---

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C.  20549

FORM 20-F

|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, 2003                                                     
|  |                                                                                                 
|  | OR                                                                                              
|  |                                                                                                 
|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR
  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934      
|  |                                                                                                 
|  | For the transition period from __________
  to __________                                       

Commission file number
0-29884

B.V.R. Systems (1998) Ltd.(Exact name of Registrant as specified in its charter)

Israel(Jurisdiction of incorporation or organization)

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

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

|Title of each
  class |  | Name of each
  exchange on which registered
|--------------------- |  | -------------------------------------------
|                      |  |                                            
|None                  |  | None                                       

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

Ordinary
Shares, NIS 1.0 par value per share(Title of Class)

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

None(Title of Class)

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

10,660,874
Ordinary Shares, NIS 1.0 par value per share

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

x Yes  
o
No

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

o Item 17  
x
Item 18

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---

INTRODUCTION

B.V.R.
Systems (1998) Ltd., an Israeli company, was formed on January 6, 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 began operating 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 subsidiaries,
unless otherwise indicated.

References
in this annual report to Elisra refer to our former controlling shareholder,
Elisra Electronics Systems Ltd.

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

References
in this annual report to fiscal 2001 refer to our fiscal year ended December
31, 2001, references to fiscal 2002 refer to our fiscal year ended
December 31, 2002, references to fiscal 2003 refer to our fiscal year
ended December 31, 2003 and references to fiscal 2004 refer to our fiscal
year ended December 31, 2004.

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

Ehud
and Atas are our trademarks.  All
other trademarks and trade names appearing in this annual report are owned by
their respective holders.

---

---

PART I

ITEM 1.  Identity of Directors, Senior Management and
Advisors

Not
applicable.

ITEM 2.  Offer Statistics and Expected Timetable

Not
applicable.

1

---

---

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, 2001, 2002 and 2003 from our
Consolidated Financial Statements and related notes included in this annual
report.  The selected consolidated
financial data for the years ended December 31, 1999 and 2000 have been
derived from audited 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 Israeli GAAP. 
Israeli GAAP, as applicable to our financial statements, differ in
certain significant respects from generally accepted accounting principles in
the United States, or U.S. GAAP.   See
Note 24 to the Consolidated Financial Statements included in this annual report
for a discussion of the material variations between Israeli 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 the number of shares
used in computing per share data.

|                                                                                                                               |  | Year Ended December 31,                           |        
|------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------------------------------- | -------
|                                                                                                                               |  |                                                   |        
|                                                                                                                               |  | 1999                                              |        
|                                                                                                                               |  |                                                   |        
|                                                                                                                               |  | (In thousands, except share and
  per share data) |        
|Statement of Operations Data:                                                                                                  |  |                                                   |        
|Revenues                                                                                                                       |  | $                                                 | 36,820 
|Cost
  of revenues:                                                                                                            |  |                                                   |        
|Costs
  and expenses                                                                                                           |  |                                                   | 35,006 
|                                                                                                                               |  |                                                   |        
|Gross
  profit (loss)                                                                                                          |  |                                                   | 1,814  
|Operating
  expenses:                                                                                                          |  |                                                   |        
|Research
  and development expenses                                                                                            |  |                                                   | 3,252  
|Selling
  and marketing expenses                                                                                               |  |                                                   | 2,420  
|General
  and administrative expenses                                                                                          |  |                                                   | 3,456  
|                                                                                                                               |  |                                                   |        
|Total
  operating expenses                                                                                                     |  |                                                   | 9,128  
|                                                                                                                               |  |                                                   |        
|Operating
  profit (loss)                                                                                                      |  |                                                   | (7,314 
|Financing
  expenses, net                                                                                                      |  |                                                   | (559   
|Other
  expenses, net                                                                                                          |  |                                                   | (6,739 
|                                                                                                                               |  |                                                   |        
|Loss
  before income taxes                                                                                                     |  |                                                   | (14,612
|Income
  tax (expenses) benefit                                                                                                |  |                                                   | 1,251  
|                                                                                                                               |  |                                                   |        
|Net
  loss                                                                                                                     |  |                                                   | (13,361
|                                                                                                                               |  |                                                   |        
|Basic
  and diluted net loss per ordinary share                                                                                |  |                                                   | (1.45  
|                                                                                                                               |  |                                                   |        
|Weighted
  average number of ordinary shares
          used in computing basic and
  diluted net loss
      per ordinary share |  |                                                   | 9,149  
|                                                                                                                               |  |                                                   |        

2

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|                                                                                                                                       |  | Year Ended December 31,                           |        
|-------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------- | -------
|                                                                                                                                       |  |                                                   |        
|                                                                                                                                       |  | 1999                                              |        
|                                                                                                                                       |  |                                                   |        
|                                                                                                                                       |  | (In thousands, except share and
  per share data) |        
|Reconciliation to the U.S. GAAP:                                                                                                       |  |                                                   |        
|Net
  loss                                                                                                                             |  |                                                   | (13,361
|Income
  tax (expenses) benefit on income                                                                                              |  |                                                   | 121    
|                                                                                                                                       |  |                                                   |        
|Loss
  under U.S. GAAP                                                                                                                 |  |                                                   | (13,240
|                                                                                                                                       |  |                                                   |        
|Basic
  and diluted net income (loss) per ordinary share under U.S. GAAP                                                               |  |                                                   | (1.52  
|                                                                                                                                       |  |                                                   |        
|Weighted
  average number of ordinary shares    used in computing basic
  and diluted net loss
     per ordinary share under U.S. GAAP |  |                                                   | 8,699  
|                                                                                                                                       |  |                                                   |        

|                                   |  | As of December 31, |       
|---------------------------------- |  | ------------------ | ------
|                                   |  |                    |       
|                                   |  | 1999               |       
|                                   |  |                    |       
|                                   |  | (In thousands)     |       
|Consolidated Balance Sheet Data:   |  |                    |       
|Israeli
  GAAP:                    |  |                    |       
|Cash
  and cash equivalents        |  | $                  | 7,788 
|Working
  capital (deficit)        |  |                    | 6,894 
|Total
  assets                     |  |                    | 40,149
|Short-term
  bank credit and loans |  |                    | 9,184 
|Shareholders
  equity (deficit)    |  | $                  | 11,381
|U.S. GAAP:                         |  |                    |       
|                                   |  |                    |       
|Total
  assets                     |  |                    | 41,299
|                                   |  |                    |       
|Shareholders
  equity (deficit)    |  | $                  | 11,637

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.

3

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---

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
began business in 1998.  We reported a
net loss of $6.5 million for the year ended December 31, 2003, a net loss of
$5.8 million for the year ended December 31, 2002 a net loss of $0.9 million
for the year ended December 31, 2001 and a net loss of $13.3 million for
the year ended December 31, 2000.    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.  If we continue to incur net losses, our cash flow position could
be further damaged, our operations could be jeopardized and our share price
could decrease.

As
of December 31, 2003 we had a deficiency in our shareholders equity and a
working capital deficit.  We may need to
raise additional funds, which may not be available.

As
of December 31, 2003 we had a deficiency in our shareholders equity of $10.2
million and a working capital deficit of $11.6 million.  We expect that cash received from the
issuance of shares to those investors who participated in the investment round
that took place in the months of March 2004 
through June 2004, loans received from former shareholders, the $3.2
million credit line from our controlling shareholder, as well as cash from our
operations, will be sufficient to meet our present working capital and capital
expenditure needs.  If our operations do not generate cash to
the extent currently anticipated or if any of the risk factors discussed in
this annual report will 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.        

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.

4

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---

Because
we receive large product orders from a relatively small number of our
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.  In addition, our net sales may
decline at a greater rate than experienced in past periods.  During fiscal 2003, we experienced a
continuous reduction in order backlog. 
A further decline in backlog levels could result in more variability and
less predictability in our quarter-to-quarter net sales. Consequently,
quarter-to-quarter comparisons of our operating results may not be meaningful.

We
are experiencing a continuing decline in our order backlog and we may not be
able to convert all of our backlog to revenue.

We
sell the majority of our products through individual purchase orders.  Many of our customers would have the right
to terminate orders by paying the cost of work in process plus a related profit
factor.  Customers may cancel orders as
a result of a budget being cancelled or for other reasons.  As of December 31, 2003, purchase orders and
contractual arrangements decreased to approximately $19.7 million, compared
with $26.1 million as of December 31, 2002. If we experience cancellations of
pending contracts, terminations or reductions of contracts in progress, we may
not be able to convert all of our backlog to revenue.  Any further reduction in backlog will
adversely affect our business, financial condition and results of operations.

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

Two
of our customers, namely a government of a country in South East Asia that
awarded us several projects and a customer located in the Republic of Korea,
accounted for 58% and 9% of our revenues in fiscal 2003, respectively. 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 one customer may have a material adverse effect
on our business.

5

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---

We
depend on a limited number of suppliers for some key components and therefore
the loss of one or more of these suppliers could cause production delays, a
reduction of revenues or an increase in costs.

We
currently purchase some key components used in our products from only once
source and purchase others from only a limited number of sources. For example,
we currently depend upon a single manufacturer, Silicon Graphics, Inc, to
manufacture the computers incorporated in our high-end simulators. If this
supplier were unable to produce our required quantities, we would be faced with
a shortage of critical components. We are also experiencing an increase in the
lead-time for delivery of some of our key components. We may not be able to
find alternative sources in a timely manner if suppliers of our key components
become unwilling or unable to provide us with adequate supplies of these key
components when we need them or increase their prices. This could cause our
relationships with customers to suffer and our revenues to decline. Even if we
are able to secure alternative sources for components, our costs could
increase.   We do not have long-term
supply contracts with Silicon Graphics or any other of our suppliers.

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, such as divisions of Thales, Lockheed-Martin, L-3 Communications,
Cubic, Israel Aircraft Industries (in some countries), Elbit Systems and CAE,
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 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, acts of God 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 insure ourselves from that risk
by ensuring 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 would be adversely effected.

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

Our
export of military goods and information is subject to approval of SIBAT, the
Foreign Defense Assistance and Defense Export Organization of the Israel
Ministry of Defense.  To date, we have
received all required approvals from SIBAT, 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.  SIBATs policy has generally been to
encourage the export of military goods and knowledge; however, SIBAT 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.

7

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---

We
purchase from manufacturers in the United States substantially all 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.

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

In
fiscal 2003, 67% of our total revenues came from customers located in South
East Asia.  We estimate that a material
portion of our revenues in 2004 will come from customers in that region.  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 foreign existing and prospective
customers and to develop new business abroad.

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.  In
recent quarters, our sales efforts have been adversely affected as a result of
unfavorable economic conditions and reduced capital spending in South East
Asia.  If the economic conditions in a
specific country in South East Asia, the government of which is a significant
customer of ours, or if the global economic slowdown continues, we may continue
to experience material adverse impacts on our business, operating results, and
financial condition.

Our
contracts are fixed-price and payment thereunder is subject to timely
accomplishment of milestones and thus commit us to unfavorable terms.

The
majority of our contracts are for fixed-price, meaning that 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, we are
required to provide performance guarantees in an amount equal to a specific
percentage of the contract price.

8

---

---

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 contracts delay or default
could expose us to liability.  However,
we will not be able to obtain full recovery for such liabilities from such
subcontractors.

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

We
are controlled by Chun Holdings LP which, in the aggregate beneficially owns
approximately65.49% of our
outstanding ordinary shares as of June 7, 2004. Therefore, Chun Holdings LP is
able to elect the majority of our directors and exercise control over the
outcome of matters requiring shareholders approval.

As
of June 7, 2004, Chun Holdings LP. or Chun LP, an Israeli limited partnership
beneficially owned an aggregate of 40,475,941 of our ordinary shares and a
warrant to purchase an additional 30,000,000 of our ordinary shares
(representing, assuming the exercise of such warrant and assuming no other exercise
of our convertible securities, approximately 65.49% of our currently
outstanding ordinary shares).  As a
result, Chun LP controls the outcome of various actions that require our
shareholder approval.  For example, Chun
LP 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

---

---

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 law, trade secret protection, confidentiality agreements and other
contractual arrangements with our employees, some of our affiliates, strategic
partners and others.  We currently own
five United States patents and 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 the European Community 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 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.  Since September 2000, the violence
between Israel and the Palestinians has intensified and a material escalation
in violence has occurred.  Israel has
experienced terrorist incidents within its borders, including in the West Bank
and Gaza Strip.  As a result,
negotiations between Israel and representatives of the Palestinian Authority
ceased.  We could be adversely affected
by hostilities involving Israel, the interruption or curtailment of trade
between Israel and its trading partners, or a continuous downturn in the
economic or financial condition of Israel. 
In addition, several countries continue to restrict business with Israel
and with companies having operations in Israel.  We could be negatively affected by adverse developments in the
peace process, including the recent violence, or by restrictive laws or
practices directed towards Israel or Israeli exporters.

10

---

---

Like
all male adult citizens and permanent residents of Israel, our directors,
officers and employees who are under the age of 40, 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.  See Item
4.  Information on the Company    B.
Business Overview    Conditions in Israel.

We benefit from government programs and tax
benefits that may be discontinued or reduced.

We
have received grants and 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
and paying royalties with respect to grants received.  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 materially adversely
affected.

Because a substantial portion of our revenues
are generated in U.S. Dollars and a portion of our expenses are incurred in New
Israeli Shekels, our results of operations may be seriously harmed if the rate
of inflation in Israel exceeds the rate of devaluation of the New Israeli
Shekel against the U.S. Dollar.

We generate a substantial portion of our
revenues in dollars, but we incur a portion of our expenses, principally
salaries and related personnel expenses, in New Israeli Shekels, or NIS.  As a result, we are exposed to the risk that
the rate of inflation in Israel will exceed the rate of devaluation of the NIS
in relation to the dollar or that the timing of this devaluation lags behind
inflation in Israel. In 2003, the rate of inflation together with the
devaluation of the dollar in relation to the NIS adversely affected our
dollar-linked results of operations.  If
the dollar-linked costs of our operations in Israel continue to increase, our
dollar-linked results of operations will continue to be adversely affected by
such increases.

11

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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 nonresidents of the United States, and a substantial portion of our assets
and the assets of these persons are located outside the United States.  Therefore, it may be difficult 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 holders
of our ordinary shares are governed by our memorandum of association, our
articles of association and by Israeli law. These rights and responsibilities
differ in some respects from the rights and responsibilities of shareholders in
typical U.S. corporations. In particular, a shareholder of an Israeli company
has a duty to act in good faith toward the company and other shareholders and
to refrain from abusing his power in the company, including, among other
things, in voting at the general meeting of shareholders on certain matters.
See Item 10.  Additional Information 
B. Memorandum and Articles of Association.

ITEM 4.  Information on the Company

A. History and
Development of the Company

B.V.R.
Systems (1998) Ltd., an Israeli company, was formed on January 1, 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 began operating 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.

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In
2003 there was a change in control of the Company. See Item 7  Major
Shareholders and Related Party Transactions  B. Related Party Transactions
for more information.

Our
web site is www.bvr.co.il. Information on our web site is not
incorporated by reference in this annual report.

B. Business Overview

General

We
are engaged in the development, manufacture and marketing of sophisticated
training and simulation systems for military and civilian applications.  We currently market three lines of products:

| |  | On-Board Training Systems such as: 
  Ehud Air Combat Maneuvering Instrumentation, or ACMI, Naval Combat
  Instrumentation System, or NCMI.                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                
| |  | Military simulators such as simulators for fighter aircraft,
  helicopters, training aircraft, Unmanned Aerial Vehicles, tank & gunnery
  and naval simulators.
| |   |                                                                                                                                                                
| |  | Embedded simulation such as: 
  Advanced Trainer Avionics Suite, or ATAS and In Flight Electronic
  Warfare Simulation, or IFEWS.                          

Our
products offer advanced, highly effective and cost-efficient solutions to
operational 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 military products improve the operational capabilities
of armed forces through enhanced command and control in the battlefield and
integration between fighting units.

Our Product Line

We
continuously design, develop and market new generation technologies for three
main product lines: on-board training; simulators; and embedded
simulation. 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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On-Board Training

Our on-board 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. The on-board training product line includes:

Ehud ACMI

Air Combat
Maneuvering Instrumentation

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 system 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.

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 worldwide.

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,
or CGF, 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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Simulators

Our
simulation product line includes flight, naval, ground systems simulators for
various platforms, electronics and weapon systems. Our line of simulators
covers a full range of training scale, from basic procedural trainers to combat
mission trainers and full mission dome simulators. Our simulators are designed
with high level architecture, or HLA, delivering the capacity to perform
sophisticated distributed mission training, or DMT, by communicating and
training with other simulators and training devices. Our simulator product
lines includes:

| |  | Flight Simulators;       
| | - | -------------------------
| |   |                          
| |  | Ground Forces Simulators;
| |   |                          
| |  | Naval Simulators; and    
| |   |                          
| |  | Systems Simulators       

Flight Simulators

Fighter
Aircraft Simulators.We have developed and manufactured fighter
aircraft simulators for aircraft such as: 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 up to 360° field of view.

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 developed and manufactured trainer
aircraft simulators for aircraft such as: PC-7, MB-339, and Fouga Magister.

AMOS
 Cadet Screening Simulator.Our AMOS cadet screening and basic flight
training simulator has been developed for the Israeli 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
developed and manufactured helicopter simulators for helicopters such as
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
developed and manufactured an unmanned air vehicle, or UAV, 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.

Our
UAV simulator provides training for missions such as: battlefield surveillance
and reconnaissance, target location and acquisition, artillery fire control,
electronic intelligence gathering and electronic warfare, exploding UAV
delivery, contaminated and mined areas, international crises management, search
and rescue services for civilian purposes, training in malfunctions and
emergency procedures.

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 officer. 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.

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We
believe that our INTACT system provides unprecedented debriefing capabilities,
including full playback of executed exercises or previously stored exercises.
Debriefing may be performed at the instructor station or at a dedicated
debriefing facility. Data is monitored and stored throughout the training
exercises for proficiency level and operational parameters analysis, thus providing
a powerful database for mission planning, rehearsal and evaluation.

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.

Submarine Simulators

Our
submarine simulator is comprised of an attack team trainer, a periscope
simulator and a submarine driver simulator, which together provide for three
different complementing training facilities that can be operated in a
standalone mode or in concert to provide for a complete and comprehensive
training for submarines crews.

Systems Simulators

Our
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.

Embedded Simulation

Our
embedded simulation product line is comprised of a wide breadth of products.
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.

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Advanced Trainer
Avionics Suite

Our
advanced trainer avionics suite, or Atas, 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 Atas may offer capabilities such as actual flight simulation,
in-flight live or virtual target threats, operational scenarios of gradually
increasing complexity, full debriefing capabilities and flight safety features.
The Atas technology is based on a patent owned by us and registered in several
regions of the world.

An
Atas 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 (radar, RWR, seekers) and weapon
systems. Pilots flying the Atas-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.

To
date, we have made no sales of our Atas system.

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 EW scenarios, simulating
the real EW systems in an aircraft. IFEWS provides a virtual EW range and
includes our post-flight debriefing capabilities.

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, or SPS. 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 AAR and debriefing with
a 3D analysis of crew performance, all weapon engagements, safety events and
mission scenarios.

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

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In
February 2002, we completed preliminary flight tests with the Israeli Air Force
and we are in the process of further demonstration flight tests with the
Israeli Air Force. To date, we have made no sales of our IFEWS.

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 (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.

|                                       |  | 1999 |     | 2000 |  | 2001 |     | 2002 |  | 2003 |    
|-------------------------------------- |  | ---- | --- | ---- |  | ---- | --- | ---- |  | ---- | ---
|                                       |  |      |     |      |  |      |     |      |  |      |    
|On-board training Family of
  Products |  |      | 56  | %    |  |      | 79  | %    |  |      | 68 
|Simulators                             |  |      | 44  | %    |  |      | 21  | %    |  |      | 32 
|Total                                  |  |      | 100 | %    |  |      | 100 | %    |  |      | 100

Strategic
Relationships

Israeli Aircraft
Industries

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, a division of Israel Aircraft Industries Ltd.,
or IAI. Pursuant to this agreement, we and IAI 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 agreements term, various claims were alleged by both IAI and
us regarding each others performance of obligations throughout the term of 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 IAI, 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.

There
are still outstanding disagreements between us and IAI relating to projects
performed prior to entering into this agreement.  Our agreement with IAI provides for a resolution mechanism of
such disputes, including by arbitration in case the parties cannot reach a
mutually agreed resolution.

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The
cooperation agreement contemplates three basic types of business relationships:

| |  | Royalties and Non-Competition Arrangement. 
  The agreement provides for countries in which either we or IAI shall
  not sell or market the Ehud ACMI.  We
  undertook not to compete with IAI in the majority of such countries.  The party operating in each such country
  shall pay to the party who undertook not to operate in such country royalties
  ranging from 4.75% to 12.5% of the contract price with respect to contracts
  executed in such countries during the term of the cooperation agreement and
  two years, thereafter.  The contract
  price for the purposes of calculating the royalties includes maintenance and
  support contracts.  In addition, in
  one of the countries in which IAI undertook not to compete, rather than
  actually paying royalties, we will pay IAI $60,000 for each pod and $100,000
  for each ground station we sold. |                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                  
| |  | Cooperation Arrangement. 
  We and IAI undertook to cooperate exclusively with each other in
  specific countries in which either we or IAI will act as the prime
  contractor.  Either we or IAI will be
  in charge of, and responsible for, supplying that portion of such contract as
  shall be decided by us and IAI.  We
  and IAI will equally share in profit, which for the purposes of this
  allocation, has been defined as the expected profit from the project
  (contract price minus projected cost regardless of actual costs).                                                                                                                                                                                                                                                                                                                              |                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                  
| |  | Royalties and Competition. 
  We and IAI have agreed that in specifically defined countries, each
  will compete with the other only if such party is required to do so under
  existing relationships with third parties. 
  Both we and IAI will generally pay royalties to the other in an amount
  ranging between 4% and 8% of a contract price with respect to contracts
  executed during the term of the cooperation agreement and two years
  thereafter.  In one of the countries,
  rather than actually paying royalties, such contracting party will pay the
  other $60,000 for each pod sold and $100,000 for each ground station sold.                                                                                                                                                                                                                           |                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                  
| |   | The cooperation agreement includes, among other provisions, the
  following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |                                                                                                                                                                  
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | We and IAI have defined a mechanism to resolve outstanding financial
  and other disagreements relating to the period prior to the execution of this
  agreement.

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| |  |  | In a few countries, either we or IAI may continue to work under
  pre-existing arrangements.                                                                                                                                                                                                                                                                                                                                              | 
| |  | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
| |  |  | In the countries covered by our contract with Bodenseewerk
  Geraetetchnik GmbH, or BGT, IAI will replace us as a subcontractor of
  BGT.  In return, IAI will pay us
  royalties ranging between 10% and 12.5%. 
  With respect to existing projects in one of these countries, we will
  remain the prime contractor and IAI will remain our subcontractor.  Profits from these projects are to be
  shared equally between us and IAI. | 
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
| |  |  | With respect to countries not covered by the agreement, a joint
  committee will meet to determine the specific business cooperation to be
  formed.  If such joint committee does
  not reach an agreement, the royalties and competition arrangement will apply,
  except that the royalty rate will be 10%.                                                                                                                            | 
| |  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                           | 
| |  |  | We and IAI each granted the other a license to use any patent or
  other intellectual property right owned by the other relating to the Ehud
  ACMI systems, as is required to enable such party to exercise its rights
  under the agreement.  In addition, we
  agreed that our trade name Ehud shall be owned jointly with IAI.                                                                                                     | 

The
cooperation agreement was approved by the Israeli Controller of Restrictive
Trade Practices, came into effect in September 1999 and is for a term of
seven years.  As a result of this
agreement, we will no longer be able to act as a prime contractor or compete with
IAI, as the case may be, with respect to sale of Ehud ACMI systems in some
countries that accounted for a substantial percentage of our revenues in the
past.

Other Strategic
Agreements

In
April 1998, we entered into a teaming agreement with Metric Systems
Corporation, Inc., or Metric, a leading US-based producer of airborne test,
evaluation and training products. 
Pursuant to this agreement, we and Metric agreed on the joint
manufacturing and marketing of our Ehud ACMI systems for some projects.  This agreement expired in April 2001, except
for certain provisions concerning the cooperation in a specific country, which
remained effective until May 2003.

In
January 2004 and March 2003, we entered into a Memorandum of Understanding and
a Teaming Agreement with two UK-based companies respectively, for cooperation
in the marketing and sales of Naval training systems to the UK and a European
country.

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Marketing

We
actively seek to identify and propose solutions for military training and debriefing
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.

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

|           |  | Year Ended December 31,     |       
|---------- |  | --------------------------- | ------
|           |  |                             |       
|           |  | 1999                        |       
|           |  |                             |       
|           |  | (U.S. Dollars in thousands) |       
|           |  |                             |       
|Sales      |  |                             |       
|Israel     |  | $                           | 652   
|Far
  East |  |                             | 18,761
|Europe     |  |                             | 16,663
|America    |  |                             | 744   
|Africa     |  |                             | --    
|           |  |                             |       
|Total      |  | $                           | 36,820
|           |  |                             |       

Customers

Currently,
all of the end-user customers of our products are governments or major defense
companies regulated by government agencies.

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, one of our customers located in Southeast
Asia has accounted for approximately 58% of our revenues in fiscal 2003, 41% of
our revenues in fiscal 2002 and 26% of our revenues in fiscal 2001, and
represented approximately 20% of our backlog as of December 31, 2003.  A customer located in the Republic of Korea
has accounted for approximately 9% of our revenues in fiscal 2003, 27% of our
revenues in fiscal 2002 and 45% of our revenues in fiscal 2001 and also
represented approximately 6% of our backlog as of December 31, 2003.  The Italian Air Force accounted for
approximately 6% of our revenues in fiscal 2003, 18% of our revenues in fiscal
2002 and approximately 6% of our revenues in fiscal 2001  and also represented approximately18% of our
backlog as of December 31, 2003.  We
expect that sales of our products to a small number of customers will continue
to account for a substantial percentage of our net revenue in the foreseeable
future.

