SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549
                                   FORM 20-F/A
                                 AMENDMENT NO. 1

        [ ]    REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
                  12 (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, 2001
                                       or
        [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
                  For the transition period from _____ to _____
                         Commission file number: 0-15375

                         RADA ELECTRONIC INDUSTRIES LTD.
              (Exact Name of Registrant as Specified in Its Charter
               and Translation of Registrant's Name Into English)

                                     Israel
                 (Jurisdiction of Incorporation or Organization)

                 7 Giborei Israel Street, Netanya 42504, Israel
                    (Address of Principal Executive Offices)

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

 Securities registered or to be registered pursuant to Section 12(g) of the Act:
                      Ordinary Shares, NIS 0.005 Par Value
                                (Title of Class)

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

Indicate the number of  outstanding  shares of each of the  issuer's  classes of
capital  or common  stock as of the close of the  period  covered  by the annual
report:
              Ordinary Shares, par value NIS 0.005 per share..........13,816,839
              (as of December 31, 2001)

Indicate  by check  mark  whether  the  registrant:  (1) has filed  all  reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.
                                 Yes X No _____

Indicate by check mark which financial statement item the registrant has elected
to follow:
                              Item 17___ Item 18 X

This  annual  report  on  Form  20-F  is  incorporated  by  reference  into  the
registrant's Registration Statement on Form F-3, Registration No. 333-12074.


<PAGE>


ITEM 18. FINANCIAL STATEMENTS
         --------------------

     We are filing our audited consolidated financial statements pursuant to SEC
Temporary  Final  Rule and Final  Rule:  Requirements  for Arthur  Andersen  LLP
Auditing Clients; Rel. No. 33-8070.

     In our  unaudited  balance  sheets  as of  December  31,  2000  and 2001 we
classified our accrued  severance pay net of deposits with insurance  companies.
Under  Israeli  law and  labor  agreements,  the  Company  is  required  to make
severance and/or pension payments to employees who are dismissed,  as well as to
those leaving employment under certain other circumstances.  In respect of these
liabilities,  regular  deposits are made with various  severance pay and pension
funds and insurance companies.  On advice of our auditors and in accordance with
US GAAP,  our audited  balance  sheets as of December 31, 2000 and 2001 classify
the  total  amount of  severance  liability  as a  long-term  liability  and the
deposits as a long-term asset rather than classifying our accrued  severance pay
net of deposits with  severance  pay and pension funds and insurance  companies,
which classification has no effect on our results of operations and shareholders
equity.



AUDITED CONSOLIDATED FINANCIAL STATEMENTS

    Index To Audited Financial Statements..................................F-1

    Report of Independent Auditors.........................................F-2

    Audited Consolidated Balance Sheets....................................F-3

    Audited Consolidated Statements of Operations..........................F-5

    Audited Statements of Changes in Shareholders' Equity (Deficit)........F-6

    Audited Consolidated Statements of Cash Flows..........................F-7

    Notes to Audited Consolidated Financial Statements.....................F-9






                                       74

<PAGE>

ITEM 19  EXHIBITS
         --------

         INDEX TO EXHIBITS

         Exhibit      Description
         -------      -----------

          3.1*        Memorandum of Association of the Registrant

          3.2*        Articles of Association of the Registrant

          4.1*        Specimen of Share Certificate

         10.1*        1993 Employee Stock Option Plan, as amended

         10.2*        1994 Employee Stock Option Plan, as amended

         10.3*        1996 Employee Stock Option Plan, as amended

         10.4*        1999 Employee Stock Option Plan, as amended

         10.5*        Form of warrants to directors

         10.6*        Loan Agreement dated June 3, 2001 between the Registrant
                      and Mr. Howard Yeung

         10.7*        Deed of Termination of Joint Venture  Agreement dated June
                      3, 2001, effective as of January 1, 2000 and Agreement for
                      the acquisition of part of the issued share capital of New
                      Reef  Holding  Ltd.  dated June 3, 2001,  effective  as of
                      January 1, 2000

