 Accounting for the Costs of Computer Software to be           Sold, Leased or
Otherwise Marketed. Capitalization of software development           costs is made
upon reaching technological feasibility and is discontinued when           the product is
available for sale to customers. Amortization expenses for the           years ended
December 31, 2007 and 2006 were $97 thousand and $73 thousand,           respectively. In
2005, the Company recorded $296 thousand as research and           development expense in
regards to the software development.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 14

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | P. | Other
assets (contd)
| | -- | ---------------------

| | 2. | As
of January 2007 the Company applies Accounting Standard No. 30,           Intangible
Assets. The Standard explains the accounting treatment of           intangible
assets and defines how to measure the book value of these assets, as           well as
the disclosures that are required.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
research and development asset shall be recognized in the amount of its value less the
amortization that would have accumulated from the date of creation until December 31,
2006 on the basis of the useful life of the asset, and less any accrued impairment
losses. The amount of the adjustment shall be included in the balance of retained
earnings of January 1, 2007.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
implementation of Accounting  Standard No. 30 had no effect on the Company's financial
position and                   the results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, 2007 and 2006, the Company had cash and cash equivalents, and restricted
bank deposits which were deposited with major Israeli banks. Management believes that the
financial institutions that hold the Companys investments are financially sound,
and, accordingly, minimal credit risk exists with respect to these investments.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Trade
receivables include amounts billed to customers. Management periodically evaluates the
collectibility of these trade receivables and adjusts the allowance for doubtful accounts
to reflect the amounts estimated to be doubtful of collection.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company operates on the basis of agreements it signs with its customers. As the Company
manages a limited number of projects at the same time, a delay in the execution of a
project may have a material effect on the financial results of any given period. The
majority of the Companys transactions in progress are with major customers, see
Note 19A.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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, loan from others, trade receivables, short-term
debt, trade payables, other payables and accrued expenses approximate their carrying
value as of December 31, 2007 and 2006, due to their short-term nature. The carrying
amounts of the Companys borrowings under its loan agreements approximate their fair
value, since they bear interest that changes according to LIBOR.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | S. | Derivative
financial instruments
| | -- | --------------------------------

| | Derivative
financial instruments, not held for hedging, are stated in the financial statements at
their fair value. Changes in fair value are recognized in the statement of operations 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 15

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | T. | Disclosure
of effect of new accounting standards in the period prior to their
          implementation
| | -- | ------------------------------------------------------------------------------------------------------

| | Adoption
of International Financial Reporting Standards (IFRS)
| | --------------------------------------------------------------

| | In
July 2006, the Israel Accounting Standards Board published Accounting Standard No. 29.
The Standard provides that entities subject to the Securities Law  1968 that are
required to report according to the regulations of this law are to prepare their
financial statements for periods beginning as from January 1, 2008 according to IFRS. The
Standard permits early adoption as from financial statements released after July 31,
2006. Furthermore, the Standard provides that entities that are not subject to the
Securities Law  1968 and not required to report according to the regulations of
this law, are also permitted to prepare their financial statements according to IFRS as
from financial statements published after July 31, 2006.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with the standard, a company that is included in the scope of the standard or
implement IFRS voluntarily is required to include in a note to its annual financial
statements for December 31, 2007, balance sheet data as of December 31, 2007 and
statement of operations data for the year then ended, that have been prepared according
to the recognition, measurement and presentation principles of IFRS.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company shall adopt IFRS as from financial statements for the period beginning on January
1, 2008.
| | ------------------------------------------------------------------------------------------------------

| | The
tables and notes hereunder provide an explanation of the effects of the transition from
Israeli GAAP to IFRS on the Companys financial position, results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 16

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | T. | Disclosure
of effect of new accounting standards in the period prior to their
          implementation (contd)
| | -- | ---------------------------------------------------------------------------------------------------------------

| | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -------------------------------------------------------------------------

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

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

F - 17

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | T. | Disclosure
of effect of new accounting standards in the period prior to their
          implementation (contd)
| | -- | ---------------------------------------------------------------------------------------------------------------

| | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -------------------------------------------------------------------------

| | Reconciliation
of balance sheet (contd)
| | ----------------------------------------

|                                               |  | January 1, 2007 | December 31, 2007
|---------------------------------------------- |  | --------------- | -----------------
|
|
|
|
|Liabilities                                    |  |                 |                  
|Current maturities of long-term bank loans     |  |                 |                  
|Bank overdraft                                 |  |                 |                  
|Short-term loan from bank and other            |  |                 |                  
|Trade payables                                 |  |                 |                  
|Excess of advances from customers over amounts |  |                
|recognized as revenue                          |  |                 |                  
|Other payables                                 |  |                 |                  
|Income taxes payable                           |  |                 |                  
|Provisions                                     |  |                 |                  
|                                               |  |                 |                  
|Total current liabilities                      |  |                 |                  
|                                               |  |                 |                  
|Long-term payables in respect of income tax    |  |                 |                  
|Liability for employee severance benefits, net |  |                 |                  
|                                               |  |                 |                  
|Total non-current liabilities                  |  |                 |                  
|                                               |  |                 |                  
|Total liabilities                              |  |                 |                  
|                                               |  |                 |                  
|Shareholders' equity                           |  |                
|Share capital                                  |  |                 |                  
|Additional paid-in capital                     |  |                 |                  
|Accumulated deficit                            |  |                 |                  
|                                               |  |                 |                  
|Total shareholders' equity                     |  |                 |                  
|                                               |  |                 |                  
|Total liabilities and shareholders' equity     |  |                 |                  
|                                               |  |                 |                  

F - 18

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | T. | Disclosure
of effect of new accounting standards in the period prior to their
          implementation (contd)
| | -- | ---------------------------------------------------------------------------------------------------------------

| | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -------------------------------------------------------------------------

| | Adjustment
of earnings
| | ----------------------

|                                |  | Year ended December 31, 2007
|------------------------------- |  | ----------------------------
|
|
|
|
|Revenues:                       |  |                             
|Sales                           |  |                             
|Royalties and commissions       |  |                             
|                                |  |                             
|Total revenues                  |  |                             
|                                |  |                             
|                                |  |                             
|Cost of sales                   |  |                             
|Inventory write-off             |  |                             
|                                |  |                             
|Total cost of revenues          |  |                             
|                                |  |                             
|                                |  |                             
|Gross profit (loss)             |  |                             
|                                |  |                             
|                                |  |                             
|Operating expenses:             |  |                             
|                                |  |                             
|Research and development        |  |                             
|Selling and marketing           |  |                             
|General and administrative      |  |                             
|                                |  |                             
|                                |  |                             
|Total operating expenses        |  |                             
|                                |  |                             
|                                |  |                             
|Operating loss                  |  |                             
|Financial income                |  |                             
|Financial expenses              |  |                             
|                                |  |                             
|Financial costs, net            |  |                             
|                                |  |                             
|                                |  |                             
|Loss before income taxes        |  |                             
|                                |  |                             
|Income tax expense              |  |                             
|                                |  |                             
|                                |  |                             
|Net loss for the period         |  |                             
|                                |  |                             
|                                |  |                             
|Loss per share:                 |  |                             
|Basic loss per share (in US$)   |  |                             
|                                |  |                             
|                                |  |                             
|Diluted loss per share (in US$) |  |                             
|                                |  |                             