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General Financial
Considerations for Projects

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

There
are various types of financing terms applicable to defense contracts.  In most cases, after we receive advance
payment at the commencement of a project, we receive progress or milestone
payments according to a percentage of cost incurred in performance or
achievement of a specific milestone.  In
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, acts of God 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.

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Manufacturing and
Suppliers

We
develop the majority of the software and hardware for our products at research
and development facilities in several 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.

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, IAI (in some countries), 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 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 2003, fiscal 2002 and fiscal 2001 totaled approximately $0.7,
$1.6 million and  $1.1 million,
respectively, and represented 5%, 5% and 2% of our revenue, respectively.  Royalty-bearing grants received in the past
from the Office of the Israeli Chief Scientist, or OCS, for research and
development were offset against our research and development costs.  In fiscal 2003, fiscal 2002 and fiscal 2001,
we did not receive any grants from the OCS. 
We expect that we will continue to commit resources to research and
development in the future.  As of
May 31, 2004, we employed approximately 32 employees in research and
development operations, both internally financed and pursuant to contracts with
our customers.

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Intellectual Property

In
order to protect our proprietary rights and technology used in our products, we
rely primarily upon a combination of patent, trademark and copyright law, trade
secret protection, confidentiality agreements and other contractual
arrangements with our employees, some of our affiliates, partners, customers
and others.

BVR-T
was granted 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. As part of the reorganization plan that
controlled our spin off from BVR-T, BVR-T granted us co-ownership rights to all
patents, pending patent applications, trademarks and other intellectual
property rights held by BVR-T with respect of its defense-related business. See
Item 7  Major Shareholders and Related Party Transactions  B. Related
Party Transactions  Relationship Between Us and BVR-T. As of the date of this
report, we own all the intellectual property rights, including the rights to
all patents, pending patent applications and
trademarks, held by BVR-T with respect to its defense-related business.

Our
trademark Atas, was registered in Israel, the European Community and
Turkey.  We applied for the registration
in Israel, the European Community and several foreign countries of our
trademark Ehud.

As
part of our cooperation agreement with IAI, we and IAI each granted the other a
license to use all patents and other intellectual property rights owned by the
other 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.

We
also rely on unpatented proprietary know-how, copyrights and trade secrets, and
employ various methods, including confidentiality 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 our trade secrets and know-how or obtain
access thereto.

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Employees

As
of May 31, 2004, we employed approximately 58 persons, including 3 part
time employees, of whom approximately 32, including 2 part time employees, were
employed in research and development operations, both internally financed and
such that are performed under contracts with our customers, approximately 4, in
marketing and sales, approximately 10 in production, and approximately 12,
including 1 part time employee, in administration and management.  Our employees who have access to proprietary
information 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.

Certain
provisions of the collective bargaining agreements between the Histadrut (the
General Federation of Labor in Israel) and the Coordination Bureau of Economic
Organizations (including the Industrialists Associations) are applicable to
our employees in Israel by order of the Israeli Ministry of Labor.  These provisions concern principally
cost-of-living increases, recreation pay and other conditions of
employment.  We generally provide our
employees with benefits and working conditions beyond the required
minimums.  In addition to salary and
other benefits, specific employees are paid bonuses based on their performance.

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.

C. Organizational
Structure

We
are controlled by Chun Holdings L.P., which, assuming the exercise of its
warrants to purchase 30,000,000 ordinary shares and assuming no other exercise
of our convertible securities, beneficially owns 65.49% of our currently
outstanding ordinary shares.

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

D. Property Plants
and Equipment

Our
executive offices and research and development facilities are located in Rosh
Haayin, Israel.  At this location, in
2003, we leased approximately 2,590 square meters of office space at a monthly
rent of approximately $30,275.  The rent
was decreased to approximately $20,577 in January 2004.  This lease will expire on September 14,
2009. See also Note 17B to our Consolidated Financial Statements.

We
lease approximately 875 square meters of manufacturing facilities in Ashdod,
Israel for a monthly rent of approximately $10,000.  This lease will expire on October 31, 2007.

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

ITEM 5.  Operating and Financial Review and Prospects

The
following discussion of our financial condition and results of operations
should be read in conjunction with 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.

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 Israeli
GAAP.  Israeli GAAP, as applicable to
our financial statements, differs in certain significant respects from U.S.
GAAP.  See Note 24 to our Consolidated
Financial Statements.

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The
financial statements of our subsidiaries, the functional currency of which is
the U.S. Dollar, but which are presented in a currency other than U.S. Dollars,
have been translated into U.S. Dollars. 
Monetary balance sheet items have been translated using the exchange
rates in effect on the balance sheet date and all non-monetary balance sheet
items have been translated using the historical exchange rates in effect on the
date of the transaction.  Statements of
income items have been translated using the average exchange rate for the
period presented.

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

In
most of our projects, we receive advance payment at the commencement of the
project and progress or milestone payments according to our performance or
achievement of specific milestones.  In
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, acts of God, 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.

In
general, to reduce risks of financial exposure resulting from an early
termination of a contract, we attempt to extend funds for projects in
accordance with the rate of performance. 
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 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 recorded mainly on the
cash basis.

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In
October 2002, as part of our cost reduction measures, we implemented
progressive marginal salary reductions ranging from 2% to 12 % for all
employees.  Israeli law generally
requires that severance pay, for eligible employees, shall be based upon such
employees most recent salary rate. 
Nevertheless we agreed with our eligible employees, that the severance
pay for such employees shall be based upon such employees salaries rate as at
the end of September 2002 with respect to the employment period ending in
October 2002, and upon the most recent salaries rate with respect to any
employment period thereafter.  We also
agreed with our employees that these salary reductions shall be reversed should
our order backlog reach $45 million, commencing on such date.

In
August 1999, we entered into a cooperation agreement with IAI.  As a result of the cooperation agreement,
IAI replaced us as the prime contractor for several projects in which we
acted as a prime contractor, and we became a subcontractor of IAI.  As a subcontractor, we do not record the
full contract price as revenue, but only the amounts we receive for the portion
of the contract we supply and royalties to which we are entitled.  The aggregate contract price transferred to
IAI is approximately $14.0 million, divided over an average period of
approximately three years.  This
transfer of contracts negatively impacted our operating results in fiscal 2000,
2001 and 2002.

Critical Accounting
Policies

The
preparation of our financial statements in conformity with the Israeli
generally accepted accounting principles, 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.

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.

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 date of the Independent
Auditors Report (included elsewhere in this annual report). The auditors
independent report for December 31, 2003 (included elsewhere in this annual) is
unqualified. Note 1E to the Consolidated Financial Statements includes more
detailed information.

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Revenue Recognition

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

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

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.

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. These differences result
in deferred tax assets and liabilities, which are included within
our consolidated balance sheet. 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. We have recorded a valuation
allowance of $15.5 million as of December 31, 2003, which is equal to the value
of the deferred tax asset consisting of our net operating loss carry-forwards.
This indicates our managements current assertion 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 carry-forwards, we may be required to adjust our
valuation allowance.

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A. Results of
Operations

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

|                                                           |  | For Years Ended
  December 31, |    
|---------------------------------------------------------- |  | ------------------------------ | ---
|                                                           |  |                                |    
|                                                           |  | 1999                           |    
|                                                           |  |                                |    
|Revenues                                                   |  |                                | 100
|Cost of revenues                                           |  |                                | 95 
|Gross profit (loss)                                        |  |                                | 5  
|Research and
       development                            |  |                                | 9  
|Selling, general and
       administrative
       expenses |  |                                | 16 
|Operating profit (loss)                                    |  |                                | (20
|Financing expenses, 
       net                            |  |                                | 1  
|Other expenses, net                                        |  |                                | 18 
|Loss before income
       taxes                            |  |                                | (39
|Income tax (expenses)
       benefits                      |  |                                | 3  
|Net Loss                                                   |  |                                | (36

Backlog of orders as of December 31, 2003, was
$19.7 million.

Subsequent Events

For a summary of the events subsequent to the
balance sheet date, see:

| |  | Item 4  Information on the Company  B. Business Overview 
  Strategic Relationships
| | - | ----------------------------------------------------------------------------------------
| |   |                                                                                         
| |  | Item 6  Directors, Senior Management and Employees  B.
  Compensation               

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| |  | Item 7  Major Shareholders and Related Party Transactions  B.
  Related Party Transactions
| | - | ----------------------------------------------------------------------------------------------

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

Revenues.

Revenues
in fiscal 2003 were $14.5 million, a decrease of 49% compared with revenues of
$28.3 million in fiscal 2002.  The
decrease was primarily attributed to a decline in new orders during fiscal
2003.  Revenues from sales of our
instrumentation line of products in fiscal 2003 accounted for 46% compared with
48% of our revenues in fiscal 2002.  Revenues
derived from our line of simulator products accounted for 54% of our revenues
in fiscal 2003 compared with 52% of our revenues in fiscal 2002.  The geographical breakdown of our revenues
in fiscal 2003 was as follows: approximately 72% of our revenues were in the
Far East, 14% in Europe, 6% in South America and 8% in Israel.  In fiscal 2002, approximately 68% of our
revenues were in the Far East, 28% in Europe, 2% in Africa and 2% in Israel.
The large decrease in the proportion of our revenues that were derived from
sales to Europe, is the result of the completion of several contracts which we
had with various states in Europe. Our agreements are multi-year contracts and
we generally recognize revenues on a percentage of completion method, recognizing
expenses when incurred.

Gross
Profit (Loss).

Gross
profit in fiscal 2003 was approximately $0.8 million, a decrease of $3.8
million, from a gross profit of $4.6 million in fiscal 2002.  As a percentage of revenues, gross profit decreased
from a gross profit of 16% in fiscal 2002, to a gross profit of 6% in fiscal
2003.  The decrease in gross profit was
primarily attributed to the decline in the number of contracts, and increased
costs incurred resulting from the delayed completion of specific contracts. We
also had to deduct $0.5 million from recorded revenues resulting from
originally charging a specific customer for the provision of additional
capacity to the performance of a delivered system, the payment for which is
currently uncertain. Additionally, $0.9 million was deducted from the payment of one customer as a result
of delays in the delivery of a specific product. Our gross profit is influenced
by various factors, such as the type and size of a project, and the portion of
projects performed by subcontractors. See also Note 2 to the Consolidated
Financial Statements.

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 2003 were $0.7 million,
a decrease of $0.9 million or 55% from $1.6 million in fiscal 2002. The
decrease in gross research and development expenses was primarily attributed to
our general policy of increased efficiency and expense reduction.

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Selling
Expenses.

Selling
expenditures consist primarily of costs relating to compensation costs,
subcontractors and consultants, travel expenses, demonstrations, exhibitions,
participation in trade shows, and customer support.  Net selling expenditures in fiscal 2003 were $1.8 million, a
decrease of $0.6 million, or 25%, from $2.4 million in fiscal 2002.  The decrease in selling expenses was
primarily attributed to a decrease in consulting expenses, a decrease in travel
expenses and a decrease in the portion of the salaries of our personnel
attributed to selling activities, all of which were part of our general policy
of increased efficiency and expense reduction.

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, provisions for doubtful debt, office, vehicle, rental
expenses, entertainment and travel expenditures and fees payable.  General and administrative expenses in fiscal
2003 were $4.0 million, a decrease of $561,000, or 12%, from $4.6 million in
fiscal 2002.  The decrease in general
and administrative expenses was primarily attributed to the reduction in
salaries due to downsizing administrative employees, cost reductions of welfare
and entertainment expenses and a reduction in costs relating to our subsidiary
BVR-S Pacific PTE due to the reduction of personnel there.  In addition, the decrease was also
attributed to a new method of allocation of indirect costs. As a percentage of
revenues, general and administrative expenses in fiscal 2003 were approximately
28% compared with 16% in fiscal 2002.

Operating
Profit (loss).

As
a result of the foregoing, we had an operating loss of $(5.6) million in fiscal
2003 compared to an operating loss of $(3.9) million in fiscal 2002.  As a percentage of revenues, operating loss
increased from an operating loss of (14)% in fiscal 2002, to an operating loss
of (39%) in fiscal 2003.

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 erosion of monetary balances.  Financial expenses, net in fiscal 2003 were approximately
$707,000, a decrease of approximately $148,000 from approximately $855,000 in
fiscal 2002. The decrease was primarily attributed to a decrease in bank
charges relating to guarantees due to guarantee reductions and gains from
derivative instruments, net of losses from erosion of monetary balances.

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Other
Income (Expenses), Net.

We
incurred net income from other sources of approximately $55,000 in fiscal 2003,
compared to approximately $140,000 net expenses in fiscal 2002.  Other income (expenses) consists primarily
of gain from available for-sale securities and a write-down of investment in
available for-sale securities. This increase was primarily attributed to a gain
from the sale of available for-sale securities.

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

Revenues.

Revenues
in fiscal 2002 were $28.3 million, a decrease of 36% compared with revenues of
$44.0 million in fiscal 2001.  The
decrease was primarily attributed to a decline in new orders during fiscal 2001
and 2002.  Revenues from sales of our
instrumentation line of products in fiscal 2002 accounted for 48% compared with
68% of our revenues in fiscal 2001. 
Revenues derived from our line of simulator products accounted for 52%
of our revenues in fiscal 2002 compared with 32% of our revenues in fiscal
2001.  The geographical breakdown of our
revenues in fiscal 2002 was as follows: approximately 68% of our revenues were
in the Far East, 28% in Europe, 2% in Africa and 2% in Israel.  In fiscal 2001, approximately 73% of our
revenues were in the Far East, 15% in Europe, 8% in Africa and 4% in Israel.
Our agreements are multi-year contracts and we recognize revenues on a
percentage of completion method, recognizing expenses when incurred.

Gross
Profit (Loss).

Gross
profit in fiscal 2002 was approximately $4.6 million, a decrease of $3.6
million, from a gross profit of $8.2 million in fiscal 2001.  As a percentage of revenues, gross profit
decreased from a gross profit of 18% in fiscal 2001, to a gross profit of 16%
in fiscal 2002.  The decrease in gross
profit was primarily attributed to the decline in the number of contracts and
to increased costs incurred as a result of delays in the completion of specific
contracts. Our gross profit is influenced by various factors, including the
type and size of a project, and the portion of projects performed by subcontractors.

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 2002 were $1.6
million, an increase of $0.5 million or 45% from $1.1 million in fiscal 2001.
The increase in gross research and development expenses was primarily
attributed to expenditure on the development of technological infrastructure,
essential to our products.

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Selling
Expenses.

Selling
expenditures consist primarily of costs relating to compensation costs, subcontractors
and consultants, travel expenses, demonstrations, exhibitions, participation in
trade shows, and customer support.  Net
selling expenditures in fiscal 2002 were $2.4 million, an increase of $448,000,
or 23%, from $1.9 million in fiscal 2001. 
The increase in selling expenses was primarily attributed to an increase
in consulting expenses, an increase in travel expenses and an increase in the
portion of the salaries of our personnel attributed to selling activities,
which were partially offset by a decrease in costs related to demonstrations.

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, provisions for doubtful debt, office, vehicle, rental
expenses, entertainment and travel expenditures and fees payable.  General and administrative expenses in
fiscal 2002 were $4.6 million, a decrease of $452,000, or 9%, from $5.0 million
in fiscal 2001.  The decrease in general
and administrative expenses was primarily attributed to cost reductions of
welfare and entertainment expenses and a decrease of approximately $137,000 in
legal expenses following the completion of a legal matter in 2001.  The decrease was also attributed to a
material reduction in costs relating to our subsidiary BVR-S Pacific PTE,
including the decrease in the number of such subsidiarys executive officers
and employees. As a percentage of revenues, general and administrative expenses
in fiscal 2002 were approximately 16% compared with 11% in fiscal 2001.

Operating
Profit (loss).

As
a consequence of the forgoing, we had an operating loss of $(3.9) million in
fiscal 2002 compared to an operating profit of $131,000 in fiscal 2001.  As a percentage of revenues, operating
profit decreased from an operating profit of 0% in fiscal 2001, to an operating
loss of (14%) in fiscal 2002.

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 derivative instruments and gains
or losses arising from erosion of monetary balances.  Financial expenses, net in fiscal 2002 were approximately
$855,000, an increase of approximately $113,000 from approximately $742,000 in
fiscal 2001. The increase was primarily attributed to a decrease in income from
interest earned on short-term deposits and a decrease in interest on
non-current receivables, which was partially offset by a decrease in interest
paid on loans and gains from erosion of monetary balances.

35

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Other
Expenses, Net.

We
incurred net expenses from other sources of approximately $140,000 in fiscal
2002, compared to approximately $319,000 in fiscal 2001.  Other expenses consist primarily of a
write-down of investment in marketable securities that are not designated for
sale in the short term. This decrease was primarily attributed to a lesser
write-down in fiscal 2002 than in fiscal 2001, resulting from the decreased
rate of decline in the capital markets in 2002.

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

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

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

|Year ended
  December 31 |  | Israeli Inflation
  % rate |   | NIS devaluation% rate |      | Israeli inflation
  adjusted for
  devaluation% | 
|------------------------ |  | -------------------------- | - | --------------------- | ---- | ----------------------------------------------- | 
|                         |  |                            |   |                       |      |                                                 | 
|                         |  |                            |   |                       |      |                                                 | 
|1999                     |  | 1.3                        |   |                       | (0.1 | )                                               | 
|2000                     |  | 0.0                        |   |                       | (2.7 | )                                               | 
|2001                     |  | 1.4                        |   |                       | 9.3  |                                                 | 
|2002                     |  | 6.5                        |   |                       | 7.3  |                                                 | 
|2003                     |  | (1.9                       | ) |                       | (7.6 | )                                               | 

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.

Because
exchange rates between the NIS and the dollar fluctuate continuously, with a
historically declining trend in the value of the NIS, exchange rate
fluctuations, particularly larger periodic devaluations, will have an impact on
our profitability and period-to-period comparisons of our results.

36

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

We
entered into currency future contracts and put and call options 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, 2003, the Company had an obligation to sell $500,000 for a
total amount of NIS 2,183,000. The fair value of this derivative financial
instrument amounted to a net liability of $3,000 as of December 31, 2003 and
was recorded as a liability in the balance sheet.

As
of December 31, 2003, the Company had a put option (which formed part of a
certain put option signed in February 2003), for selling $400,000 for NIS
1,920,000 over the course of twelve months. The expiration of this option was
staggered and finally expired in February 2004. The fair value of the
derivative financial instrument amounted to a net asset of US$172,000 and was
recorded as an asset in the balance sheet.

Political Conditions

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.  Since September 2000,
the violence between Israel and the Palestinians has intensified and a material
escalation in violence has occurred. 
Israel has experienced terrorist incidents within its borders, including
in the West Bank and Gaza Strip.  As a
result, negotiations between Israel and representatives of the Palestinian
Authority ceased.  We could be adversely
affected by hostilities involving Israel, the interruption or curtailment of
trade between Israel and its trading partners, or a continuous downturn in the
economic or financial condition of Israel. 
In addition, several countries continue to restrict business with Israel
and with companies having operations in Israel.  We could be negatively affected by further adverse developments
in the peace process, including the recent violence, or by restrictive laws or
practices directed towards Israel or Israeli exporters.

Like
all male adult citizens and permanent residents of Israel, our directors,
officers and employees who are under the age of 40, 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.  The majority 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.  See Item 4.  Information on the Company 
  B. Business Overview   
Conditions in Israel.

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Economic Conditions

Israels
economy has been subject to numerous destabilizing factors, including a period
of rampant inflation in the early to mid-1980s, low foreign exchange reserves,
fluctuations in world commodity prices, military conflicts and civil
unrest.  The Israeli Government has
intervened in various sectors of the economy by utilizing fiscal and monetary policies,
import duties, foreign currency restrictions and controls of wages, prices and
foreign currency exchange rates.  The
Israeli Government has periodically changed its policies in all these areas.

Effective Corporate
Tax Rate

Israeli
companies are generally subject to tax at the rate of 36% of taxable
income.  However, our old manufacturing
facilities in Jerusalem and our new 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.

Government Grants

The
Government of Israel, through the Office of the Chief Scientist, encourages
research and development projects which result in products for export.  We may receive from the Office of the Chief
Scientist up to 50% of the research and development expenditures for particular
projects.  In the past we received
grants from the Office of the Chief Scientist for the development of
technologies related to our simulators. 
Pursuant to the terms of these grants, we were obligated to pay
royalties of 3% to 6% of revenues derived from sales of products funded with
these grants.  We completed payment of
all royalties due with respect to the grants we received.

B.   Liquidity and
Capital Resources

Historically
we have met our financial requirements primarily through the private sale of
equity securities, accumulation of profits, customer payments and advances and
the utilization of bank credit lines. 
In addition, capital raised by BVR-T in 1998 and 1997 was attributed
proportionately to us in accordance with the reorganization plan.  As of December 31, 2003, we had cash
and cash equivalents of approximately $1.6 million and a working capital
deficit of approximately ($11.6) million.

On
December 3, 2003 we received a short-term loan in the amount of $430,000 from
Chun, which was repaid on March 3, 2004. The loan bore no interest.

38

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As
of December 31, 2003, we had borrowed $10.1 million from banks from then
available credit lines.

Following
the approval of our shareholders at a meeting held on March 1, 2004, we sold
ordinary shares to a group of investors (including several pre-existing
shareholders) at price per share of $0.18 in the aggregate amount of
approximately $12 million, of which 55,206,203 ordinary shares with an
aggregate value of approximately $9.9 million were issued in exchange for cash
and 11,666,667 ordinary shares with an aggregate value of $2.1 million were
issued in exchange for the conversion of an aggregate of $2,000,000 of loans
from certain of our banks and a debt in the aggregate amount of $100,000 owed
to two of our existing shareholders.

Our
shareholders also approved the provision of a four-year credit line from Chun,
in the amount of $3.2 million, which can be used for credit or loan-guarantees.

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.

There
are no restrictions as to our 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 aggregated $15.9 million on December 31, 2003, guarantees in
an aggregate of $15.5 million are to be released by our obtaining specific
performance milestones, which are scheduled to be completed through the end of
2006.

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 2003, 2002
and 2001, provided (or used) cash of approximately 0.5 million, ($3.1) million
and ($12.0) million, respectively. For fiscal 2003, cash provided from
changes in assets and liabilities of $6.5 million primarily consisted of a
decrease in trade receivables of $11.6 million due to collection of payments
and due to a reduction in contracts performed compared to 2002 and 2001. Such
changes in assets and liabilities also consisted of an increase in excess of
advances from customers over amount recognized as revenue of $2.3 million due to
the collection of payments, which were not at such time recognized as revenues
as a consequence of the revenue recognition method used (see Note 2 to the
Consolidated Financial Statements included in this annual report).
Additionally, there was a decrease in non-current receivables of $0.5 million,
net of a decrease in trade payables of $5.2 million, an increase in inventory
of $1.8 million and a decrease in other payables and accrued expenses of $1.2
million.

39

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For
fiscal 2002, cash provided from changes in assets and liabilities of
$1.4 million primarily consisted of a decrease in trade receivables of
$4.4 million and a decrease in non-current receivables of $0.5 million, net of
a decrease in excess of advances from customers over amount recognized as
revenues of $2.6 million, an increase in inventory of $0.4 million and an
increase in work in progress of $0.3 million.

For
fiscal 2001, cash provided from changes in assets and liabilities of
($12.1) million primarily consisted of a decrease in excess of advances
from customers over amount recognized as revenues of $7.6 million, an increase
in trade receivables of $4.5 million and a decrease in other payables and
accrued expenses of $1.1 million, net of an increase in trade payables of $1.4
million.

Investing
activities for fiscal 2003, fiscal 2002 and fiscal 2001 provided (or used) cash
of approximately $4.2 million, $(0.5) million and 3.0 million,
respectively. Cash flow provided by investing activities in fiscal 2003
consisted primarily of a decrease in restricted bank deposits of $4.3 million
net of purchase of fixed assets in the amount of $171,000. The decrease in
restricted bank deposits was due to a reduction in advance payment guarantees.

Cash
flow used in investing activities in fiscal 2002 consisted primarily of the
purchase of fixed assets in the amount of $535,000.

Cash
flow provided by investing activities in fiscal 2001 consisted primarily of a
decrease in restricted bank deposits of $3.3 million, partially offset by the
purchase of fixed assets in the amount of $324,000.

Financing
activities for fiscal 2003, fiscal 2002 and fiscal 2001 provided (or used) cash
of approximately $(3.9) million, $3.1 million and $(1.9) million,
respectively. Cash flow used in financing activities in fiscal 2003 consisted
primarily of a net repayment of short-term bank credit of $5.0 million net of
receipt of the short-term loan from Chun of $0.4 and receipt of long-term loans
from former shareholders of $0.6 million.

Cash
flow provided by financing activities in fiscal 2002 consisted of receipt of $3.1 million in
short-term bank credit.

Cash
flow used in financing activities in fiscal 2001 consisted primarily of a
repayment of a short-term bank loan of $1.3 million and a repayment of a loan
received from BVR-T of $642,000.

Although
our current liabilities exceed our current assets, we believe
that cash received from the
share issuances to the investors who participated in the investment round that
took place in the months of March 2004 through June 2004, the rescheduling of short term
bank loans, the loans received from former shareholders, the receipt of a
credit line from our controlling shareholder, as well as cash from our operations
will be sufficient to meet our present working capital and capital expenditure
needs.

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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

Periodic Variations in Operating Results

Due
to the nature of our customers and products, our sales are often made pursuant
to a relatively small number of customers and large orders.  Consequently, an individual project, from an
individual customer can represent a substantial portion of our revenues in any
one period.  In addition, a significant
project for any customer during one period may not be followed by further
projects for the same customer in subsequent periods.  Our sales and operating results may, therefore, vary
substantially from period to period. In 2003, we experienced a significant
increase in orders from South American countries. This would appear to be the
result of our having invested substantial amounts of our time and resources
from 2001, in developing a market that we believe to have significant
commercial potential.