         10.8**       Letter Agreement dated May 15, 2002 between the Registrant
                      and the authorized  representative  of Howard P.L. Yeung
                      re Conversion of Outstanding Loans into Ordinary Shares
                      and Warrants

         10.9**       Letter Agreements dated May 15, 2002 between the
                      Registrant and the Investors re Private Placement of
                      Ordinary Shares and Warrants

         23.1         Consent of Kost, Forer & Gabbay, Certified Public
                      Accountants (Israel)

         99.1         CEO Certification Pursuant To 18 U.S.C. Section 1350 As
                      Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act
                      Of 2002

         99.2         CFO Certification Pursuant To 18 U.S.C. Section 1350 As
                      Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act
                      Of 2002
------------------
*    Filed as an exhibit  to our  Annual  Report on Form 20-F for the year ended
     December 31, 2000 and incorporated herein by reference.
**   Filed as an exhibit  to our  Annual  Report on Form 20-F for the year ended
     December 31, 2001 and incorporated herein by reference.


                                       75

<PAGE>






                         RADA ELECTRONIC INDUSTRIES LTD.


                                                                      Page


Index To Audited Financial Statements..................................F-1

Report of Independent Auditors.........................................F-2

Audited Consolidated Balance Sheets....................................F-3

Audited Consolidated Statements of Operations..........................F-5

Audited Statements of Changes in Shareholders' Equity (Deficit)........F-6

Audited Consolidated Statements of Cash Flows..........................F-7

Notes to Audited Consolidated Financial Statements.....................F-9







                                      F-1


<PAGE>


                         REPORT OF INDEPENDENT AUDITORS


To the Shareholders of
RADA ELECTRONIC INDUSTRIES LIMITED
----------------------------------


We have audited the accompanying  consolidated balance sheets of RADA Electronic
Industries  Limited and its subsidiaries (the "Company") as of December 31, 2000
and 2001 and the  related  consolidated  statements  of  operations,  changes in
shareholders'  equity and cash  flows for each of the three  years in the period
ended December 31, 2001. These financial  statements are the  responsibility  of
the Company's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the 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  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  subsidiaries  as of December 31, 2000 and 2001, and the results
of its operations and cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States.




                                                        /s/Luboshitz Kasierer
                                                         LUBOSHITZ KASIERER
                                                           ARTHUR ANDERSEN


Tel-Aviv, Israel
April 28, 2002

                                      F-2


<PAGE>

<TABLE>
<CAPTION>

                       RADA ELECTRONIC INDUSTRIES LIMITED

                           CONSOLIDATED BALANCE SHEETS
          In thousands of U.S. dollars, except share and per share data

                                                                      DECEMBER 31,
                                                                ----------------------
                                                      NOTE          2001       2000
                                                      ----       --------    ---------
<S>                                                   <C>        <C>         <C>
Current assets
  Cash and cash equivalents                                      $     74    $     20
  Trade receivables (net of allowance for
     doubtful accounts of $189 and $141 as of
     December 31, 2001 and 2000, respectively)                        817         894
  Other receivables and prepaid expenses              (3)              67         687
  Recoverable costs and accrued profits not yet
    billed                                            (4)             109         192
  Inventories                                         (5)           2,022       1,641
                                                                 --------    --------
      Total current assets                                          3,089       3,434
                                                                 --------    --------

  Long-term assets
   Inventories in excess of amounts expected to
     be sold currently                                (5)               -         347

   Long-term receivables                              (6)           1,163         911
                                                                 --------    --------
                                                                    1,163       1,258
                                                                 --------    --------

 Severance pay funds                                                1,351       1,505
                                                                 --------    --------

Property and equipment, net                           (7)
  Cost                                                             18,631      19,783
  Less - accumulated depreciation                                  12,010      11,768
                                                                 --------    --------
      Total property and equipment, net                             6,621       8,015
                                                                 --------    --------