F - 19

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | T. | Disclosure
of effect of new accounting standards in the period prior to their
          implementation (contd)
| | -- | ---------------------------------------------------------------------------------------------------------------

| | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -------------------------------------------------------------------------

| | The
effects were reflected upon the adoption of IFRS:
| | -----------------------------------------------------

| | A. | In
accordance with Israeli GAAP, current and non-current provisions were
          classified as other payables and accrued expenses according to the nature of
the           provision. In accordance with IFRS, provisions are presented as a separate
item           in liabilities. Therefore, upon applying IFRS, as of January 1, 2007 and
          December 31, 2007 other payables and accrued expenses decreased in the amount
of           $156 thousand and $84 thousand, respectively.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | C. | In
accordance with IFRS, an asset is classified as current if it is expected to           be
realized in, or is held for sale or consumption in, the entitys normal
          operating cycle. The Companys operating cycle is generally 24 months.
          Under Israeli GAAP the reclassification between current and non-current assets
          did not consider the operating cycle of the Company. The effect of adoption of
          IFRS as of January 1, 2007 and December 31, 2007 is a reclassification of $106
          thousand and $106 thousand, respectively, from non-current bank deposits to
          restricted bank deposits.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | In
accordance with Israeli GAAP, liabilities in respect of employee benefits           were
recognized according to the full amount of the liability as at balance           sheet
date using the shut down method without taking into           consideration a
discount rate, future salary raises and future termination of           employment. As
from the transition date, a net liability is measured in respect           of employee
benefits in accordance with IAS 19 on the basis of evaluations that           are based,
inter alia, on actuarial assumptions.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has chosen to recognize actuarial gains and losses through profit and loss in the
statements of operation, in accordance with the alternatives provided in IAS 19.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
effect of the transition to IFRS as of January 1, 2007, is a reduction in the liability
against accumulated deficit in the amount of $137 thousand as a result of the adjustment
in actuarial assumptions. In the year ended December 31, 2007, the Company recorded a $12
thousand reduction, through profit and loss.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

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

| | T. | Disclosure
of effect of new accounting standards in the period prior to their
          implementation (contd)
| | -- | ---------------------------------------------------------------------------------------------------------------

| | Adoption
of International Financial Reporting Standards (IFRS) (contd)
| | -------------------------------------------------------------------------

| | The
effects were reflected upon the adoption of IFRS (Contd):
| | --------------------------------------------------------------

| | E. | In
accordance with Israeli GAAP, current taxation liabilities were presented
          within other liabilities. In accordance with IFRS, taxation liabilities are
          presented as a separate item in liabilities. Therefore, upon applying IFRS,
          taxation liabilities as of January 1, 2007, in the amount of $654 thousand,
were           reclassified from the item of other current liabilities under current
          liabilities to the item of current taxation liabilities under current
          liabilities.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | The
effect of the aforementioned adjustments on accumulated deficit:
| | -- | --------------------------------------------------------------------

| |                      |  | January 1
2007 | December 31
2007
| | -------------------- |  | -------------- | ----------------
|
|
|
|
| | Share based payments |  |                |                 
| | Employee benefits    |  |                |                 
| |                      |  |                |                 
| |                      |  |               
| |                      |  |                |                 
| |                      |  |                |                 

# Note 3  Cash and
Cash Equivalents

| |                                                         | December 31
| | ------------------------------------------------------- | -----------
|
|
|
|
| | In dollars                                              |            
| | In New Israel Shekels                                   |            
| | In other foreign currencies (Euro and Singapore Dollar) |            
| |                                                         |            
| |                                                         |            
| |                                                         |            
| |                                                         |            

F - 21

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 4  Trade
Receivables

| |                                                 | December 31
| | ----------------------------------------------- | -----------
|
|
|
|
| | Open accounts                                   |            
| | Unbilled revenue *                              |            
| | Receivables from related parties (see Note 20A) |            
| | Receivables from IAI (see Note 16A)             |            
| |                                                 |            
| |                                                 |            
| |                                                 |            
| |                                                 |            
| |                                                 |            
| | *     Unbilled revenue is comprised as follows: |            
| |                                                 |            
| | Accumulated amounts recognized as revenues      |            
| | Less - advances from customers                  |            
| | Less - provision for losses                     |            
| |                                                 |            
| | Unbilled revenue                                |            
| |                                                 |            

| | Information
on contracts for long-term projects
| | -----------------------------------------------

| |                                                                      | December 31
2007 and the
year then ended | December 31
2006 and the
year then ended
| | -------------------------------------------------------------------- | ---------------------------------------- | ----------------------------------------
|
|
|
|
| | Revenue expected on contracts for long-term projects signed          |                                          |                                         
| | during the year                                                      |                                          |                                         
| |                                                                      |                                          |                                         
| |                                                                      |                                          |                                         
| | Portion of the cumulative amount of contracts for long-term projects |                                          |                                         
| | not yet recognized as income at the year end                         |                                          |                                         
| |                                                                      |                                          |                                         

# Note 5  Other Receivables
and Prepaid Expenses

| |                                            | December 31
| | ------------------------------------------ | -----------
|
|
|
|
| | Prepaid expenses                           |            
| | Receivables in respect of work in progress |            
| | Loans to employees                         |            
| | Others                                     |            
| |                                            |            
| |                                            |            
| | Less - allowance for doubtful accounts     |            
| |                                            |            
| |                                            |            
| |                                            |            
| |                                            |            

F - 22

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 6  Inventories

| |                     | December 31
| | ------------------- | -----------
|
|
|
|
| | Finished goods      |            
| | Raw materials       |            
| |                     |            
| |                     |            
| |                     |            
| | Inventory write-off |            
| |                     |            
| |                     |            
| |                     |            
| |                     |            

# Note 7  Other
Non-Current Assets

| |                                      | December 31
| | ------------------------------------ | -----------
|
|
|
|
| | Non-current restricted bank deposits |            
| | Non-current prepaid expenses         |            
| |                                      |            
| |                                      |            
| |                                      |            
| |                                      |            