Reduction in Order Backlog

Our
business is subject to the effect of general economic conditions globally, and,
in particular, conditions in the market for simulation systems for military and
civilian applications.  In recent
quarters, our sales efforts have been adversely affected as a result of
unfavorable economic conditions and reduced capital spending in South East Asia
where we have lately derived and anticipate continuing to derive a material
portion of our revenues.  For example, we were informed by one of our
customers, that due to the suspension of its budget, that customer decided
not to proceed with a planned project in which we had expected to participate.  As
of December 31, 2003 we had purchase orders and contractual
arrangements of approximately $19.7 million compared with a backlog of $26.1
million as of December 31, 2002.  A
further decline in our backlog level could result in more variability and less
predictability in our quarter-to-quarter net sales.

Delay in the Receipt of Required Export Approvals

We
purchase from manufacturers in the United States substantially all 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.  Since the events of
September 11, 2001, the United States has imposed a longer bureaucratic process
on the provision of approvals and has attached more stringent conditions;
consequently, we have experienced delays in the receipt of such required
approvals.

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E. Off-Balance Sheet
Arrangements

We
do not have any Off-Balance Sheet Arrangements.

F. Tabular Disclosure
of Contractual Obligations

Our
significant financial and contractual obligations as of December 31, 2003,
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                                                        |       
|                               |  |                                                                                    |       
|                               |  |                                                                                    |       
|Borrowed
  Lines of credit(2)  |  |                                                                                    | 10,116
|Guarantees                     |  |                                                                                    | 15,903
|Other
  commitments(3)         |  |                                                                                    | 2,364 
|                               |  |                                                                                    |       
|Total
  commercial commitments |  | $                                                                                  | 28,383
|                               |  |                                                                                    |       

(1) Excludes liability
for employee severance benefits, net in the amount of $460,000.(2) Following the approval of our shareholders at a
meeting held on March 1, 2004, we sold 66,872,670 ordinary shares to the
investors who participated in the investment round that took place
in the months of March 2004 through June 2004
at price per share of $0.18 in the aggregate amount of
approximately $12 million, of which 55,206,003 ordinary shares with an
aggregate value of approximately $9.9 million were issued in exchange for cash
and 11,666,667 ordinary shares with an aggregate value of $2.1 million were
issued in exchange for the conversion of an aggregate of $2,000,000 of loans
from certain of our banks and a debt in the aggregate amount of $100,000 owed
to two of our existing shareholders. In addition, the banks agreed to postpone
repayment of short-term credit, in the amount $0.5 million to 2005, $0.5 to
2006 and $0.5 million to  2007. The
Company also received a credit line from Chun, in the amount $3.2 million.
Subsequent to the balance sheet date, on March 2, 2004, the loans from related
parties in the amount of $100,000 were converted into our ordinary shares at a
price of $0.18 per share. 
(3) Includes lease commitments.

G. Safe Harbor

Not
applicable.

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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, 2004:

|Name             |  | Age |  | Position                                       
|---------------- |  | --- |  | -----------------------------------------------
|                 |  |     |  |                                                
|Aviv Tzidon      |  | 48  |  | Director and Chairman of the Board of Directors
|Yaron Sheinman   |  | 50  |  | Director                                       
|Avi Leumi        |  | 40  |  | Director                                       
|Uri Manor        |  | 61  |  | Director                                       
|Pritam Singh     |  | 40  |  | Director                                       
|Eric Chan        |  | 45  |  | Director                                       
|Rimon Ben-Shaoul |  | 59  |  | Director                                       
|Gadi Aviram      |  | 49  |  | Director                                       
|Orit Stav        |  | 33  |  | Director*                                      
|Amnon Harari     |  | 53  |  | Director*                                      
|Ilan Gillies     |  | 35  |  | CEO                                            
|Reuven Shahar    |  | 45  |  | VP Finance and CFO                             
|Dekel Tzidon     |  | 44  |  | VP Development and CTO                         
|Gilad Yavets     |  | 34  |  | VP Marketing                                   

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

Aviv
Tzidon
has been our Director and Chairman of the Board of Directors since November 24,
2003. Mr. Tzidon was the co-founder of BVR Technologies Ltd. and served
as 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 Technologies Ltd., and until April
2000, Mr. Tzidon served as Chairman of the Board of Directors and Chief
Executive Officer of BVR Technologies. 
For 3 years, Mr. Tzidon worked as an independent consultant for Israel
Aircraft Industries.  Mr. Tzidon has
served as a combat pilot with the Israeli Air Force (including reserve service)
for approximately 20 years.

Yaron
Sheinman
has been our Director since the consummation of our spin-off in October 1998.
He is a Founder and Chairman of the Board of Directors of BVR-T. From the
commencement of BVR-Ts operations in 1987 through 1996, Mr. Sheinman served as
the chairman and chief executive officer of BVR-T. Previously, he acted as an
independent consultant to Israel Aircraft Industries for two years for the
development of avionics systems. Mr. Sheinman served as a combat pilot with the
Israeli Air Force (including reserve service) for approximately 15 years.  Mr. Sheinman also served as chairman of the
board of Nexus Telocation Systems, VIZ, Coresma and Unisfair. Mr. Sheinman
serves on the board of BrightCom.

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Avi Leumi - Has been
our Director since March 1, 2004. Mr. Leumi has served as CEO,
Co-Founder and Chairman of the Board of Directors of Aeronautics Defense
Systems Ltd. since November 1997. From 1992 to 1997, Mr. Leumi served as CEO of
Leumi Chemicals Ltd. (family owned business). Mr. Leumi is a graduate of the
Israel Naval Academy.

Uri Manor - Has been
our Director since March 1, 2004. Mr. Manor has served as Managing
Director of Datus Ltd., a consulting company specializing in the marketing of
defence systems since, January
1, 1996 and Managing Director of Loven Hachatzav Ltd., a holding company
specializing in High Tech and Defence companies, since 2001. Mr. Manor is also
a member of the board of directors of Soltam Systems and Fibrotex International
and Aeronautics Defence Systems. Moreover, Mr. Manor represents Hindustan
Aeronautics Limited in Israel. 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 (1965) and M.Sc (1971) in Aeronautical Engineering, Technion
(Israel Institute of Technology).

Pritam Singh - Has
been our Director since March 1, 2004. Pritam Singh has served as
Vice President (Asia Pacific Operations) of Singapore Technologies Electronics
Limited since August 1, 2003.  Prior to
this Mr. Singh served in the following positions:  General Manager of ST Training & Simulation Pte Ltd (from
January 1, 2002 until July 31, 2003); Chief Operating Officer of ST Training
& Simulation Pte Ltd (from January 1, 2001 to December 31, 2001); Vice
President (Programs) of ST Training & Simulation Pte Ltd. (from January 1,
2000 until December 31, 2000); and Director (Programs) of ST Training &
Simulation Pte Ltd. (from January 1, 1999 until December 31, 1999).

Eric Chan been our
Director since March 1, 2004. On November 10, 2003, Mr. Chan was appointed
General Manager of ST training & Simulation (STTS). Between the years 1999 and 2003, Mr. Chan held various
management positions in CET Technologies (a subsidiary of ST Elect) including
Vice President, Defence Business and Deputy General Manager. In 1997, Mr. Chan
served as Division Manager of Land Systems Division of Singapore Engineering
Software (a subsidiary of ST Elect) where he was instrumental in winning the
large-scale island-wide Police C2 program from Singapores Ministry of Home
Affairs. Mr. Chan currently serves as the Chairman of the Board of iVLab (a subsidiary
of STTS), the Alternate Director of Prescient Systems & Technologies and
Director of a number of companies including Knowledge Alive and ST Education
& Training. Mr. Chan holds a B.Eng (2nd Honors) from the
National University of Singapore.

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Rimon Ben-Shaoul has
been our Director since March 1, 2004. Since February 2001, Mr. Ben-Shaoul has
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 holding 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
MBA, Tel-Aviv University (1973) and BA in Economics, Tel-Aviv University
(1970).

Gadi Aviram has been
our Director since March 1, 2004. Mr. Aviram is the founder and Chief Executive
Officer of Metro Motor Marketing Ltd. (importer and representative of Kawasaki
Heavy Industries). From 2000 to 2002, Mr. Aviram served as director of Safecom
Car Communication Ltd. and from 1999 to 2000, Mr. Aviram served as director of
Pointer (Eden Telecom Group) Ltd.

Orit Stav has been
one of our external directors since March 1, 2004. Ms. Stav is a partner in
Platinum Neurone Ventures (PNV), an Israeli Venture Capital Fund with $110
million under management and 20 portfolio companies. Her responsibilities
include leading new investments, advising portfolio companies on financial,
operational, and strategic issues. Prior to her position at PNV, Ms. Stav was a
partner in Neurone Ventures where she gained experience in analyzing start-up
companies, led financing rounds in more than 10 companies, negotiated term
sheets and final investment documents, dealt with all facets of founders and
management teams and served as a director in several of the portfolio
companies. Ms. Stav holds a BA in Economics and Management from Tel Aviv
University and an MBA from Hertfordshire University, UK.

Amnon Harari has been
one of our external directors since July 2002. 
Mr. Harari currently serves as the chief executive officer of Advanced
Heating Technologies Ltd.  From May 2000
to March2002, Mr. Harari served
as chief executive officer of Partner Future Communication Ltd. From April1999 to April2000, Mr. Harari served as general manager of Alcatel
Israel.  From April1997 to April1999, Mr. Harari served as corporate vice-president and
general manager of the Public Switching Division of Tadiran Telecommunication
Ltd.  From 1992 to 1996 Mr. Harari
served as the head of the Israeli Air Force Material Directorate.  From February1997 to February 2002, Mr. Harari served as an external
director of Elbit Systems Ltd.  Mr.
Harari is a Brigadier-General in the Israeli Air Force.  Mr. Harari holds a B.Sc. in Physics from the
Tel Aviv University.

Ilan Gillies has been
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 Israeli Air Force
since 1989.

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Reuven Shahar has been our Chief Financial Officer and
Vice President, Finance since his appointment on July 1, 2000.  From 1995 through June 2000, he was
treasurer, 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 commencing in 1984.  Mr. Shahar
holds a BA in business management from the Hebrew University, Jerusalem and an
MBA from Recanati Graduate School of Business Administration in Tel Aviv
University.

Dekel Tzidon has been
our Chief Technology Officer and Vice President, development 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 has 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.

Gilad Yavetshas been
our Vice President, marketing March 3, 2004. Mr Yavets joined BVR in 1997 and
since has served in different positions in the company, including: Contracts
Director, Director of Business Development and acting vice president marketing.
Mr. Yavets holds an LLB in Law from the Hebrew University and an Executive MBA
from the Recanti Graduate School of Business Administration in Tel-Aviv
University.

Resignation of
Directors and Officers

The
following directors resigned from our board of directors during 2003 and 2004:

| |  | Mr. Avner Raz resigned on March 30, 2003.     
| | - | ----------------------------------------------
| |   |                                               
| |  | Mr. Yuval Yanai resigned on December 24, 2003.
| |   |                                               
| |  | Mr. Shlomi Rozenfeld resigned on May 14, 2003.
| |   |                                               
| |  | Mr. Aaron Zuker resigned on December 24, 2003.
| |   |                                               
| |  | Mr. Dov Avron resigned on October 9, 2003.    
| |   |                                               
| |  | Mr. Itzhak Benny resigned on October 9, 2003. 
| |   |                                               
| |  | Mr. Itzchak Gat resigned on December 30, 2003.
| |   |                                               
| |  | Mrs. Shali Shalit resigned on March 1, 2004.  

The
following officers resigned from our company during 2003 and 2004:

46

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| |  | Mr. Yoel Katzir, our former Chief Executive Officer, resigned on
  March 26, 2004.                    
| | - | ------------------------------------------------------------------------------------------------------
| |   |                                                                                                       
| |  | Mr. Amir Makover, our former Vice President - Projects, resigned from
  on January 28, 2004.          
| |   |                                                                                                       
| |  | Mr. Hulio Arlok, our former Vice President - Research and
  Development, resigned on January 22, 2004.
| |   |                                                                                                       
| |  | Mr. Yitzchak Rabinovitz, our former Vice President - Marketing,
  resigned on March 26, 2003          
| |   |                                                                                                       
| |  | Mr. Iftach Gideoni, or former Chief Technology Officer, resigned on January
  31, 2003.               

Expiration of Term of Office

The
term of Ms. Brurira Lekner as our external director has expired, in accordance
with the provisions of the Israeli Companies Law, on April 5, 2003.

B. Compensation

The
aggregate remuneration we paid for the year ended December 31, 2003 to all
executive officers as a group (6 persons) was approximately $593,000 in
salaries, fees, commissions and bonuses. This amount includes approximately
$99,000 set aside or accrued to provide for pension, retirement or similar
benefits provided to our directors and executive officers (this sum includes
compensation paid to the five executive officers who resigned).

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 $8,700 for the year ended
December 31, 2003.

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 (Yaron
Sheinman, Avi Leumi, Uri Manor, Pritam Singh, Eric Chan, Gadi Aviram, Rimon
Ben-Shaoul, Orit Stav and Amnon Harari), with the exception of the chairman of
our board of directors. The options will vest upon the completion of one full
year of service on our board following the March 1, 2004 shareholders meeting
and will be exercisable at a price of $0.18 per share for a period of three
years.

47

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---

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 Zidon, the chairman of
our board of directors. 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, 2004, options to purchase 10,753,136 ordinary shares
granted to our directors and executive officers under our option plans were outstanding.
The weighted average exercise price of these options was $0.22 per share. Of
these options, options to purchase 103,136 ordinary shares are currently
exercisable or will become exercisable within 60 days of such date.

C. Board Practices

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

Our
articles of association provide that any director may, by written notice,
appoint another person to serve as a substitute director and may cancel such
appointment.  According to the Israeli
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. 
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
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;
| | - | ---------------------------

48

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

No
person can serve as an external director if the persons position or other
business creates, or may create, conflict of interests with the persons
responsibilities as an external director. 
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 Special General Meetings dated July 9, 2002 and March
1, 2004, Amnon Harari and Orit Stav were appointed respectively as external
directors of the Company each for a three-year term.

49

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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.

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.

50

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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 directors and officers liability insurance.

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.  Following the expiration of Ms. Bruria Lekners
term as our external director and the resignation of Itzhak Gat, Yaron
Sheinman, Amnon Harari and Orit Stav were appointed to 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 our business management,
in consultation with the internal auditor and our 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.

51

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Management Employment
Agreements

We
have entered into employment 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. 
Under the Companies Law, in a public company, as defined in the Companies
Law, the chief executive officer may not serve as the companys chairman of the
board.  However, the shareholders of the
company may approve the service of the chairman of the board also as the chief
executive officer, for a period of up to three years, provided, that at least
two-thirds of the votes of non-controlling shareholders present and voting at
the meeting vote affirmatively.

Employee Share Option
Plans

We
have five employee stock option plans. 
Options granted under our option plans generally vest over a period of
two or three years.  Options granted
under each plan expire four or five 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.  The 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, the board of directors adopted a new share option plan under
which 5,000,000 options for the purchase of 5,000,000 ordinary shares of the
company may be grated to our employees and consultants. Under this plan, as of
31 March 2004, 4,955,000 options were granted to employees and consultants of
the Company, at an exercise price of $0.18 each. These options will vest over 5
years with one-fifth vesting each year and each increment expiring 3 years
after vesting.

In
total, as of March 31, 2004, we have granted options to purchase 6,488,136
ordinary shares of the company. 
Moreover, as of March 31, 2004, an additional 187,400 ordinary
shares of the company were reserved for issuance pursuant to options issuable
under our share option plans.

52

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D. Employees

As
of March 31, 2004, we employed approximately 58 persons, including 3 part
time employees, of whom approximately 32 including 2 part time employees, were
employed in research and development operations, both internally financed and
such that are performed under contracts with our customers, approximately
4  in marketing and sales, approximately
10 in production, and approximately 12, including 1 time employee, in
administration and management.  Our
employees who have access to proprietary information 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 (General Federation of Labor in Israel) and the Coordination Bureau
of Economic Organizations (including the Industrialists Association) by order
of the Israeli Ministry of Labor and Welfare. 
None of our employees are represented by a labor union and we have not
experienced any work stoppages.

E. Share Ownership

As
of March 31, 2004, Yaron Sheinman beneficially owned 948,328 ordinary shares
and an option to purchase 72,000 ordinary shares, vesting in full on March 1,
2005 (subject to the completion of a full year of service on our Board of
Directors) and exercisable at a price of $0.18 per share for three years
following vesting.  Assuming the
exercise of such option and no other exercise of our convertible securities,
Mr. Sheinman would hold 1.31% of our then outstanding ordinary shares.

As
of March 31, 2004, Rimon Ben Shaoul beneficially owned 777,778 ordinary shares,
a four-year option to purchase 355,593 ordinary shares, vesting immediately and
exercisable at a price of $0.18 per share and an option to purchase 72,000
ordinary shares, vesting in full on March 1, 2005 (subject to the completion of
a full year of service on our Board of Directors) and exercisable at a price of
$0.18 per share for three years following vesting. Assuming the exercise of
such options and no other exercise of our convertible securities, Mr. Ben
Shaoul would hold 1.54% of our then outstanding ordinary shares.

Other
than Yaron Sheinman and Rimon Ben Shaoul, none of our directors and officers
beneficially owned more than 1% of our outstanding equity securities.

53

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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 June 7, 2004, 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 c/o
  Yigal Arnon & Co. 
  1 Azrieli Center Tel-Aviv 67021 Israel. |  | 70,475,941                                        |     |                                                  | 65.49
|                                                                                                     |  |                                                   |     |                                                  |      
|Mikal
  Ltd. 7 Yad Harutzim St.
  Herzeliya 46606 Israel.                                            |  | 5,666,856                                         | (3) |                                                  | 7. 14
|                                                                                                     |  |                                                   |     |                                                  |      
|Polar
  Investments House
  Platinum House
  21 Haarbah St.
  Tel Aviv 64731 Israel.                |  | 8,411,167                                         | (4) |                                                  | 10.54
|                                                                                                     |  |                                                   |     |                                                  |      
|Bank
  Hapoalim B.M.
  104 Hayarkon St.
  Tel Aviv 63432 Israel.                                     |  | 3,888,889                                         |     |                                                  | 5.01 
|                                                                                                     |  |                                                   |     |                                                  |      
|Bank Leumi Le-Israel B.M.
  24-32 Yehuda Halevi St.
  Tel Aviv 63432 Israel.                         |  | 6,111,111                                         |     |                                                  | 7.87 

|   
|---
|(1)
|   
|(2)
|   
|(3)
|   
|(4)

54

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As
of June 24, 2002, we had approximately 6 shareholders of record with a United
States address holding approximately 2,878,212 of our ordinary shares,
representing approximately 3.71% of our outstanding share capital as of such
date

B. Related Party
Transactions

Relationship Between
Us and BVR-T

Loan
Agreement

In
November 1998, we and BVR-T entered into a loan agreement, pursuant to which
BVR-T agreed to loan us up to $6.5 million. 
As of December 31, 2000, the loan, including all interest
accumulated thereon, amounted to approximately $600,000.  Interest on the loan was at the average
interest rate we paid to Bank Hapoalim B.M. on our line of credit.  The loan was repaid during the period ending
on the first quarter of 2001.

Management Services
Agreements with Elisra Electronic Systems Ltd.

On
July 27, 2000 we entered into a management services agreement with Elisra
Electronic Systems Ltd., our former controlling shareholder, pursuant to which
we paid Elisra a management services fee of $200,000.  The agreement expired on December 31, 2000.  On March 29, 2001, we entered into a second
management services agreement with Elisra pursuant to which Elisra provided us
with management services during fiscal 2001 for an annual fee of $200,000,
which has since expired.  On March 18,
2002, we entered into a third management services agreement with Elisra
pursuant to which Elisra will provide us with management services during the
year 2002 for an annual fee of $200,000. 
On April 6, 2003 we entered into a fourth management services agreement
with Elisra pursuant to which Elisra will provide us with management services
during the year 2003 for an annual fee of $200,000.  The fourth management agreement was approved by our audit
committee and by our board of directors. 
See Item 10.  Additional
Information  Transactions Requiring Special Approval.

Loan agreement with
Elisra

On
May 15, 2002, we obtained a $4.0 million credit line from Elisra,
under which we borrowed $3.5 million and which bore interest at a rate of three
months LIBOR plus 1%.  The proceeds of
this loan were used to finance our operations in the third quarter of
2002.  Following a payment by a customer
of approximately $12.5 million the loan was repaid and the credit line was
terminated.

One time acquisition
through our Subsidiary

During
2003, our subsidiary, BVR-S Pacific, purchased on behalf of Elisra, certain
hardware products from a Singaporean company. BVR-S Pacific, thereafter, sold
such products to Elisra. BVR-S Pacific received a 5% commission from Elisra
(approximately $25,000) on this sale.

55

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Transaction With a
Subsidiary of Elisra

We
purchase a specific component that is incorporated into our on-board training
systems from Tadiran Spectalink Ltd., a wholly owned subsidiary of Elisra.
Purchases from Tadiran Spectalink were approximately $45,000, $244,000 and $1.7
million for fiscal 2003, fiscal 2002 and fiscal 2001, respectively. We believe
that the terms of our transactions with Tadiran Spectalink were no less favorable
to us from those we could have obtained from an unaffiliated third party
supplier.

In
November 2002, Elta, a division of IAI, acquired from Koor Industries Ltd. 30%
of the outstanding shares of Elisra at such time.  Commencing on November 
2002 we treat IAI as a related party. 
See Item 4  Information on the Company  B. Business Overview 
Strategic Relationships. In 2003, we recorded approximately $1.4 million as
revenues and approximately $0.5 million expenses as cost of sales from
transactions with IAI.

Loan from major
shareholders

On
October 1, 2003 the major shareholders of the Company (at that date) loaned the
Company  an aggregate amount of
$601,000, in order to finance the Companys operations. This loan does not bear
interest and is comprised of: (i) a $381,000 loan from Elisra  (which was subsequently repaid in April
2004); (ii)a $120,000 loan from Clal Industries and Investments Ltd.; (iii) a
$62,000 loan from Polar Investment Ltd (which was subsequently converted into
shares  see below); and (iv) a $38,000 loan from Koonras Technologies Ltd
(which was subsequently converted into shares  see below).

Short-term Loan from
Chun

In
December 2003, the company received a loan from Chun in the amount of $430,000
linked to the US Dollar and bearing no interest. In March 1, 2004 the Company
repaid the aforementioned loan.

Agreement with
Consult Wise Pte Ltd.

On
January 1, 2004, we entered 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. Our audit committee and board of directors in their meetings on
March 3, 2004 approved this agreement. 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 the monthly fee was agreed to
be paid 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. Should the agreement be
terminated prior to the completion of the three-year term, no more shares will
be issued to Consult Wise, pursuant to the agreement.

56

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For further information see:

| | Sale of Shares and Issue of Warrants to Investors below.                        
|- | ----------------------------------------------------------------------------------
|  |                                                                                   
| | Note 23 to the Consolidated Financial Statements included in this
  annual report.

Sale of Shares to
Principal Shareholders

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 holding an aggregate of 65.49% of our
outstanding shares. Following the expiration of the tender offer, Elisra no
longer held any of our share capital.

On
March 3, 2004, Chun LP 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 audit committee, board of
directors and by a special majority of our shareholders who did not have a
personal interest in the transaction and who voted at our shareholders meeting
held on March 1, 2004.

Also
on March 3, Chun LP, agreed to provide our company with a credit line in the
amount of $3.2 million. In consideration for this credit line our audit
committee and our board of directors agreed, subject to shareholder approval,
to grant Chun LP a four-year warrant to purchase an additional 40,000,000 of
our ordinary shares for an exercise price of $0.18 per share. A special
majority of our shareholders who did not have a personal interest in the
transaction and who voted at our shareholders meeting held on March 1, 2004,
approved the grant of the warrant. Chun LP, however, waived its rights to
receipt of warrants to purchase 10,000,000 ordinary shares of our company and
agreed that such warrants be granted to other investors (see below).

57

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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, 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. This transaction was approved by our audit committee, our board
of directors and a special majority of our shareholders who did not have a
personal interest in the transaction and who voted at our shareholders meeting
held on March 1, 2004.

Sale of Shares and
Issue 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. (which were also existing
security holders of the Company prior to the March 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 same 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). 
Two of the investors, Polar Communications Ltd. (and its affiliates) and
Mikal Ltd., were granted four-year warrants to purchase an aggregate of
2,158,960 and 1,777,967 of our ordinary shares, respectively. This transaction
was approved by our audit committee, our board of directors and a special
majority of our shareholders who did not have a personal interest in the
transaction and who voted at our shareholders meeting held on March 1, 2004.

Convertible Loan
Agreements

On
March 3, 2004 three of our banks, namely Bank Leumi 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.

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.

58

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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 proceeding.

B. Significant
Changes

Except
as otherwise disclosed in this annual report, there has been no material change
in our financial position since December 31, 2003.

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
SmallCap Market from March 2001. From October 1998 until March 2001 our shares
were traded on the Nasdaq National Market.