Other assets, net                                     (8)           4,108       4,662
                                                                 --------    --------
      Total assets                                               $ 16,332    $ 18,874
                                                                 ========    ========

</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                      F-3


<PAGE>

<TABLE>
<CAPTION>
                       RADA ELECTRONIC INDUSTRIES LIMITED

                           CONSOLIDATED BALANCE SHEETS
          In thousands of U.S. dollars, except share and per share data


                                                                     DECEMBER 31,
                                                               -----------------------
                                                    NOTE          2001          2000
                                                    ----       ---------     ---------
<S>                                                 <C>        <C>           <C>
Current liabilities
  Short-term bank credits and loans                  (9)       $   5,912     $   5,581
  Current maturities of long-term debt              (11)               8            43
  Trade payables                                                     797         1,020
  Other liabilities and accrued expenses            (10)           2,825         2,924
  Deferred revenues                                                2,363         2,408
  Billing in excess of incurred costs and profits    (4)             224           126
                                                               ---------     ---------
        Total current liabilities                                 12,129        12,102
                                                               ---------     ---------

Long-term liabilities
  Long-term debt, net of current maturities         (11)               -             8
  Accrued severance pay                                            1,784         1,938
  Loan due to a related party                       (16)           1,061             -
                                                               ---------     ---------
                                                                   2,845         1,946
                                                               ---------     ---------

Contingencies, commitments and liens                (12)

Minority interests                                                   658           757
                                                               ---------     ---------

Shareholders' equity                                (13)
  Share capital
   Ordinary shares of NIS 0.005 par value:
   Authorized - 26,000,000 shares; issued
   and outstanding - 13,816,839 shares as
   of December 31, 2001 and 2000                                     103           103
  Additional paid-in capital                                      56,646        56,646
  Accumulated deficit                                            (56,049)      (52,680)
                                                               ---------     ---------
      Total shareholders' equity                                     700         4,069
                                                               ---------     ---------
      Total liabilities and shareholders' equity               $  16,332     $  18,874
                                                               =========     =========

</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements


                                      F-4


<PAGE>

<TABLE>
<CAPTION>

                       RADA ELECTRONIC INDUSTRIES LIMITED

                      CONSOLIDATED STATEMENTS OF OPERATIONS
               In thousands of U.S. dollars, except per share data

                                                                  FOR THE YEAR ENDED
                                                                     DECEMBER 31,
                                                          ----------------------------------
                                                  NOTE       2001         2000        1999
                                                  ----    ---------    ---------   ---------
<C>                                               <C>     <C>          <C>         <C>
Revenues
  Sale of ATE products and avionics
   equipment                                              $   5,784    $   2,530   $   9,715
  Sale of aircraft spare parts and repair and
   maintenance services                                       1,246          848         658
  Leasing of equipment                                        1,312          438           -
                                                          ---------    ---------   ---------
                                                              8,342        3,816      10,373
                                                          ---------    ---------   ---------

Cost of revenues                                 (15A)        7,416        5,307      12,707
                                                          ---------    ---------   ---------
      Gross profit (loss)                                       926       (1,491)     (2,334)
                                                          ---------    ---------   ---------

Operating expenses
  Research and development expenses              (15B)          534          730         428
  Marketing and selling expenses                              1,512        1,292       1,540
  General and administrative expenses                         2,105        2,320       2,776
                                                          ---------    ---------   ---------
      Total operating expenses                                4,151        4,342       4,744
                                                          ---------    ---------   ---------

      Operating loss from continuing
        operations                                           (3,225)      (5,833)     (7,078)
Financing expenses, net                          (15C)         (210)        (861)     (1,141)
Other income (expenses), net                     (15D)          (30)         563         505
                                                          ---------    ---------   ---------
                                                             (3,465)      (6,131)     (7,714)