# Note 8  Fixed Assets,
Net

| |                      | Computers
and electronic
equipment | Manufacturing
equipment | Office
furniture and
equipment | Leasehold
improvements | Total
| | -------------------- | ---------------------------------- | ----------------------- | ------------------------------ | ---------------------- | -----
|
|
|
|
| | Cost                 |                                    |                         |                                |                        |      
| | Balance as of        |                                    |                        
| | December 31, 2006    |                                    |                         |                                | 7,192                  |      
| | Additions            |                                    |                         |                                | 386                    |      
| | Disposals            |                                    |                         |                                | -                      |      
| |                      |                                    |                         |                                |                        |      
| |                      |                                    |                        
| | Balance as of        |                                    |                        
| | December 31, 2007    |                                    |                         |                                | 7,578                  |      
| |                      |                                    |                         |                                |                        |      
| |                      |                                    |                        
| | Accumulated          |                                    |                        
| | depreciation         |                                    |                        
| | Balance as of        |                                    |                        
| | December 31, 2006    |                                    |                         |                                | 6,714                  |      
| | Additions            |                                    |                         |                                | 318                    |      
| | Disposals            |                                    |                         |                                | -                      |      
| |                      |                                    |                         |                                |                        |      
| |                      |                                    |                        
| | Balance as of        |                                    |                        
| | December 31, 2007    |                                    |                         |                                | 7,032                  |      
| |                      |                                    |                         |                                |                        |      
| |                      |                                    |                        
| | Net book value as of |                                    |                        
| | December 31, 2007    |                                    |                         |                                | 546                    |      
| |                      |                                    |                         |                                |                        |      
| |                      |                                    |                        
| | Net book value as of |                                    |                        
| | December 31, 2006    |                                    |                         |                                | 478                    |      
| |                      |                                    |                         |                                |                        |      

F - 23

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 9  Short-Term
Loan from Bank and Others

| | On
October 1, 2003, shareholders of the Company (at that date) granted loans in the total
amount of $601 thousand for a period of two years, bearing no interest. On March 2, 2004,
loans in the amount of $100 thousand were converted into shares of the Company, at a
price of $0.18 per share. On April 20, 2004, the Company reached an agreement for the
repayment of $204 thousand and a waiver of $177 thousand out of the then outstanding loan
amount.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, a loan in the amount of $120 thousand is outstanding, bearing no
interest. The Company expects to repay this loan within twelve months from balance sheet
date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
June 30, 2007, the Company received a loan from the bank in the amount of $500 thousand
bearing an interest of 7.45% for a period of one year.
| | -------------------------------------------------------------------------------------------------------------------------------------------------

# Note 10  Trade
Payables

| |                                | December 31
| | ------------------------------ | -----------
|
|
|
|
| | Payables to IAI (see Note 16A) |            
| | Open accounts                  |            
| | Sub-contractor payables        |            
| |                                |            
| |                                |            
| |                                |            
| |                                |            

# Note 11  Excess of
Advances from Customers over Amounts Recognized as Revenue

| |                                                 | December 31
| | ----------------------------------------------- | -----------
|
|
|
|
| | Advances from customers                         |            
| | Less - cumulative amounts recognized as revenue |            
| |                                                 |            
| |                                                 |            
| |                                                 |            
| |                                                 |            

# Note 12  Other
Payables and Accrued Expenses

| |                              | December 31
| | ---------------------------- | -----------
|
|
|
|
| | Payroll and related accruals |            
| | Provision for completion     |            
| | Government authorities       |            
| | Other accrued expenses       |            
| |                              |            
| |                              |            
| |                              |            
| |                              |            

F - 24

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 13  Long-Term
Bank Loans

| | During
the second quarter of 2004, the Company reached an agreement with its principal bank to
reschedule the repayment of loans in the amount of $1,550 thousand, in three equal annual
installments for the years 2005, 2006 and 2007. At January 1, 2007 the Company paid the
last installment in the amount of $516 thousand.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 14  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.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                         | December 31
| | ----------------------- | -----------
|
|
|
|
| | Severance pay liability |            
| | Less - amounts funded*  |            
| |                         |            
| |                         |            
| |                         |            
| |                         |            

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

| | B. | Severance
pay expense recorded for the years ended December 31, 2007, 2006 and           2005 was
$23 thousand, $90 thousand and $8 thousand, respectively.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 15 
Shareholders Equity

| | A. | The
Companys ordinary shares are traded in the United States on the Over           the
Counter Bulletin Board (OTCBB) under the symbol BVRSF.OB.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | 
| | -- | 

| |                    | Issued and Outstanding
| | ------------------ | ----------------------
|
|
|
|
| | Ordinary shares of |                       
| | NIS 1.00 par value |                       
| |                    |                       

| | The
authorized share capital of the Company as of December 31, 2007 and 2006 was NIS 400,000,000,
divided into 400,000,000 shares.
| | ----------------------------------------------------------------------------------------------------------------------------------

F - 25

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 15 
Shareholders Equity (contd)

| | C. | In
December 2003, Chun Holding L.P. (Chun), a limited partnership,
          gained control of the Company by purchasing the Companys shares through a
          tender offer, and through a share issuance performed on March 1, 2004 and
during           2004, in which the Company completed the issuance of 66,872,669 shares,
in the           amount of $11.8 million, of which $9.8 million was issued in exchange
for cash           and $2.1 million was issued in exchange for the conversion of loans
from banks           and from a controlling shareholder.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, Chun was granted an option (the Options) to purchase 40,000,000
ordinary shares of the Company, for an additional investment amount of up to $7.2 million
at an exercise price per share of $0.18, for a period of four years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Chun
has resolved, and instructed the Company accordingly, that even though the shareholders
of the Company have voted for the grant of all of the options to Chun, Chun shall only be
entitled to 28,531,111 of the options and the remaining 11,468,889 options shall be
distributed as follows: 10,000,000 among the other shareholders of the Company, pro-rata
to the cash invested by them during 2004, and 1,468,889 to the Companys principal
banks.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the third quarter of 2004, Chun exercised 17,666,667 options into shares for the amount
of $3,180 thousand. At December 31, 2007 and 2006, there are 22,333,333 options
outstanding, which were expired in March 2008.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | On
March 21, 2006, the Company issued to a group of new investors 20,000,000
          ordinary shares for a total consideration of $3.6 million, together with three
          separate warrants for the purchase of 6,000,000 ordinary shares per each
          warrant, with exercise prices of $0.36, $0.54 and $1.00, exercisable for a
          period of three years, with a mandatory exercise mechanism under certain
          conditions.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | In
January 2004, the Company signed a three-year consulting agreement with Wise
          Pte Ltd. (Wise), a company owned and controlled by the brother of
          Aviv Tzidon, the Companys Chairman of the Board of Directors.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | According
to the agreement, Wise will provide the Company marketing services in the Far East, in
consideration of a monthly payment of $3,000 a month by way of issuance of 16,667 of the
Companys ordinary shares each month. In 2006, the agreement with Wise was amended,
see Note 16D.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
each of the years 2004, 2005 and 2006, the Company issued 200,000 ordinary shares,
totaling 600,000 ordinary shares issued in respect of this agreement.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | F. | On
June 8, 2005, the Company issued to Tact Computers and Systems Ltd.           (Tact)
63,547 ordinary shares of the Company in consideration for           the services
provided by Tact under a service agreement signed on February 2004.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | G. | On
January 1, 2006, the Company signed an addendum to the agreement signed with
          Electra Real-Estate Ltd. (Electra) during August 1999. According to
          the addendum, the Company issued to Electra 1,000,000 ordinary shares of the
          Company in consideration for part of the lease payments for the premises
          occupied by the Company.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 26

