UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F


(Mark One)

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

OR

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

For the fiscal year ended December 31, 2007

OR

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

OR

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

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

Commission file number: 0-29884

BVR SYSTEMS (1998) LTD.

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s Name into English)

Israel

(Jurisdiction of incorporation or organization)

16 Hamelacha Street, Park Afek, Rosh Ha’ayin 48091, Israel

(Address of principal executive offices)


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

	Title of each class	Name of each exchange on which registered

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

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

	None

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

	None

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

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

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

Yeso Nox

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

Yeso Nox

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

Yesx Noo


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filero	Accelerated Filero	Non-Accelerated Filerx

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

Item 17x Item 18o

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

U.S. GAAPo

International Financial Reporting Standards as issued by the International Accounting Standards Boardo

Otherx

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

Item 17x Item 18o

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


	TABLE OF CONTENTS

		Page

INTRODUCTION		ii

PART I		1
Item 1.	Identity of Directors, Senior Management and Advisors	1
Item 2.	Offer Statistics and Expected Timetable	1
Item 3.	Key Information	2
Item 4.	Information on the Company	14
Item 5.	Operating and Financial Review and Prospects	30
Item 6.	Directors, Senior Management and Employees	44
Item 7.	Major Shareholders and Related Party Transactions	55
Item 8.	Financial Information	59
Item 9.	Offer and Listing	59
Item 10.	Additional Information	61
Item 11.	Quantitative and Qualitative Disclosures about Market Risk	81
Item 12.	Description of Securities Other than Equity Securities	83

PART II		83
Item 13.	Defaults, Dividend Arrearages and Delinquencies	83
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	83
Item 15.	Controls and Procedures	83
Item 16.	Reserved	85
Item 16A.	Audit Committee Financial Expert	85
Item 16B.	Code of Ethics	85
Item 16C.	Principal Accountant Fees and Services	85
Item 16D.	Exemptions from the Listing Standards for Audit Committees	86
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	86

PART III		87
Item 17.	Financial Statements	87
Item 18.	Financial statements	87
Item 19.	Exhibits	88

SIGNATURE		90

INDEX TO FINANCIAL STATEMENTS		F-1

INTRODUCTION

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

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

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

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

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

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

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

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

PART I


ITEM 1.	Identity of Directors, Senior Management and Advisors

Not applicable.



ITEM 2.	Offer Statistics and Expected Timetable

Not applicable.


ITEM 3.	Key Information

A. Selected Consolidated Financial Data

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

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


	Year Ended December 31,

	2003			2004			2005			2006			2007

	(In thousands)
Statement of Operations Data:
Revenues	$	14,467		$	12,684		$	19,196		$	10,103		$	13,106
Cost of sales:		13,625			10,291			14,806			7,866			10,719
Inventory write off		-			-			-			-			699

Gross profit		842			2,393			4,390			2,237			1,688
Operating expenses:
Research and development		693			294			614			615			959
Selling and marketing		1,778			1,139			1,356			1,430			2,232
General and administrative		4,016			1,822			2,117			2,155			2,343

Total operating expenses		6,487			3,255			4,087			4,200			5,534

Operating profit (loss)		(5,645	)		(862	)		303			(1,963	)		(3,846	)
Financial expenses, net		(707	)		(496	)		(187	)		(185	)		(18	)
Other Income (expenses), net		55			192			(2	)		-			-

Profit (loss) before income taxes		(6,297	)		(1,166	)		114			(2,148	)		(3,864	)
Income tax expense		(249	)		(59	)		-			(75	)		-

Net profit (loss)		(6,546	)		(1,225	)		114			(2,223	)		(3,864	)

Basic and diluted earning (loss) per share		(0.61	)		(0.01	)		0.00			(0.02	)		(0.03	)

Weighted average number of ordinary shares used in computing basic and diluted earning (loss) per share		10,661			106,342			95,528			112,361			116,864


	Year Ended December 31,

	2003			2004			2005			2006			2007

	(In thousands)
Reconciliation to U.S. GAAP:
Net profit (loss)	$	(6,546	)	$	(1,225	)	$	114		$	(2,223	)	$	(3,864	)

Reversal of restatement according to Standard No. 24		-			-			7			-			-

Allocation of share expense issued to service providers under the fair value based method		-			(40	)		(14	)		-			-

Compensation expense for all stock-based awards using the modified prospective method		-			-			-			*(596	)		(601	)

Profit (loss) under U.S. GAAP		(6,546	)		(1,265	)		107			*(2,819	)		(4,465	)

Basic and diluted net profit (loss) per share under U.S. GAAP		(0.61	)		(0.02	)		0.00			*(0.03	)		(0.04	)

Weighted average number of ordinary shares outstanding (in thousands) used in basic profit (loss) per share calculation according to U.S. GAAP		10,661			75,962			95,528			112,361			116,864

Weighted average number of ordinary shares outstanding (in thousands) used in diluted profit (loss) per share calculation according to U.S. GAAP		10,661			75,962			96,921			112,361			116,864


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


	As of December 31,

	2003			2004		2005		2006		2007

	(In thousands)
Consolidated Balance Sheet Data:
Israeli GAAP:
Cash and cash equivalents	$	1,627		$	2,664	$	3,057	$	3,421	$	1,520
Total assets		11,403			13,683		10,111		13,293		10,160
Short-term bank credit and loans		10,116			637		637		636		1,086
Share capital		2,529			21,247		21,306		25,861		25,861
Shareholders equity (deficit)		(10,176	)		3,609		3,777		5, 406		1,560
U.S. GAAP:

Total assets		12,372			14,791		11,244		14,604		11,922

Shareholders equity (deficit)	$	(10,176	)	$	3,609	$	3,777	$	5,406	$	1,560

B. Capitalization and Indebtedness

Not applicable.

C. Reasons for the Offer and Use of Proceeds

Not applicable.

D. Risk Factors

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

Risks Related to our Business

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

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

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

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


Ÿ	implementing further marketing and sales activities;

Ÿ	hiring additional qualified personnel; and

Ÿ	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:


Ÿ	maintain the level of our current operations;

Ÿ	develop new products;

Ÿ	enhance our existing products;

Ÿ	remain current with evolving defense technologies;

Ÿ	take advantage of future opportunities; or

Ÿ	respond to competitive pressures or unanticipated requirements.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Ÿ	economic and political instability;

Ÿ	import or export licensing requirements;

Ÿ	difficulties in collecting accounts receivable;

Ÿ	longer payment cycles;

Ÿ	unexpected changes in regulatory requirements and tariffs;

Ÿ	fluctuations in exchange rates;

Ÿ	potentially adverse tax consequences; and

Ÿ	potentially weak protection of intellectual property rights.

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

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

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

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

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

Risks Relating to Our Location in Israel

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

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

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

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

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

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

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

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

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

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

We have tax benefits that may be discontinued or reduced.

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

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

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

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

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

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

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


ITEM 4.	Information on the Company


A. History and Development of the Company

B.V.R. Systems (1998) Ltd., an Israeli company, was formed in January 1998 to receive all of the assets and liabilities of the defense-related business of BVR Technologies Ltd., or BVR-T, in accordance with the terms of a reorganization plan. The reorganization plan was consummated, and BVR commenced operations as an independent company in October 1998, effective as of January 1, 1998. Our principal executive offices and research and development facilities are located at 16 Hamelacha Street, Afek Industrial Park, Rosh Ha’ayin 48091, Israel, and our telephone number is 972-3-900-8000. Our manufacturing facilities are located in Ashdod, Israel. Our wholly-owned subsidiary, BVR-S Pacific PTE, which is incorporated under the laws of Singapore, is located in Singapore.

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

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

Capital Expenditures

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


B. Business Overview

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

General

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

Live and Embedded Training Systems:


Ÿ	On-Board, Combat Training Systems such as the “Ehud™”; Air Combat Maneuvering Instrumentation, or ACMI, Naval Combat Instrumentation System, or NCMI; and

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

Ÿ	Virtual and Constructive Training Systems:

Ÿ	Flight simulators for fighter aircraft, helicopters, trainer aircraft, unmanned aerial vehicles;

Ÿ	Armored & Gunnery Simulators and Infantry Simulators; Infantry and Special forces Simulators; and

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

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

Our Product Offerings

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

Live and Embedded Training

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

Ehud™ ACMI

Air Combat Maneuvering Instrumentation

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

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

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

Naval Combat Instrumentation System

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

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

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

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

Embedded Simulation

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

Embedded Virtual Avionics Suite, or EVA

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

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

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

In-Flight Electronic Warfare Simulation, or IFEWS

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

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

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

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

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

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

Hybrid Air Defense Embedded Simulation System (HADES)

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

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

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

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

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

For additional information with respect to these purchase orders, see “Item 10. Additional Information – C. Material Contracts.”