Equity in losses of affiliated company                            -            -        (101)
Minority interest in losses of subsidiaries                      96           32         292
                                                          ---------    ---------   ---------
      Loss from continuing operations                        (3,369)      (6,099)     (7,523)
Gain from disposal of discontinued segment                        -            -         306
                                                          ---------    ---------   ---------
      Net loss                                            $  (3,369)   $  (6,099)  $  (7,217)
                                                          =========    =========   =========
Basic and diluted net loss per share:

  From continuing operations                              $   (0.24)   $   (0.46)  $   (0.77)
                                                          =========    =========   =========
  From discontinued segment                                    -            -      $    0.03
                                                          =========    =========   =========
      Net loss                                            $   (0.24)   $   (0.46)  $   (0.74)
                                                          =========    =========   =========
Weighted average number of ordinary
  shares used in computing basic
  and diluted net loss per share
  (in thousands)                                             13,817       13,305       9,722
                                                          =========    =========   =========
</TABLE>


The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                      F-5

<PAGE>




                       RADA ELECTRONIC INDUSTRIES LIMITED
<TABLE>
<CAPTION>
                       CONSOLIDATED STATEMENTS OF CHANGES
                      IN SHAREHOLDERS' EQUITY (DEFICIENCY)
                 In thousands of U.S. dollars, except share data

                                                                                                                         TOTAL
                                        NUMBER OF               ADDITIONAL   RECEIVABLE   RECEIPT ON                 SHAREHOLDERS'
                                        ORDINARY     SHARE       PAID-IN     ON ACCOUNT   ACCOUNT OF   ACCUMULATED       EQUITY
                                         SHARES     CAPITAL      CAPITAL     OF SHARES      SHARES       DEFICIT      (DEFICIENCY)
                                         ------     -------      -------     ---------      ------       -------      ------------
<S>                                     <C>          <C>        <C>           <C>          <C>         <C>             <C>
Balance at January 1, 1999               6,531,342   $   94     $  39,176     $      -     $     -     $ (39,364)      $    (94)

Issuance of ordinary shares (*)          3,110,000        4         6,310          240           -             -          6,554

Conversion of loans to ordinary          2,496,016        3         4,873            -           -             -          4,876
shares

Issuance of ordinary shares in
  consideration for services performed      60,000      (**)           90            -           -             -             90


Consideration received for shares
  to be issued                                   -        -             -            -         120             -            120

Net loss                                         -        -             -            -           -        (7,217)        (7,217)
                                        ----------   ------      --------     --------     -------     ---------       --------

Balance at December 31, 1999            12,197,358      101        50,449          240         120       (46,581)         4,329

Issuance of ordinary shares (*)          1,458,372        2         5,125            -        (120)            -          5,007

Amount received on account of shares             -        -           240         (240)          -             -              -

Conversion of loan to ordinary shares        7,292      (**)           28            -           -             -             28

Issuance of ordinary shares in
  connection with settlement of debt       153,817      (**)          804            -           -             -            804


Net loss                                         -        -             -            -           -        (6,099)        (6,099)
                                        ----------   ------      --------     --------     -------     ---------       --------
Balance at December 31, 2000            13,816,839      103        56,646            -           -       (52,680)         4,069

Net loss                                         -        -             -            -           -        (3,369)        (3,369)
                                        ----------   ------      --------     --------     -------     ---------       --------
Balance at December 31, 2001            13,816,839   $  103     $  56,646     $      -     $     -     $ (56,049)      $    700
                                        ==========   ======     =========     ========     =======     =========       ========
</TABLE>

     (*)  Net of issuance  expenses of  approximately  $263 and $60 in the years
          1999 and 2000, respectively.

     (**) Represents an amount less than $1.