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

| |                           |  | High |       | Low |  
| | ------------------------- |  | ---- | ----- | --- | -
| |                           |  |      |       |     |  
| |                           |  |      |       |     |  
| | 1999                      |  |      |       |     |  
| |                           |  |      |       |     |  
| | January 1 -
  December 31 |  | $    | 12.63 |     | $
| |                           |  |      |       |     |  
| | 2000                      |  |      |       |     |  
| |                           |  |      |       |     |  
| | January 1 
  December 31 |  | $    | 9.63  |     | $
| |                           |  |      |       |     |  
| | 2001                      |  |      |       |     |  
| |                           |  |      |       |     |  
| | First
  Quarter           |  | $    | 3.50  |     | $
| | Second
  Quarter          |  | $    | 2.31  |     | $
| | Third
  Quarter           |  | $    | 3.50  |     | $
| | Fourth
  Quarter          |  | $    | 3.02  |     | $
| |                           |  |      |       |     |  
| | 2002                      |  |      |       |     |  
| |                           |  |      |       |     |  
| | First
  Quarter           |  | $    | 3.00  |     | $
| | Second
  Quarter          |  | $    | 2.65  |     | $
| | Third
  Quarter           |  | $    | 2.42  |     | $
| | Fourth
  Quarter          |  | $    | 1.07  |     | $
| |                           |  |      |       |     |  
| | 2003                      |  |      |       |     |  
| |                           |  |      |       |     |  
| | First
  Quarter           |  | $    | 1.10  |     | $
| | Second
  Quarter          |  | $    | 0.95  |     | $
| | Third
  Quarter           |  | $    | 0.99  |     | $
| | Fourth
  Quarter          |  | $    | 0.85  |     | $
| | December                  |  | $    | 0.41  |     | $
| |                           |  |      |       |     |  
| | 2004                      |  |      |       |     |  
| |                           |  |      |       |     |  
| | January                   |  | $    | 0.85  |     | $
| | February                  |  | $    | 1.10  |     | $
| | March                     |  | $    | 1.02  |     | $
| | April                     |  | $    | 0.95  |     | $
| | May                       |  | $    | 0.73  |     | $

B. Plan of
Distribution

Not
applicable.

C. Markets

Our
ordinary shares traded on the Nasdaq SmallCap Market until February 13,
2003.  The Nasdaq delisted our ordinary
shares after we failed to comply with required listing standards of the Nasdaq
SmallCap Market.  Since February 14,
2003, our ordinary shares have been traded on the Over-the-Counter Bulletin
Board under the symbol BVRSF.

D. Selling
Shareholders

Not
applicable.

E. Dilution

Not
applicable.

F. Expenses of the
Issue

Not
applicable.

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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 Israeli
registrar of companies is 52-004362-1. 
Our objects and purposes include the development, design, manufacture
and marketing of advanced training systems for military objectives and a
wide variety of other business purposes as set forth in Section 2 of our Memorandum
of Association, which was filed with the Israeli registrar of companies.

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

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| |   |                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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.

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:

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| |   |                                                                                                                                                                                                                                                                                                                         
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | 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
Israeli 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 70 days have passed from the time that a proposal for the
approval of the merger has been filed with the Israeli Registrar of Companies.

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 50% 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 acquiror offered to purchase will be
transferred to it.  However, the  tendered shareholders may seek to alter the
consideration by court order.

C.   Material Contracts

In
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 a 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 expect to derive revenues
from this project until 2006.

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On
August 15, 2002 we entered into a contract with a foreign naval force with
respect to the delivery of enhancements to ship-borne, embedded Naval Combat
Maneuvering Instrumentation.  The
contract price is approximately $4.8 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 first quarter of 2005.

On
October 31, 2002 we entered into a contract with the armed forces of an Asian
country with respect to the delivery of a simulator.  The contract price was for a minimum of $1.6 million, which, as
in substantially all of our contracts, was payable in accordance and subject to
timely achievement of specific milestones during the lifetime of the
project.  As of April 30, 2003, we
received $295,000 under this contract. The party with which we entered the
contract is experiencing financial difficulties and we do not anticipate to
receive any further revenues thereunder.

In
April 2003 we entered into a contract with the air force of a South-American
country for the development and supply of an F-16 training facility.  The contract price is approximately $5.0
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 first quarter of 2005.

In
October 2003 we entered into a contract with the armed forces of a
South-American country for the development and supply of a tank training
center.  The contract price is
approximately $2.7 million, which, as in substantially all of our contracts, is
payable in accordance with and subject to timely achievement of specific
milestones during the lifetime of the project. 
We expect to complete this project during the first quarter of 2005.

In
November 2003 we entered into a contract together with a European company, with
the navy of a European country for the development and supply of a Naval
Tactical Trainer.  The contract price is approximately $1.5
million (a significant portion of which will be payable to the Company), which,
as in substantially all of our contracts, is payable in accordance with and
subject to timely achievement of specific milestones during the lifetime of the
project.  We expect to complete this
project during the third quarter of 2004.

In
December 2003 we entered into a leasing contract with the Israeli Air Force for
the use and maintenance of an ACMI system. 
The contract price is approximately $0.7 million, and is payable on
monthly basis. We expect to complete this contract during the first quarter of
2006.

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For
a summary of our other material contracts, see:

| |  | Item 4  Information on the Company  B. Business Overview 
  Strategic Relationships       | 
| | - | ---------------------------------------------------------------------------------------------- | 
| |   |                                                                                                | 
| |  | Item 6  Directors, Senior Management and Employees  B.
  Compensation                      | 
| |   |                                                                                                | 
| |  | Item 7  Major Shareholders and Related Party Transactions  B.
  Related Party Transactions | 

D. Exchange Controls

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

Non-residents
of Israel may freely hold and trade our securities pursuant to the general
permit issued under the Israeli Currency Control Law, 1978.  Neither our memorandum of association nor
the laws of the State of Israel restrict in any way the ownership of our
ordinary shares by non-residents, except that 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.

On
January 1, 2003 Israels tax laws underwent a significant tax reform (Amendment
132 to Israels Income Tax Ordinance (New Version)  1961, the New Law). The
underlying principle of the New Law is to broaden the categories of taxable
income, and reduce the tax rates imposed on employment income.

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The
New Law includes provisions which impose a tax on capital gains at a rate of up
to 15% for Israeli residents, with respect to real capital gains derived from
sales of shares of publicly traded companies (which were previously exempt from
capital gains tax in certain cases) subject to certain conditions.  Under the New Law, foreign residents will
generally continue to be exempt from capital gains tax on sale of traded
securities of Israeli companies.

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

Israeli companies are subject to Company
Tax at the rate of 36% of taxable income. 
According to a proposed amendment to Israeli tax law, the company
tax rate may be reduced in the near future to 35%, and may be additionally
reduced in subsequent tax years. 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

The Law for the Encouragement of Capital
Investments, 1959 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.

Taxable income of a company derived from an
approved enterprise is subject to company tax at the maximum rate of 25%
(rather than the ordinary corporate tax rate) for the benefit period.  This period is ordinarily seven 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.

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A company owning an approved enterprise may
elect to receive an alternative package of benefits.  Under the alternative package, a companys undistributed income
derived from an approved enterprise will be exempt from company tax for a
period of between two and ten years 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.

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 our 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 their effective tax rate 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.

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The Investment Law also provides that an
approved enterprise is entitled to accelerated depreciation on its property and
equipment that are included in an approved investment program.

We have derived, and expect to continue to
derive, a substantial portion of our income from our approved enterprise
facilities.  Subject to compliance with
applicable requirements, income derived from our approved enterprise facility
will be tax exempt for a period of two years after we have taxable income and
will be subject to a reduced company tax of up to 25% depending on the extent
of foreign shareholders holding our ordinary shares for the following five
years.

It
has been recently announced that significant changes in the Investment Law,
including the tax benefits therein, can be expected in the near future.
Nonetheless, the Investment Law provides that terms and benefits included in
any certificate of approval already granted will remain subject to the
provisions of the law as they were on the date of such approval. Therefore, any
future changes in the Investment Law are likely to apply only to applications
approved after such changes are legislated.

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 100-150% 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.

71

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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.  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.  The technology developed pursuant to the
terms of these grants may not be transferred outside of Israel and may
be transferred in Israel only 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.  See Item 5Operating and Financial Review and ProspectsGovernment
Grants.

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
is 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.

72

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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 corporate 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; and

(c)     accelerated
depreciation rates on equipment and buildings.

Eligibility for the benefits under the
Industry Encouragement Law is not subject to receipt of prior approval from any
governmental authority.  No assurance
can be given that 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, generally referred to as the Inflationary Adjustments Law, represents
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.  Its features which are material to us can be described as
follows:

(a)     There is 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 is allowed (up to a
ceiling of 70% of taxable income in any single tax year, with the unused
portion permitted to be carried forward on a linked basis).  If the depreciated cost of fixed assets
exceeds a companys equity, then such excess multiplied by the applicable
annual rate of inflation is added to taxable income.

73

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

(c)     Gains
on certain traded securities, which are normally subject to reduced tax rates,
are taxable in certain circumstances. Dealers in securities are subject to the
regular tax rules applicable to business income in Israel.

Capital Gains Tax on
Sales of Our Ordinary Shares

Under
current Israeli law, capital gains received by individual shareholders (which
are not subject to the provisions of the Inflationary Adjustments Law) upon the
sale of our ordinary shares are subject to a 15% tax rate on any capital gain
accrued from January 1, 2003. Notwithstanding the foregoing, dealers in
securities in Israel are taxed at regular tax rates applicable to business
income. Under the New Law, foreign residents will continue to be exempt from
capital gains tax on sale of traded securities of Israeli companies, subject to
certain conditions.

Pursuant to the convention 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.

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 like dividends, royalties and interest, as
well as non-passive income from services rendered in Israel. On distributions
of dividends other than bonus shares (stock dividends) we should generally
withhold at source income tax at a rate of 25%, unless a different rate applies
under a treaty between Israel and the shareholders country of residence. Under
the U.S.-Israel tax treaty, the maximum tax on dividends paid to a holder of
our ordinary shares who is a resident of the United States will be 25% or 12.5%
if the holder is a company which holds, 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 date of payment of the dividend. However,
under the Law for the Encouragement of Capital Investments, 1959 (the
Investments Law), dividends generated by an approved enterprise are taxed at
the rate of 15%.

74

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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 converted freely 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.

75

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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.  As of December 31, 2003, $10.1 million
of our debt bore interest at variable rates. The weighted average interest
rates on short-term bank credit (linked to the U.S. dollar) as at
December 31, 2003 and 2002 are 3.6% and 3.7%, respectively. As of December
31, 2003, the Company utilized all of its available credit lines which were due
for payment through June 2004.  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 short-term loans
totaling $1.5 million until the years 2005, 2006 and 2007. As of December 31,
2003 the interest expenses we attributed to the utilization of our credit lines
amounted to $456,000. 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
$46,000.

Equity Price Risk

As
of December 31, 2003 we did not have any marketable securities that were
recorded at a fair value, hence there was no exposure to equity price risk.

Foreign Currency
Exchange Risk

As
of December 31, 2003 we had cash and cash equivalents in New Israeli Shekels
(NIS) or in funds linked thereto in the amount of $378,000  (out of $1.6 million 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 $34,000.    As of December 31, 2003 we had accounts
receivable in New Israeli Shekels (NIS) or in funds linked thereto in the
amount of $592,000. 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 $54,000.As
of December 31, 2003 we had accounts payable in New Israeli Shekels (NIS) or in
funds linked thereto in the amount of $969,000. 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
$108,000.

76

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The
devaluation of the Singapore Dollar (SGD) against the Dollar in 2003 had no
material effect on the results of operations of the Company.  As of December 31, 2003 we had accounts
receivable in SGD or in funds linked thereto in the aggregate amount of
$251,000. 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 $23,000. As of December 31,
2003 we had other receivables in SGD or in funds linked thereto in the
aggregate amount of $126,000. 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 other receivables in SGD would decrease by $11,000.

The
devaluation of the Euro against the Dollar in 2003 had no material effect on
the results of operations of the Company. 
As of December 31, 2003 we had other payables in Euro or in funds linked
thereto in the aggregate amount of $349,000. 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 $39,000.

As
of December 31, 2003, the Company had an outstanding put option (which formed
part of a certain put option over the course of twelve months signed in
February 2003), for selling $400,000 for NIS 1,920,000. The expiration of this
option was staggered and finally expired in February 2004. The fair value of
the derivative financial instrument amounted to a net asset of $172,000 and is
recorded as an asset in the balance sheet.

ITEM 12. Description
of Securities Other Than Equity Securities

Not applicable.

77

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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

We
have established and maintain disclosure controls and procedures that are
designed to ensure that material information relating to us that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms, and that such information is
accumulated and communicated to the companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.

Within
the 90 days prior to the filing date of this annual report, we carried out an
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of disclosure controls and
procedures. Based on that evaluation of these disclosure controls and
procedures, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of the date of
such evaluation.

The
Chief Executive Officer and Chief Financial Officer have also concluded that
there were no significant changes in the our internal controls or in other
factors that could significantly affect the internal controls subsequent to the
date that the evaluation was completed, including any corrective actions with regard
to significant deficiencies and material weaknesses.

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

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

78

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|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 accountant.

Copies of our code of ethics will be
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, 2003 and 2002, and fees
billed for other services rendered by Somekh Chaikin, a member of KPMG
International (independent auditors).

|                      |  | 2003 |    | 2002 |  
|--------------------- |  | ---- | -- | ---- | -
|                      |  |      |    |      |  
|Audit Fees(1)         |  | $    | 53 |      | $
|Audit-Related Fees(2) |  |      | -  |      |  
|Tax Fees(3)           |  | $    | 10 |      | $
|All Other Fees(4)     |  |      | -  |      | $

|(1) | Audit fees consist of fees
  for professional services rendered for the audit of the Companys Consolidated
  Financial Statements and review of financial statements and services normally
  provided by the independent auditor in connection with statutory and
  regulatory filings or engagements.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                                                                                                                                        
|(2) | Audit-related fees are
  fees principally for services not provided in Audit Fees.                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                        
|(3) | Tax services fees consist
  of compliance fees for the preparation of original and amended tax returns,
  claims for refunds and tax payment-planning services for tax compliance, tax
  planning and tax advice.                                                                                      
|    |                                                                                                                                                                                                                                                                                                        
|(4) | Other fees include
  consulting fees.                                                                                                                                                                                                                                                                  

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 KPMG that
are not specially included within the scope of the audit must be pre-approved
by our audit committee prior to any engagement.

79

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|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.

PART III

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

We
have responded to Item 18 in lieu of this item.

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

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

80

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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                                                                                                                                      
|            |  |                                                                                                                                                                      
|2.1**       |  | Management Services Agreement, dated March 18, 2002, between the
  Registrant and Elisra Electronic System Ltd. (an English summary accompanied
  by Hebrew original)
|            |  |                                                                                                                                                                      
|2.2***      |  | Management Services Agreement, dated April 6, 2003, between the
  Registrant and Elisra Electronic System Ltd. (an English summary accompanied
  by Hebrew original) 
|            |  |                                                                                                                                                                      
|2.3        |  | Lease agreement, dated September 14, 1999, as amended, between BVR
  Technologies Ltd. and Minrav Holdings Ltd. (an English summary accompanied by
  Hebrew original)
|            |  |                                                                                                                                                                      
|2.4        |  | Lease agreement, dated August 29, 1999, between the Registrant and
  Electra Real Estate Ltd.(an English summary accompanied by Hebrew original)                     
|            |  |                                                                                                                                                                      
|3          |  | Subsidiaries of the Registrant                                                                                                                                       
|            |  |                                                                                                                                                                      
|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.              
|            |  |                                                                                                                                                                      
|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 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.

81

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



82

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SIGNATURE

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

| | B.V.R. SYSTEMS (1998) LTD.
| | --------------------------
| |                           
| |                           
| | By:                       
| |                           
| |                           
| |                           
| |                           
| |                           
| | By:                       
| |                           
| |                           
| |                           

Date:  June 28, 2004

83

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

Financial Statements
As of December 31, 2003

---

---

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

|Consolidated Financial Statements as of
  December 31, 2003
|-----------------------------------------------------------
|                                                           

Contents

|                                                                                                  | Page      
|------------------------------------------------------------------------------------------------- | ----------
|                                                                                                  |           
|Report of the Independent Auditors                                                                | F-2       
|                                                                                                  |           
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                      | F-3       
|                                                                                                  |           
|Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001        | F-4       
|                                                                                                  |           
|Statement of Changes in Shareholders Equity for the years ended December 31, 2003, 2002 and 2001 | F-5       
|                                                                                                  |           
|Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001        | F-6  F-7 
|                                                                                                  |           
|Notes to Consolidated Financial Statements                                                        | F-8  F-53

---

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LOGO

| | Somekh Chaikin                             |                                                                               |                                            
| | ------------------------------------------ | ----------------------------------------------------------------------------- | -------------------------------------------
| |                                            |                                                                               |                                            
| | Mail addressPO Box 609Tel Aviv 61006Israel | Office addressKPMG Millennium Tower17 Haarbaa Street
  Tel Aviv 61070Israel | Telephone  972 3 684 8000Fax 972 3 684 8444

# Independent
Auditors Report to the 
Shareholders of B.V.R. Systems (1998) Ltd.

We have audited the accompanying
consolidated balance sheets of B.V.R. Systems (1998) Ltd. (the Company) and its subsidiary
as of December 31, 2003 and 2002, 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, 2003. These consolidated financial statements are the
responsibility of the Companys Board of Directors and of its Management. Our
responsibility is to express an opinion on these consolidated financial statements based
on our audits.

We conducted our 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 Board of Directors and by its Management,
as well as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the
consolidated financial position of the Company and its subsidiary as of December 31, 2003
and 2002, and the consolidated results of their operations, changes in the
shareholders equity and their cash flows for each of the years in the three-year
period ended December 31, 2003, in conformity with accounting principles generally
accepted 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 24 to the consolidated financial
statements.

Somekh Chaikin 
Certified Public Accountants (Isr.)
A member of KPMG International
March 3, 2004, Except for Notes 1 and 11, as to which the date is June 8, 2004

| | Somekh Chaikin, a partnership registered under the Israeli
  Partnership Ordinance, is a member of KPMG International, a Swiss
  cooperative. | 
| | --------------------------------------------------------------------------------------------------------------------------------------------- | 

---

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

|                                               |  |      |  | 2003          |  | 2002          | 
|---------------------------------------------- |  | ---- |  | ------------- |  | ------------- | 
|                                               |  |      |  |               |  |               | 
|                                               |  | Note |  | US$ thousands |  | US$ thousands | 
|                                               |  |      |  |               |  |               | 
|Assets                                         |  |      |  |               |  |               | 
|                                               |  |      |  |               |  |               | 
|Current assets                                 |  |      |  |               |  |               | 
|Cash and
  cash equivalents                    |  | 3    |  | 1,627         |  | 860           | 
|Restricted
  bank deposits                     |  | 4    |  | -             |  | 4,266         | 
|Trade
  receivables                            |  | 5    |  | 4,094         |  | 15,700        | 
|Work in
  progress                             |  | 6    |  | 102           |  | 328           | 
|Other
  receivables and prepaid expenses       |  | 7    |  | 763           |  | 827           | 
|Inventories                                    |  | 8    |  | 2,339         |  | 1,817         | 
|                                               |  |      |  |               |  |               | 
|                                               |  |      |  |               |  |               | 
|Total current assets                           |  |      |  | 8,925         |  | 23,798        | 
|                                               |  |      |  |               |  |               | 
|                                               |  |      |  |               |  |               | 
|Investments, loans and long-term
  receivables |  | 9    |  | 1,318         |  | 584           | 
|                                               |  |      |  |               |  |               | 
|                                               |  |      |  |               |  |               | 
|Fixed assets                                   |  | 10   |  |               |  |               | 
|Cost                                           |  |      |  | 9,538         |  | 9,380         | 
|Less -
  accumulated depreciation              |  |      |  | 8,378         |  | 7,724         | 
|                                               |  |      |  |               |  |               | 
|                                               |  |      |  |               |  |               | 
|Fixed
  assets, net                            |  |      |  | 1,160         |  | 1,656         | 
|                                               |  |      |  |               |  |               | 
|                                               |  |      |  |               |  |               | 
|Total assets                                   |  |      |  | 11,403        |  | 26,038        | 
|                                               |  |      |  |               |  |               | 

|                                     |  |                                         |  |              
|------------------------------------ |  | --------------------------------------- |  | -------------
|Aviv Tzidon                          |  | Ilan Gillies                            |  | Reuven Shahar
|Chairman of the Board of
  Directors |  | President and Chief
  Executive Officer |  | CFO          

Approval date of the financial
statements:  March 3, 2004

---

---

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

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

|                                                                          |  |      |  | 2003          |   | 2002          |  
|------------------------------------------------------------------------- |  | ---- |  | ------------- | - | ------------- | -
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  | Note |  | US$ thousands |   | US$ thousands |  
|                                                                          |  |      |  |               |   |               |  
|Liabilities and shareholders equity                                      |  |      |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|Current liabilities                                                       |  |      |  |               |   |               |  
|Short-term
  bank credit                                                  |  | 11   |  | 10,116        |   | 15,083        |  
|Trade
  payables                                                          |  | 12   |  | 3,268         |   | 8,461         |  
|Excess of
  advances from customers over amounts
   recognized as revenue |  | 13   |  | 3,586         |   | 1,290         |  
|Other
  payables and accrued expenses                                     |  | 14   |  | 3,118         |   | 4,325         |  
|Short-term
  loan from related party                                      |  | 15   |  | 430           |   | -             |  
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|Total current liabilities                                                 |  |      |  | 20,518        |   | 29,159        |  
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|Long-term liabilities                                                     |  |      |  |               |   |               |  
|Long-term
  loans                                                         |  | 16   |  | 601           |   | -             |  
|Liability
  for employee severance benefits, net                          |  | 17   |  | 460           |   | 509           |  
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|Total long-term liabilities                                               |  |      |  | 1,061         |   | 509           |  
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|Commitments and contingencies                                             |  | 19   |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|Shareholders equity (deficit)                                            |  | 18   |  |               |   |               |  
|Share
  capital                                                           |  |      |  | 2,529         |   | 2,529         |  
|Additional
  paid-in capital                                              |  |      |  | 21,408        |   | 21,408        |  
|Accumulated
  deficit                                                     |  |      |  | (34,113       | ) | (27,567       | )
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  |      |  | (10,176       | ) | (3,630        | )
|                                                                          |  |      |  |               |   |               |  
|                                                                          |  |      |  |               |   |               |  
|Total
  liabilities and shareholders equity                              |  |      |  | 11,403        |   | 26,038        |  
|                                                                          |  |      |  |               |   |               |  

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

F-3

---

---

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

|Consolidated Statements of Operations for
  the years ended December 31
|-----------------------------------------------------------------------
|                                                                       

|                                                                                                                                                                               |  |      |  | 2003          |   | 2002   |   | 2001   |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---- |  | ------------- | - | ------ | - | ------ | -
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|                                                                                                                                                                               |  | Note |  | US$ thousands |  
|                                                                                                                                                                               |  |      |  |               |  
|Income from
  sales                                                                                                                                                            |  |      |  | 13,218        |   | 26,295 |   | 42,550 |  
|Income from
  royalties and commissions                                                                                                                                        |  | 22B  |  | 1,249         |   | 1,995  |   | 1,451  |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Total income                                                                                                                                                                   |  | 22A  |  | 14,467        |   | 28,290 |   | 44,001 |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Cost of
  sales                                                                                                                                                                |  | 22C  |  | 13,625        |   | 23,715 |   | 35,845 |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Gross profit                                                                                                                                                                   |  |      |  | 842           |   | 4,575  |   | 8,156  |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Operating
  expenses:                                                                                                                                                          |  |      |  |               |   |        |   |        |  
|Research and
  development                                                                                                                                                     |  |      |  | 693           |   | 1,554  |   | 1,081  |  
|Selling and
  marketing                                                                                                                                                        |  |      |  | 1,778         |   | 2,363  |   | 1,915  |  
|General and
  administrative                                                                                                                                                   |  |      |  | 4,016         |   | 4,577  |   | 5,029  |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Operating
  (loss) profit                                                                                                                                                      |  |      |  | (5,645        | ) | (3,919 | ) | 131    |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Financing
  expenses, net                                                                                                                                                      |  | 22D  |  | (707          | ) | (855   | ) | (742   | )
|Other income
  (expenses), net                                                                                                                                                 |  | 22E  |  | 55            |   | (140   | ) | (319   | )
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Loss before
  income taxes                                                                                                                                                     |  |      |  | (6,297        | ) | (4,914 | ) | (930   | )
|Income tax
  expense                                                                                                                                                           |  | 20   |  | (249          | ) | (878   | ) | -      |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Net loss for
  the year                                                                                                                                                        |  |      |  | (6,546        | ) | (5,792 | ) | (930   | )
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Loss per
  share:                                                                                                                                                              |  |      |  |               |   |        |   |        |  
|Basic and
  diluted loss per share (in US $)                                                                                                                                   |  |      |  | (0.61         | ) | (0.54  | ) | (0.09  | )
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  
|Weighted-average
  number of ordinary
   shares  of nominal NIS 1.00 par
   value outstanding (in thousands) used
   in calculation of the basic and diluted loss
   per share |  |      |  | 10,661        |   | 10,660 |   | 10,705 |  
|                                                                                                                                                                               |  |      |  |               |   |        |   |        |  

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

F-4

---

---

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

|Statement of Changes in Shareholders
  Equity
|----------------------------------------------
|                                              

|                                   |  | Number of
  ordinary shares
  (NIS 1
  par value) |  | Share
  capital |  | Additional
  paid-in capital |  | Retained
  earnings
  (accumulated
  deficit) |   | Total
  shareholders
  equity
  (deficit) |  
|---------------------------------- |  | ------------------------------------------------- |  | --------------- |  | ---------------------------- |  | --------------------------------------------- | - | ------------------------------------------ | -
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|                                   |  |                                                   |  | US$ thousands   |  | US$ thousands                |  | US$ thousands                                 |   | US$ thousands                              |  
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Balance as at
   January 1, 2001   |  | 10,659,701                                        |  | 2,529           |  | 21,408                       |  | (20,845                                       | ) | 3,092                                      |  
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Changes during 2001                |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Net loss for
  the year            |  | -                                                 |  | -               |  | -                            |  | (930                                          | ) | (930                                       | )
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Balance as at
   December 31, 2001 |  | 10,659,701                                        |  | 2,529           |  | 21,408                       |  | (21,775                                       | ) | 2,162                                      |  
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Changes during 2002                |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Issuance of
  ordinary shares      |  | 1,173                                             |  | (1) -           |  | -                            |  | -                                             |   | -                                          |  
|Net loss for
  the year            |  | -                                                 |  | -               |  | -                            |  | (5,792                                        | ) | (5,792                                     | )
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Balance as at
   December 31, 2002 |  | 10,660,874                                        |  | 2,529           |  | 21,408                       |  | (27,567                                       | ) | (3,630                                     | )
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Changes during 2003                |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Net loss for
  the year            |  | -                                                 |  | -               |  | -                            |  | (6,546                                        | ) | (6,546                                     | )
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  
|Balance as at
   December 31, 2003 |  | 10,660,874                                        |  | 2,529           |  | 21,408                       |  | (34,113                                       | ) | (10,176                                    | )
|                                   |  |                                                   |  |                 |  |                              |  |                                               |   |                                            |  