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 15 
Shareholders Equity (contd)

| | H. | Share-based
compensation
| | -- | ------------------------

| | 1. | In
August 2001, the Board of Directors of the Company approved an option plan to
          grant options for the purchase of up to 707,900 ordinary shares to the
          Companys employees, directors and subcontractors. Each option is
          exercisable into one ordinary share of the Company at exercise prices of $0.90
           $2.69, equal to the market price of the share on the date of issuance.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aforesaid options are exercisable in two increments, one third after one year from the
date of issuance and two thirds after two years from the date of issuance. The options
will expire after three years from the vesting date of each increment. At December 31,
2007, there are 4,000 options outstanding under this plan. No other options are available
for additional grants under this plan.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | In
2004, the Company granted Aviv Tzidon, the Chairman of the Board of           Directors,
an option to purchase 9,000,000 ordinary shares of the Company vested           in five
equal increments subject to him serving as an active Chairman of the           Board of
Directors. The exercise price per share shall be $0.18. The options           will expire
after three years from the vesting date of each installment. As of           December 31,
2007, there are 9,000,000 options outstanding, 7,200,000 of which           are
exercisable.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
the same date, the Company also granted to each of the Companys directors (not
including Aviv Tzidon), options to purchase 72,000 shares of the Company (total of
648,000 shares), at an exercise of $0.18 per share. The options were subject to the
completion of a full year of service. As of December 31, 2007, there are 576,000
options outstanding and exercisable, after the cancellation of 72,000 options of one
director who did not complete a full year of service.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | In
January 2004, the Companys Board of Directors approved the grant of up           to
5,000,000 options to the Companys employees and service providers. In
          2006, the Companys Board of Directors approved an increase of 5,200,000
          options in the total option program. Each option is exercisable into one
          ordinary share of the Company. At December 31, 2007, there are 4,051,200
          employee options outstanding and there are 1,064,000 options outstanding for
          service providers, 2,421,200 and 738,000 of which are exercisable for employees
          and service providers, respectively. The options are exercisable at prices of
          $0.145 to $0.65 per share, and are exercisable in five equal increments
          commencing one year after their issuance. The options will expire after three
          years from the vesting date of each increment.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2006, there were 3,924,000 employee options outstanding, of which 132,800
options were cancelled during 2007.
| | --------------------------------------------------------------------------------------------------------------------------------

| | The
cost of the benefit inherent in the options based on the fair value on the day of their
grant in accordance with the provisions of Standard No. 24 of the Israel Accounting
Standards Board amounts to approximately $27 thousand and $51 thousand for 2007 and 2006,
respectively. This amount will be recognized as an expense over the vesting period of
each portion. An expense in the amount of $18 thousand, $31 thousand and $7 thousand was
recorded in the year ended December 31, 2007, 2006 and 2005, respectively.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 27

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 15 
Shareholders Equity (contd)

| | H. | Share-based
compensation (contd)
| | -- | ---------------------------------

| | 4. | Option
plan information
| | -- | -----------------------

| | a. | A
summary of the status of the Companys stock option plans as of December
                    31, 2007, 2006 and 2005, and changes during the years then ended, is
as follows:
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                | As of December 31,
| | -------------- | ------------------
|
|
|
|
| | Options        |                   
| | outstanding at |                   
| | the beginning  |                   
| | of the year    |                   
| | Granted        |                   
| | Forfeited      |                   
| |                |                   
| | Outstanding at |                   
| | the end of     |                   
| | the year       |                   
| |                |                   
| | Options        |                   
| | exercisable at |                   
| | the end of     |                   
| | the year       |                   
| |                |                   

| | b. | The
following table summarizes information relating to stock options at December
          31, 2007:
| | -- | ----------------------------------------------------------------------------------------------------

| |                    | Number of Options
| | ------------------ | -----------------
|
|
|
|
| | Exercise price ($) |                  
| |                    |                  
| | 0.2                |                  
| | 0.19               |                  
| | 0.9                |                  
| | 0.65               |                  
| | 0.55               |                  
| | 0.23               |                  
| | 0.185              |                  
| | 0.18               |                  
| | 0.17               |                  
| | 0.145              |                  
| |                    |                  
| |                    |                  
| |                    |                  
| |                    |                  

F - 28

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 15 
Shareholders Equity (contd)

| | H. | Share-based
compensation (contd)
| | -- | ---------------------------------

| | 4. | Option
plan information (contd)
| | -- | --------------------------------

| | c. | Outstanding
options as of December 31, 2007 may be exercised as follows:
| | -- | ------------------------------------------------------------------------

| |                           | Number
of options | Weighted
average
exercise
price ($)
| | ------------------------- | ----------------- | -----------------------------------
|
|
|
|
| | Immediately               |                   |                                    
| | First year                |                   |                                    
| | Second year or thereafter |                   |                                    
| |                           |                   |                                    
| |                           |                   |                                    
| |                           |                   |                                    
| |                           |                   |                                    

| | d. | The
fair value of the options granted and accounted for under Standard No. 24           was
calculated on the basis of the Black & Scholes model for the pricing of
          options. The parameters that were used in order to implement the model are as
          follows:
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                       | Option grant date
| | --------------------- | -----------------
|
|
|
|
| | Share price (in $)    |                  
| | Exercise price (in $) |                  
| | Expected volatility   |                  
| | Life of options       |                  
| | (in years)            |                  
| | Risk-free             |                  
| | interest rate         |                  
| | Rate of anticipated   |                  
| | dividends             |                  

| | The
expected volatility was determined on the basis of the historical volatility in the
Companys share prices.
| | ---------------------------------------------------------------------------------------------------------------

| | The
life of the option warrants was determined on the basis of the managements estimate
of the period the employees will hold the options, taking into consideration their
position with the Company and the Companys experience regarding the turnover of
employees.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
risk-free interest was determined on the basis of the yield to maturity of $-denominated
Government debentures with a remaining life equal to the anticipated life of the option
warrants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 29

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 16 
Commitments and Contingent Liabilities

| | A. | Cooperation
agreement
| | -- | ---------------------

| | The
Company developed, manufactured and marketed the Ehud system pursuant to a
joint venture agreement entered into in 1992 with the MLM division of Israel Aircraft
Industries Ltd. (the IAI Agreement). Pursuant to the IAI Agreement, the
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
Company and IAI currently operate in accordance with an amendment to the IAI agreement
executed in August 2005 that amended a prior agreement entered into in 1999. The 2005
agreement governs the cooperation between the parties including in the marketing Naval
Combat Maneuvering Instrumentation System in various countries worldwide through the
transfer of work share from the leading party to the other and provides guidelines for
fair competition between the parties.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
2005 agreement expands cooperation between the parties in the marketing of Naval Combat
Maneuvering Instrumentation Systems in various countries worldwide through the transfer of
work share from the leading party to the other. The 2005 Agreement also sets the rate of
royalties in all territories to 5% with respect to Ehud Systems. In addition,
the 2005 Agreement resolved all disagreements between the parties prior to January 1,
2005. The term of the 2005 Agreement is for ten years. As result of the resolution of the
disagreements between the parties, the Company released during 2005, certain previously
accrued liabilities in the amount of $780 thousand that were no longer payable as a result
of the new agreement signed with IAI in 2005, and this amount was credited to the cost of
revenues during 2005. In the years ended December 31, 2007, 2006 and 2005, the Company
recognized royalty revenue from IAI in the amount of $ 0.6 million, $0.3 million and $ 1.7
million, respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Furthermore,
the Company recorded royalty fees to IAI in the amount of $0.3 million, $0.2 million and
$0.3 million for the years ended December 31, 2007, 2006 and 2005, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Lease
commitments
| | -- | -----------------

| | The
premises occupied by the Company are rented under various operating leases expiring at the
end of September 2009. On October 30, 2007, the Company signed an extension to one of its
operating leases that will be expire at the end of October 2009. The future minimum annual
rental payments as of December 31, 2007 are as follows:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Year ending December 31, | $ thousand
| | ------------------------ | ----------
|
|
|
|
| | 2008                     |           
| | 2009                     |           
| |                          |           
| |                          |           
| |                          |           
| |                          |           