The  accompanying  notes are an integral  part of these  consolidated  financial
statements


                                      F-6

<PAGE>





                       RADA ELECTRONIC INDUSTRIES LIMITED
<TABLE>
<CAPTION>
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          In thousands of U.S. dollars

                                                                          FOR THE YEAR ENDED
                                                                             DECEMBER 31,
                                                                  -----------------------------------
                                                                      2001        2000         1999
                                                                  ---------   ---------    ---------
<S>                                                               <C>         <C>          <C>
CASH FLOW FROM OPERATING ACTIVITIES
  Net loss                                                        $  (3,369)  $  (6,099)   $  (7,217)
   Adjustments to reconcile net loss to net cash used in
    operating activities (See Appendix A)                             2,468       1,951        3,707
                                                                  ---------   ---------    ---------
               Net cash used in operating activities                   (901)     (4,148)      (3,510)
                                                                  ---------   ---------    ---------

CASH FLOW FROM INVESTING ACTIVITIES
  Purchase of property and equipment                                   (236)     (1,020)      (1,231)
  Capitalization of software development costs                         (104)       (243)        (308)
  Grant of loans to employees, officers and directors                    (9)          -            -
  Sale of a consolidated subsidiary (See Appendix B)                    (14)          -            -
                                                                  ---------   ---------    ---------
               Net cash used in investing activities                   (363)     (1,263)      (1,539)
                                                                  ---------   ---------    ---------

CASH FLOW FROM FINANCING ACTIVITIES
  Proceeds from issuance of shares and amount received on
   account of shares, net                                                 -       5,007        6,434
  Increase (decrease) in short-term bank credits and loans, net         361         377       (1,207)
  Proceeds from issuance of long-term debt and loan to related
   party                                                              1,000          15           20
  Repayment of long-term debt                                           (43)       (146)        (436)
                                                                  ---------   ---------    ---------
               Net cash provided by financing activities              1,318       5,253        4,811
                                                                  ---------   ---------    ---------

INCREASE (DECREASE) IN CASH AND
  CASH EQUIVALENTS                                                       54        (158)        (238)


CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR                   20         178          416
                                                                  ---------   ---------    ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                  $      74   $      20    $     178
                                                                  =========   =========    =========
Noncash transactions:

  Conversion of convertible debt, net                             $       -   $      28    $   4,876
                                                                  =========   =========    =========
  Ordinary shares issued in settlement of debt                    $       -   $     804    $      90
                                                                  =========   =========    =========
  Receivable from shareholder                                     $       -   $       -    $     240
                                                                  =========   =========    =========
  Offset of advance from investment in affiliated company         $       -   $       -    $   1,307
                                                                  =========   =========    =========
  Reclassification of property and equipment to inventory         $     325   $       -    $       -
                                                                  =========   =========    =========

Supplement disclosures of cash flow activities -
  Net cash paid during the year for:
   Income taxes                                                   $      13   $      69     $      -
                                                                  =========   =========    =========
   Interest                                                       $     525   $     520    $     714
                                                                  =========   =========    =========

</TABLE>



The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                      F-7


<PAGE>

<TABLE>
<CAPTION>
                       RADA ELECTRONIC INDUSTRIES LIMITED

                  CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
                          In thousands of U.S. dollars


                                                                               DECEMBER 31,
                                                                    ----------------------------------
                                                                       2001        2000         1999
                                                                    ---------    --------    ---------
      <S>                                                           <C>          <C>         <C>
      APPENDIX A -
      ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
       USED IN OPERATING ACTIVITIES:
         Depreciation and amortization                              $   1,710    $   1,950   $   2,437
         Write-off of inventories                                           -          200       2,718
         Loss on investment in affiliated company                           -            -         300
         Write-off of property and equipment and other assets             251          217         898
         Gain on sale of discontinued segment                               -            -        (306)
         Loss on sale of a consolidated subsidiary                         30            -           -
         Minority interest in losses of subsidiaries                      (96)         (32)       (292)
         Equity in losses of affiliated company                             -            -         101
         Others                                                            61           29         286
         Decrease in trade receivables                                     21          693         513
         Decrease in other receivables and prepaid expenses               559          236         111
         Decrease (increase) in inventories                                 7         (558)        878
         Decrease (increase) in long-term receivables                      47          (56)          -
         Decrease (increase) in costs and estimated earnings in
          excess of billings on uncompleted contracts, net                181          560      (1,125)
         Decrease in trade payables                                      (159)        (684)     (2,298)
         Decrease in other liabilities and accrued expenses               (99)      (1,591)     (1,998)
         Increase (decrease) in deferred revenues                         (45)       1,159       1,442
         Increase (decrease) in accrued severance pay, net                  -         (172)         42
                                                                    ---------    ---------   ---------
                                                                    $   2,468    $   1,951   $   3,707
                                                                    =========    =========   =========
</TABLE>