Virtual and Constructive Training

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


Ÿ	Flight Simulators;

Ÿ	Ground Forces Simulators;

Ÿ	Naval Simulators;

Ÿ	Weapon and Electronic Systems Simulators;

Ÿ	Air and Missile Defense Simulators

Flight Simulators

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

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

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

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

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

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

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

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

Ground Forces Simulation Systems

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

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

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

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


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

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

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

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


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

	Ÿ	Features unlimited tactically diverse training scenarios with ‘real-life’ 3D audio-visual environment and user-definable Computer Generated Forces;

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

	Ÿ	A laser based hit detection system with high detection accuracy; and

	Ÿ	Saves time and material expenses (with proven ROI) by ‘user- friendly’ calibration procedure, customizable user interface, PC-based scalable and modular system, and network based architecture.

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


	Ÿ	Video and/or graphic ‘real-life’ 3D audio-visual environment for challenging decision-making scenarios;

	Ÿ	Supports military operation in urban terrain; and

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

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


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

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

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

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

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

Air and Missile Defense Simulators

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

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

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

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

Naval Simulators

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

Naval Tactical Trainer

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

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

Raw Materials

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

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


	2003			2004			2005			2006			2007


Live and Embedded Training Systems		46	%		45	%		64	%		56	%		56	%
Virtual and constructive Simulators		54	%		55	%		36	%		44	%		44	%
Total		100	%		100	%		100	%		100	%		100	%

Strategic Relationships

Israel Aircraft Industries Ltd

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

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

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

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

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

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

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

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

Other Strategic Agreements

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

Marketing

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

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

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


	Year Ended December 31,

	2003		2004		2005		2006		2007

			(U.S. Dollars in thousands)

Sales
Israel	$	1,181	$	824	$	1,068	$	2,284	$	398
Asia Pacific		10,391		4,596		6,274		2,120		5,926
Europe		2,041		2,710		8,358		4,557		5,120
America		854		4,554		3,099		1,142		1,662
Africa		-		-		397		-		-

Total	$	14,467	$	12,684	$	19,196	$	10,103	$	13,106

Customers

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

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

General Financial Considerations for Projects

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

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

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

Manufacturing and Suppliers

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

Competition

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

Research and Development

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

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

Intellectual Property

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

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

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

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

C. Organizational Structure

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

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

D. Property, Plant and Equipment

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

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

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


ITEM 5.	Operating and Financial Review and Prospects

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

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

General

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

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

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

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

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

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

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

Critical Accounting Policies

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

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

Adoption of International Financial Reporting Standards (IFRS)

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

Stock-Based Compensation

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

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

Going Concern

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

Revenue Recognition

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

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

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

Impairment in value of assets

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

Income Taxes

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

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

A. Results of Operations

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


	For Years Ended December 31,

	2003			2004			2005			2006			2007


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

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

Subsequent Events

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

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

Revenues.

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

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

Gross Profit (Loss).

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

Research and Development Costs.

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

Selling and Marketing Expenses.

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

General and Administrative Expenses.

Operating Profit (Loss).

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

Financial Expenses, Net.

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

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

Revenues.

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

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

Gross Profit (Loss).

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

Research and Development Costs.

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

Selling and Marketing Expenses.

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

General and Administrative Expenses.

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

Operating Profit (Loss).

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

Financial Expenses, Net.

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

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

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

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


Year ended 31 December	Israeli inflation % rate	Devaluation of the NIS % rate	Israeli inflation adjusted for devaluation %


2003	(1.9)	(7.6)	5.7
2004	1.2	(1.6)	2.8
2005	2.4	6.8	(4.4)
2006	(0.1)	(8.2)	8.1
2007	3.4	(8.97)	12.37

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

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

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

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

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

Effective Corporate Tax Rate

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

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

B. Liquidity and Capital Resources

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

C. Research and Development, Patents and Licenses

See “Item 4 — Information on the Company – B. Business Overview – Research and Development; Intellectual Property.”

D. Trend Information

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

E. Off-Balance Sheet Arrangements

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

F. Tabular Disclosure of Contractual Obligations

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


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


Contractual Obligations⁽¹⁾	Total Amounts Committed		Less than 1 Year		1-3Years		3-5 Years


Borrowed Lines of credit		1,086		1,086

Guarantees:
Performance guarantees		3,118		222		1,984		912
Advance payment guarantees		15,035		1,954		12,828		253
Other bank guarantees		571		571

Total Guarantees		18,724		2,747		14,812		1,165

Operating lease commitments		745		424		321

Total commercial commitments		20,555		4,257		15,133		1,165

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

G. Safe Harbor

Not applicable.


ITEM 6.	Directors, Senior Management and Employees

A. Directors and Senior Management

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


Name	Age		Position


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

* External Director

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

B. Compensation

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

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

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

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

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

C. Board Practices

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

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

External Directors

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


Ÿ	an employment relationship;

Ÿ	a business or professional relationship maintained on a regular basis;

Ÿ	control; and

Ÿ	service as an office holder.

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


Ÿ	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

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

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

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

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

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

Exculpation, Insurance and Indemnification of Directors and Officers

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

Office Holder Insurance

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


Ÿ	a breach of his duty of care to us or to another person;

Ÿ	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

Ÿ	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:


Ÿ	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

Ÿ	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.

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:


Ÿ	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;

Ÿ	a breach by the office holder of his duty of care if the breach was done intentionally or recklessly;

Ÿ	any act or omission done with the intent to derive an illegal personal benefit; or

Ÿ	any fine levied against the office holder.

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

We have obtained liability insurance for our directors and officers.

Audit Committee

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

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

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

Management Employment Agreements

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

Employee Share Option Plans

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

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

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

Employees

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


	Year ended December 31,

Activity	2007		2006		2005

Production & Research and Development		98		66		53
Marketing and Sales		7		4		3
Administration and Management		12		10		10

Total		117		80		66

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

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

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

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

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

D. Share Ownership

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

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


ITEM 7.	Major Shareholders and Related Party Transactions

A. Major Shareholders

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


Name	Number of Ordinary Shares Beneficially Owned⁽¹⁾			Percentage of Outstanding Ordinary Shares⁽²⁾


CHUN Holdings Limited Partnership (³) c/o Yigal Arnon & Co. 1 Azrieli Center Tel-Aviv 67021 Israel		58,142,608			49.71	%

H.S.N General Managers Holdings LP 7 Berkowitz St. Tel Aviv Israel		38,000,000	⁽⁴⁾		28.15	%

Polar Investments House Platinum House 21 Ha’arbah St. Tel Aviv 64731 Israel		6,252,207	⁽⁵⁾		5.34	%

Bank Leumi Le-Israel B.M. 24-32 Yehuda Halevi St. Tel Aviv 63432 Israel		6,111,111			5.22	%


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


(2)	Ordinary shares deemed beneficially owned by virtue of the right of any person or group to acquire these ordinary shares within 60 days of March 31, 2008 are treated as outstanding only for the purposes of determining the percent owned by such person or group. The percentage of outstanding ordinary shares is based on 116,973,757 Ordinary Shares outstanding as of March 31, 2008.

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

(4)	Includes three separate warrants for the purchase of 6,000,000 ordinary shares per each warrant, with exercise prices of $0.36, $0.54 and $1.00, exercisable for a period of three years, with a mandatory exercise mechanism under certain conditions.

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

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

B. Related Party Transactions

Agreement with Consult Wise Pte Ltd.

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

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

Agreement with Eyepoint Ltd.

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

Sale of Shares to Principal Shareholders

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

Sale of Shares to and Issue of Warrants to Chun

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

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

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

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

Options issued to the Chairman of the Board of Directors

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

Sale of Shares and Issuance of Warrants to Investors

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

Convertible Loan Agreements

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

Employment Agreements

We have entered into employment agreements with each of our executive officers. See “Item 6 – Directors, Senior Management and Employees – C. Board Practices—Management Employment Agreements.”

C. Interests of Experts and Counsel

Not applicable.