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

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

F-5

---

---

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

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

|                                                                                                   |  | Year ended
  December 31 |  
|-------------------------------------------------------------------------------------------------- |  | ------------------------ | -
|                                                                                                   |  |                          |  
|                                                                                                   |  | 2003                     |  
|                                                                                                   |  |                          |  
|                                                                                                   |  | US$ thousands            |  
|                                                                                                   |  |                          |  
|Cash flows from operating activities                                                               |  |                          |  
|Net loss for
  the year                                                                            |  | (6,546                   | )
|                                                                                                   |  |                          |  
|Adjustments
  to reconcile net loss to net cash provided by
    (used in) operating activities (A) |  | 7,042                    |  
|                                                                                                   |  |                          |  
|                                                                                                   |  |                          |  
|Net cash
  provided by (used in) operating activities                                              |  | 496                      |  
|                                                                                                   |  |                          |  
|                                                                                                   |  |                          |  
|Cash flows from investing activities                                                               |  |                          |  
|Purchases of
  fixed assets                                                                        |  | (171                     | )
|Proceeds
  from sale of fixed assets                                                               |  | 8                        |  
|Increase in
  long-term deposits                                                                   |  | (2                       | )
|Proceeds
  from sale of available for sale securities                                              |  | 78                       |  
|Withdrawal
  of long-term deposits                                                                 |  | 10                       |  
|Decrease
  (increase) in restricted bank deposits                                                  |  | 4,266                    |  
|Changes in
  loans to employees                                                                    |  | 18                       |  
|                                                                                                   |  |                          |  
|                                                                                                   |  |                          |  
|Net cash
  provided by (used in) investing activities                                              |  | 4,207                    |  
|                                                                                                   |  |                          |  
|                                                                                                   |  |                          |  
|Cash flows from financing activities                                                               |  |                          |  
|Short-term
  loan from B.V.R. Technologies Ltd., net                                               |  | -                        |  
|Short-term
  bank credit, net                                                                      |  | (4,967                   | )
|Receipt of
  short-term loan from related party                                                    |  | 430                      |  
|Receipt of
  long-term loans from related parties                                                  |  | 601                      |  
|                                                                                                   |  |                          |  
|                                                                                                   |  |                          |  
|Net cash
  provided by (used in) financing activities                                              |  | (3,936                   | )
|                                                                                                   |  |                          |  
|                                                                                                   |  |                          |  
|Increase
  (decrease) in cash and cash equivalents                                                 |  | 767                      |  
|Cash and
  cash equivalents at the beginning of the year                                           |  | 860                      |  
|                                                                                                   |  |                          |  
|                                                                                                   |  |                          |  
|Cash and
  cash equivalents at the end of the year                                                 |  | 1,627                    |  
|                                                                                                   |  |                          |  

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

F-6

---

---

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

|Consolidated Statements of Cash Flows
  (contd)
|------------------------------------------------
|                                                

|                                                                                                     |  | Year ended
  December 31 |  
|---------------------------------------------------------------------------------------------------- |  | ------------------------ | -
|                                                                                                     |  |                          |  
|                                                                                                     |  | 2003                     |  
|                                                                                                     |  |                          |  
|                                                                                                     |  | US$ thousands            |  
|                                                                                                     |  |                          |  
|                                                                                                     |  |                          |  
|A.     Adjustments to reconcile net income
  to netcash provided by (used
  in) operating activities |  |                          |  
|                                                                                                     |  |                          |  
|Income and
  expenses not involving cash flows:                                                      |  |                          |  
|Loss (gain)
  on sale of fixed assets                                                                |  | 5                        |  
|Gain on sale
  of available for sale securities                                                      |  | (47                      | )
|Erosion of
  long-term deposits                                                                      |  | -                        |  
|Depreciation
  and amortization                                                                      |  | 659                      |  
|(Decrease)
  increase in liability for employee                                                      |  |                          |  
|severance benefits, net                                                                              |  | (49                      | )
|Write down
  of investment in marketable securities                                                  |  | -                        |  
|Deferred
  income taxes, net                                                                         |  | -                        |  
|                                                                                                     |  |                          |  
|                                                                                                     |  | 568                      |  
|                                                                                                     |  |                          |  
|                                                                                                     |  |                          |  
|Changes in
  operating asset and liability items:                                                    |  |                          |  
|Decrease
  (increase) in trade receivables                                                           |  | 11,606                   |  
|Decrease
  (increase) in other receivables and                                                       |  |                          |  
|prepaid expenses                                                                                     |  | 46                       |  
|Decrease
  (increase) in work in progress                                                            |  | 226                      |  
|Increase
  (decrease) in excess of advances from customers                                           |  |                          |  
|over amount recognized as revenue                                                                    |  | 2,296                    |  
|Increase in
  inventory                                                                              |  | (1,815                   | )
|(Decrease)
  increase in trade payables                                                              |  | (5,198                   | )
|(Decrease)
  increase in other payables and accrued expenses                                         |  | (1,207                   | )
|Decrease in
  non-current receivables                                                                |  | 520                      |  
|                                                                                                     |  |                          |  
|                                                                                                     |  | 6,474                    |  
|                                                                                                     |  |                          |  
|                                                                                                     |  |                          |  
|                                                                                                     |  | 7,042                    |  
|                                                                                                     |  |                          |  
|                                                                                                     |  |                          |  
|B.     
  Non-cash transactions
            Purchases of
  fixed assets                              |  | 5                        |  
|                                                                                                     |  |                          |  

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

F-7

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 1 - General

| | A. | B.V.R.
  Technologies Limited (B.V.R.), an Israeli company formed in 1986, has been
  engaged in the development, manufacture and marketing of advanced training
  and computer-based simulation systems for military applications, and through
  its subsidiary, of commercial applications in the fields of
  telecommunications and entertainment based on virtual reality. On October 23,
  1998, B.V.R. executed a Plan of Arrangement (the Plan or the spin off
  plan) under Sections 233 and 234 of the Israeli Companies Ordinance,
  pursuant to which B.V.R. was divided into two separate companies:  (i) B.V.R. Systems (1998) Ltd. (The
  Company), which owns and operates all of what was the defense-related
  business of B.V.R. and (ii) B.V.R. itself, which owns and operates all of its
  existing commercial businesses.  The
  Company, incorporated in Israel, was formed on January 6, 1998 to receive all
  of the assets and liabilities of the defense-related business of B.V.R., in
  accordance with the terms of the Plan.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The
  principal markets for the Companys products are mainly Europe and the Far
  East. Most of the Companys customers are either government institutions or
  entities controlled by governments. Approximately 58% of the Companys
  revenues during 2003 were provided by one customer and approximately 86% and
  71% of the Companys revenues during 2002 and 2001 respectively, were
  provided by three and two customers, respectively.  (See Note 22A).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | The
  Companys business is exposed to numerous risks including product
  development, technological advancement and the introduction of these products
  to the worlds markets. The companies engaged in this field are required to invest
  significant resources and constantly update products. The future success of
  the Company is dependent upon the technological sophistication, price and
  quality of its products, and the provision of solutions to meet customers
  needs in comparison to competitors.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | B. | As part of
  the Plan, the Company issued ordinary shares to the shareholders of B.V.R. in
  a manner so that each shareholder of B.V.R. received a quantity of the
  Companys shares equal to the number of B.V.R.s shares held.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    | In accordance
  with the spin-off plan, upon the exercise of options by any option holder of
  B.V.R., the option holder will be issued an equal number of shares of the
  Company, and the exercise price of both such options will be allocated
  between B.V.R. and the Company on a 65% - 35% basis of the original price.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | C. | In December
  2003, Chun Holding L.P. (Chun), a corporation controlled by Aviv Tzidon,
  Aeronautics Defense Systems Ltd. and iTS Technologies Pte Ltd. gained control
  of the Company by purchasing through tender offer the Companys shares from
  other shareholders, including Elisra Electronic Systems Ltd. (Elisra), the
  former controlling company.  As of
  December 31, 2003, Chun holds approximately 67% of the outstanding shares of
  the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

F-8

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 1 - General (contd)

| | D. | On March 1,
  2004, subsequent to the balance sheet date, the Meeting of the Companys
  shareholders approved the following decisions:
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                        
| |    | (1)                                                                                                                                    
| |    |                                                                                                                                        
| |    |                                                                                                                                        
| |    |                                                                                                                                        
| |    | (2)                                                                                                                                    
| |    |                                                                                                                                        
| |    |                                                                                                                                        
| |    |                                                                                                                                        
| |    |                                                                                                                                        
| |    |                                                                                                                                        
| |    |                                                                                                                                        
| |    | (3)                                                                                                                                    
| |    |                                                                                                                                        
| |    | (4)                                                                                                                                    

F-9

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 1 - General (contd)

| |    | (5)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       | On June 8,
  2004, the Company completed the issuance of shares, in the amount of $12
  million, of which $9.9 million was issued in exchange for cash and $2.1
  million was issued in exchange for conversion of loans from banks and a
  controlling interest into shares. The banks postponed repayment of short-term
  credit, in the amount of $1.5 million, to 2005, 2006 and 2007, and the
  Company also received a credit line from Chun, in the amount of $3.2 million.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | E. | During 2003,
  the Companys income totaled only US$14.5 million, and it incurred an
  operating loss of US$5.6 million, a net loss of US$6.5 million and positive
  cash flows from operating activities of US$0.5 million.                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | In addition,
  as of December 31, 2003, the Company has a deficiency in its shareholders
  equity and a working capital deficit of US$10.2 million and US$11.6 million,
  respectively.  On the same date, the
  Companys cash balance was US$1.6 million, short-term bank credit totaled
  US$10.1 million. In addition, in the period of report the volume of orders
  obtained by the Company amounted to $8 million and the Companys backlog of
  orders, which has not yet been recognized as income in the statement of
  operations, was US$19.7 million.      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | Subsequent
  to the balance sheet date and following the approval date of the financial
  statements, the Company issued shares, in the aggregate amount of $12
  million, of which $9.9 million were issued in exchange for cash and $2.1 million
  were issued in exchange for conversion of loans from banks and from some
  shareholders into shares. In addition, the banks agreed to postpone repayment
  of short-term credit, in the amount $1.5 million, to 2005, 2006 and 2007, and
  the Company received a credit line from Chun, in the amount $3.2 million.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    | The Company
  is confident that following the capital issue, the rescheduling of the above
  mentioned loans and raising the sums mentioned above, receipt of the credit
  line from the controlling shareholders together with meeting forecasted cash
  flows from operating activities for 2004, as well as obtaining orders
  forecasted in the budget approved by the Board of Directors, the Company
  believes it will be able to meet its anticipated commitments for the next 12
  months following the approval date of these financial statements.            

F-10

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 2 - Significant Accounting Policies

| | The financial statements have been prepared in accordance with
  generally accepted accounting principles in Israel.                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The
  preparation of financial statements in conformity with generally accepted
  accounting principles requires management to make estimates and assumptions
  that affect the reported amounts of assets and liabilities and disclosure of
  contingent assets and liabilities at the date of the financial statements and
  the reported amount of revenues and expenses during the reporting period.
  These are managements best estimates based on experience and historical
  data.  Actual results could differ
  from those estimates.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | C.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The consolidated financial statements include the accounts of the
  Company and its subsidiary B.V.R.S. Pacific Pte. Ltd. a wholly
  owned subsidiary, (Pacific). Inter-company transactions and balances,
  including profits from inter-company sales not yet realized outside the group,
  have been eliminated in the consolidation.                                                                                                                                                                                                      

F-11

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 2 - Significant Accounting
Policies (contd)

| | D.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Cash equivalents                                                     
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | Cash
  equivalents are short-term, highly liquid investments originally purchased
  with maturities of three months or less and that are readily convertible to
  cash.                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Inventories                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | Inventories
  (raw materials and components) are stated at the lower of cost or market
  value. Cost is determined as follows:                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | Raw
  materials and components                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  on the
  first-in, first-out method                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | Labor and
  overhead component                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  on the
  basis of direct and allocable indirect manufacturing cost.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | Inventory
  held for rent is presented in the long-term investments category and is
  depreciated based on its economic useful life.                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Work in progress and advances from customers                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | Work in
  progress is stated at cost which includes direct identified costs and
  indirect joint costs. Direct costs are charged to a project by identification
  and indirect joint costs are divided between projects based on the ratio of
  costs.  The net balance of costs
  stated in the balance sheet as part of current assets is after the deduction
  of those accumulated costs, which were included in the statement of
  operations on the basis of the percentage of completion (see Note 2K).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | The excess
  of accumulated revenues included in the statement of operations over advances
  from customers in respect of the completed part of the project is classified
  as trade receivables.                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | Excess
  advances received from customers, after deduction of revenues included in the
  statement of operation by the percentage of completion method, are classified
  as current liabilities.                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | G.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | Provision for doubtful debts                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | The
  financial statements include specific provisions for doubtful debts, which,
  in managements opinion, adequately reflect the loss inherent in those
  debts.  Managements determination of
  the adequacy of the provision is based, inter alia, on an evaluation of the
  risk, by considering the available information on the financial position of
  the debtors, the volume of their business and an evaluation of the security
  received from them.                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      
| | Doubtful
  debts which, in the opinion of management, are unlikely to be collected, are
  written off, based either on a management resolution or if they exceed a
  specified amount.                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                                                      

F-12

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 2 - Significant Accounting
Policies (contd)

| | H.                                                                                                                                                                          | Fixed assets
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------
| |                                                                                                                                                                             |             
| | Fixed assets
  are stated at cost less accumulated depreciation. Depreciation is calculated
  using the straight-line method over the estimated useful lives of the assets.
| |                                                                                                                                                                             |             
| | Annual rates
  of depreciation are as follows:                                                                                                                             

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

| | I.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Provision for warranties     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | -----------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                              
| | The Company
  provides warranties on sales of systems to certain customers for periods of
  up to 24 months. The provision is computed on the basis of specific
  management evaluations.                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                              
| | J.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Available for sale securities
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                              
| | Investments in available for sale securities that are not designated
  for sale in the short-term are carried at cost, except where market value is
  lower than cost and the impairment in value is deemed to be other than
  temporary.  An impairment in the value
  of available for sale securities is charged to earnings and a new cost basis
  for the security is established.                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                              
| | K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Revenue
  recognition        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                              
| | The Company
  follows the requirements defined in Israel Accounting Standard No.4 (the
  Standard).  The Standard requires
  that income from the execution of long-term contract work should be
  recognized according to the percentage of completion method. The percentage
  of completion is computed based on the projects total execution costs which
  reflect the progress of its completion, and which mainly include:  salaries, material costs and subcontractor
  charges.                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                              
| | Revenues
  ascribed to each period are the amounts of gross profits, based on the
  percentage of completion multiplied by the total revenue on the contract,
  earned on such contracts during the period plus the costs incurred during the
  period (excluding cost of materials that have not yet been used and costs
  incurred for subcontracted work that is still to be performed).                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                              
| | In
  accordance with the Standard, the accumulated results of project execution
  work are recorded currently. The yearly report of operations from project
  execution work covers the full turnover, including such turnover in respect
  of which an earnings forecast cannot be estimated at the time of reporting,
  but from which it can be determined that the recovery of expenses incurred is
  probable.  In such cases, full
  expenses incurred are currently charged against income at the level of such
  expenses (nil net margin presentation).

F-13

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 2 - Significant Accounting
Policies (contd)

| | K.                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Revenue
  recognition (contd)                                                                                                                                                                                                                                                                           
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | Provisions
  for estimated losses on uncompleted contracts are made in the period in which
  such losses are first determined, in the amount of the estimated loss on the
  entire contract.                                                                                                                                                                                                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | Royalty
  revenues are recorded mainly on a cash basis.                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | As to
  managements estimates and assumptions - see Note 2A above.                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | L.                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Research and development costs                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | Research and
  development costs are charged to the Statement of Operations, as incurred.                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | M.                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Selling and marketing costs                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | Selling and
  marketing costs which can be identified clearly and unmistakably with the
  individual project and with it alone, are charged to the costs of work in
  progress.                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | Costs that
  cannot be so identified are charged to selling and marketing expenses in the
  statement of operations.                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | N.                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Income taxes                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | Taxes on
  income for all periods presented have been computed on the basis of income
  tax rates applicable to the Company as a separate stand-alone entity.                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | The Company
  accounts for income taxes under the liability method of accounting for income
  taxes.                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | Under the
  liability method, deferred tax assets and liabilities are determined based on
  differences between financial reporting and tax bases of assets and
  liabilities as well as losses carried forward, and are measured using the
  prevailing tax rates and laws that will be in effect when the differences are
  expected to be utilized. The main factors, in respect of which deferred taxes
  were not calculated, are as follows:
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | 1.                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Adjustments
  relating to the change in the purchasing power of the shekel (which is the
  basis for computation of taxable income of the Company), in respect of
  private motor vehicles, according to the rules determined by the Israeli
  Institute of Certified Public Accountants.                
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| | 2.                                                                                                                                                                                                                                                                                                                                                                                                                                                 | Realization
  of investment in a subsidiary that management intends to retain. Similarly,
  deferred taxes have not been provided for future taxable distribution from a
  subsidiary, since it is group policy not to initiate a distribution of
  dividend that involves additional tax liability.     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Deferred tax
  assets for future tax benefits from realization are not included where their
  realization is less than reasonable. As such, the Company has recorded a
  valuation allowance in regard of all its tax losses carried forward as well
  as for other temporary differences (see Note 20G).

F-14

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 2 - Significant Accounting Policies (contd)

| | O.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Decline in Value of Assets             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                        
| | The Company applies Accounting Standard No. 15 - Decline in Value of
  Assets (hereinafter - the standard). 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, buildings for sale, tax assets and monetary assets
  (excluding monetary assets which are investments in investee companies that
  are not subsidiaries). In addition, the standard provides rules for
  presentation and disclosure with respect to assets whose value has declined.
  When the value of an asset in the consolidated balance sheet is higher than
  its recoverable value, the company recognizes a loss from the decline 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 decline in value was recognized.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Basic and diluted loss per share       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                        
| | Basic loss
  per share is computed based on the weighted average number of ordinary shares
  of nominal NIS 1.00 par value outstanding during each year, plus the effect
  of options and warrants outstanding at year-end the exercise of which is
  probable. Diluted loss per share is computed based on the weighted average
  number of ordinary shares used for computing the basic loss per share plus
  options and warrants which were not included in the basic loss per share
  calculation and which do not have an anti-dilutive effect.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Q.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | Accounting for stock-based compensation
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                        
| | The Company
  has elected to follow Accounting Principles Board Opinion No. 25, Accounting
  for Stock Issued to Employees (APB 25) and related interpretations,
  including the FASB Interpretation No. 44, Accounting for Certain
  Transactions Involving Stock Compensation and interpretation of APB 25
  issued in March 2000 (FIN No. 44) in accounting for its fixed employee stock
  options plans.  Under APB 25, when the
  exercise price of the Companys employee stock options equals or is above the
  market price of the underlying stock on the date of grant, no compensation
  expense is recognized. The pro-forma information with respect to the fair
  value of the options is provided in accordance with the provisions of
  Statement No. 123 (see Note 24).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-15

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 2 - Significant Accounting Policies (contd)

| | R.                                                                                                                                                                                                                                                                                                                                                                                                                                             | 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, 2003 and 2002, 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. The Company
  manages a limited number of projects at the same time, so that a delay in the
  execution of a project may have a material effect on the financial
  results.  Furthermore, the majority of
  the Companys transactions in progress are with major customers, see Note 1A.                                                                      
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                    
| | S.                                                                                                                                                                                                                                                                                                                                                                                                                                             | Fair value of financial instruments
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                    
| | The fair
  market value of the Companys financial instruments, which are cash and cash
  equivalents, loan from related party, accounts receivable, and short and
  long-term debt approximate their carrying value as of December 31, 2003 and
  2002. The carrying amounts of the Companys borrowings under its short loan
  agreements approximate their fair value, since they bear interest that
  changes according to the LIBOR rate.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                    
| | T.                                                                                                                                                                                                                                                                                                                                                                                                                                             | Derivative financial instruments   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                    
| | Derivative
  financial instruments, held for hedging, are deferred and recognized when the
  hedged transactions occur.                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                    
| | Derivative
  financial instruments, not held for hedging, are stated in the financial
  statements at their fair value. Changes in fair value are recognized as they
  occur.                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                |                                    
| | The fair
  value of derivative financial instruments is determined based on their market
  value and, when there is no market value, then according to a valuation
  model.                                                                                                                                                                                                                                                                   

F-16

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 3 - Cash and Cash Equivalents

| |                                      |  | December
  31,  |      
| | ------------------------------------ |  | --------------- | -----
| |                                      |  |                 |      
| |                                      |  | 2003            |      
| |                                      |  |                 |      
| |                                      |  | US$
  thousands |      
| |                                      |  |                 |      
| | Linked to
  the U.S. dollar          |  |                 | 1,235
| | In New
  Israeli Shekels             |  |                 | 378  
| | Linked to
  other foreign currencies |  |                 | 14   
| |                                      |  |                 |      
| |                                      |  |                 | 1,627
| |                                      |  |                 |      

Note 4 - Restricted Bank Deposits

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

| |    |                             |  | Effective
  Interest rate as at
  December 31
  2003 |      | December
  31,  |     
| | -- | --------------------------- |  | ---------------------------------------------------- | ---- | --------------- | ----
| |    |                             |  |                                                      |      |                
| |    |                             |  |                                                      | 2003 |                 | 2002
| |    |                             |  |                                                      |      |                 |     
| |    |                             |  | %                                                    |      | US$
  thousands |     
| |    |                             |  |                                                      |      |                 |     
| | B. | Composed as
  follows:      |  |                                                      |      |                 |     
| |    | Linked to
  the U.S. dollar |  |                                                      | -    |                 |     
| |    |                             |  |                                                      |      |                 |     
| |    |                             |  |                                                      |      |                 |     
| |    |                             |  |                                                      |      |                 |     

F-17

---

---

|B. V. R. Systems (1998) Ltd.                             
|---------------------------------------------------------
|                                                         
|Notes to the Financial Statements as of December 31, 2003
|                                                         

Note 5 - Trade Receivables

| | Open
  accounts include amounts billed to customers and various amounts due from
  transactions arising in the ordinary course of business. Management
  periodically evaluates the collectibility of these trade receivables and
  adjusts the allowance for doubtful accounts to reflect the amounts estimated
  to be doubtful of collection.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                 
| | Customers of
  the Company in the context of long-term contracts are billed in accordance
  with milestones determined in the agreements. In respect of the majority of
  the contracts, advances are paid upon the signing of the contract.                                                                                                    

| |                                                     |  | December
  31   |      
| | --------------------------------------------------- |  | --------------- | -----
| |                                                     |  |                 |      
| |                                                     |  | 2003            |      
| |                                                     |  |                 |      
| |                                                     |  | US$
  thousands |      
| |                                                     |  |                 |      
| | Open accounts                                       |  |                 | 569  
| | Income receivable
  (1)                             |  |                 | 1,217
| | Current
  maturities of long-term trade receivables |  |                 | 520  
| | Former
  related party                              |  |                 | 1,788
| |                                                     |  |                 |      
| |                                                     |  |                 |      
| |                                                     |  |                 | 4,094
| |                                                     |  |                 |      

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

| |                                              |  | December
  31   |       
| | -------------------------------------------- |  | --------------- | ------
| |                                              |  |                 |       
| |                                              |  | 2003            |       
| |                                              |  |                 |       
| |                                              |  | US$
  thousands |       
| |                                              |  |                 |       
| |                                              |  |                 |       
| | Accumulated
  amounts recognized as revenues |  |                 | 36,906
| | Less -
  advances from customers             |  |                 | 35,800
| |                                              |  |                 |       
| |                                              |  |                 |       
| |                                              |  |                 | 1,106 
| |                                              |  |                 |       
| | Other income
  receivable                    |  |                 | 111   
| |                                              |  |                 |       
| |                                              |  |                 |       
| |                                              |  |                 | 1,217 
| |                                              |  |                 |       

F-18

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 6 -
Work In Progress

| |                                                 |  | December
  31   |  
| | ----------------------------------------------- |  | --------------- | -
| |                                                 |  |                 |  
| |                                                 |  | 2003            |  
| |                                                 |  |                 |  
| |                                                 |  | US$
  thousands |  
| |                                                 |  |                 |  
| |                                                 |  |                 |  
| | Costs with
  respect to work-in-progress        |  | 126,113         |  
| | Less -
  amounts charged to statement of income |  | (126,011        | )
| |                                                 |  |                 |  
| |                                                 |  |                 |  
| |                                                 |  | 102             |  
| |                                                 |  |                 |  

Note 7 -
Other Receivables and Prepaid Expenses

| |                                                       |  | December
  31,  |  
| | ----------------------------------------------------- |  | --------------- | -
| |                                                       |  |                 |  
| |                                                       |  | 2003            |  
| |                                                       |  |                 |  
| |                                                       |  | US$
  thousands |  
| |                                                       |  |                 |  
| |                                                       |  |                 |  
| | Government
  authorities                              |  | 42              |  
| | Employees                                             |  | -               |  
| | Prepaid
  expenses                                    |  | 281             |  
| | Others                                                |  | 812             |  
| |                                                       |  |                 |  
| |                                                       |  |                 |  
| |                                                       |  | 1,135           |  
| | Allowance
  for doubtful accounts (other receivables) |  | (372            | )
| |                                                       |  |                 |  
| |                                                       |  |                 |  
| |                                                       |  | 763             |  
| |                                                       |  |                 |  

Note 8 -
Inventories

| |                                        |  | December
  31,  | 
| | -------------------------------------- |  | --------------- | 
| |                                        |  |                 | 
| |                                        |  | 2003            | 
| |                                        |  |                 | 
| |                                        |  | US$
  thousands | 
| |                                        |  |                 | 
| |                                        |  |                 | 
| | Components
  for systems manufacturing |  | 2,287           | 
| | Raw
  materials                        |  | 52              | 
| |                                        |  |                 | 
| |                                        |  |                 | 
| |                                        |  | 2,339           | 
| |                                        |  |                 | 

F-19

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 9 -
Investments, Loans and Long-Term Receivables

| |                                   |  | December
  31,  |  
| | --------------------------------- |  | --------------- | -
| |                                   |  |                 |  
| |                                   |  | 2003            |  
| |                                   |  |                 |  
| |                                   |  | US$
  thousands |  
| |                                   |  |                 |  
| |                                   |  |                 |  
| | Long-term
  trade receivables (1) |  | 520             |  
| | Less -
  current maturities       |  | (520            | )
| |                                   |  |                 |  
| |                                   |  | -               |  
| |                                   |  |                 |  
| | Marketable
  securities           |  | -               |  
| | Inventories
  (2)                 |  | 1,293           |  
| | Long term
  deposit               |  | 25              |  
| |                                   |  |                 |  
| |                                   |  |                 |  
| |                                   |  | 1,318           |  
| |                                   |  |                 |  

|(1) | Linked to the U.S. dollar
  and bearing interest at the rate of 7.8% per year.                                                                                                                                   
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | In November 2003, the
  Company signed an agreement with one of its customers pursuant to which the
  customer will rent from the Company Ehud systems for a period of two years,
  beginning in February 2004.