                                                                    DECEMBER 31,
                                                                        2001
                                                                    ------------
      APPENDIX B - SALE OF A CONSOLIDATED SUBSIDIARY (JETBORNE)
         Working capital (excluding cash and cash equivalents)       $    69
         Property and equipment                                            2
         Long-term assets                                                238
         Minority interest                                                (3)
         Loss on realization                                             (30)
         Long-term receivable                                           (290)
                                                                     -------
                                                                     $   (14)
                                                                     -------

The  accompanying  notes are an integral  part of these  consolidated  financial
statements

                                      F-8


<PAGE>

                       RADA ELECTRONIC INDUSTRIES LIMITED

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
          In thousands of U.S. dollars except share and per share data


NOTE 1   -  GENERAL

          A.   RADA Electronic  Industries  Limited, an Israeli corporation (the
               "Company") is engaged in the development,  manufacturing and sale
               of Automated Test Equipment ("ATE") products,  avionics equipment
               and aviation data acquisition and debriefing systems.

          B.   As  reflected in the  consolidated  financial  statements,  as of
               December  31,  2001,  the Company had an  accumulated  deficit of
               $56,049 and a working capital deficiency of $9,040. Subsequent to
               balance  sheet  date,  a  shareholder  agreed  to  convert a $1.0
               million loan granted to the Company  into shares,  under  certain
               conditions.  In addition,  this shareholder  agreed to advance to
               the  Company  an   additional   $500  as  a  loan.   Three  other
               shareholders  committed to purchase  shares of the Company in the
               amount of  approximately  $950,  under  certain  conditions.  The
               Company believes that the actions described above,  together with
               its improved  operations  will enable it to finance its liquidity
               needs at least  through  December  31,  2002.  See Note 18(1) and
               18(2).

          C.   The  Company  operates a test and repair shop based on the use of
               its  ATE  in  Beijing,   China  through  its  80%  owned  Chinese
               subsidiary,  Beijing Huari Aircraft  Components  Maintenance  and
               Services  Co.  Ltd.  ("CACS").  CACS was  established  as a joint
               venture company with a third party,  which owns the remaining 20%
               equity interest.

          D.   The  Company  sold   aircraft   spare  parts   through   Jetborne
               International,  Inc.  ("Jetborne"),  which  was 75%  owned by the
               Company until December 31, 2001. Jetborne historically  purchased
               inventory in bulk,  mainly at auctions,  and sold the spare parts
               over long  periods of time through a  computerized  communication
               system through which sales and purchases of airplanes spare parts
               are  effected.  In March 2002,  the  Company  sold its 75% equity
               interest in Jetborne in consideration for one dollar and recorded
               a loss of $30.  As of  December  31,  2001,  the  Company did not
               consolidate  the  assets  and  liabilities  of  Jetborne  in  the
               December  31,  2001  balance  sheet,  as the Company did not have
               control  over  Jetborne as of  December  31, 2001 and none of its
               directors  or  representatives  had  functioned  as  directors or
               managers of Jetborne. The Company consolidated Jetborne's results
               of  operations  for the year 2001 and did not include it's assets
               and liabilities as of December 31, 2001 (see Note 6).