ITEM 8.	Financial Information

A. Consolidated Statements and Other Financial Information

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

Legal Proceedings

We are not a party to any material legal proceedings.

B. Significant Changes

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


ITEM 9.	The Offer and Listing

A. Offer and Listing Details

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

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


		High		Low

2003
Year ending December 31, 2003	$	1.10	$	0.75

2004
Year ending December 31, 2004	$	1.10	$	0.40

2005
Year ending December 31, 2005	$	0.72	$	0.20

2006
First Quarter	$	0.28	$	0.16
Second Quarter	$	0.27	$	0.22
Third Quarter	$	0.24	$	0.18
Fourth Quarter	$	0.22	$	0.15

2007
First Quarter	$	0.24	$	0.19
Second Quarter	$	0.21	$	0.17
Third Quarter	$	0.19	$	0.16
Fourth Quarter	$	0.20	$	0.14
October	$	0.20	$	0.15
November	$	0.20	$	0.19
December	$	0.19	$	0.14

2008
January	$	0.19	$	0.16
February	$	0.18	$	0.16
March	$	0.20	$	0.15
April	$	0.19	$	0.17
May	$	0.19	$	0.16

B. Plan of Distribution

Not applicable.

C. Markets

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

D. Selling Shareholders

Not applicable.

E. Dilution

Not applicable.

F. Expenses of the Issue

Not applicable.


ITEM 10.	Additional Information

A. Share Capital

Not applicable.

B. Memorandum and Articles of Association

Objects and Purposes

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

Transactions Requiring Special Approval

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

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


	Ÿ	information on the appropriateness of a given action brought for his approval or performed by him by virtue of his position; and

	Ÿ	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:

	Ÿ	refrain from any conflict of interest between the performance of his duties in the company and his personal affairs;

	Ÿ	refrain from any activity that is competitive with the company;


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

	Ÿ	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:


	Ÿ	not in the ordinary course of business;

	Ÿ	not on market terms; or

	Ÿ	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:


	Ÿ	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

	Ÿ	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.

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.

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:


	Ÿ	any amendment to the articles of association;

	Ÿ	an increase of our authorized share capital;

	Ÿ	a merger; or

	Ÿ	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.

Mergers and Acquisitions under Israeli Law

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

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

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

C. Material Contracts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

For a summary of our other material contracts, see:


	Ÿ	“Item 4 – Information on the Company – B. Business Overview – Strategic Relationships,” including a description of the Cooperation Agreement entered into with MLM in August 2005.

	Ÿ	“Item 6 – Directors, Senior Management and Employees – B. Compensation”

	Ÿ	“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.

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

General Corporate Tax Structure

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

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

On March 30, 2005, the Knesset approved a reform of the Encouragement of Capital Investments Law – 1959 (the “Encouragement Reform”).

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

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

A. The Investment Law before the Encouragement Reform

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

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

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

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

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

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

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

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

B. Outline of the primary changes of the Encouragement Reform

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

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

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


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

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

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

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

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

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

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

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

Tax Benefits and Grants for Research and Development

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

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

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

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

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

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

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

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

Special Provisions Relating to Taxation under Inflationary Conditions

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

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

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

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

Capital Gains Tax on Sales of Our Ordinary Shares

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

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

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

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

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

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

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

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

Taxation of Dividends

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

Foreign Exchange Regulations

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

F. Dividends and Paying Agents

Not applicable.

G. Statements by Experts.

Not applicable.

H. Documents on Display

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

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

I. Subsidiary Information

Not applicable.


ITEM 11.	Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

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

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

Equity Price Risk

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

Foreign Currency Exchange Risk

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

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

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

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


ITEM 12.	Description of Securities Other Than Equity Securities

Not applicable.

PART II


ITEM 13.	Defaults, Dividend Arrearages And Delinquencies

Not applicable.


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

Not applicable.


ITEM 15.	Controls and Procedures

Disclosure Controls and Procedures

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

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

Management’s Annual Report on Internal Control Over Financial Reporting

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

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

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

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

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

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

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

Remediation of Material Weaknesses in Internal Control over Financial Reporting

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

Changes in Internal Control over Financial Reporting

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


ITEM 16	Reserved

ITEM 16A	Audit Committee Financial Expert

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

ITEM 16B	Code of Ethics

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

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


ITEM 16C	Principal Accountant Fees and Services

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


	2007		2006
	(In thousands)

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


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

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

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

(4)	In 2006: Fees regarding due diligence of a company BVR considered acquiring. In 2007: Fees regarding the rendering of advisory services with respect to section 404 of the Sarbanes-Oxley Act.

Pre-approval Policies and procedures

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


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

Not applicable.

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

For information relating to the purchase of our securities by Chun LP see “Item 7 – Major Shareholders and Related Party Transactions – B. Related Party Transactions.”

PART III


ITEM 17	Financial Statements

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


ITEM 18	Financial Statements

See Item 17.


ITEM 19	EXHIBITS

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


Exhibit No.		Description

1.1*		Memorandum of Association of Registrant

1.2*		Form of Articles of Association

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

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

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

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

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

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

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

8†		Subsidiaries of the Registrant

10.1		Consent of Independent Registered Public Accounting firm.

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

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

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


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

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

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

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

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

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

SIGNATURE

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


	B.V.R. SYSTEMS (1998) LTD.

	By:	/s/ Ilan Gillies

		Name: Ilan Gillies
		Title: Chief Executive Officer


	By:	/s/ Reuven Shahar

		Name: Reuven Shahar
		Title: Chief Financial Officer

Date: June 30, 2008

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

Financial Statements
As of and for the Year Ended
December 31, 2007

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

Consolidated Financial Statements as of December 31, 2007

	Page




Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets as of December 31, 2007 and 2006	F-3

Consolidated Statements of Operations for the years
ended December 31, 2007, 2006 and 2005	F-5

Statement of Changes in Shareholders' Equity for the years
ended December 31, 2007, 2006 and 2005	F-6

Consolidated Statements of Cash Flows for the years
ended December 31, 2007, 2006 and 2005	F-7

Notes to Consolidated Financial Statements	F-9

Report of Independent Registered Public Accounting Firm
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, 2007 and 2006, and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

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

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

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

Tel Aviv, Israel

June 29, 2008

F - 2

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

Consolidated Balance Sheets as of December 31

			2007		2006
	Note		$ thousands		$ thousands



Assets

Current assets
Cash and cash equivalents		3		1,520		3,421
Restricted bank deposits				1,328		967
Trade receivables		4		2,433		4,383
Other receivables and prepaid expenses		5		313		262
Inventories		6		1,322		2,021


Total current assets				6,916		11,054


Other non-current assets		7		2,242		1,155

Fixed assets, net		8		880		865

Other assets, net		2P		122		219


Total assets				10,160		13,293

——————————————————
Aviv Tzidon
Chairman of the Board of Directors

——————————————————
Ilan Gillies
Chief Executive Officer

——————————————————
Reuven Shahar
Chief Financial Officer

Approval date of the financial statements: June 29, 2008

F - 3

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

Consolidated Balance Sheets as of December 31

			2007			2006
	Note		$ thousands			$ thousands



Liabilities and Shareholders' Equity

Current liabilities
Current maturities of long-term bank loans		13		-			516
Bank overdraft				466			-
Short-term loans from bank and others		9		620			120
Trade payables		10		1,922			1,487
Excess of advances from customers over amounts
recognized as revenue		11		3,591			2,952
Other payables and accrued expenses		12		1,812			2,492


Total current liabilities				8,411			7,567


Long-term liabilities
Long-term payable in respect of income tax				-			154
Liability for employee severance benefits, net		14		189			166


Total long-term liabilities				189			320


Total liabilities				8,600			7,887


Commitments and contingencies		16

Shareholders' equity		15
Share capital:
Ordinary shares, NIS 1.00 par value
400,000,000 shares authorized,
116,863,757 shares issued and outstanding
as of December 31, 2007 and 2006				25,861			25,861
Additional paid-in capital				17,010			16,992
Accumulated deficit				(41,311	)		(37,447	)


Total shareholders' equity				1,560			5,406


Total liabilities and shareholders' equity				10,160			13,293

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

F - 4

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

Consolidated Statements of Operations for the Years Ended December 31

			2007
	Note		$ thousands (except for per share data)



Revenues:
Sales				12,547		9,827		17,450
Royalties and commissions		16A		559		276		1,746