F - 30

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 16 
Commitments and Contingent Liabilities (contd)

| | C. | Liabilities
and guarantees
| | -- | --------------------------

| | 1. | In
order to provide security for the credit received from banks and for the bank
                    guarantees provided in favor of the Company, the Company registered
first degree                     fixed and floating liens on monetary deposits, a
floating lien on all its                     property, assets and related insurance
benefits and a floating lien on its                     unpaid share capital, its
goodwill and its plant, assets and rights.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | On
certain occasions the Company deposits cash and cash equivalents 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 commitments, the                     Company places a charge on its bank
deposits (including the insurance rights                     attached thereto). At
December 31, 2007, there are $3,541 thousand in current                     and
non-current restricted bank deposits (as of December 31, 2006  $2,054
                    thousand current and non-current restricted bank deposits).
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Guarantees
issued by banks in favor of the Company are as follows:
| | -- | ------------------------------------------------------------------

| |                            | December 31
| | -------------------------- | -----------
|
|
|
|
| | Performance guarantees     |            
| |                            |            
| |                            |            
| | Advance payment guarantees |            
| |                            |            
| |                            |            
| | Other bank guarantees      |            
| |                            |            

| | The
expiration dates of the guarantees are through November 30, 2012. Bank charge guarantees
are recorded as financial expenses.
| | --------------------------------------------------------------------------------------------------------------------------------

| | D. | In
November 2006, the Board of Directors approved a new service agreement signed
                    with Wise (see Note 15E) effective as of January 1, 2007. According
to the                     agreement, Wise will provide marketing and support services in
Singapore in                     exchange for a gross monthly fee of $3,500 for marketing
services and a gross                     monthly fee of $3,500 for the support services.
In the event that, during the                     term of the new agreement, the Company
receives a purchase order for its                     products or services based on the
marketing services, Wise shall be entitled to                     a commission as
follows: (a) on the first $1,000,000 received from a purchase                     order a
commission equal to 3%; (b) on amounts between $1,000,000 and up to
                    $3,000,000  a commission equal to 2%; (c) on amounts over
$3,000,000 a                     commission equal to 1%.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
new agreement is for a period of two years from the effective date.
| | -----------------------------------------------------------------------

F - 31

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 16 
Commitments and Contingent Liabilities (contd)

| | E. | Derivative
financial instruments
| | -- | --------------------------------

| | TheCompany
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
dollar resulting primarily from firm commitments not denominated in 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 52 and SFAS 80 are recorded as financial income or expense.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
derivative financial instruments of the Company as of December 31, 2007 are as follows:
| | -------------------------------------------------------------------------------------------

| |                          | Currency
receivable | Currency
payable | Date of
expiration/
maturity/
sale | Amounts
receivable | Amounts
payable | Fair
value | Book
value
| | ------------------------ | ------------------- | ---------------- | ---------------------------------- | ------------------ | --------------- | ---------- | ----------
|
|
|
|
| | Future currency contract |                     |                  |                                    | NIS                |                 |            | Dollar    

# Note 17  Income
Taxes

| | A. | Tax
benefits under the Israeli Law for the Encouragement of Industry (Taxes),           1969
| | -- | --------------------------------------------------------------------------------------------

| | The
Company is an industrial company, as defined by this law and, as such, is
entitled to certain tax benefits, mainly accelerated depreciation of machinery and
equipment, as prescribed by regulations published under the Israeli Income Tax
(Inflationary Adjustments) Law, 1985 (see Note 17C), 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 Israeli Law for the Encouragement of Capital           Investments,
1959 (the Law)
| | -- | -----------------------------------------------------------------------------------------------------------

| | Pursuant
to the Law, the Company was awarded Approved Enterprise status under the
government alternative benefits track. The main benefits to which the Company is entitled
is a full exemption on its taxable income arising from two Approved Enterprise plans for a
period of two years and a reduced tax rate of 25% for an additional five years from the
date on which the investments are significantly completed and the Company has taxable
income as defined by the Law.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1998, the Company applied for approval of the expansion of its facilities in Rosh
Haayin (the second plan).
| | -----------------------------------------------------------------------------------------------------------------

| | In
addition, in 2001 the Company filed a request for an additional new plan to expand its
production facilities in Rosh Haayin (the third plan). The request was
approved in 2002.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, due to losses, the Company had not yet utilized the tax benefits
provided in the second and third plans.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | The
benefits, to which the Company is entitled, will be granted on the proportionate part of
the income, deriving from a future increase in its income in excess of the base turnover,
which is not entitled to benefits. The utilization of the seven years of benefits for the
second and third plans is limited to 2012 and 2016, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 32

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 17  Income
Taxes (contd)

| | B. | Tax
benefits under the Israeli Law for the Encouragement of Capital
                    Investments, 1959 (the Law)(contd)
| | -- | -----------------------------------------------------------------------------------------------------------------------------

| | 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 of December 31, 2007, the Company has accumulated losses (see Note 17I).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
aforementioned benefits are conditional upon compliance with the terms and regulations as
prescribed by law, and the approvals according to which the investments were carried out.
Non-compliance with the terms may result in the cancellation of the benefits, in whole, or
in part, and the refund of the benefit amounts in addition to accrued interest.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, 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
(TheInflationary Adjustments Law)
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Inflationary Adjustments Law, results for tax proposes are measured in real terms,
taking into consideration the change in the Israeli Consumer Price Index (CPI).
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | D. | Tax
rates applicable to income from other sources in Israel
| | -- | -----------------------------------------------------------

| | Income
derived from sources other than the Approved Enterprise is not eligible for the
aforementioned benefits and is taxed at the regular tax rates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 25, 2005, the Knesset passed the Israeli Law for the Amendment of the Income
Tax Ordinance (147 and Temporary Order)  2005 (hereinafter  the
Amendment).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Amendment provides for a gradual reduction in the corporate tax rate in the following
manner: in 2006 a rate of 31%, in 2007  29%, in 2008  27%, in 2009
- 26% and from 2010 onward 25%. Furthermore, as from 2010, upon reduction of the
corporate tax rate to 25%, real capital gains will be subject to tax of 25%.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Taxation
of foreign subsidiary
| | -- | ------------------------------

| | The
Companys subsidiary in the Far East is taxed under the tax laws in force in that
country.
| | ----------------------------------------------------------------------------------------------