          E.   As for major customer see Note 17.

                                       F-9

<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 2   -  SIGNIFICANT ACCOUNTING POLICIES

          The financial  statements  are prepared in accordance  with  generally
          accepted  accounting  principles in the United States ("US GAAP"). The
          significant  accounting  policies  followed in the  preparation of the
          financial statements, applied on a consistent basis, are as follows:


          A.   USE OF ESTIMATES

               The  preparation  of  financial  statements  in  conformity  with
               generally accepted  accounting  principles requires management to
               make estimates and assumptions  that affect the reported  amounts
               of assets and liabilities and disclosure of contingent assets and
               liabilities  at the  date of the  financial  statements,  and the
               reported  amounts of revenues  and  expenses  during the reported
               period. Actual results could differ from those estimates.

          B.   FINANCIAL STATEMENTS IN U.S. DOLLARS

               The  consolidated  financial  statements of the Company have been
               prepared in U.S.  dollars as the currency of the primary economic
               environment  in  which  the  operations  of the  Company  and its
               subsidiaries (the "Group") are conducted is the U.S. dollar. Most
               of the Group's sales are made outside Israel in U.S. dollars,  as
               is a substantial  portion of its expenses and capital  issuances.
               Thus, the  functional and reporting  currency of the Group is the
               U.S. dollar.

               Transactions  and  balances   denominated  in  U.S.  dollars  are
               presented at their original amounts. Transactions and balances in
               other  currencies are remeasured into U.S.  dollars in accordance
               with Statement of Financial  Accounting Standards No. 52 "Foreign
               Currency   Translation"   ("SFAS  52")  of  the  U.S.   Financial
               Accounting Standards Board ("FASB"). Accordingly, items have been
               remeasured as follows:

               -    Monetary  items  - at the  exchange  rate in  effect  on the
                    balance sheet date.

               -    Nonmonetary items - at historical exchange rates.

               -    Revenues and expense items - at the exchange rates in effect
                    as of the  date of  recognition  of those  items  (excluding
                    depreciation  and other  items  deriving  from  non-monetary
                    items).

                                      F-10


<PAGE>



                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 2   -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          B.   FINANCIAL STATEMENTS IN U.S. DOLLARS (Cont.)

               All exchange  gains and losses from the  remeasurement  mentioned
               above  are  reflected  in  the  statement  of   operations.   The
               representative   rate  of  exchange  at  December  31,  2001  was
               U.S.$1.00 = NIS 4.416;  and at  December  31, 2000 and 1999 = NIS
               4.041 and NIS 4.153, respectively.

          C.   BASIS OF CONSOLIDATION

               The  consolidated  financial  statements  include  the  financial
               statements  of the  Company  and its  subsidiaries.  The  Company
               consolidates the financial  statements of all  subsidiaries  with
               greater that 50% ownership and control.  The major  subsidiary is
               CACS.  The Company  sold its 75% equity  interest in Jetborne and
               therefore  consolidated  only the statement of operations for the
               year  ended   December   31,  2001  (see  Note  6).   Significant
               intercompany  balances and  transactions  have been eliminated in
               consolidation.

          D.   CASH EQUIVALENTS

               All  highly  liquid  investments  that are not  restricted  as to
               withdraw or use with an,  original  maturity  of three  months or
               less are considered cash equivalents.

          E.   ALLOWANCE FOR DOUBTFUL ACCOUNTS

               The allowance is determined based upon management's evaluation of
               receivables  doubtful of collection on a specific  identification
               basis.

          F.   INVENTORIES

               Inventories  are  stated at the  lower of cost or  market  value.
               Inventory  write-offs  are  provided to cover risks  arising from
               slow-moving  items,  excess  inventories,  and for market  prices
               lower than cost.

               Cost is determined as follows:

               Raw materials and  components-  using "the  first-in,  first-out"
               cost method.

                                      F-11


<PAGE>



                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 2   -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          F.   INVENTORIES (Cont.)

               Work-in-process  - represents the cost of manufacturing  with the
               addition of allocable indirect manufacturing costs.

               Finished goods - on the basis of direct  manufacturing costs with
               the addition of allocable indirect manufacturing costs.