Total revenues		19A		13,106		10,103		19,196


Cost of sales		19B		10,719		7,866		14,806
Inventory write-off				699		-		-

Total cost of revenues				11,418		7,866		14,806


Gross profit				1,688		2,237		4,390


Operating expenses:
Research and development				959		615		614
Selling and marketing				2,232		1,430		1,356
General and administrative				2,343		2,155		2,117


Operating profit (loss)				(3,846	)	(1,963	)	303

Financial expenses, net		19C		(18	)	(185	)	(187	)
Other expenses, net				-		-		(2	)


Profit (loss) before income taxes				(3,864	)	(2,148	)	114
Income tax expense		17		-		(75	)	-


Net profit (loss) for the year				(3,864	)	(2,223	)	114


Earnings (loss) per share
Basic earnings (loss) per share (in $)				(0.03	)	(0.02	)	0.00


Diluted earnings (loss) per share (in $)				(0.03	)	(0.02	)	0.00


Weighted-average number of ordinary
shares of nominal NIS 1.00 par value
outstanding (in thousands) used in
calculation of the basic and diluted
earnings (loss) per share				116,864		112,361		95,528

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

F - 5

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

Statement of Changes in Shareholders' Equity

		Share capital		Additional paid-in capital			Accumulated deficit			Total shareholders' equity
		$ thousands		$ thousands			$ thousands			$ thousands



Balance as of December 31,
2004	95,400,210		21,247		17,700			(35,338	)		3,609

Changes in the year ended
December 31, 2005:

Issuance of shares in respect
of services	263,547		59		(12	)		-			47

Employee stock option
compensation	-		-		7			-			7

Net profit for the year	-		-		-			114			114

Balance as of December 31,
2005	95,663,757		21,306		17,695			(35,224	)		3,777

Changes in the year ended
December 31, 2006:

Issuance of shares in respect
of services	1,200,000		262		(41	)		-			221

Employee stock
option compensation	-		-		31			-			31

Issuance of shares and warrants	20,000,000		4,293		(693	)		-			3,600

Net loss for the year	-		-		-			(2,223	)		(2,223	)


Balance as of December 31,
2006	116,863,757		25,861		16,992			(37,447	)		5,406

Changes in the year ended
December 31, 2007:

Employee stock option
compensation	-		-		18			-			18

Net loss for the year	-		-		-			(3,864	)		(3,864	)


Balance as of December 31,
2007	116,863,757		25,861		17,010			(41,311	)		1,560

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

F - 6

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

Consolidated Statements of Cash Flows for the Years Ended December 31

	2007
	$ thousands



Cash flows from operating activities
Net profit (loss) for the year		(3,864	)	(2,223	)	114
Adjustments to reconcile net profit (loss) to net cash flows
from operating activities (A)		3,352		(219	)	905


Net cash (used in) provided by operating activities		(512	)	(2,442	)	1,019


Cash flows from investing activities
Purchases of fixed assets		(352	)	(295	)	(339	)
Proceeds from sale of fixed assets		-		-		6
Decrease (increase) in restricted bank deposits		(1,487	)	310		224
Other assets		-		(292	)	-


Net cash used in investing activities		(1,839	)	(277	)	(109	)


Cash flows from financing activities
Bank overdraft		466		-		-
Receipt of short-term bank loan		500		-		-
Repayment of long-term loans from banks		(516	)	(517	)	(517	)
Issuance of shares		-		3,600		-


Net cash provided by (used in) financing activities		450		3,083		(517	)


Increase (decrease) in cash and cash equivalents		(1,901	)	364		393
Cash and cash equivalents at the beginning of the year		3,421		3,057		2,664


Cash and cash equivalents at the end of the year		1,520		3,421		3,057

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

F - 7

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

Consolidated Statements of Cash Flows for the Years Ended December 31 (cont'd)

	2007
	$ thousands



A. Adjustments to reconcile net profit (loss) to net
cash flows from operating activities

Income and expenses not involving cash flows:
Gain on sale of fixed assets		-		-		(2	)
Depreciation and amortization		492		394		364
Stock based compensation		18		31		7
Increase in liability for employee severance
benefits, net		23		87		10
Write-off of inventories		699		-		-
Services in exchange for shares issuance		39		114		47


		1,271		626		426


Changes in operating asset and liability items:
Decrease (increase) in trade receivables		1,950		(2,904	)	2,405
Decrease (increase) in other receivables and prepaid expenses		(51	)	68		144
Increase (decrease) in excess of advances from customers
over amount recognized as revenue		639		2,098		(2,425	)
Decrease in inventories		-		55		1,163
Increase (decrease) in trade payables		377		(124	)	(640	)
Decrease in other payables and accrued expenses
(current and non-current)		(834	)	(38	)	(168	)


		2,081		(845	)	479


		3,352		(219	)	905


B. Non-cash transactions
Accounts payable in respect of fixed assets		58		47		-


Prepaid expenses in respect of share issuance		-		107		-


Supplemental information:

Income taxes paid		642		641		317


Interest paid		43		48		49

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

F - 8

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

Notes to the Consolidated Financial Statements

Note 1 – General

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

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

Note 2 – Significant Accounting Policies

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

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

Financial statements in US dollars

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

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

F - 9

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Principles of consolidation

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

Use of estimates

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

Cash equivalents and restricted bank deposits

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

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

Inventories

Inventories are stated at the lower of cost or market value. Cost is determined as follows:






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

	Finished goods	- on the basis of actual manufacturing cost.

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

F - 10

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Trade receivables

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

Allowance for doubtful accounts

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

Fixed assets

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

		%




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

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

F - 11

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Revenue recognition

Recognition of revenues and costs from long-term contracts

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

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

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

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

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

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

Revenue from royalties and commissions

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

Revenue from services

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

F - 12

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Research and development costs

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

Selling and marketing costs

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

Income taxes

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

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

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

Impairment in value of assets

The Company applies Israeli Accounting Standard No. 15 – “Impairment in Value of Assets”. The standard provides procedures which a company must apply in order to ensure that its assets in the consolidated balance sheet (to which the standard applies), are not presented at an amount which is in excess of their recoverable value, which is the higher of the net selling price and the use value (the present value of the estimated future cash flows expected to be derived from use and disposal of the asset).

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

F - 13

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Basic and diluted income (loss) per share

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

Accounting for stock-based compensation

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

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

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

Other assets

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

F - 14

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Other assets (cont’d)

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

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

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

Concentration of credit risk

Financial instruments that potentially subject the Company to concentration of credit risk consist mainly of cash and cash equivalents, restricted bank deposits and trade receivables.

At December 31, 2007 and 2006, the Company had cash and cash equivalents, and restricted bank deposits which were deposited with major Israeli banks. Management believes that the financial institutions that hold the Company’s investments are financially sound, and, accordingly, minimal credit risk exists with respect to these investments.

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

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

Fair value of financial instruments

The fair market value of the Company’s financial instruments, which are cash and cash equivalents, restricted bank deposits, loan from others, trade receivables, short-term debt, trade payables, other payables and accrued expenses approximate their carrying value as of December 31, 2007 and 2006, due to their short-term nature. The carrying amounts of the Company’s borrowings under its loan agreements approximate their fair value, since they bear interest that changes according to LIBOR.

Derivative financial instruments

Derivative financial instruments, not held for hedging, are stated in the financial statements at their fair value. Changes in fair value are recognized in the statement of operations as they occur. The fair value of derivative financial instruments is determined based on their market value and, when there is no market value, then according to a valuation model.