F-20

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 10 -
Fixed Assets

| |                                                       |  | Computers
  and electronic
  equipment |   | Manufacturing
  equipment |  | Motor
  vehicles |   | Office
  furniture and
  equipment |  | Leasehold
  improvements |  | Total         |  
| | ----------------------------------------------------- |  | -------------------------------------- | - | ------------------------- |  | ---------------- | - | ---------------------------------- |  | ------------------------ |  | ------------- | -
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| |                                                       |  | US$ thousands                          |   | US$ thousands             |  | US$ thousands    |   | US$ thousands                      |  | US$ thousands            |  | US$ thousands |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| | Cost                                                  |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| | Balance as
  at
    December 31
    2002              |  | 6,249                                  |   | 1,974                     |  | 26               |   | 879                                |  | 252                      |  | 9,380         |  
| | Additions                                             |  | 169                                    |   | -                         |  | -                |   | 7                                  |  | -                        |  | 176           |  
| | Disposals                                             |  | (2                                     | ) | -                         |  | (16              | ) | -                                  |  | -                        |  | (18           | )
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| | Balance as
  at
    December 31
    2003              |  | 6,416                                  |   | 1,974                     |  | 10               |   | 886                                |  | 252                      |  | 9,538         |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| | Accumulated  depreciation                             |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| | Balance as at  December 31  2002                      |  | 5,300                                  |   | 1,926                     |  | 6                |   | 399                                |  | 93                       |  | 7,724         |  
| | Additions                                             |  | 554                                    |   | 18                        |  | 3                |   | 58                                 |  | 26                       |  | 659           |  
| | Disposals                                             |  | -                                      |   | -                         |  | (5               | ) | -                                  |  | -                        |  | (5            | )
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| | Balance as
  at
    December 31
    2003              |  | 5,854                                  |   | 1,944                     |  | 4                |   | 457                                |  | 119                      |  | 8,378         |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| | Net book value
    as
  at
    December
  31
    2003 |  | 562                                    |   | 30                        |  | 6                |   | 429                                |  | 133                      |  | 1,160         |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  
| | Net book value
    as at
    December 31
    2002     |  | 949                                    |   | 48                        |  | 20               |   | 480                                |  | 159                      |  | 1,656         |  
| |                                                       |  |                                        |   |                           |  |                  |   |                                    |  |                          |  |               |  

F-21

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 11 -
Short-Term Bank Credit

| | The weighted
  average interest rates on short-term bank credit (linked to the U.S. dollar)
  as at December 31, 2003 and 2002, are 3.6% and 3.7%, respectively. As of
  December 31, 2003, the Company has utilized all its available credit lines
  which were due for payment through June 2004.  Subsequent to balance sheet date
  and during March 25,2004 until June 8, 2004, the Company reached an
  agreement with its principal bank lenders for repayment of US$ 6.55 million
  and reschedule the repayment of short-term loans in the amount of US$ 1.5
  million to the years 2005, 2006 and 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | In addition,
  the banks converted short-term credit, in the amount of $2 million, into
  Company shares (see also Note 1D).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

Note 12 -
Trade Payables

| |                     |  | December
  31,  | 
| | ------------------- |  | --------------- | 
| |                     |  |                 | 
| |                     |  | 2003            | 
| |                     |  |                 | 
| |                     |  | US$
  thousands | 
| |                     |  |                 | 
| |                     |  |                 | 
| | Related
  party     |  | 989             | 
| | Post-dated
  checks |  | 99              | 
| | Open
  accounts     |  | 1,120           | 
| | Accrued
  expenses  |  | 1,060           | 
| |                     |  |                 | 
| |                     |  |                 | 
| |                     |  | 3,268           | 
| |                     |  |                 | 

Note 13 -
Excess of Advances from Customers over Amounts Recognized as Revenue

| |                                                    |  | December
  31,  |  
| | -------------------------------------------------- |  | --------------- | -
| |                                                    |  |                 |  
| |                                                    |  | 2003            |  
| |                                                    |  |                 |  
| |                                                    |  | US$
  thousands |  
| |                                                    |  |                 |  
| |                                                    |  |                 |  
| | Advances
  from customers                          |  | 49,435          |  
| | Less -
  accumulated amounts recognized as revenue |  | (45,849         | )
| |                                                    |  |                 |  
| |                                                    |  |                 |  
| |                                                    |  | 3,586           |  
| |                                                    |  |                 |  

F-22

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 14 -
Other Payables And Accrued Expenses

| |                                               |  | December
  31,  | 
| | --------------------------------------------- |  | --------------- | 
| |                                               |  |                 | 
| |                                               |  | 2003            | 
| |                                               |  |                 | 
| |                                               |  | US$
  thousands | 
| |                                               |  |                 | 
| |                                               |  |                 | 
| | Payroll and
  related accruals                |  | 719             | 
| | Provision
  for warranty and completion       |  | 72              | 
| | Income taxes
  payable                        |  | 1,273           | 
| | Related
  party                               |  | 364             | 
| | Other
  accrued expenses and accounts payable |  | 690             | 
| |                                               |  |                 | 
| |                                               |  |                 | 
| |                                               |  | 3,118           | 
| |                                               |  |                 | 

Note 15 -
Short-Term Loan from Related Parties

| | Loan from
  Chun received in December 2003 linked to US Dollar and bearing no interest.
| | ---------------------------------------------------------------------------------------
| |                                                                                        
| | In March 1,
  2004 the Company repaid the aforementioned loan.                         

Note 16 -
Long-Term Loans

| | A. | Balances according to linkage basis and rates of interest
| | -- | ---------------------------------------------------------

| |                                  |  |                 |  |                     |  | December
  31   | 
| | -------------------------------- |  | --------------- |  | ------------------- |  | --------------- | 
| |                                  |  | Linkage
  Basis |  | Rates of
  Interest |  |                 | 
| |                                  |  |                 |  | 2003                |  | 2002            | 
| |                                  |  |                 |  |                     |  |                 | 
| |                                  |  |                 |  | %                   |  | US$
  thousands | 
| |                                  |  |                 |  |                     |  |                 | 
| |                                  |  |                 |  |                     |  |                 | 
| | Former
  related parties         |  | US dollar       |  | -                   |  | 501             | 
| | Liabilities
  to related parties |  | US dollar       |  | -                   |  | 100             | 
| |                                  |  |                 |  |                     |  |                 | 
| |                                  |  |                 |  |                     |  |                 | 
| |                                  |  |                 |  |                     |  | 601             | 
| |                                  |  |                 |  |                     |  |                 | 

F-23

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 16 -
Long-Term Loans (contd)

|                                                           | B. | On October 1, 2003 the major shareholders of the Company (at that
  date) granted a loan in the amount of $601 thousand, in order to finance the
  current operations of the Company. The loan does not bear interest.                                                                       
|---------------------------------------------------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                           |    |                                                                                                                                                                                                                                                                                              
|                                                           |    | Subsequent
  to the balance sheet date, on March 2, 2004, the loans from related parties
  in the amount of US$ 100 thousands converted into ordinary shares of the
  company, at a price of US$ 0.18 per share.                                                                             
|                                                           |    |                                                                                                                                                                                                                                                                                              
|Note 17 -
  Liability for Employee Severance Benefits, Net
|                                                          
|                                                           | A. | Under
  Israeli law, the Company is required to make severance payments to dismissed
  employees and to employees terminating employment under certain other
  circumstances.  The Companys
  liability for severance pay is fully provided for through insurance policies
  and by accrual.
|                                                           |    |                                                                                                                                                                                                                                                                                              
|                                                           |    | Due to a
  reduction in salaries effective from October 1, 2002 and in accordance with
  an agreement between the Company and its employees, the liability for
  severance pay calculation is divided into two periods, until the salary
  reduction and onwards.                            
|                                                           |    | The
  calculation was based on the number of years of employment until September
  30, 2002 multiplied by the latest salary paid as of September, 2002, plus the
  number of years of employment commencing October 1, 2002 multiplied by the
  latest salary paid.                          

| |                          |  | December
  31,  |  
| | ------------------------ |  | --------------- | -
| |                          |  |                 |  
| |                          |  | 2003            |  
| |                          |  |                 |  
| |                          |  | US$
  thousands |  
| |                          |  |                 |  
| |                          |  |                 |  
| | Severance
  pay          |  | 1,429           |  
| | Less -
  amounts funded* |  | (969            | )
| |                          |  |                 |  
| |                          |  |                 |  
| |                          |  | 460             |  
| |                          |  |                 |  

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

| | B. | Severance
  pay expenses (income) recorded for the years ended December 2003, 2002 and
  2001 were US$ 116 thousand, US$ (54) thousand and US$ 163 thousand,
  respectively.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-24

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 18 -
Shareholders Equity

| | A. | On February 14, 2003, the Company was asked to transfer the ordinary
  shares quote from the NASDAQ SmallCap Market to the Over the Counter Bulletin
  Board (OTCBB) under the symbol BVRSF.OB.                                                                                                       
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                       
| |    | On October
  9, 2003, the Company filed a Form 15 with the U.S. Securities and Exchange
  Commission (the SEC) to deregister its ordinary shares and terminate its
  reporting obligations under the Securities Exchange Act of 1934.                                                               
| |    | In addition,
  the ordinary shares of the Company will no longer be listed on the Over-the
  Counters Bulleting Board (OTCBB)                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                       
| |    | Subsequent to the balance sheet date, on January 5, 2004, the Company
  withdrew the Form 15 previously filed with the SEC.  As a result, from February 15, 2004, the Companys ordinary
  shares are once again quoted on the Over-The Counters Bulletin Board (OTCBB)
  under the symbol BVRSF.OB.
| |    |                                                                                                                                                                                                                                                                                                       
| | B. |                                                                                                                                                                                                                                                                                                       

| |                                               |  | Authorized     |  | Issued and
  outstanding | 
| | --------------------------------------------- |  | -------------- |  | ------------------------ | 
| |                                               |  |                |  |                          | 
| |                                               |  | December
  31, |  | December
  31,           | 
| |                                               |  |                |  |                          | 
| |                                               |  | 2003           |  | 2002                     | 
| |                                               |  |                |  |                          | 
| |                                               |  |                |  |                          | 
| | Ordinary
  shares of
    NIS
  1.00 par value |  | 20,000,000     |  | 20,000,000               | 
| |                                               |  |                |  |                          | 

| | C. | In June 2000, the Board of Directors of the Company approved a plan
  to grant options for the purchase of up to 1,200,000 ordinary shares to the
  Companys employees. Each option is exercisable into one ordinary share of
  the Company at an exercise price equal to the market price of the share on
  the date of issuance.                                                                                                                                                                                                                                           
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | At December
  31, 2003, there are 805 thousand options outstanding, after cancellation of
  those options held by employees who are no longer employed by the Company.                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | The options
  are exercisable at prices of US$ 1.188 to US$ 4.25 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | The
  aforesaid options are exercisable in three equal increments (one third per
  year) commencing one year after their issuance.                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | Within the
  framework of the above plan, in July 2000, the Company issued to Mr. Avner
  Raz, the former Chairman of the Board of Directors and former CEO, options to
  purchase 60,000 ordinary shares of the Company, at an exercise price of US$
  4.25 per each share.  The vesting
  dates of the options are as follows: options to purchase 20,000 ordinary
  shares of the Company on July 24, 2001; options to purchase 20,000 ordinary shares
  of the Company on July 24, 2002, and options to purchase 20,000 ordinary
  shares of the Company on July 24, 2003.
| |    | In March
  2002, Avner Raz resigned and accordingly 20,000 options which had not vested
  were cancelled.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    | In August
  2001, the Board of Directors resolved to cancel the remaining balance of
  options that were available for issuance from this option plan.                                                                                                                                                                                                                                                                                                                                                                                                                        

F-25

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 18 -
Shareholders Equity (contd)

| | D. | In February
  2000, the Companys Board of Directors approved the grant of up to 300
  thousand options to employees of the Company. The options were issued in
  March 2000 and will be exercisable, after a vesting period, until March 2005
  at the price of US$ 7.125 in cash per option.  Each option is exercisable into one ordinary share of the
  Company.       
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| |    | At December
  31, 2003, there are 163 thousand options outstanding, after cancellation of
  those options held by employees who are no longer employed by the Company.                                                                                                                                                                                                     
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| | E. | In August
  2001, the Board of Directors of the Company approved an option plan to grant
  options for the purchase of up to 707,900 ordinary shares to the Companys
  employees, directors and subcontractors. Each option is exercisable into one
  ordinary share of the Company at an exercise price equal to the market price
  of the share on the date of issuance.
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| |    | 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.                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| |    | Within the
  framework of the above plan, in September 2001, the Company issued to Mr.
  Avner Raz, the former Chairman of the Board of Directors, options to purchase
  60,000 ordinary shares of the Company, at an exercise price of US$ 2.03 per
  each share.                                                                                                         
| |    | In March
  2003, Avner Raz resigned and accordingly 40,000 options which had not vested
  were cancelled.                                                                                                                                                                                                                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| |    | At December
  31, 2003, there are 587 thousand options outstanding after cancellation of
  those options held by employees who are no longer employed by the Company.                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| | F. | In January
  2004, the Companys Board of Directors approved the grant of up to 5,000
  thousand options to employees of the Company.  Each option is exercisable into one ordinary share of the
  Company.                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| |    | In January
  2004, the Company issued to Mr. Ilan Gillies, the Chief Executive Officer,
  options to purchase 1,000,000 ordinary shares of the Company, at an exercise
  price of US$ 0.18 per each share.                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| | G. | In January
  2004, the Company signed an agreement with Consult Wise Pte Ltd. (the
  Consultant) according to which the Consultant will provide the Company
  marketing services in the Far East. The Company will pay to the Consultant an
  amount of $3,000 each month by way of issuance of 16,667 ordinary shares of
  nominal value NIS 1 per share.               
| |    | Maayan Tzidon, a brother of Aviv Tzidon Chairman of the Board of
  Directors, provides the Consultants services.                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                            
| | H. | Any dividend
  distributed by the Company will be declared in NIS and paid in U.S. dollars
  on the basis of the exchange rate prevailing at the date of payment.                                                                                                                                                                                                          

F-26

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 18 -
Shareholders Equity (contd)

| | I. | (1) | In
  accordance with the decisions of the Companys shareholders meeting which
  held on March 1, 2004, on June 8, 2004, the Company completed the issuance of
  shares, in the amount of $12 million, of which $9.9 million was issued in
  exchange for cash and $2.1 million was issued in exchange for conversion of
  loans from banks and a controlling interest into shares.
| | -- | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |     |                                                                                                                                                                                                                                                                                                                                                                                    
| |    |     | In addition,
  the Company will grant to Aviv Tzidon, Chairman of the Board of Directors, an
  option to purchase 9,000,000 Ordinary Shares of the Company, nominal value
  NIS 1.00 each at an exercise price per share shall be $0.18.                                                                                                                                           
| |    |     |                                                                                                                                                                                                                                                                                                                                                                                    
| |    |     | The Company
  will also grant to Companys directors (not including Aviv Tzidon) and
  external directors, for the coming year, options to purchase 648,000 Ordinary
  shares of the Company (72,000 options for each director), nominal value NIS
  1.00 each, at an exercise per share of $0.18.                                                                                 
| |    |     |                                                                                                                                                                                                                                                                                                                                                                                    
| |    |     | In addition,
  and per the demands of the banks, Chun is to provide a credit line to the
  Company in the amount of $3.2 million. 
  In consideration for the credit line to grant to Chun an option to
  invest an additional sum of up to $7.2 million at an exercise price per
  Ordinary Share, nominal value NIS 1.00 each, of $0.18, for a period of four
  years.           
| |    |     |                                                                                                                                                                                                                                                                                                                                                                                    
| |    |     | See also
  Note 1D.                                                                                                                                                                                                                                                                                                                                                                
| |    |     |                                                                                                                                                                                                                                                                                                                                                                                    
| |    | (2) | Subsequent
  to the balance sheet date, on March 2, 2004, the loans from related parties
  in the amount of US$ 100 thousands converted into ordinary shares of the
  company, at a price of US$ 0.18 per share.                                                                                                                                                                   
| |    |     |                                                                                                                                                                                                                                                                                                                                                                                    
| |    |     | See also
  Note 16.                                                                                                                                                                                                                                                                                                                                                                

F-27

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 19 -
Commitments And Contingent Liabilities

| | A. | Cooperation agreement                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 1. | The Company
  developed, manufactured and marketed the Ehud system pursuant to a joint
  venture agreement entered into in 1992 with the MLM division of Israel
  Aircraft Industries Ltd. (IAI) (the IAI Agreement). Pursuant to the IAI
  Agreement, the Company and IAI agreed to jointly develop, manufacture and
  market the Ehud, with IAI subcontracting certain of the manufacturing and
  integration work with respect to the Ehud product to the Company.
| |    | The IAI
  Agreement expired pursuant to its terms in October 1997.                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | During
  August 1999, the Company signed a new agreement with MLM (MLM Agreement)
  which governs a joint venture between the parties and which also provides
  guidelines for fair competition between the parties, this without adversely
  impacting existing agreements previously signed with third parties.                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | The parties
  have agreed that the Ehud system will be marketed by each of the parties,
  in various territories, in consideration of the payment of various royalties
  to the other party.                                                                                                                                                                                                                                                                                 
| |    | As part of
  the MLM Agreement, the following worldwide territories have been delineated:                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | a.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | b.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    | c.                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-28

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 19 -
Commitments And Contingent Liabilities

| | A.                                                                                                                                                                                                             | Cooperation agreement (contd)                                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | 2.                                                                                                                                                                                                             | During
  November 2001, the Company and Smiths Aerospace signed a Memorandum of
  Understanding to pursue an integrated Smiths Airborne Video Solid State
  Recorder (AVSR) with the Companys airborne embedded training suite (the
  Product). The parties agreed to work towards a teaming agreement that will
  define the roles of the parties and terms of a program or programs relating
  to the said Product.
| |                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | B.                                                                                                                                                                                                             | Lease commitments                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | The premises
  occupied by the Company are rented under various operating leases expiring at
  the end of September 2009.  The future
  minimum annual rental payments as of December 31, 2003 are as follows:

| | Year ending December 31, |  | US$
  thousand | 
| | ------------------------ |  | -------------- | 
| |                          |  |                | 
| |                          |  |                | 
| | 2004                     |  | 364            | 
| | 2005                     |  | 474            | 
| | 2006                     |  | 474            | 
| | 2007                     |  | 453            | 
| | 2008 and after           |  | 599            | 
| |                          |  |                | 
| |                          |  |                | 
| |                          |  | 2,364          | 
| |                          |  |                | 

| | C.                                                                                                                                                                                                                              | Spin-off                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | In
  connection with the spin-off plan (plan) the Company completed several
  agreements with B.V.R. for the purpose of giving effect to the plan and
  defining the Companys and B.V.R.s working relationship, as follows:
| |                                                                                                                                                                                                                                
| | 1.                                                                                                                                                                                                                              | The Company
  and B.V.R. each undertook to indemnify and/or compensate the other (the
  Injured Party) for any amount, damage or expense that the Injured Party
  incurs in consequence of a third-party claim relating to a field of activity
  of the indemnifying party, concerning events occurring before the effective
  date of the spin-off, provided that the Injured Party has notified the
  indemnifying party of the third-party claim and has allowed the indemnifying
  party to manage and defend such claim.
| |                                                                                                                                                                                                                                 | As at
  December 31, 2003 and for the three years then ended, no expenses and/or
  liabilities were recorded by the Company. The Company has no information that
  would indicate that any material payments will be required in respect of this
  agreement.                                                                                                                                                                                                                                                                  

F-29

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 19 -
Commitments And Contingent Liabilities (contd)

| | C. | Spin-off (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 2. | The Company
  and B.V.R. entered into an agreement concerning technology transfers and
  cross licenses between each of the parties (the Agreement). Under this
  agreement, B.V.R. transferred to the Company the rights to co-ownership of
  B.V.R.s intellectual property as related to the defense-related operations
  transferred to the Company pursuant to the spin-off agreement.                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 3. | B.V.R. will
  only be entitled to exploit such intellectual property rights for its
  activities that do not conflict with the Companys activities as conducted at
  the time of consummation of the Plan other than with respect to applications
  relating to simulation and training systems for commercial applications which
  shall be exploited solely by the Company. The Company and B.V.R. further
  agreed not to compete with each others business activities.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | D. | Charges and guarantees                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 1. | In order to
  provide security for the credit received from banks and for the bank
  guarantees provided in favor of the Company, the Company registered first
  degree fixed and floating liens on money deposits, a floating lien on all its
  property, assets and related insurance benefits and a floating lien on its
  unpaid share capital, its goodwill and its plant, assets and rights.                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 2. | On certain
  occasions the Company deposit cash and cash equivalents with certain
  financial institutions that have issued guarantees on behalf of the Company
  in favor of its customers. In order to fulfill the above-mentioned
  commitment, the Company places a charge on its bank deposits (including the
  insurance rights attached thereto). At the balance sheet date there are no
  restricted bank deposits (as at December 31, 2002 US$ 4,266 thousand).    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | 3. | The secured
  liabilities and guarantees (secured by a debenture) are as follows:                                                                                                                                                                                                                                                                                                                                                                                           

| |                                  |  | December
  31,  | 
| | -------------------------------- |  | --------------- | 
| |                                  |  |                 | 
| |                                  |  | 2003            | 
| |                                  |  |                 | 
| |                                  |  | US$
  thousands | 
| |                                  |  |                 | 
| |                                  |  |                 | 
| | Short-term
  credit from banks   |  | 10,116          | 
| |                                  |  |                 | 
| |                                  |  |                 | 
| | Performance
  guarantees (1)     |  | 7,571           | 
| |                                  |  |                 | 
| |                                  |  |                 | 
| | Advance
  payment guarantees (1) |  | 7,762           | 
| |                                  |  |                 | 
| |                                  |  |                 | 
| | Other bank
  guarantees (1)      |  | 570             | 
| |                                  |  |                 | 

| | (1)     The
  guarantees are provided by banks in favor of the Company. 
| | ------------------------------------------------------------------------
| |                                                                         
| | The
  expiration dates of the guarantees are up to December 31, 2006.   
| |                                                                         
| | Bank charges
  on those guarantees are attributed to financial expenses.

F-30

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 19 -
Commitments And Contingent Liabilities (contd)

| | E.                                                                                                                                                       | Liability for warranty and completion
| | -------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------
| |                                                                                                                                                          |                                      
| | The Company
  has made provision for warranty for some of its completed projects, in
  accordance with management judgment and based on past experience.
| | The changes
  in this provision during 2003 are as follows:                                                                                             

| |                                |  | US$
  thousands |  
| | ------------------------------ |  | --------------- | -
| |                                |  |                 |  
| |                                |  |                 |  
| | Balance at
  December 31, 2001 |  | 150             |  
| | Accrued                        |  | 334             |  
| | Utilized                       |  | (29             | )
| |                                |  |                 |  
| |                                |  |                 |  
| | Balance at
  December 31, 2002 |  | 455             |  
| | Accrued                        |  | 30              |  
| | Utilized                       |  | (413            | )
| |                                |  |                 |  
| |                                |  |                 |  
| | Balance at
  December 31, 2003 |  | 72              |  
| |                                |  |                 |  

| | F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Management agreement with the shareholders
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                           
| | The Company
  reached an agreement with Elisra concerning management services to be
  provided to the Company by Elisra.                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | For each of
  the three years ended December 31, 2003, the Company paid Elisra US$ 200
  thousand.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The
  Agreement was cancelled in December 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | G.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | Derivative financial instruments          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |                                           
| | The Company
  enters, from time to time, into foreign currency future contracts and put and
  call options contracts to reduce the impact of fluctuations of certain
  currencies against the U.S. dollar resulting primarily from firm commitments
  not denominated in U.S. dollars. Gains or losses resulting from qualified
  hedges of firm commitments are deferred and recognized when the hedged
  transactions occur, while results of transactions which do not meet all the
  criteria specified in SFAS No. 52 and SFAS No. 80 are recorded as financial
  income or expense.