F - 33

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 17  Income
Taxes (contd)

| | F. | Deferred
income taxes
| | -- | ---------------------

| | Deferred
income taxes reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Deferred
tax assets for realization of future tax benefits are included where their realization is
probable. As such, the Company has recorded a valuation allowance in respect 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:
| | -------------------------------------------------------------------------------------------

| |                                                | December 31
| | ---------------------------------------------- | -----------
|
|
|
|
| | Deferred tax assets                            |            
| | Provision for vacation                         |            
| | Liability for employees severance benefit, net |            
| | Net operating loss carryforwards               |            
| | Impairment of inventory                        |            
| | Research and development costs, net            |            
| | Issuance expenses                              |            
| | Capitalized software expenses                  |            
| | Others                                         |            
| |                                                |            
| |                                                |            
| |                                                |            
| | Less: Valuation allowance                      |            
| |                                                |            
| |                                                |            
| | Net deferred tax asset                         |            
| |                                                |            

| | The
Company recognized deferred taxes based on a tax rate of 25% according to the tax rate
anticipated to be in effect on the date of reversal as stated in Note 17D above.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of December 31, 2007, the Company has not provided for deferred income taxes on the
undistributed earnings of its foreign subsidiary in Singapore, since these earnings are
intended to be reinvested indefinitely. A deferred tax liability will be recognized when
the Company no longer demonstrates that it plans to permanently reinvest the undistributed
earnings.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | It
is impracticable to determine the amount of additional taxes that will be payables when
these earnings will be remitted. The total undistributed earning of the Singapore
subsidiary as of December 31, 2007 are $ 325 thousand.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 34

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 17  Income
Taxes (contd)

| | G. | A
reconciliation of the theoretical tax expense, assuming all income is taxable
                    at the statutory rates applicable in Israel, and the actual tax
expense, is as                     follows:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                               | Year ended December 31
| | --------------------------------------------- | ----------------------
|
|
|
|
| | Profit (loss) before taxes on income          |                       
| |                                               |                       
| |                                               |                       
| | Statutory tax rate in Israel                  |                       
| |                                               |                       
| |                                               |                       
| | Theoretical tax cost (benefit)                |                       
| | Losses, deductions and expenses in respect of |                       
| | which deferred tax assets were not recorded   |                       
| | Taxes in respect of previous years            |                       
| | Non-deductible expenses                       |                       
| |                                               |                       
| |                                               |                       
| | Actual tax expense                            |                       
| |                                               |                       

| | H. | Income
tax assessments
| | -- | ----------------------

| | Find
tax assessment have been received by the Company up to and including 2003.
| | -------------------------------------------------------------------------------

| | I. | Net
operating loss carryforwards
| | -- | --------------------------------

| | Net
operating loss carryforwards as of December 31, 2007, totaled approximately $57 million.
The net operating loss carryforwards have no expiration date.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------

# Note 18  Monetary
Balances in Currencies Other than the US Dollar

| |                       | December 31, 2007 | December 31, 2006
| | --------------------- | ----------------- | -----------------
|
|
|
|
| | Assets                |                   |                  
| | Current assets        |                   |                  
| |                       |                   |                  
| |                       |                   |                  
| | Total assets          |                   |                  
| |                       |                   |                  
| |                       |                   |                  
| | Liabilities           |                   |                  
| | Current liabilities   |                   |                  
| | Long-term liabilities |                   |                  
| |                       |                   |                  
| |                       |                   |                  
| | Total liabilities     |                   |                  
| |                       |                   |                  

F - 35

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 19 
Supplementary Statement of Operation Information

| | A. | Summary
information about geographical areas:
| | -- | ---------------------------------------------

| | Total
revenues are attributed to geographic areas based on the location of the customers.
| | -----------------------------------------------------------------------------------------

| |                      | Year ended December 31
| | -------------------- | ----------------------
|
|
|
|
| | Total revenues from: |                       
| | Israel               |                       
| | Far East             |                       
| | Europe               |                       
| | Africa               |                       
| | America              |                       
| |                      |                       
| |                      |                       
| | Total revenues       |                       
| |                      |                       

| | Major
customersdata as a percentage of the total revenues:
| | -----------------------------------------------------------

| |            | Year ended December 31
| | ---------- | ----------------------
|
|
|
|
| | Customer A |                       
| | Customer B |                       
| | Customer C |                       
| | Customer D |                       
| | Customer E |                       
| | Customer F |                       
| | Customer G |                       
| |            |                       
| |            |                       
| |            |                       
| |            |                       

| | *
Less than 10%
| | ---------------

F - 36

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 19 
Supplementary Statement of Operation Information (Contd)

| | B. | Cost
of revenues
| | -- | ----------------

| |                                         | Year ended December 31
| | --------------------------------------- | ----------------------
|
|
|
|
| | Raw materials and components            |                       
| | Salaries, wages and employees' benefits |                       
| | Subcontractors                          |                       
| | Agents fees                             |                       
| | Depreciation                            |                       
| | Other manufacturing costs               |                       
| | Inventory write-off                     |                       
| |                                         |                       
| |                                         |                       
| |                                         |                       
| |                                         |                       

| | * Reclassified
| | --------------

| | C. | Financial
expenses, net
| | -- | -----------------------

| |                                             | Year ended December 31
| | ------------------------------------------- | ----------------------
|
|
|
|
| | Financial income:                           |                       
| | Interest on short-term deposits             |                       
| | Other                                       |                       
| |                                             |                       
| |                                             |                       
| |                                             |                       
| |                                             |                       
| |                                             |                       
| | Financial expenses:                         |                       
| | Bank charges and interest on long-term loan |                       
| | Other                                       |                       
| |                                             |                       
| |                                             |                       
| |                                             |                       
| |                                             |                       
| |                                             |                       
| | Total financial expenses, net               |                       
| |                                             |                       

# Note 20  Related
Parties

| | A. | Balances
| | -- | --------

| | Related
parties are comprised of principal shareholders (holding 10% or greater 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.
| | -- | -----------------------------------

F - 37

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 20  Related
Parties (cont)

| | A. | Balances
(contd)
| | -- | -----------------

| | All
transactions and terms with related parties were comparable to those applied to
transactions with other customers or suppliers.
| | -----------------------------------------------------------------------------------------------------------------------------------

| |                           |  |  | December 31
| | ------------------------- |  |  | -----------
|
|
|
|
| | Due from:                 |  |  |            
| | Cash and cash equivalents |  |  | -          
| | Restricted bank deposits  |  |  | -          
| |                           |  | 
| | Trade receivables         |  |  | -          
| |                           |  | 
| | Other receivables         |  |  | -          
| |                           |  |  |            
| |                           |  | 
| | Other Non-current assets  |  |  | -          
| |                           |  | 
| | Due to:                   |  | 
| | Bank overdraft            |  |  | -          
| |                           |  | 
| | Other payable             |  |  | -          
| |                           |  |  |            
| |                           |  |  |            

| | B. | Transactions
with related parties
| | -- | ---------------------------------