F - 15

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Disclosure of effect of new accounting standards in the period prior to their implementation

Adoption of International Financial Reporting Standards (IFRS)

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

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

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

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

F - 16

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Disclosure of effect of new accounting standards in the period prior to their implementation (cont’d)

Adoption of International Financial Reporting Standards (“IFRS”) (cont’d)

Reconciliation of balance sheet

			January 1, 2007							December 31, 2007
	Note		Israeli GAAP		Effect of the transition to IFRS			IFRS		Israeli GAAP		Effect of the transition to IFRS			IFRS
			$ thousands		$ thousands			$ thousands		$ thousands		$ thousands			$ thousands


Assets
Cash and cash equivalents				3,421		-			3,421		1,520		-			1,520
Restricted bank deposits		C		967		106			1,073		1,328		106			1,434
Trade receivables				4,383		-			4,383		2,433		-			2,433
Other receivables				262		-			262		313		-			313
Inventories				2,021		-			2,021		1,322		-			1,322

Total current assets				11,054		106			11,160		6,916		106			7,022


Other non-current assets		C		1,155		(106	)		1,049		2,242		(106	)		2,136
Property, plant and equipment, net				865		-			865		880		-			880
Other assets, net				219		-			219		122		-			122

Total non-current assets				2,239		(106	)		2,133		3,244		(106	)		3,138


Total assets				13,293		-			13,293		10,160		-			10,160

F - 17

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Disclosure of effect of new accounting standards in the period prior to their implementation (cont’d)

Adoption of International Financial Reporting Standards (“IFRS”) (cont’d)

Reconciliation of balance sheet (cont’d)

			January 1, 2007									December 31, 2007
	Note		Israeli GAAP			Effect of the transition to IFRS			IFRS			Israeli GAAP			Effect of the transition to IFRS			IFRS
			$ thousands			$ thousands			$ thousands			$ thousands			$ thousands			$ thousands


Liabilities
Current maturities of long-term bank loans				516			-			516			-			-			-
Bank overdraft				-			-			-			466			-			466
Short-term loan from bank and other				120			-			120			620			-			620
Trade payables				1,487			-			1,487			1,922			-			1,922
Excess of advances from customers over amounts
recognized as revenue				2,952			-			2,952			3,591			-			3,591
Other payables		A		2,492			(810	)		1,682			1,812			(84	)		1,728
Income taxes payable		E		-			654			654			-			-			-
Provisions		A		-			156			156			-			84			84

Total current liabilities				7,567			-			7,567			8,411			-			8,411

Long-term payables in respect of income tax				154			-			154			-			-			-
Liability for employee severance benefits, net		D		166			(137	)		29			189			(125	)		64

Total non-current liabilities				320			(137	)		183			189			(125	)		64

Total liabilities				7,887			(137	)		7,750			8,600			(125	)		8,475

Shareholders' equity
Share capital				25,861			-			25,861			25,861			-			25,861
Additional paid-in capital		B		16,992			(38	)		16,954			17,010			(56	)		16,954
Accumulated deficit		F,D,B		(37,447	)		175			(37,272	)		(41,311	)		181			(41,130	)

Total shareholders' equity				5,406			137			5,543			1,560			125			1,685

Total liabilities and shareholders' equity				13,293			-			13,293			10,160			-			10,160

F - 18

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Disclosure of effect of new accounting standards in the period prior to their implementation (cont’d)

Adoption of International Financial Reporting Standards (“IFRS”) (cont’d)

Adjustment of earnings

			Year ended December 31, 2007
			Israeli GAAP			Effect of the transition to IFRS			IFRS
	Note		US$ thousands (except for per share data)


Revenues:
Sales				12,547			-			12,547
Royalties and commissions				559			-			559

Total revenues				13,106			-			13,106


Cost of sales		B		10,719			44			10,763
Inventory write-off				699			-			699

Total cost of revenues				11,418			44			11,462


Gross profit (loss)				1,688			(44	)		1,644


Operating expenses:

Research and development				959			-			959
Selling and marketing		B		2,232			9			2,241
General and administrative		B, D		2,343			179			2,522


Total operating expenses				5,534			188			5,722


Operating loss				(3,846	)		(232	)		(4,078	)
Financial income				15			-			15
Financial expenses				(33	)		-			(33	)

Financial costs, net				(18	)		-			(18	)


Loss before income taxes				(3,864	)		(232	)		(4,096	)

Income tax expense				-			-			-


Net loss for the period				(3,864	)		(232	)		(4,096	)


Loss per share:
Basic loss per share (in US$)				(0.03	)		(0.00	)		(0.03	)


Diluted loss per share (in US$)				(0.03	)		(0.00	)		(0.03	)

F - 19

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Disclosure of effect of new accounting standards in the period prior to their implementation (cont’d)

Adoption of International Financial Reporting Standards (“IFRS”) (cont’d)

The effects were reflected upon the adoption of IFRS:

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

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

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

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

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

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

F - 20

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

Notes to the Consolidated Financial Statements

Note 2 – Significant Accounting Policies (cont’d)

Disclosure of effect of new accounting standards in the period prior to their implementation (cont’d)

Adoption of International Financial Reporting Standards (“IFRS”) (cont’d)

The effects were reflected upon the adoption of IFRS (Cont’d):

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

The effect of the aforementioned adjustments on accumulated deficit:

			January 1 2007		December 31 2007
	Note		$ thousands		$ thousands



Share based payments		B		38		56
Employee benefits		D		137		125


				175		181

Note 3 – Cash and Cash Equivalents

	December 31
	2007		2006
	$ thousands		$ thousands


In dollars		68		2,494
In New Israel Shekels		1,086		636
In other foreign currencies (Euro and Singapore Dollar)		366		291


		1,520		3,421

F - 21

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

Notes to the Consolidated Financial Statements

Note 4 – Trade Receivables

	December 31
	2007		2006
	$ thousands		$ thousands


Open accounts		483		1,176
Unbilled revenue *		1,658		2,991
Receivables from related parties (see Note 20A)		-		51
Receivables from IAI (see Note 16A)		292		165


		2,433		4,383


* Unbilled revenue is comprised as follows:

Accumulated amounts recognized as revenues		22,753		24,646
Less - advances from customers		20,748		21,655
Less - provision for losses		347		-

Unbilled revenue		1,658		2,991

Information on contracts for long-term projects

	December 31 2007 and the year then ended		December 31 2006 and the year then ended
	Contracts for projects
	$ thousands		$ thousands


Revenue expected on contracts for long-term projects signed
during the year		37,993		17,694


Portion of the cumulative amount of contracts for long-term projects
not yet recognized as income at the year end		45,920		19,193

Note 5 – Other Receivables and Prepaid Expenses

	December 31
	2007		2006
	$ thousands		$ thousands


Prepaid expenses		163		122
Receivables in respect of work in progress		111		104
Loans to employees		12		23
Others		27		80

		313		329
Less - allowance for doubtful accounts		-		67


		313		262

F - 22

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

Notes to the Consolidated Financial Statements

Note 6 – Inventories

	December 31
	2007		2006
	$ thousands		$ thousands


Finished goods		1,969		1,969
Raw materials		52		52

		2,021		2,021

Inventory write-off		699		-


		1,322		2,021

Note 7 – Other Non-Current Assets

	December 31
	2007		2006
	$ thousands		$ thousands


Non-current restricted bank deposits		2,213		1,087
Non-current prepaid expenses		29		68


		2,242		1,155

Note 8 – Fixed Assets, Net

	Computers and electronic equipment		Manufacturing equipment			Office furniture and equipment			Leasehold improvements			Total
	$ thousands		$ thousands			$ thousands			$ thousands			$ thousands



Cost
Balance as of
December 31, 2006		7,192		2,001			912			274			10,379
Additions		386		-			24			-			410
Disposals		-		(256	)		(11	)		(7	)		(274	)


Balance as of
December 31, 2007		7,578		1,745			925			267			10,515


Accumulated
depreciation
Balance as of
December 31, 2006		6,714		1,993			608			199			9,514
Additions		318		3			46			28			395
Disposals		-		(256	)		(11	)		(7	)		(274	)


Balance as of
December 31, 2007		7,032		1,740			643			220			9,635


Net book value as of
December 31, 2007		546		5			282			47			880


Net book value as of
December 31, 2006		478		8			304			75			865

F - 23

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

Notes to the Consolidated Financial Statements

Note 9 – Short-Term Loan from Bank and Others

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

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

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

Note 10 – Trade Payables

	December 31
	2007		2006
	$ thousands		$ thousands


Payables to IAI (see Note 16A)		164		207
Open accounts		1,414		995
Sub-contractor payables		344		285


		1,922		1,487

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

	December 31
	2007		2006
	$ thousands		$ thousands


Advances from customers		18,614		9,565
Less - cumulative amounts recognized as revenue		15,023		6,613


		3,591		2,952

Note 12 – Other Payables and Accrued Expenses

	December 31
	2007		2006
	$ thousands		$ thousands


Payroll and related accruals		1,128		721
Provision for completion		84		282
Government authorities		56		562
Other accrued expenses		544		927