F-31

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 19 -
Commitments And Contingent Liabilities (contd)

| | G.                                                                                                                                                                                                                                                                                                                                                                                                                                 | Derivative financial instruments (contd)      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                
| | As at
  December 31, 2003, the Company has an obligation to sell US$ 500 thousand for
  a total amount of NIS 2,183 thousand.                                                                                                                                                                                                                                                                                                     
| | The fair
  value of this derivative financial instrument amounted to a net liability of
  US$ 3 thousand as of December 31, 2003 and was recorded as a liability in the
  balance sheet (See Note 14, in other accrued expenses and accounts payable).                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | As at
  December 31, 2003, the Company has a put option (part of a certain put option
  strategy signed in February 2003) for selling US$ 400 thousand for NIS 1,920
  thousand. The option expires during various periods until February 2004. The
  fair value of the derivative financial instrument amounted to a net asset of
  US$ 172 thousand and was recorded as an asset in the balance sheet (See Note
  7, in others).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | As at
  December 31, 2002, the Company has an obligation to sell US$ 151 thousand for
  a total amount of £ 108 thousand (recorded as a hedge).                                                                                                                                                                                                                                                                                   
| | The fair
  value of this off-balance sheet instrument amounted to a net asset of US$ 22
  thousand as of December 31, 2002.                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | H.                                                                                                                                                                                                                                                                                                                                                                                                                                 | Information on contracts for long-term projects

| |                                                                                                                              |  | December
  31
  2003 and the
  Year then ended |  | December
  31
  2002 and the
  year then ended |  | December
  31
  2001 and the
  year then ended | 
| | ---------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------- |  | ---------------------------------------------- |  | ---------------------------------------------- | 
| |                                                                                                                              |  |                                                |  |                                                |  |                                                | 
| |                                                                                                                              |  | Contracts
  for
  projects                     |  | Contracts
  for
  projects                     |  | Contracts
  for
  projects                     | 
| |                                                                                                                              |  |                                                |  |                                                |  |                                                | 
| |                                                                                                                              |  | US$
  thousands                                |  | US$
  thousands                                |  | US$
  thousands                                | 
| |                                                                                                                              |  |                                                |  |                                                |  |                                                | 
| |                                                                                                                              |  |                                                |  |                                                |  |                                                | 
| | Amount of
  contracts for long-term projects
    signed during the year                                                      |  | 7,723                                          |  | 6,123                                          |  | 12,291                                         | 
| |                                                                                                                              |  |                                                |  |                                                |  |                                                | 
| |                                                                                                                              |  |                                                |  |                                                |  |                                                | 
| | Portion of
  the accumulated amount of contracts
    for long-term projects not yet recognized as
    income at the year end |  | 14,066                                         |  | 20,225                                         |  | 38,152                                         | 
| |                                                                                                                              |  |                                                |  |                                                |  |                                                | 

Note 20 -
Income Taxes

| | A.                                                                                                                                                                                                                                                                                                                                                                                                                                            | Tax benefits under the Law for the
  Encouragement of Industry (Taxes), 1969
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                             
| | The Company is an industrial company, as defined by this law and,
  as such, is entitled to certain tax benefits, mainly accelerated depreciation
  of machinery and equipment, as prescribed by regulations published under the
  Inflationary Adjustments Law (see Note 20C hereunder), the right to claim
  public issuance expenses and amortization of patents and other intangible
  property rights as a deduction for tax purposes.

F-32

---

---

|B.V.R.
  Systems (1998) Ltd.                               
|-----------------------------------------------------------
|                                                           
|Notes to the
  Financial Statements as of December 31, 2003
|                                                           

Note 20 -
Income Taxes (contd)

| | B.                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Tax benefits under the law for the
  Encouragement of Capital Investments, 1959 (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.                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | Pursuant to
  the aforementioned law the Company will be entitled to a full exemption on
  its taxable income arising from the second and third plan for a period of two
  years and a reduced tax rate of 25% for an additional five years from the
  date on which the investments are significantly completed and the Company has
  taxable income as defined by the law.                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The benefits
  to which the Company will be entitled, will be granted on the proportionate
  part of the income, deriving from a future increase in its income in excess
  of the base turnover, which is not entitled to benefits. The utilization of
  the seven years of benefits for the second and third plan is limited to 2012
  and 2016, respectively.                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | As of
  December 31, 2003, due to losses, the Company had not yet utilized the tax
  benefits provided in the second and third plan.                                                                                                                                                                                                                                                                                                                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The
  tax-exempt income attributable to the Approved Enterprise can be
  distributed to shareholders without subjecting the Company to taxes only upon
  the complete liquidation of the Company. 
  The Companys Board of Directors has determined that such tax-exempt
  income will not be distributed as dividends. Accordingly, no deferred income
  taxes have been provided on income attributable to the Companys Approved
  Enterprise.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | If the
  retained tax-exempt income is distributed in a manner other than the complete
  liquidation of the Company, it would be taxed at the corporate tax rate
  applicable to such profits as if the Company had not chosen the alternative
  tax benefits (currently - 25%).  As at
  December 31, 2003 the Company has accumulated losses.                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | The
  aforementioned benefits are conditional upon compliance with the terms and
  regulations as prescribed by law, and the approvals according to which the
  investments were carried out.  Non
  compliance with the terms may result in the cancellation of the benefits, in
  whole, or in part, and the refund of the benefit amounts in addition to
  accrued interest.                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | As of the
  date of the financial statements, the Companys management is of the opinion
  that it is in compliance with all of the aforementioned terms.                                                                                                                                                                                                                                                                                             

F-33

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 20 - Income Taxes (contd)

| | C.                                                                                                                                                                                                                                                                                                                                                          | Measurement of taxable income under the Income Tax (Inflationary
  Adjustments) Law, 1985                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Under this
  law, taxable income is measured in real terms, in accordance with the changes
  in the Israeli CPI.                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                            
| | D.                                                                                                                                                                                                                                                                                                                                                          | Tax rates applicable to income from other sources in Israel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | Income derived
  from sources other than the approved enterprise is not eligible for the
  aforementioned benefits and is taxed at the regular rate of 36%.                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                            
| | E.                                                                                                                                                                                                                                                                                                                                                          | Taxation of foreign subsidiary                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | The
  subsidiary in the Far East is taxed under the tax laws in force in
  those countries.                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                            
| | F.                                                                                                                                                                                                                                                                                                                                                          | Israel Tax Reform with effect from January 1, 2003                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | During the
  year 2002, tax reform legislation was enacted with effect from January 1,
  2003, which significantly changed the taxation basis of corporate and
  individual taxpayers from a territorial basis to a worldwide basis. From such
  date an Israel resident taxpayer will be taxed on income produced and derived
  both in and out of Israel.
| | The main
  provisions of the tax reform that may affect the Company are as follows:                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                            
| | 1.                                                                                                                                                                                                                                                                                                                                                          | Transfer
  pricing of international transactions with related parties.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                             | The Income
  Tax Ordinance was amended to include provisions concerning transfer pricing
  between related parties, where one of the parties is situated abroad.
  Detailed provisions are to be included in Income Tax Regulations that have
  yet to be issued. Although the Company considers that the transfer pricing
  policy adopted with foreign affiliates is economically fair, an adjustment
  may be required following the issue of the said Regulations.                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | 2.                                                                                                                                                                                                                                                                                                                                                          | Employee
  stock incentive plans.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                             |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |                                                                                                                                                                                                                                                                                                                                                             | The tax
  reform codified past practice and determined three alternative tracks for
  taxing employee stock option plans. Where a trustee arrangement is in place,
  the employer can either claim an expense for tax purposes while the employee
  will be fully taxed up to the maximum marginal tax rate of 50% or the Company
  can waive the tax expense and the employee will pay a reduced tax rate of
  25%. Where there is no trustee arrangement, the employee is fully taxable and
  no expense is allowed to the Company. There are detailed provisions for
  implementing these tracks. The Company has chosen for the employee stock
  incentive plans commencing January 1, 2003 to waive the tax expense and the
  employee will pay a reduced tax rate of 25%.

F-34

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 20 - Income Taxes (contd)

| | F.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Israel Tax Reform with effect from January 1, 2003 (contd)                                                                                                                                                                                                                  
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                              
| | 3.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Controlled
  foreign company (CFC).                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | The amendment
  to the law introduced Controlled Foreign Company (CFC) provisions, which, in
  certain circumstances, will lead to the Israeli company being charged to tax
  on passive income of foreign affiliates as if it had received a
  dividend from such companies.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                              
| | 4.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Capital
  gains tax is reduced to 25% from 36%, except with respect to capital gains
  from marketable securities, with transitional provisions for assets acquired
  prior to January 1, 2003.                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                              
| | 5.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | The seven
  year limit for carrying forward of capital losses has been removed with
  respect to capital losses arising from 1996 and thereafter.                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                              
| | G.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  | Deferred income taxes                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |                                                                                                                                                                                                                                                                              
| | Deferred
  income taxes reflect the net tax effects of temporary differences between the
  carrying amounts of assets and liabilities for financial reporting purposes
  and the amounts used for income tax purposes. Deferred tax assets for future
  tax benefits from realization are included where their realization is
  reasonable. As such, the Company has recorded a valuation allowance in regard
  of all its tax losses carried forward as well as for other temporary
  differences.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | Significant
  components of the Companys deferred tax liabilities and assets are as
  follows:                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                         |  | December
  31, |  
| | --------------------------------------- |  | -------------- | -
| |                                         |  |                |  
| |                                         |  | 2003           |  
| |                                         |  |                |  
| |                                         |  | US$ thousands  |  
| |                                         |  |                |  
| | Deferred tax
  assets:                  |  |                |  
| | Provision
  for vacation                |  | 67             |  
| | Liability
  for employees severance pay |  | 166            |  
| | Net
  operating loss carryforwards      |  | 14,897         |  
| | Research
  and development costs, net   |  | 373            |  
| | Others                                  |  | 42             |  
| |                                         |  |                |  
| |                                         |  | 15,545         |  
| | Deferred tax
  liabilities              |  |                |  
| | Others                                  |  | -              |  
| |                                         |  |                |  
| |                                         |  | -              |  
| |                                         |  |                |  
| |                                         |  |                |  
| |                                         |  | 15,545         |  
| | Less:
  Valuation allowance             |  | (15,545        | )
| |                                         |  |                |  
| |                                         |  |                |  
| | Deferred tax
  asset                    |  | -              |  
| |                                         |  |                |  

| | If the undistributed earnings of the Singapore subsidiary of
  approximately US$ 210 thousand were to be distributed as a dividend,
  additional taxes of approximately US$ 46 thousand will be payable (see
  Note 2N2).
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F-35

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 20 - Income Taxes (contd)

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

| |                                                                                               |  | Year ended
  December 31, |  
| | --------------------------------------------------------------------------------------------- |  | ------------------------- | -
| |                                                                                               |  |                           |  
| |                                                                                               |  | 2003                      |  
| |                                                                                               |  |                           |  
| |                                                                                               |  | US$ thousands             |  
| |                                                                                               |  |                           |  
| |                                                                                               |  |                           |  
| | Loss before
  taxes on income                                                                 |  | (6,297                    | )
| |                                                                                               |  |                           |  
| |                                                                                               |  |                           |  
| | Statutory tax
  rate in Israel                                                                |  | 36                        | %
| |                                                                                               |  |                           |  
| |                                                                                               |  |                           |  
| | Theoretical
  tax benefit                                                                     |  | (2,267                    | )
| | Losses
  deductions and expenses in respect of
   which deferred tax assets were not recorded |  | 2,289                     |  
| | Taxes in
  respect of previous years                                                          |  | 143                       |  
| | Non-deductible
  expenses                                                                     |  | 84                        |  
| | Deductible
  expenses                                                                         |  | -                         |  
| | Change in
  beginning-of-year valuation allowance                                             |  | -                         |  
| | Taxes in
  respect of subsidiary                                                              |  | -                         |  
| |                                                                                               |  |                           |  
| |                                                                                               |  |                           |  
| | Actual tax
  expense                                                                          |  | 249                       |  
| |                                                                                               |  |                           |  

| | I.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Income tax assessments           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                  
| | The Company
  has not received any final tax assessments since incorporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | J.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Net operating losses carryforward
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                  
| | Net
  operating loss carryforwards as of December 31, 2003 totaled approximately
  US$ 41.4 million (as of December 31, 2002 approximately US$ 32 million). The
  net operating loss carryforwards have no expiration date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | K.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    | Tax assessments                  
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |                                  
| | In December
  2003, the Income Tax Authority issued a tax assessment for the 1998 tax year,
  pursuant to which the Company is required to pay the balance of its tax
  liabilities in respect of this year, along with a demand for payment of
  additional sums, in the total amount of $1,330 thousand (including interest
  and linkage differences). The Company has submitted an appeal to the Income
  Tax Authority regarding this assessment. In the estimation of Company
  Management, based on the opinion of its professional advisors, the Company
  will not be required to pay additional sums in excess of the provision included
  in the books, in the amount of $ 1,053 thousand.

F-36

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 21 - Monetary Balances In or Linked To Currencies Other
Than The U.S. Dollar

| |                          |  | December
  31, 2003 |  | December
  31, 2002  | 
| | ------------------------ |  | ------------------- |  | -------------------- | 
| |                          |  |                     |  |                      | 
| |                          |  | Israeli
  currency  |  | Foreign
  currencies | 
| |                          |  |                     |  |                      | 
| |                          |  | Linked              |  | Unlinked             | 
| |                          |  |                     |  |                      | 
| |                          |  | US$ thousands       |  | US$ thousands        | 
| |                          |  |                     |  |                      | 
| | Assets                   |  |                     |  |                      | 
| |                          |  |                     |  |                      | 
| | Current
  assets         |  | -                   |  | 1,194                | 
| |                          |  |                     |  |                      | 
| | Long-term
  assets       |  | -                   |  | 25                   | 
| |                          |  |                     |  |                      | 
| |                          |  |                     |  |                      | 
| |                          |  | -                   |  | 1,219                | 
| |                          |  |                     |  |                      | 
| |                          |  |                     |  |                      | 
| | Liabilities              |  |                     |  |                      | 
| |                          |  |                     |  |                      | 
| | Current
   liabilities   |  | 1,273               |  | 2,323                | 
| |                          |  |                     |  |                      | 
| | Long-term
   liabilities |  | -                   |  | -                    | 
| |                          |  |                     |  |                      | 
| |                          |  |                     |  |                      | 
| |                          |  | 1,273               |  | 2,323                | 
| |                          |  |                     |  |                      | 

F-37

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 22 - 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, |  
| | -- | ---------------------------------------------------------------- |  | ------------------------- | -
| |    |                                                                  |  |                           |  
| |    |                                                                  |  | 2003                      |  
| |    |                                                                  |  |                           |  
| |    |                                                                  |  | US$ thousands             |  
| |    |                                                                  |  |                           |  
| | 1. | Total
  revenues:                                                |  |                           |  
| |    | Israel                                                           |  | 1,181                     |  
| |    | Far East                                                         |  | 10,391                    |  
| |    | Italy                                                            |  | 842                       |  
| |    | Rest of
  Europe                                                 |  | 1,199                     |  
| |    | America                                                          |  | 854                       |  
| |    | Africa                                                           |  | -                         |  
| |    |                                                                  |  |                           |  
| |    |                                                                  |  |                           |  
| |    |                                                                  |  | 14,467                    |  
| |    |                                                                  |  |                           |  
| |    |                                                                  |  |                           |  
| | 2. | Major
  customers data as a
   percentage of the total revenues: |  |                           |  
| |    |                                                                  |  |                           |  
| |    | Customer A                                                       |  | 58                        | %
| |    | Customer B                                                       |  | *-                        |  
| |    | Customer C                                                       |  | *-                        |  
| |    |                                                                  |  |                           |  
| |    |                                                                  |  |                           |  
| |    |                                                                  |  | 58                        | %
| |    |                                                                  |  |                           |  

| |                                                                                                                                                                                                                                                                                                        | *  Less
  than 10%.                    
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ---------------------------------------
| |                                                                                                                                                                                                                                                                                                        |                                        
| | B.                                                                                                                                                                                                                                                                                                     | Income from
  royalties and commissions
| |                                                                                                                                                                                                                                                                                                        |                                        
| | In the
  Cooperation agreement the Company signed with MLM, it was provided that in
  respect of those territories in which the project is carried out by one
  party, royalties will be paid to the other party.  The rate of royalties is mainly 4% - 12.5% of the contract
  price (see Note 19A1).

F-38

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 22 - Supplementary Statement of Operation Information
(contd)

| |                                           |  | Year ended
  December 31, | 
| | ----------------------------------------- |  | ------------------------- | 
| |                                           |  |                           | 
| |                                           |  | 2003                      | 
| |                                           |  |                           | 
| |                                           |  | US$ thousands             | 
| |                                           |  |                           | 
| |                                           |  |                           | 
| | C.       Cost
  of sales                  |  |                           | 
| |                                           |  |                           | 
| | Raw
  materials and components            |  | 1,646                     | 
| | Salaries,
  wages and employees benefits |  | 4,403                     | 
| | Subcontractors                            |  | 3,455                     | 
| | Agents fees                               |  | 657                       | 
| | Depreciation                              |  | 477                       | 
| | Other
  manufacturing costs               |  | 2,987                     | 
| |                                           |  |                           | 
| |                                           |  |                           | 
| |                                           |  | 13,625                    | 
| |                                           |  |                           | 

| | D. | Financial items
| | -- | ---------------

| |                                                                              |  | Year ended
  December 31, |  
| | ---------------------------------------------------------------------------- |  | ------------------------- | -
| |                                                                              |  |                           |  
| |                                                                              |  | 2003                      |  
| |                                                                              |  |                           |  
| |                                                                              |  | US$ thousands             |  
| |                                                                              |  |                           |  
| |                                                                              |  |                           |  
| | Financial
  income:                                                          |  |                           |  
| | Interest on
  short-term deposits                                            |  | 41                        |  
| | Interest on
  loans to others and interest from
   non-current
  receivables |  | 57                        |  
| | Other                                                                        |  | 240                       |  
| |                                                                              |  |                           |  
| |                                                                              |  |                           |  
| |                                                                              |  | 338                       |  
| |                                                                              |  |                           |  
| |                                                                              |  |                           |  
| | Financial
  expenses:                                                        |  |                           |  
| | Bank charges
  and interest on short-term credit                             |  | 838                       |  
| | Other                                                                        |  | 207                       |  
| |                                                                              |  |                           |  
| |                                                                              |  |                           |  
| |                                                                              |  | 1,045                     |  
| |                                                                              |  |                           |  
| |                                                                              |  |                           |  
| | Total
  financial (expenses)                                                 |  | (707                      | )
| |                                                                              |  |                           |  

F-39

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 22 - Supplementary Statement Of Operation Information
(contd)

| | E. | Other (income) expenses, net
| | -- | ----------------------------

| |    |                                                                |  | 2003          |   | 2002          |   | 2001          | 
| | -- | -------------------------------------------------------------- |  | ------------- | - | ------------- | - | ------------- | 
| |    |                                                                |  |               |   |               |   |               | 
| |    |                                                                |  | US$ thousands |   | US$ thousands |   | US$ thousands | 
| |    |                                                                |  |               |   |               |   |               | 
| |    |                                                                |  |               |   |               |   |               | 
| |    | Write-down
  of investment in
   available for sale securities |  | -             |   | 141           |   | 317           | 
| |    | Gain from
  sale of available for
   sale securities           |  | (47           | ) | -             |   | -             | 
| |    | Others                                                         |  | (8            | ) | (1            | ) | 2             | 
| |    |                                                                |  |               |   |               |   |               | 
| |    |                                                                |  |               |   |               |   |               | 
| |    |                                                                |  | (55           | ) | 140           |   | 319           | 
| |    |                                                                |  |               |   |               |   |               | 
| |    |                                                                |  |               |   |               |   |               | 
| | F. | Supplementary information on
  statements of operations        |  |               |   |               |   |               | 
| |    |                                                                |  |               |   |               |   |               | 
| |    | Rent                                                           |  | 565           |   | 574           |   | 542           | 
| |    |                                                                |  |               |   |               |   |               | 
| |    |                                                                |  |               |   |               |   |               | 
| |    | Advertising
  costs                                            |  | 35            |   | 61            |   | 73            | 
| |    |                                                                |  |               |   |               |   |               | 
| |    |                                                                |  |               |   |               |   |               | 
| |    | Royalties
  expenses                                           |  | 437           |   | 671           |   | 1,482         | 
| |    |                                                                |  |               |   |               |   |               | 

F-40

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 23 - Related Parties

| | A.                                                                                                                                                                                                                                              | Balances                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------
| |                                                                                                                                                                                                                                                 |                                                                      
| | Related
  parties are comprised of principal shareholders (10% holding of the Companys
  share capital) and their subsidiaries and affiliates as well as affiliates of
  the Company. Transactions with related parties are mainly as follows:
| |                                                                                                                                                                                                                                                
| | 1.                                                                                                                                                                                                                                              | Sales of the
  Companys products and expenses related to such sales.
| | 2.                                                                                                                                                                                                                                              | Interest
  payable on loans received.                                
| | 3.                                                                                                                                                                                                                                              | Payment of
  Management fees.                                        
| | 4.                                                                                                                                                                                                                                              | Purchases of
  services and products.                                
| |                                                                                                                                                                                                                                                 |                                                                      
| | All
  transactions, and terms with related parties were identical to those applied
  to transactions with other customers or suppliers.                                                                                                        

| |                                                           |  | December
  31, | 
| | --------------------------------------------------------- |  | -------------- | 
| |                                                           |  |                | 
| |                                                           |  | 2003           | 
| |                                                           |  |                | 
| |                                                           |  | US$ thousands  | 
| |                                                           |  |                | 
| |                                                           |  |                | 
| | Due from:                                                 |  |                | 
| | Trade receivables - Elisra Electronic Systems Ltd.(*)     |  | -              | 
| | Israel
  Aircraft Industries Ltd.(*)                      |  | 1,788          | 
| | Due to:                                                   |  |                | 
| | Trade payable
  -       Tadiran Spectralink Ltd.(*)       |  | -              | 
| | Israel Aircraft Industries Ltd.(*)                        |  | 989            | 
| | Other payable
  -       Elisra Electronic Systems Ltd.(*) |  | 172            | 
| | Israel Aircraft Industries Ltd.(*)                        |  | 192            | 
| | Short-term loan
  -     Chun Holding L.P.                 |  | 430            | 
| | Long-term loan
  -     Polar Investments Ltd.             |  | 62             | 
| | Koonras Technologies Ltd.                                 |  | 38             | 
| | Elisra Electronic Systems Ltd. (*)                        |  | 381            | 
| | Clal Industries and Investments Ltd. (*)                  |  | 120            | 

| | (*)  A related party until December 2003.
| | -----------------------------------------

F-41

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 23 - Related Parties (contd)

| | B. | Transactions with related parties
| | -- | ---------------------------------

| |                                                                                          |  | Year ended
  December 31, | 
| | ---------------------------------------------------------------------------------------- |  | ------------------------- | 
| |                                                                                          |  |                           | 
| |                                                                                          |  | 2003                      | 
| |                                                                                          |  |                           | 
| |                                                                                          |  | US$ thousands             | 
| |                                                                                          |  |                           | 
| | Income from
  sales (1)(3)                                                               |  | 1,961                     | 
| | Cost of
  sales (mainly Royalties and components for
   systems manufacturing) (1)(2)(3) |  | 604                       | 
| | General and
  administrative expenses (1) (4)                                            |  | 370                       | 
| | Interest
  expense, net (5)                                                              |  | -                         | 

| | (1) | To
  Elisra (*)                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2) | To
  Tadiran Spectralink (*)                                                                                                                                                                                                                                                                                                                                                                                                                              
| | (3) | To Israel Aircraft Industries Ltd. (*)                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (4) | Including
  the salary of the CEO and fees paid to directors.                                                                                                                                                                                                                                                                                                                                                                                             
| | (5) | On
  May 15, 2002, the Company obtained a US$ 4.0 million credit line from Elisra
  Electronics Systems Ltd. (*) (Elisra) of which $500,000 were not utilized,
  which bears interest at the rate of three months LIBOR plus 1%. The proceeds
  of this loan were used to finance the Companys operation until receiving, in
  the third quarter of 2002, a payment of approximately US$ 12.5 million,
  following which the loan was repaid to Elisra.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | (*) | A related party until
  December 2003                                                                                                                                                                                                                                                                                                                                                                                                                     

F-42

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 24 - Effect of Material Differences Between Israeli and
U.S. GAAP

| | A. | The
  consolidated financial statements of the Company conform with generally
  accepted accounting principles in Israel (Israeli GAAP), which differ in
  certain significanrespects from those followed in the United States (U.S.
  GAAP), as described below:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 1. | Deferred Income Taxes                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Under
  Israeli GAAP, deferred taxes are recognized on temporary differences that
  result from changes in exchange rates or indexing when the reporting and
  local currency is the U.S. dollar or a currency linked thereto.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Under U.S.
  GAAP and in accordance with paragraph 9(f) of FAS 109, deferred taxes should
  not be provided for differences that result from changes in exchange rates or
  indexation for tax purposes related to non-monetary assets and liabilities
  that are remeasured using historical exchange rates when the functional
  currency is the reporting currency.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    | Under
  Israeli GAAP, a deferred tax asset is recognized when it is probable that the
  deferred tax asset will be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| |    | Under U.S
  GAAP, a deferred tax asset is recognized when it is more likely than not that
  the deferred asset will be realized.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 2. | Derivative financial instruments                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Under
  Israeli GAAP, derivative financial instruments designated for hedge are
  deferred and recognized when the hedged transactions occur.  Derivative financial instruments that are
  not qualified or designated for hedge accounting are stated in the financial
  statements at their fair value. 
  Changes in fair value are recognized in the statement of income in the
  period in which they occur.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Under U.S.
  GAAP, SFAS No. 133 Accounting for Derivative Instruments and Hedging
  Activities (the Standard) requires that all derivatives will be classified
  on the balance sheet as assets or as liabilities at their fair value.  The change in the fair value of derivatives,
  which are not designated as a hedging instrument, will be recognized in the
  statement of operations in the period of the change.  If the nature and characteristics of a
  derivative meet the definition of a hedge, the changes in the fair value of
  the derivative will be offset from the changes in the fair value of the
  hedged item (assets, liabilities or firm commitments) and will be recognized
  in the statement of operations or as part of comprehensive income, depending
  on the type of the hedge, until the hedged item is recognized in the statement
  of operations. The ineffective part of the hedging derivative will be
  reported in the statement of operations on a current basis.
| |    | The
  Companys derivative financial instruments do not meet the conditions for
  hedging relationship of FAS 133, and therefore have been presented at fair
  value, while all adjustments to fair value are recorded in earnings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 3. | Comprehensive Income                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |    | Israeli GAAP
  does not require disclosure of comprehensive income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| |    | Under U.S. GAAP, the amount of comprehensive income, comprising net
  income and items described as other comprehensive income, such as foreign
  currency translation adjustments, unrealized gains and losses on
  available-for-sale securities and changes in the fair value of derivatives
  that qualify as cash flow hedges, should be reported separately in the
  financial statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