| |                                         | Year ended December 31
| | --------------------------------------- | ----------------------
|
|
|
|
| | Sales (1)                               |                       
| | Cost of sales (1) (2)                   |                       
| | Marketing expenses (2)                  |                       
| | General and administrative expenses (4) |                       
| | Finance expenses, net (3)               |                       

| | (1) | To
ST Training and Simulation Pte Ltd.
| | --- | --------------------------------------

| | (2) | To
Prescient Systems and Technologies Pte Ltd.
| | --- | ----------------------------------------------

| | (3) | To
Bank Leumi
| | --- | -------------

| | (4) | Including
the salary of the CEO and fees paid to directors
| | --- | ----------------------------------------------------------

| | C. | Agreement
with Eyepoint Ltd.
| | -- | ----------------------------

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

F - 38

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 21 
Differences between Israeli GAAP and US GAAP

| | A. | The
effect of the differences between Israeli GAAP and US GAAP on the           financial
statements
| | -- | ----------------------------------------------------------------------------------------------------

| | As
discussed in Note 2, the accompanying consolidated financial statements were prepared in
accordance with Israeli GAAP, which differ in certain respects from US GAAP. Information
related to the nature and effect of such differences is presented below.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Reconciliation
of:
| | -- | ------------------

| | a. | Israeli
GAAP net income to net income according to US GAAP:
| | -- | -----------------------------------------------------------

| |                                                      | Year ended December 31
| | ---------------------------------------------------- | ----------------------
|
|
|
|
| | Net profit (loss) as reported, according to          |                       
| | Israeli GAAP                                         |                       
| | GAAP differences:                                    |                       
| | Reversal of restatement according to Standard No. 24 |                       
| | Allocation of share expense issued to service        |                       
| | providers under the fair value based method          |                       
| | Compensation expense for all stock-based awards      |                       
| | using the modified prospective method                |                       
| |                                                      |                       
| |                                                      |                       
| | Net profit (loss) according to US GAAP               |                       
| |                                                      |                       
| |                                                      |                       
| | *  Restated, see Note 21B                            |                       
| |                                                      |                       
| | I.     Basic and diluted net profit (loss)           |                       
| | per share                                            |                       
| | As reported, according to Israeli GAAP               |                       
| |                                                      |                       
| |                                                      |                       
| | According to US GAAP                                 |                       
| |                                                      |                       
| |                                                      |                       
| | II.    Weighted average number of ordinary           |                       
| | shares outstanding (in thousands) used in            |                       
| | basic profit (loss) per share calculation            |                       
| | according to US GAAP                                 |                       
| |                                                      |                       
| |                                                      |                       
| | Weighted average number of ordinary                  |                       
| | shares outstanding (in thousands) used in            |                       
| | diluted profit (loss) per share calculation          |                       
| | according to US GAAP                                 |                       
| |                                                      |                       

F - 39

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 21 
Differences between Israeli GAAP and US GAAP (contd)

| | A. | The
effect of the differences between Israeli GAAP and US GAAP on the           financial
statements (contd)
| | -- | -------------------------------------------------------------------------------------------------------------

| | 1. | Reconciliation
of (contd):
| | -- | ---------------------------

| | b. | Shareholders equity
according to US GAAP:
| | -- | ------------------------------------------

| |                                 | Share
capital | Additional
paid-in
capital | Accumulated
deficit | Total
shareholders'
equity
| | ------------------------------- | ------------- | -------------------------- | ------------------- | --------------------------
|
|
|
|
| | Balance as of December 31, 2004 |               |                            |                     | 21,247                    
| | Net profit for the year         |               |                            |                     | -                         
| | Issuance of shares in respect   |               |                           
| | of services                     |               |                            |                     | 59                        
| | Stock-based compensation        |               |                            |                     | -                         
| |                                 |               |                            |                     |                           
| | Balance as of December 31, 2005 |               |                            |                     | 21,306                    
| | Net loss for the year           |               |                            |                     | -                         
| | Issuance of shares and warrants |               |                            |                     | 4,293                     
| | Issuance of shares in respect   |               |                           
| | of services                     |               |                            |                     | 262                       
| | Stock-based compensation        |               |                            |                     | -                         
| |                                 |               |                            |                     |                           
| | Balance as of December 31, 2006 |               |                            |                     | 25,861                    
| | Net loss for the year           |               |                            |                     | -                         
| | Stock-based compensation        |               |                            |                     | -                         
| |                                 |               |                            |                     |                           
| | Balance as of December 31, 2007 |               |                            |                     | 25,861                    
| |                                 |               |                            |                     |                           

| | 2. | Condensed
balance sheet items
| | -- | -----------------------------

| |                         | December 31
| | ----------------------- | -----------
|
|
|
|
| | Severance pay fund      |            
| |                         |            
| |                         |            
| | Total assets            |            
| |                         |            
| |                         |            
| | Liability for employee  |            
| | severance benefits, net |            
| |                         |            
| |                         |            
| | Total liabilities       |            
| |                         |            
| |                         |            
| | Total shareholders'     |            
| | equity                  |            
| |                         |            

F - 40

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 21 
Differences between Israeli GAAP and US GAAP (contd)

| | B. | Restatement
| | -- | -----------

| | The
statement of operations in accordance with US GAAP for the year ended December 31, 2006
has been restated in order to reflect a correction relating to compensation expenses due
to calculation error.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                    | Year ended
December 31
2006
| | -------------------------------------------------- | ---------------------------
|
|
|
|
| | Stock option expenses - as reported                |                            
| | Stock option expenses - as restated                |                            
| | Net loss according to US GAAP - as reported        |                            
| | Net loss according to US GAAP - as restated        |                            
| | Basic and diluted net loss per share - as reported |                            
| | Basic and diluted net loss per share - as restated |                            

| | C. | Accounting
principles generally accepted in Israel compared to accounting
                    principles generallyaccepted in the United States
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | 1. | Liability
for termination of employer-employee relations
| | -- | --------------------------------------------------------

| | According
to Israeli GAAP
| | -------------------------

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

| | According
to US GAAP
| | --------------------

| | According
to US 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Stock
options granted to employees, service providers and other non-employees
                    and stock issued toservice providers
| | -- | --------------------------------------------------------------------------------------------------------------------------------------

| | According
to Israeli GAAP
| | -------------------------

| | Until
December 31, 2005, the Company recorded expenses with respect to stock options granted to
employees and service providers that provide similar services to those provided by
employees, in accordance with the intrinsic value method described in APB 25 Accounting
for Stock Issued to Employees. Shares issued to service providers were recorded
based on the cost of service at the grant date of the shares issued.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2006, the Company applies Standard No. 24 and records expense for
share-based payment transactions conducted after March 15, 2005 and not yet vested at
January 1, 2006, the expenses recorded in accordance with the fair value of the options
on the grant date using the Black-Scholes model.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 41