		1,812		2,492

F - 24

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

Notes to the Consolidated Financial Statements

Note 13 – Long-Term Bank Loans

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

Note 14 – Liability for Employee Severance Benefits, Net

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

	December 31
	2007		2006
	$ thousands		$ thousands


Severance pay liability		1,604		1,477
Less - amounts funded*		1,415		1,311


		189		166

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

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

Note 15 – Shareholders’ Equity

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

	Issued and Outstanding
	December 31
	2007		2006


Ordinary shares of
NIS 1.00 par value		116,863,757		116,863,757

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

F - 25

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

Notes to the Consolidated Financial Statements

Note 15 – Shareholders’ Equity (cont’d)

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

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

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

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

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

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

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

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

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

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

F - 26

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

Notes to the Consolidated Financial Statements

Note 15 – Shareholders’ Equity (cont’d)

Share-based compensation

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

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

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

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

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

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

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

F - 27

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

Notes to the Consolidated Financial Statements

Note 15 – Shareholders’ Equity (cont’d)

Share-based compensation (cont’d)

Option plan information

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

	As of December 31,
	2007					2006					2005
	Number of options			Weighted average exercise price ($)		Number of options			Weighted average exercise price ($)		Number of options			Weighted average exercise price ($)


Options
outstanding at
the beginning
of the year		14,596,600			0.19		14,695,300			0.24		16,026,136			0.52
Granted		260,000			0.20		350,000			0.20		208,000			0.17
Forfeited		(161,400	)		0.56		(448,700	)		1.97		(1,538,836	)		3.23

Outstanding at
the end of
the year		14,695,200			0.19		14,596,600			0.19		14,695,300			0.24

Options
exercisable at
the end of
the year		10,939,200			0.18		8,256,200			0.19		5,805,300			0.33

The following table summarizes information relating to stock options at December 31, 2007:

	Number of Options
	Outstanding		Exercisable



Exercise price ($)

0.2		210,000		-
0.19		50,000		-
0.9		4,000		4,000
0.65		80,000		48,000
0.55		30,000		18,000
0.23		120,000		30,000
0.185		220,000		52,000
0.18		13,836,000		10,720,000
0.17		121,200		55,200
0.145		24,000		12,000


		14,695,200		10,939,200

F - 28

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

Notes to the Consolidated Financial Statements

Note 15 – Shareholders’ Equity (cont’d)

Share-based compensation (cont’d)

Option plan information (cont’d)

Outstanding options as of December 31, 2007 may be exercised as follows:






Immediately	10,939,200	0.18
First year	2,724,000	0.19
Second year or thereafter	1,032,000	0.19


	14,695,200	0.19

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

	Option grant date
	March 2006			June 2006			August 2006			May 2007			November 2007



Share price (in $)		0.19			0.23			0.185			0.2			0.17
Exercise price (in $)		0.19			0.23			0.185			0.2			0.17
Expected volatility		146.63	%		123.58	%		125.29	%		85.82	%		63.88	%
Life of options
(in years)		2-4			2-4			2-4			2-4			2-4
Risk-free
interest rate		4.99	%		5	%		4.93	%		4.82	%		4.82	%
Rate of anticipated
dividends		0			0			0			0			0

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

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

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

F - 29

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

Notes to the Consolidated Financial Statements

Note 16 – Commitments and Contingent Liabilities

Cooperation agreement

The Company developed, manufactured and marketed the “Ehud” system pursuant to a joint venture agreement entered into in 1992 with the MLM division of Israel Aircraft Industries Ltd. (the “IAI Agreement”). Pursuant to the IAI Agreement, the Company and IAI agreed to jointly develop, manufacture and market the “Ehud”, with IAI subcontracting certain of the manufacturing and integration work with respect to the “Ehud” product to the Company.

The Company and IAI currently operate in accordance with an amendment to the IAI agreement executed in August 2005 that amended a prior agreement entered into in 1999. The 2005 agreement governs the cooperation between the parties including in the marketing Naval Combat Maneuvering Instrumentation System in various countries worldwide through the transfer of work share from the leading party to the other and provides guidelines for fair competition between the parties.

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

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

Lease commitments

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

	Year ending December 31,			$ thousand




	2008				424
	2009				321


					745

F - 30

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

Notes to the Consolidated Financial Statements

Note 16 – Commitments and Contingent Liabilities (cont’d)

Liabilities and guarantees

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

On certain occasions the Company deposits cash and cash equivalents with certain financial institutions that have issued guarantees on behalf of the Company in favor of its customers. In order to fulfill the above-mentioned commitments, the Company places a charge on its bank deposits (including the insurance rights attached thereto). At December 31, 2007, there are $3,541 thousand in current and non-current restricted bank deposits (as of December 31, 2006 – $2,054 thousand current and non-current restricted bank deposits).

Guarantees issued by banks in favor of the Company are as follows:

	December 31
	2007		2006
	$ thousands		$ thousands


Performance guarantees		3,118		6,087


Advance payment guarantees		15,035		5,423


Other bank guarantees		571		602

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

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

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

F - 31

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

Notes to the Consolidated Financial Statements

Note 16 – Commitments and Contingent Liabilities (cont’d)

Derivative financial instruments

TheCompany enters, from time to time, into foreign currency future contracts and put and call options contracts to reduce the impact of fluctuations of certain currencies against the dollar resulting primarily from firm commitments not denominated in dollars. Gains or losses resulting from qualified hedges of firm commitments are deferred and recognized when the hedged transactions occur, while results of transactions which do not meet all the criteria specified in SFAS 52 and SFAS 80 are recorded as financial income or expense.

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

				Amounts receivable		Amounts payable		Fair value		Book value
				$ thousands		$ thousands		$ thousands		$ thousands



Future currency contract	NIS	Dollar	14/1/08		254,582		250,000		4,585		4,585

Note 17 – Income Taxes

Tax benefits under the Israeli Law for the Encouragement of Industry (Taxes), 1969

The Company is an “industrial company”, as defined by this law and, as such, is entitled to certain tax benefits, mainly accelerated depreciation of machinery and equipment, as prescribed by regulations published under the Israeli Income Tax (Inflationary Adjustments) Law, 1985 (see Note 17C), the right to claim public issuance expenses and amortization of patents and other intangible property rights as a deduction for tax purposes.

Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (“the Law”)

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

In 1998, the Company applied for approval of the expansion of its facilities in Rosh Ha’ayin (“the second plan”).

In addition, in 2001 the Company filed a request for an additional new plan to expand its production facilities in Rosh Ha’ayin (“the third plan”). The request was approved in 2002.

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

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

F - 32

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

Notes to the Consolidated Financial Statements

Note 17 – Income Taxes (cont’d)

Tax benefits under the Israeli Law for the Encouragement of Capital Investments, 1959 (“the Law”)(cont’d)

The Company’s Board of Directors has determined that such tax-exempt income will not be distributed as dividends. Accordingly, no deferred income taxes have been provided on income attributable to the Company’s “Approved Enterprise”.

If the retained tax-exempt income is distributed in a manner other than the complete liquidation of the Company, it would be taxed at the corporate tax rate applicable to such profits as if the Company had not chosen the alternative tax benefits (currently – 25%). As of December 31, 2007, the Company has accumulated losses (see Note 17I).

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

As of December 31, 2007, the Company’s management is of the opinion that it is in compliance with all of the aforementioned terms.

Measurement of taxable income under the Income Tax (Inflationary Adjustments) Law, 1985 (“TheInflationary Adjustments Law”)

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

Tax rates applicable to income from other sources in Israel

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

On July 25, 2005, the Knesset passed the Israeli “Law for the Amendment of the Income Tax Ordinance (147 and Temporary Order) – 2005” (hereinafter – the Amendment).

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

Taxation of foreign subsidiary

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

F - 33

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

Notes to the Consolidated Financial Statements

Note 17 – Income Taxes (cont’d)

Deferred income taxes

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

Deferred tax assets for realization of future tax benefits are included where their realization is probable. As such, the Company has recorded a valuation allowance in respect of all its tax losses carried forward as well as for other temporary differences.