F-43

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 24 - Effect of Material Differences Between Israeli and
U.S. GAAP (contd)

| | A. | The
  consolidated financial statements of the Company conform with generally
  accepted accounting principles in Israel (Israeli GAAP), which differ in
  certain significant respects from those followed in the United States (U.S.
  GAAP), as described below: (contd)                                                                                                                  
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| | 4. | Marketable securities                                                                                                                                                                                                                                                                                                                                                                             
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | According to
  Israeli GAAP                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Marketable
  securities not designated for sale in the short-term are carried at cost
  (regarding debentures, including accumulated interest), except where market
  value is lower and the decline in value is deemed to be permanent.                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | According to
  U.S. GAAP                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | In
  accordance with SFAS 115 unrealized gains and losses on investments in
  available-for-sale securities (purchase and sales transactions which are not
  carried out on an active and frequent basis) are reported as a separate
  component of shareholders equity. Other than temporary decline in the value
  of available-for-sale securities is recorded in the statement of operations.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | For U.S.
  GAAP purposes, the Company has determined, as of the purchase date and as of
  the balance sheets date that its equity securities should be classified as
  available-for-sale securities and stated at fair value, with unrealized gains
  and losses, net of tax, reported as Other Comprehensive Income.                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The effect
  of the above-mentioned difference on the Statement of Changes in
  Shareholders Equity for each of the three years ended December 31, 2003 is
  reported as part of the Other Comprehensive Income.                                                                                                                                                                                 
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| | 5. | Earnings per share                                                                                                                                                                                                                                                                                                                                                                                
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | According to
  Israeli GAAP                                                                                                                                                                                                                                                                                                                                                                       
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The effect
  of options and warrants is included in the computation of basic earnings per
  share only if their exercise is considered probable, based on the ordinary
  relationship between the market price of the shares stemming from the
  exercise of the warrants and the discounted present value of the future
  proceeds derived from the exercise of the options and warrants.        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | The effect
  of convertible debentures is taken into account in the computation of basic
  earnings per share only if their conversion is considered probable, based on
  the relationship between the market price of the shares stemming from the
  conversion and the discounted present value of the convertible debentures.                                                                  
| |    |                                                                                                                                                                                                                                                                                                                                                                                                   
| |    | Diluted
  earnings (losses) per share are computed based on the weighted average number
  of ordinary shares used for computing the basic earnings per share plus
  options, warrants and convertible debentures which were not included in the
  basic earnings per share calculation and which are not anti dilutive.                                                                           

F-44

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 24 - Effect of Material Differences Between Israeli and
U.S. GAAP (contd)

| | A. | The consolidated financial statements of
  the Company conform with generally accepted accounting principles in Israel
  (Israeli GAAP), which differ in certain significant respects from those
  followed in the United States (U.S. GAAP), as described below: (contd)                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 5. | Earnings per share (contd)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | According to
  U.S. GAAP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | U.S. GAAP
  also requires dual presentation of basic and diluted earnings per share for
  entities with complex capital structures as well as a reconciliation of the
  basic EPS computation to the diluted EPS computation.  Basic EPS is calculated by dividing net
  income available to ordinary stockholders, by the weighted average number of
  common shares outstanding.  The
  computation of diluted EPS assumes the issuance of common shares for all dilutive-potential
  common shares outstanding during the reporting period.  The dilutive effect of stock options is
  considered in earnings per share calculations if dilutive, using the if
  converted treasury stock method.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 6. | Liability for termination of
  employer-employee relations                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | According to
  Israeli GAAP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Amounts
  funded by purchase of insurance policies are deducted from the related
  severance pay liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | According to
  U.S. GAAP                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | According to
  U.S. GAAP, the amounts funded should be presented as long-term investments and
  the gross amount of the liability should be presented as a long-term
  liability.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

F-45

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 24 - Effect of Material Differences Between Israeli and
U.S. GAAP (contd)

| | B. | The effect of the differences between
  Israeli and U.S. GAAP of the aforementioned items on the financial statements
  is as follows:
| | -- | --------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                       
| | 1. | On statements of income                                                                                                               

| |                                                                                                                                                    |  | Year ended
  December 31, |  
| | -------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -
| |                                                                                                                                                    |  |                           |  
| |                                                                                                                                                    |  | 2003                      |  
| |                                                                                                                                                    |  |                           |  
| |                                                                                                                                                    |  | US$ thousands             |  
| |                                                                                                                                                    |  |                           |  
| |                                                                                                                                                    |  |                           |  
| |                                                                                                                                                    |  |                           |  
| | Net loss as reported, according to
   Israeli GAAP                                                                                                 |  | (6,546                    | )
| |                                                                                                                                                    |  |                           |  
| | GAAP
  differences                                                                                                                                 |  | -                         |  
| |                                                                                                                                                    |  |                           |  
| |                                                                                                                                                    |  |                           |  
| | Net loss under U.S. GAAP                                                                                                                           |  | (6,546                    | )
| |                                                                                                                                                    |  |                           |  
| |                                                                                                                                                    |  |                           |  
| | Basic and diluted net (loss)
  income per share
   (in U.S. $)                                                                                     |  |                           |  
| |                                                                                                                                                    |  |                           |  
| | As reported,
  according to Israeli GAAP                                                                                                           |  | (0.61                     | )
| |                                                                                                                                                    |  |                           |  
| |                                                                                                                                                    |  |                           |  
| | According to
  U.S. GAAP                                                                                                                           |  | (0.61                     | )
| |                                                                                                                                                    |  |                           |  
| |                                                                                                                                                    |  |                           |  
| | Weighted average number of
  ordinary shares
  outstanding (in thousands) used in basic and
  diluted loss per share calculation under U.S.
  GAAP |  | 10,661                    |  
| |                                                                                                                                                    |  |                           |  

F-46

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 24 - Effect of Material Differences Between Israeli and
U.S. GAAP (contd)

| | 2. | On balance sheet items
| | -- | ----------------------

| |                                                           |  | December
  31, |  
| | --------------------------------------------------------- |  | -------------- | -
| |                                                           |  |                |  
| |                                                           |  | 2003           |  
| |                                                           |  |                |  
| |                                                           |  | US$ thousands  |  
| |                                                           |  |                |  
| |                                                           |  | As
  Reported  |  
| |                                                           |  |                |  
| |                                                           |  |                |  
| | Severance
   pay fund                                     |  | -              |  
| | Derivative
   financial
   instruments                    |  | -              |  
| | Total assets                                              |  | 11,403         |  
| | Liability
  for
   employee
   severance
   benefits, net |  | 460            |  
| |                                                           |  |                |  
| |                                                           |  |                |  
| | Total
   shareholders
   Equity
   (deficit)              |  | (10,176        | )
| |                                                           |  |                |  

| | 3.                                                                         | On statements of cash flow
| | -------------------------------------------------------------------------- | --------------------------
| |                                                                            |                           
| | According to
  U.S. GAAP, supplemental disclosures is required as follows:

| |                 |  | Year ended
  December 31 | 
| | --------------- |  | ------------------------ | 
| |                 |  |                          | 
| |                 |  | 2003                     | 
| |                 |  |                          | 
| |                 |  | US$ thousands            | 
| |                 |  |                          | 
| |                 |  |                          | 
| | Income tax paid |  | 28                       | 
| |                 |  |                          | 
| |                 |  |                          | 
| | Interest
  paid |  | 483                      | 
| |                 |  |                          | 

F-47

---

---

|                                                           
|-----------------------------------------------------------
|B.V.R. Systems (1998) Ltd.                                 
|                                                           
|Notes to the Financial Statements as of
  December 31, 2003
|                                                           

Note 24 - Effect of Material Differences Between Israeli and
U.S. GAAP (contd)

| | 4. | On Statement of Changes in Shareholders
  Equity
| | -- | -------------------------------------------------

|                                                                   |  | Share
  capital    |  | Additional
  paid-in
  capital |   | Accumulated
  other
  comprehensive
  income (loss) |  | Accumulated
  deficit |   | Total           |  
|------------------------------------------------------------------ |  | ------------------ |  | ------------------------------ | - | --------------------------------------------------- |  | --------------------- | - | --------------- | -
|                                                                   |  |                    |  |                                |   |                                                     | 
|                                                                   |  | Number of
  shares |  | Amount                         |   |                                                     |  |                       |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|                                                                   |  |                    |  | US$ (thousands)                |   | US$ (thousands)                                     |  | US$ (thousands)       |   | US$ (thousands) |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Balance as
  of
   January 1, 2001                                 |  | 10,659,701         |  | 2,529                          |   | 21,408                                              |  | (335                  | ) | (20,845         | )
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Changes
  during 2001:                                             |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Net loss for the year                                              |  | -                  |  | -                              |   | -                                                   |  | -                     |   | (930            | )
|Unrealized loss on
   available for sale securities                |  | -                  |  | -                              |   | -                                                   |  | (43                   | ) | -               |  
|Realized loss on investment
   in available for
   sale securities |  | -                  |  | -                              |   | -                                                   |  | 317                   |   | -               |  
|Unrealized profit deriving
   from financial instruments           |  | -                  |  | -                              |   | -                                                   |  | 23                    |   | -               |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Comprehensive loss                                                 |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Balance as
  of
   December 31, 2001                               |  | 10,659,701         |  | 2,529                          |   | 21,408                                              |  | (38                   | ) | (21,775         | )
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Changes
  during 2002:                                             |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Net loss for the year                                              |  | -                  |  | -                              |   | -                                                   |  | -                     |   | (5,792          | )
|Realized loss on investment
   in available for
   sale securities |  | -                  |  | -                              |   | -                                                   |  | 61                    |   | -               |  
|Realization of profit
  deriving
   from financial instruments     |  | -                  |  | -                              |   | -                                                   |  | (1                    | ) | -               |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Comprehensive loss                                                 |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Issuance of ordinary shares                                        |  | 1,173              |  | (1                             | ) | -                                                   |  | -                     |   | -               |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Balance as
  of
   December 31, 2002                               |  | 10,660,874         |  | 2,529                          |   | 21,408                                              |  | 22                    |   | (27,567         | )
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Changes
  during 2003:                                             |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Net loss for the year                                              |  | -                  |  | -                              |   | -                                                   |  | -                     |   | (6,546          | )
|Realization of profit
  deriving
   from financial instruments     |  | -                  |  | -                              |   | -                                                   |  | (22                   | ) | -               |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Comprehensive loss                                                 |  | -                  |  | -                              |   | -                                                   |  | -                     |   | -               |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  
|Balance as
  of
   December 31, 2003                               |  | 10,660,874         |  | 2,529                          |   | 21,408                                              |  | -                     |   | (34,113         | )
|                                                                   |  |                    |  |                                |   |                                                     |  |                       |   |                 |  

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

F-48

---

---

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

|Notes to the Financial Statements as of
  December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 24
- Effect of Material Differences Between Israeli and U.S. GAAP (contd)

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

| |                                                                                                                                                  |  | Year ended
  December 31, |  
| | ------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------------------- | -
| |                                                                                                                                                  |  |                           |  
| |                                                                                                                                                  |  | 2003                      |  
| |                                                                                                                                                  |  |                           |  
| |                                                                                                                                                  |  | US$
  thousands           |  
| |                                                                                                                                                  |  |                           |  
| | Net loss
  attributable to ordinary
   shareholders under U.S. GAAP:                                                                             |  |                           |  
| | As
  reported                                                                                                                                    |  | (6,546                    | )
| | Add:                                                                                                                                             |  |                           |  
| | Stock
  compensation expenses under APB 25                                                                                                       |  | -                         |  
| | Deduct:                                                                                                                                          |  |                           |  
| | Total
  stock-based employee compensation expense
   determined under the fair value based method for
   all amounts, net of related tax effects |  | (249                      | )
| |                                                                                                                                                  |  |                           |  
| |                                                                                                                                                  |  |                           |  
| | Pro-forma                                                                                                                                        |  | (6,795                    | )
| |                                                                                                                                                  |  |                           |  
| |                                                                                                                                                  |  |                           |  
| | Basic and
  diluted loss per share under
   U.S. GAAP in U.S. dollars:                                                                           |  |                           |  
| | As
  reported                                                                                                                                    |  | (0.61                     | )
| | Pro-forma                                                                                                                                        |  | (0.64                     | )

F-49

---

---

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

|Notes to the Financial Statements as of
  December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 24
- Effect of Material Differences Between Israeli and U.S. GAAP (contd)

| | C.                                                                                                                                                                                                               | Stock based compensation (contd)
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------
| |                                                                                                                                                                                                                 
| | The fair
  value of each option grant is estimated on the date of grant using the Black
  & Scholes option-pricing model, with the following assumptions used for
  grants during the years 2001, 2002 and 2003:

| |                                                                         |  | Options granted during2003 |  | Options granted during 2002 |  | Options granted during 2001 | 
| | ----------------------------------------------------------------------- |  | -------------------------- |  | --------------------------- |  | --------------------------- | 
| |                                                                         |  |                            |  |                             |  |                             | 
| |                                                                         |  | May                        |  | November                    |  | February                    | 
| |                                                                         |  |                            |  |                             |  |                             | 
| | Dividend yield (%)                                                      |  | 0                          |  | 0                           |  | 0                           | 
| |                                                                         |  |                            |  |                             |  |                             | 
| | Expected volatility (%)                                                 |  | 113                        |  | 159                         |  | 110                         | 
| |                                                                         |  |                            |  |                             |  |                             | 
| | Risk-free interest rate (%)                                             |  | 1.5                        |  | 1                           |  | 2                           | 
| |                                                                         |  |                            |  |                             |  |                             | 
| | Weighted average expected life (years)                                  |  | 4.7                        |  | 4.7                         |  | 4.7                         | 
| |                                                                         |  |                            |  |                             |  |                             | 
| | Average fair value of
  options granted
   to Companys employees (US$) |  | 0.71                       |  | 0.11                        |  | 2.08                        | 

F-50

---

---

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

|Notes to the Financial Statements as of
  December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 24
- Effect of Material Differences Between Israeli and U.S. GAAP (contd)

| | D.                                                                                                                                                                                          | Data in respect of the option plans                                                                                                                        
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                            
| | As of
  December 31, 2003, 1,660,686options were outstanding. The options are each
  exercisable for one ordinary share at exercise price ranging between US$0.12
  and US$7.875 per share.
| |                                                                                                                                                                                            
| | 1.                                                                                                                                                                                          | A summary of
  status of the Companys stock option plans as of December 31, 2003, 2002 and
  2001, and changes during the years then ended, is as follows:

| |                                                           |  | As at
  December 31, |  
| | --------------------------------------------------------- |  | -------------------- | -
| |                                                           |  |                      |  
| |                                                           |  | 2003                 |  
| |                                                           |  |                      |  
| |                                                           |  | Number of
  options  |  
| |                                                           |  |                      |  
| | Options
   outstanding at
   the beginning
   of the year |  | 1,791,086            |  
| | Granted during
   the year                                |  | 27,000               |  
| | Exercised
   during the year                              |  | -                    |  
| | Forfeited during
   the year                              |  | (157,400             | )
| |                                                           |  |                      |  
| | Outstanding at
   the end of the
   the year              |  | 1,660,686            |  
| |                                                           |  |                      |  
| | Options
   exercisable at
   year-end                     |  | 1,061,086            |  
| |                                                           |  |                      |  

F-51

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---

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

|Notes to the Financial Statements as of
  December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 24
- Effect of Material Differences Between Israeli and U.S. GAAP (contd)

| | 2. | The
  following table summarizes information relating to stock options at
  December 31, 2003:
| | -- | ----------------------------------------------------------------------------------------------

| |                      |  | Options                       |  | Options                       | 
| | -------------------- |  | ----------------------------- |  | ----------------------------- | 
| |                      |  | outstanding                   |  | exercisable                   | 
| |                      |  |                               |  |                               | 
| | Exercise price (US$) |  | Number at
  December 31, 2003 |  | Number at
  December 31, 2003 | 
| |                      |  |                               |  |                               | 
| | 7.875                |  | 106,550                       |  | 106,550                       | 
| | 7.125                |  | 162,636                       |  | 162,636                       | 
| | 4.25                 |  | 40,000                        |  | 40,000                        | 
| | 4.125                |  | 683,000                       |  | 683,000                       | 
| | 4                    |  | 3,000                         |  | 3,000                         | 
| | 2.69                 |  | 35,100                        |  | 18,500                        | 
| | 2.6                  |  | 39,000                        |  | 39,000                        | 
| | 2.5                  |  | 18,000                        |  | 12,000                        | 
| | 2.36                 |  | 449,200                       |  | 449,200                       | 
| | 2.25                 |  | 16,000                        |  | 16,000                        | 
| | 2.06                 |  | 16,200                        |  | 6,200                         | 
| | 2.03                 |  | 20,000                        |  | 20,000                        | 
| | 1.188                |  | 45,000                        |  | 45,000                        | 
| | 0.9                  |  | 6,000                         |  | -                             | 
| | 0.12                 |  | 21,000                        |  | -                             | 
| |                      |  |                               |  |                               | 
| |                      |  |                               |  |                               | 
| |                      |  | 1,660,686                     |  | 1,601,086                     | 
| |                      |  |                               |  |                               | 

| | 3. | Outstanding
  options as at December 31, 2003 may be exercised as follows:
| | -- | --------------------------------------------------------------------------

| |                             |  | Number
  of options |  | Weighted
  average
  exercise
  price (US$) | 
| | --------------------------- |  | ------------------- |  | ------------------------------------------- | 
| |                             |  |                     |  |                                             | 
| | Immediately                 |  | 1,601,086           |  | 3.99                                        | 
| | First year or
  thereafter  |  | 61,600              |  | 2.73                                        | 
| | Second year
  or thereafter |  | 18,000              |  | 0.29                                        | 
| |                             |  |                     |  |                                             | 
| |                             |  |                     |  |                                             | 
| |                             |  | 1,660,686           |  |                                             | 
| |                             |  |                     |  |                                             | 

F-52

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---

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

|Notes to the Financial Statements as of
  December 31, 2003
|-----------------------------------------------------------
|                                                           

Note 24
- Effect of Material Differences Between Israeli and U.S. GAAP (contd)

| | E.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              | Impact of relevant recently issued accounting standards
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                        
| | In December 2003, the FASB issued Interpretation No. 46, revised  Consolidation of Variable Interest Entities, an interpretation of ARB no. 51, or
  FIN 46R.  FIN 46R addresses the
  consolidation of variable interest entities, or VIEs, which include entities
  that have one or more of the following characteristics: (1) the equity
  investment at risk is not sufficient to permit the entity to finance its
  activities without additional subordinated financial support; (2) the equity
  investors lack essential characteristics of a controlling financial interest
  (as defined by FIN 46R); and (3) the equity investors have voting rights that
  are not proportionate to their economic interests, and activities of the
  entity involve or are conducted on behalf of an investor with a
  disproportionally small voting interest. 
  In addition, FIN 46R provides for certain scope exceptions to its application.
  Adoption of this interpretation is required in financial statements that have
  interests in VIEs or potential VIEs, also commonly referred to as
  special-purpose entities, for periods ending after December 15, 2003.  Application for all other types of
  entities is required in financial statements for periods ending after March
  15, 2004.  We do not expect the
  adoption of FIN 46R to have a material impact on our financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | FASB Statement No. 150, Accounting
  for Certain Financial Instruments with Characteristics of both Liabilities
  and Equitywas issued in May 2003.
  This Statement establishes standards for the classification and measurement
  of certain financial instruments with characteristics of both liabilities and
  equity. The Statement also includes required disclosures for financial
  instruments within its scope. For the Company, the Statement was effective
  for instruments entered into or modified after May 31, 2003 and otherwise
  will be effective as of January 1, 2004, except for mandatorily redeemable
  financial instruments. For certain mandatorily redeemable financial
  instruments, the Statement will be effective for the Company on January 1,
  2005. The effective date has been deferred indefinitely for certain other
  types of mandatorily redeemable financial instruments.  The Company is currently evaluating the
  impact of adopting statement 150 on its financial statement.                                                                                                                                                                                                                                                                                                                                                                               
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | FASB Statement No. 149, Amendment of Statement 133 on Derivative
  Instruments and Hedging Activities was issued On April 30, 2003, the FASB issued FASB Statement
  No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
  Activities, which amends FASB Statement No. 133, Accounting for Derivative
  instruments and Hedging Activities, to address (1) decisions reached by the
  Derivatives Implementation Group, (2) developments in other Board projects
  that address financial instruments, and (3) implementation issues related to
  the definition of a derivative. Statement 149 has multiple effective date
  provisions depending on the nature of the amendment to Statement 133. The
  adoption of FASB 149 had no material impact on the Companys financial
  statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

F-53



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Exhibit 12.1

CERTIFICATION BY
CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Ilan
Gillies, certify that:

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

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

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

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

| | a. | designed
  such disclosure controls and procedures, or caused such disclosure and
  procedures to be designed under our supervision, to ensure that material
  information relating to the company, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this annual report is being prepared; | 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                     | 
| | b. | evaluated
  the effectiveness of the companys disclosure controls and procedures and
  presented in this report our conclusions about the effectiveness of the
  disclosure controls and procedures, as of the end of the period covered by
  this report based on such evaluation; and                                                                                            | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                     | 
| | c. | disclosed in
  this report any change in the companys internal control over financial
  reporting that occurred during the period covered by the annual report that
  has materially affected, or is reasonably likely to materially affect, the
  companys internal control over financial reporting;                                                                            | 

5. The companys other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the companys auditors and the audit committee of companys board of directors
(or persons performing the equivalent function):

84

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| | a. | all
  significant deficiencies and material weaknesses in the design or operation
  of internal control over financial reporting which are reasonably likely to
  adversely affect the companys ability to record, process, summarize and
  report financial information; and | 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | b. | any fraud,
  whether or not material, that involves management or other employees who have
  a significant role in the companys internal control over financial
  reporting.                                                                                                  | 

Date: June 28, 2004

| |  | /s/
  Ilan Gillies     
| |  | -----------------------
| |  |                        
| |  | Chief Executive Officer

85

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Exhibit 12.2

CERTIFICATION BY
CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Reuven Shahar, certify that:

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

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

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

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

| | a. | designed
  such disclosure controls and procedures, or caused such disclosure and
  procedures to be designed under our supervision, to ensure that material
  information relating to the company, including its consolidated subsidiaries,
  is made known to us by others within those entities, particularly during the
  period in which this annual report is being prepared; | 
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                     | 
| | b. | evaluated
  the effectiveness of the companys disclosure controls and procedures and
  presented in this report our conclusions about the effectiveness of the
  disclosure controls and procedures, as of the end of the period covered by
  this report based on such evaluation; and                                                                                            | 
| |    |                                                                                                                                                                                                                                                                                                                                                                                     | 
| | c. | disclosed in
  this report any change in the companys internal control over financial
  reporting that occurred during the period covered by the annual report that
  has materially affected, or is reasonably likely to materially affect, the
  companys internal control over financial reporting;                                                                            | 

86

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5. The companys other certifying officers and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the companys auditors and the audit committee of companys board of directors
(or persons performing the equivalent function):

| | a. | all
  significant deficiencies and material weaknesses in the design or operation
  of internal control over financial reporting which are reasonably likely to
  adversely affect the companys ability to record, process, summarize and
  report financial information; and | 
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | 
| | b. | any fraud,
  whether or not material, that involves management or other employees who have
  a significant role in the companys internal control over financial
  reporting.                                                                                                  | 

Date: June 28, 2004

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

87

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Exhibit 13.1

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of B.V.R. Systems (1998) Ltd (the Company)
on Form 20-F for the year ended December 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Ilan Gillies, Chief Executive Officer
of the Company, certify, pursuant to 18 U.S.C. section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:

|1. | the Report
  fully complies with the requirements of section 13(a) of the Securities
  Exchange Act of 1934; and                                         | 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|   |                                                                                                                                                          | 
|2. | the
  information contained in the Report fairly presents, in all material
  respects, the financial condition and results of operations of the Company. | 

Date: June 28, 2004

| |  | /s/
  Ilan Gillies     
| |  | -----------------------
| |  |                        
| |  | Chief Executive Officer

A signed original of this written statement required by Section 906 has
been provided to the Company and will be retained by the Company and furnished
to the Securities and Exchange Commission or its staff upon request.

88

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Exhibit 13.2

CERTIFICATION PURSUANT TO
18 U.S.C SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In
connection with the Annual Report of B.V.R. Systems (1998) Ltd (the Company)
on Form 20-F for the year ended December 31, 2003 as filed with the Securities
and Exchange Commission on the date hereof (the Report), I, Reuven Shahar,
Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section
1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002,
that to my knowledge:

|1. | the Report
  fully complies with the requirements of section 13(a) of the Securities
  Exchange Act of 1934; and                                         | 
|-- | -------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|   |                                                                                                                                                          | 
|2. | the
  information contained in the Report fairly presents, in all material
  respects, the financial condition and results of operations of the Company. | 

Date: June 28, 2004

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

A signed original of this
written statement required by Section 906 has been provided to the Company and
will be retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.

89

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---