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 21 
Differences between Israeli GAAP and US GAAP (contd)

| | C. | Accounting
principles generally accepted in Israel compared to accounting
                    principles generallyaccepted in the United States (contd)
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2. | Stock
options granted to employees, service providers and other non-employees
                    and stock issued toservice providers (contd)
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------

| | According
to US GAAP
| | --------------------

| | Stock
options granted to employees
| | ----------------------------------

| | Prior
to fiscal 2006, the Company applied the intrinsic value method as prescribed in APB25,
and related interpretations, in accounting for stock options granted under the stock
option plan. Under the intrinsic value method, no compensation cost is recognized if the
exercise price of the Companys employee stock options was equal to or greater than
the market price of the underlying stock on the date of the grant. Accordingly, no
compensation cost was recognized in the accompanying consolidated statements of operation
prior to fiscal year 2006 on stock options granted to employees, since all options
granted under the Companys stock option plan had an exercise price equal to the
market value of the underlying common stock on the date of grant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of January 1, 2006, the Company adopted SFAS 123 (revised 2004), Share-Based
Payments) (SFAS 123R) using the modified prospective method, which requires
measurement of compensation cost for all stock-based awards based upon the fair value on
the date of grant and recognition of such compensation cost over the service period for
awards expected to vest. Under this method, the Company recognizes compensation cost for
awards granted on or after January 1, 2006, based on the Black-Scholes option-pricing
model. In addition, the Company recognizes compensation cost for unvested share-based
awards as of January 1, 2006 based on the grand date fair value of those awards, as
previously calculated and reported for pro-forma disclosure purposes, over the requisite
service period of the awards.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
warrants granted to service providers and other non-employees and stock issued to service
providers
| | ---------------------------------------------------------------------------------------------------------

| | The
Company accounts for such awards in accordance with the provisions of EITF 96-18, Accounting
for Equity Instruments That are Issued to Other than Employees for Acquiring, or in
Conjunction of Selling, Goods or Services. Since the warrants issued by the Company
are not fully vested, and no performance commitment as defined in EITF 96-18 has been
reached, the Company estimates the cost of the unvested warrants based on the fair value
of the warrants at each reporting period (using the Black-Scholes model) and accounts for
the portion of the services that the recipient has rendered to date using that estimate.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 42

---

---

|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 21 
Differences between Israeli GAAP and US GAAP (contd)

| | C. | Accounting
principles generally accepted in Israel compared to accounting
                    principles generallyaccepted in the United States (contd)
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3. | Recently
adopted accounting standards
| | -- | -------------------------------------

| | Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting Standards
Board (FASB) Interpretation No. 48 Accounting for Uncertain Tax Positions  An
Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 addresses the
accounting for uncertainty in income taxes recognized in an enterprises financial
statements and prescribes a threshold of more-likely-than-not for recognizing and
derecognizing of tax positions taken or expected to be taken in a tax return. FIN 48 also
provides related guidance on measurement, classification, interest and penalties, and
disclosure. Under Israeli GAAP there is no specific accounting guidance for uncertainties
in income taxes. There was no material effect on the financial statements resulting from
adoption FIN 48. As a result, the Company did not record any cumulative effect related to
adopting FIN 48.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Recently
issued accounting standards
| | -- | ------------------------------------

| | A. | In
September 2006, the FASB issued SFAS No. 157 Fair Value
                    Measurements (Statement 157). Statement 157 defines
fair                     value, establishes a framework for the measurement of fair
value, and enhances                     disclosures about fair value measurements. The
statement does not require any                     new fair value measurement. The
statement is effective for fair value measures                     already required or
permitted by other standards for fiscal years beginning                     after
November 15, 2007. The Company is required to adopt statement 157
                    beginning on January 1, 2008. Statement 157 is required to be applied
                    prospectively, except for certain financial instruments. Any
transition                     adjustment will be recognized as an adjustment to opening
retained earnings in                     the year of adoption. In February 2008, the FASB
approved FSP FAS 157-2, which                     grants proposed a one year deferral of
Statement 157s fair value                     measurement requirements for
nonfinancial assets and liabilities, except for                     items that are
recognized or disclosed at fair value in the financial statements                     on
a recurring basis. The Company does not believe that the adoption of the
                    provisions of SFAS No. 157 will materially impact its financial
position,                     results of operations or cash flows.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | In
February 2007, the FASB issued FASB Statement No. 159 The Fair Value
                    Option for Financial Assets and Financial Liabilities  Including
an                     amendment of FASB Statement No. 115 (Statement 159),
which                     permits entities to irrevocably choose to measure many
financial assets and                     liabilities at fair value that are not currently
required to be measured at fair                     value. If the fair value option is
elected, change in fair value would be                     recorded in results of
operation at each subsequent reporting date. The                     Statement allows
entities to achieve an offset accounting effect for certain                     changes
in fair value of certain related assets and liabilities without having
                    to apply complex hedge accounting provisions, and is expected to
expand the use                     of fair value measurement consistent with the Boards
long-term objectives                     for financial instruments. This Statement is
effective as of the beginning of an                     entitys first fiscal year
that begins after November 15, 2007. The Company                     does not believe
that the adoption of the provisions of SFAS No. 159 will                     materially
impact its financial position, results of operations or cash flows.
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F - 43

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|B.V.R. Systems (1998) Ltd.and Subsidiary      
|----------------------------------------------
|                                              
|Notes to the Consolidated Financial Statements
|                                              
|                                              

# Note 21 
Differences between Israeli GAAP and US GAAP (contd)

| | C. | Accounting
principles generally accepted in Israel compared to accounting
                    principles generallyaccepted in the United States (contd)
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4. | Recently
issued accounting standards (contd)
| | -- | ---------------------------------------------

| | C. | In
June 2007, the FASB reached a final consensus on Emerging Issues Task Force
                    Issue 07-3 Accounting for Advance Payments for Goods or
Services to Be                     Used in Future Research and Development Activities (EITF
                    07-3). The consensus reached by the FASB requires companies
involved in                     research and development activities to capitalize such
non-refundable advance                     payments for goods and services pursuant to an
executory contractual arrangement                     because the right to receive those
services in the future represents a probable                     future economic benefit.
Those advance payments will be capitalized until the                     goods have been
delivered or the related services have been performed. The                     consensus
on EITF 07-3 is effective prospectively for financial statements
                    issued for fiscal years beginning after December 15, 2007, and
interim periods                     within those fiscal years. Earlier application is not
permitted. The Company                     does not believe that the adoption of the
provisions of EITF 07-3 will                     materially impact its financial
position, results of operations or cash flows.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | In
December 2007, the FASB issued FASB Statements No. 141R Business
                    combinations (Statement 141R) and FASB Statement No. 160
                    Noncontrolling Interests in Consolidated Financial Statements                     an
amendment to ARB 51 (Statement 160). Statements 141R and 160 require most
                    identifiable assets, liabilities, noncomtrolling interests and
goodwill acquired                     in a business combination to be recorded at full
fair value and                     required noncontrolling interests (previously
referred to as minority                     interests)to be reported as a component of
equity, which change the accounting                     for transactions with
noncontrolling interest holders. Both statements are                     effective for
periods beginning on or after December 15, 2008 and earlier                     adoption
is prohibited. Statement 141R will be applied to business combinations
                    occurring after the effective date and statement 160 will be applied
                    prospectively to all noncontrolling interests, including any that
arose before                     the effective date. The Company does not believe that
the adoption of statements                     141R and 160 will have any impact on its
result of operation and financial                     position.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 44

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