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

	December 31
	2007			2006
	$ thousands			$ thousands


Deferred tax assets
Provision for vacation		116			79
Liability for employees severance benefit, net		47			41
Net operating loss carryforwards		14,169			11,756
Impairment of inventory		173			-
Research and development costs, net		229			162
Issuance expenses		-			22
Capitalized software expenses		(37	)		(60	)
Others		26			12


		14,723			12,012
Less: Valuation allowance		(14,723	)		(12,012	)


Net deferred tax asset		-			-

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

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

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

F - 34

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

Notes to the Consolidated Financial Statements

Note 17 – Income Taxes (cont’d)

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
	2007			2006			2005
	$ thousands			$ thousands			$ thousands


Profit (loss) before taxes on income		(3,864	)		(2,148	)		114


Statutory tax rate in Israel		29	%		31	%		34	%


Theoretical tax cost (benefit)		(1,121	)		(666	)		39
Losses, deductions and expenses in respect of
which deferred tax assets were not recorded		1,071			640			(113	)
Taxes in respect of previous years		-			75			-
Non-deductible expenses		50			26			74


Actual tax expense		-			75			-

Income tax assessments

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

Net operating loss carryforwards

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

Note 18 – Monetary Balances in Currencies Other than the US Dollar

	December 31, 2007				December 31, 2006
	Israeli currency		Other foreign currencies		Israeli currency		Other foreign currencies
	$ thousands		$ thousands		$ thousands		$ thousands


Assets
Current assets		1,456		874		736		1,389


Total assets		1,456		874		736		1,389


Liabilities
Current liabilities		2,690		55		1,919		306
Long-term liabilities		189		-		320		-


Total liabilities		2,879		55		2,239		306

F - 35

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

Notes to the Consolidated Financial Statements

Note 19 – Supplementary Statement of Operation Information

Summary information about geographical areas:

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

	Year ended December 31
	2007		2006		2005
	$ thousands		$ thousands		$ thousands


Total revenues from:
Israel		398		2,284		1,068
Far East		5,926		2,120		6,274
Europe		5,120		4,557		8,358
Africa		-		-		397
America		1,662		1,142		3,099


Total revenues		13,106		10,103		19,196

Major customers’data as a percentage of the total revenues:

	Year ended December 31
	2007			2006			2005
	$ thousands			$ thousands			$ thousands


Customer A		*			18	%		*
Customer B		*			17	%		*
Customer C		21	%		16	%		*
Customer D		32	%		12	%		15	%
Customer E		-			-			31	%
Customer F		*			*			14	%
Customer G		13	%		*			11	%


		66	%		63	%		71	%

* Less than 10%

F - 36

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

Notes to the Consolidated Financial Statements

Note 19 – Supplementary Statement of Operation Information (Cont’d)

Cost of revenues

	Year ended December 31
	2007		2006		2005
	$ thousands		$ thousands		$ thousands


Raw materials and components		1,513		*976		2,420
Salaries, wages and employees' benefits		4,028		*2,663		2,645
Subcontractors		2,006		*2,020		6,181
Agents fees		848		438		2,253
Depreciation		368		*274		263
Other manufacturing costs		1,956		*1,495		1,044
Inventory write-off		699		-		-


		11,418		7,866		14,806

* Reclassified

Financial expenses, net

	Year ended December 31
	2007			2006			2005
	$ thousands			$ thousands			$ thousands


Financial income:
Interest on short-term deposits		160			140			69
Other		71			40			102


		231			180			171


Financial expenses:
Bank charges and interest on long-term loan		225			203			275
Other		24			162			83


		249			365			358


Total financial expenses, net		(18	)		(185	)		(187	)

Note 20 – Related Parties

Balances

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

Sales of the Company’s products, and expenses related to such sales.

Interest payable on loans received.

Payment of management fees.

Purchases of services and products.

F - 37

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

Notes to the Consolidated Financial Statements

Note 20 – Related Parties (cont’)

Balances (cont’d)

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

			December 31
			2007		2006
			$ thousands		$ thousands


Due from:
Cash and cash equivalents	-	Bank Leumi Ltd.		6		1,516
Restricted bank deposits	-	Bank Leumi Ltd.		510		707

Trade receivables	-	ST Training and Simulation Pte Ltd.		-		51

Other receivables	-	Bank Leumi Ltd.		63		8
		Prescient Systems and Technologies Pte Ltd.		-		30

Other Non-current assets	-	Bank Leumi Ltd.		975		169

Due to:
Bank overdraft	-	Bank Leumi Ltd.		466		229

Other payable	-	Bank Leumi Ltd.		-		4
		Prescient Systems and Technologies Pte Ltd.		-		40
		ST Training and Simulation Pte Ltd.		-		360

Transactions with related parties

	Year ended December 31
	2007			2006		2005
	$ thousands			$ thousands		$ thousands


Sales⁽¹⁾		205			577		775
Cost of sales^{(1) (2)}		366			408		59
Marketing expenses⁽²⁾		-			4		65
General and administrative expenses⁽⁴⁾		152			167		137
Finance expenses, net⁽³⁾		(9	)		37		66

⁽¹⁾

To ST Training and Simulation Pte Ltd.

⁽²⁾

To Prescient Systems and Technologies Pte Ltd.

⁽³⁾

To Bank Leumi

⁽⁴⁾

Including the salary of the CEO and fees paid to directors

Agreement with Eyepoint Ltd.

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

F - 38

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

Notes to the Consolidated Financial Statements

Note 21 – Differences between Israeli GAAP and US GAAP

The effect of the differences between Israeli GAAP and US GAAP on the financial statements

As discussed in Note 2, the accompanying consolidated financial statements were prepared in accordance with Israeli GAAP, which differ in certain respects from US GAAP. Information related to the nature and effect of such differences is presented below.

Reconciliation of:

Israeli GAAP net income to net income according to US GAAP:

	Year ended December 31
	2007			2006			2005
	$ thousands			$ thousands			$ thousands


Net profit (loss) as reported, according to
Israeli GAAP		(3,864	)		(2,223	)		114
GAAP differences:
Reversal of restatement according to Standard No. 24		-			-			7
Allocation of share expense issued to service
providers under the fair value based method		-			-			(14	)
Compensation expense for all stock-based awards
using the modified prospective method		(601	)		*(596	)		-


Net profit (loss) according to US GAAP		(4,465	)		(2,819	)		107


* Restated, see Note 21B

I. Basic and diluted net profit (loss)
per share
As reported, according to Israeli GAAP		(0.03	)		(0.02	)		0.00


According to US GAAP		(0.04	)		(0.03	)		0.00


II. Weighted average number of ordinary
shares outstanding (in thousands) used in
basic profit (loss) per share calculation
according to US GAAP		116,864			112,361			95,528


Weighted average number of ordinary
shares outstanding (in thousands) used in
diluted profit (loss) per share calculation
according to US GAAP		116,864			112,361			96,921

F - 39

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

Notes to the Consolidated Financial Statements

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

The effect of the differences between Israeli GAAP and US GAAP on the financial statements (cont’d)

Reconciliation of (cont’d):

Shareholders’ equity according to US GAAP:

	Share capital		Additional paid-in capital			Accumulated deficit			Total shareholders' equity
	$ thousands		$ thousands			$ thousands			$ thousands



Balance as of December 31, 2004		21,247		17,740			(35,378	)		3,609
Net profit for the year		-		-			107			107
Issuance of shares in respect
of services		59		(12	)		-			47
Stock-based compensation		-		14			-			14

Balance as of December 31, 2005		21,306		17,742			(35,271	)		3,777
Net loss for the year		-		-			(2,819	)		(2,819	)
Issuance of shares and warrants		4,293		(693	)		-			3,600
Issuance of shares in respect
of services		262		(41	)		-			221
Stock-based compensation		-		627			-			627

Balance as of December 31, 2006		25,861		17,635			(38,090	)		5,406
Net loss for the year		-		-			(4,465	)		(4,465	)
Stock-based compensation		-		619			-			619

Balance as of December 31, 2007		25,861		18,254			(42,555	)		1,560

Condensed balance sheet items

	December 31
	2007						2006
	$ thousands
	As reported		Adjustment		As per US GAAP		As reported		Adjustment		As per US GAAP

Severance pay fund		-		1,415		1,415		-		1,311		1,311


Total assets		10,507		1,415		11,922		13,293		1,311		14,604


Liability for employee
severance benefits, net		189		1,415		1,604		166		1,311		1,477


Total liabilities		8,947		1,415		10,362		7,887		1,311		9,198


Total shareholders'
equity		1,560		-		1,560		5,406		-		5,406

F - 40

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

Notes to the Consolidated Financial Statements

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

Restatement

The statement of operations in accordance with US GAAP for the year ended December 31, 2006 has been restated in order to reflect a correction relating to compensation expenses due to calculation error.

	Year ended December 31 2006
	$ thousands



Stock option expenses - as reported		130
Stock option expenses - as restated		596
Net loss according to US GAAP - as reported		2,353
Net loss according to US GAAP - as restated		2,819
Basic and diluted net loss per share - as reported		0.02
Basic and diluted net loss per share - as restated		0.03

Accounting principles generally accepted in Israel compared to accounting principles generallyaccepted in the United States

Liability for termination of employer-employee relations

According to Israeli GAAP

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

According to US GAAP

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

Stock options granted to employees, service providers and other non-employees and stock issued toservice providers

According to Israeli GAAP

Until December 31, 2005, the Company recorded expenses with respect to stock options granted to employees and service providers that provide similar services to those provided by employees, in accordance with the intrinsic value method described in APB 25 “Accounting for Stock Issued to Employees”. Shares issued to service providers were recorded based on the cost of service at the grant date of the shares issued.

As of January 1, 2006, the Company applies Standard No. 24 and records expense for share-based payment transactions conducted after March 15, 2005 and not yet vested at January 1, 2006, the expenses recorded in accordance with the fair value of the options on the grant date using the Black-Scholes model.

F - 41

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

Notes to the Consolidated Financial Statements

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

Accounting principles generally accepted in Israel compared to accounting principles generallyaccepted in the United States (cont’d)

Stock options granted to employees, service providers and other non-employees and stock issued toservice providers (cont’d)

According to US GAAP

Stock options granted to employees

Prior to fiscal 2006, the Company applied the intrinsic value method as prescribed in APB25, and related interpretations, in accounting for stock options granted under the stock option plan. Under the intrinsic value method, no compensation cost is recognized if the exercise price of the Company’s employee stock options was equal to or greater than the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost was recognized in the accompanying consolidated statements of operation prior to fiscal year 2006 on stock options granted to employees, since all options granted under the Company’s stock option plan had an exercise price equal to the market value of the underlying common stock on the date of grant.

As of January 1, 2006, the Company adopted SFAS 123 (revised 2004), “Share-Based Payments”) (SFAS 123R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards based upon the fair value on the date of grant and recognition of such compensation cost over the service period for awards expected to vest. Under this method, the Company recognizes compensation cost for awards granted on or after January 1, 2006, based on the Black-Scholes option-pricing model. In addition, the Company recognizes compensation cost for unvested share-based awards as of January 1, 2006 based on the grand date fair value of those awards, as previously calculated and reported for pro-forma disclosure purposes, over the requisite service period of the awards.

Stock warrants granted to service providers and other non-employees and stock issued to service providers

The Company accounts for such awards in accordance with the provisions of EITF 96-18, “Accounting for Equity Instruments That are Issued to Other than Employees for Acquiring, or in Conjunction of Selling, Goods or Services”. Since the warrants issued by the Company are not fully vested, and no performance commitment as defined in EITF 96-18 has been reached, the Company estimates the cost of the unvested warrants based on the fair value of the warrants at each reporting period (using the Black-Scholes model) and accounts for the portion of the services that the recipient has rendered to date using that estimate.

F - 42

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

Notes to the Consolidated Financial Statements

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

Accounting principles generally accepted in Israel compared to accounting principles generallyaccepted in the United States (cont’d)

Recently adopted accounting standards

Effective January 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 48 “Accounting for Uncertain Tax Positions – An Interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 addresses the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a threshold of more-likely-than-not for recognizing and derecognizing of tax positions taken or expected to be taken in a tax return. FIN 48 also provides related guidance on measurement, classification, interest and penalties, and disclosure. Under Israeli GAAP there is no specific accounting guidance for uncertainties in income taxes. There was no material effect on the financial statements resulting from adoption FIN 48. As a result, the Company did not record any cumulative effect related to adopting FIN 48.

Recently issued accounting standards

In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“Statement 157”). Statement 157 defines fair value, establishes a framework for the measurement of fair value, and enhances disclosures about fair value measurements. The statement does not require any new fair value measurement. The statement is effective for fair value measures already required or permitted by other standards for fiscal years beginning after November 15, 2007. The Company is required to adopt statement 157 beginning on January 1, 2008. Statement 157 is required to be applied prospectively, except for certain financial instruments. Any transition adjustment will be recognized as an adjustment to opening retained earnings in the year of adoption. In February 2008, the FASB approved FSP FAS 157-2, which grants proposed a one year deferral of Statement 157‘s fair value measurement requirements for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The Company does not believe that the adoption of the provisions of SFAS No. 157 will materially impact its financial position, results of operations or cash flows.

In February 2007, the FASB issued FASB Statement No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115” (“Statement 159”), which permits entities to irrevocably choose to measure many financial assets and liabilities at fair value that are not currently required to be measured at fair value. If the fair value option is elected, change in fair value would be recorded in results of operation at each subsequent reporting date. The Statement allows entities to achieve an offset accounting effect for certain changes in fair value of certain related assets and liabilities without having to apply complex hedge accounting provisions, and is expected to expand the use of fair value measurement consistent with the Board’s long-term objectives for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company does not believe that the adoption of the provisions of SFAS No. 159 will materially impact its financial position, results of operations or cash flows.

F - 43

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

Notes to the Consolidated Financial Statements

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

Accounting principles generally accepted in Israel compared to accounting principles generallyaccepted in the United States (cont’d)

Recently issued accounting standards (cont’d)

In June 2007, the FASB reached a final consensus on Emerging Issues Task Force Issue 07-3 “Accounting for Advance Payments for Goods or Services to Be Used in Future Research and Development Activities” (“EITF 07-3”). The consensus reached by the FASB requires companies involved in research and development activities to capitalize such non-refundable advance payments for goods and services pursuant to an executory contractual arrangement because the right to receive those services in the future represents a probable future economic benefit. Those advance payments will be capitalized until the goods have been delivered or the related services have been performed. The consensus on EITF 07-3 is effective prospectively for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. The Company does not believe that the adoption of the provisions of EITF 07-3 will materially impact its financial position, results of operations or cash flows.

In December 2007, the FASB issued FASB Statements No. 141R “Business combinations” (Statement 141R) and FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements” – an amendment to ARB 51 (Statement 160). Statements 141R and 160 require most identifiable assets, liabilities, noncomtrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and required noncontrolling interests (previously referred to as minority interests)to be reported as a component of equity, which change the accounting for transactions with noncontrolling interest holders. Both statements are effective for periods beginning on or after December 15, 2008 and earlier adoption is prohibited. Statement 141R will be applied to business combinations occurring after the effective date and statement 160 will be applied prospectively to all noncontrolling interests, including any that arose before the effective date. The Company does not believe that the adoption of statements 141R and 160 will have any impact on its result of operation and financial position.

F - 44

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Eviation Aircraft (EVTNF) Inactive 20-F2007 FY Annual report (foreign)

Content analysis

Contents

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

Note 1 – General

Note 2 – Significant Accounting Policies

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 2 – Significant Accounting Policies (cont’d)

Note 3 – Cash and Cash Equivalents

Note 4 – Trade Receivables

Note 5 – Other Receivables and Prepaid Expenses

Note 6 – Inventories

Note 7 – Other Non-Current Assets

Note 8 – Fixed Assets, Net

Note 9 – Short-Term Loan from Bank and Others

Note 10 – Trade Payables

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

Note 12 – Other Payables and Accrued Expenses

Note 13 – Long-Term Bank Loans

Note 14 – Liability for Employee Severance Benefits, Net

Note 15 – Shareholders’ Equity

Note 15 – Shareholders’ Equity (cont’d)

Note 15 – Shareholders’ Equity (cont’d)

Note 15 – Shareholders’ Equity (cont’d)

Note 15 – Shareholders’ Equity (cont’d)

Note 16 – Commitments and Contingent Liabilities

Note 16 – Commitments and Contingent Liabilities (cont’d)

Note 16 – Commitments and Contingent Liabilities (cont’d)

Note 17 – Income Taxes

Note 17 – Income Taxes (cont’d)

Note 17 – Income Taxes (cont’d)

Note 17 – Income Taxes (cont’d)

Note 18 – Monetary Balances in Currencies Other than the US Dollar

Note 19 – Supplementary Statement of Operation Information

Note 19 – Supplementary Statement of Operation Information (Cont’d)

Note 20 – Related Parties

Note 20 – Related Parties (cont’)

Note 21 – Differences between Israeli GAAP and US GAAP

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

Note 21 – Differences between Israeli GAAP and US GAAP (cont’d)

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