               Amounts  related to  long-term  contracts  as  determined  by the
               percentage  of completion  method of  accounting  are recorded as
               "Recoverable cost and accrued profit not yet billed".

               Inventories include aircraft spare parts that, although currently
               available  for  sale,  are  expected  to be  sold  over a  period
               exceeding one year and are included under long-term assets.

          G.   RESEARCH AND DEVELOPMENT EXPENSES

               Statement of Financial  Accounting  Standards No. 86  "Accounting
               for  the  Costs  of  Computer  Software  to be  Sold,  Leased  or
               Otherwise  Marketed," ("SFAS No.86") "requires  capitalization of
               certain   software    development   costs   subsequent   to   the
               establishment of technological feasibility.  Based on the Company
               and its subsidiaries product development  process,  technological
               feasibility is established upon completion of a working model.

               Research  and  development  costs  incurred  in  the  process  of
               producing product masters and product  enhancements and producing
               the  Company's   Aircraft  Test  Systems  Programs  Sets  ("TPS")
               software  library,  which is integrated  with the Company's  test
               station,  are generally  charged to expenses as incurred,  net of
               participation of the Office of the Chief Scientist in the Israeli
               Ministry  of Industry  and Trade  ("OCS") and the Israel - United
               States Binational Industrial Research and Development  Foundation
               ("BIRD Foundation").

               Costs incurred by the Company  between  completion of the working
               model  and the point at which the  product  is ready for  general
               release, have been capitalized.



                                      F-12


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 2   -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          H.   OTHER ASSETS

               Capitalized  software  costs are  amortized by the greater of the
               amount  computed using the: (i) ratio that current gross revenues
               from  sales  of  the   software  to  the  total  of  current  and
               anticipated future gross revenues from sales of that software, or
               (ii) the  straight-line  method over the estimated useful life of
               the product  (five to twenty  years).  The Company  assesses  the
               recoverability  of this  intangible  asset on a regular  basis by
               determining  whether  the  amortization  of the  asset  over  its
               remaining  life  can be  recovered  through  undiscounted  future
               operating cash flows from the specific software product sold.

          I.   PROPERTY AND EQUIPMENT

               Property and  equipment  are stated at cost,  net of  accumulated
               depreciation.  Depreciation  is calculated  by the  straight-line
               method over the  estimated  useful  lives of the  assets.  Annual
               rates of depreciation are as follows:

                Buildings                            2.5 -  4%
                Machinery and equipment             10   - 33%
                Office furniture and equipment       6   - 33%
                Motor vehicles                      15   - 20%

               Leasehold  improvements  are  amortized  over the  shorter of the
               estimated useful life or the lease period.

               Assets, in respect of which investment grants have been received,
               are presented at cost less the related grant amount. Depreciation
               is based on net cost.

                                      F-13


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 2   -     SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          J.   LONG LIVED ASSETS

               The Company  periodically  evaluates the  recoverability  and the
               appropriateness  of the  amortization  periods of its  long-lived
               assets in  accordance  with  Statement  of  Financial  Accounting
               Standards No. 121,  "Accounting  for the Impairment of Long Lived
               Assets and for the Long Lived Assets to be Disposed of ("SFAS No.
               121").The  Company  recognizes  impairment  losses for long-lived
               assets whenever events or changes in circumstances  result in the
               carrying  amount of the assets  exceeding the sum of the expected
               future  undiscounted cash flows associated with such assets.  The
               measurement  of the  impairment  losses to be recognized is to be
               based on the difference  between the fair values and the carrying
               amounts of the assets.  Impairment loss recorded in the statement
               of  operations  for the years ended  December 31, 2001,  2000 and
               1999 amounted to $251, $217 and $898, respectively.

          K.   INCOME TAXES

               The  Company   accounts  for  income  taxes  in  accordance  with
               Statement of Financial  Accounting Standard No. 109,  "Accounting
               for Income Taxes" ("SFAS No. 109"). This statement prescribes the
               use of the  liability  method  whereby  deferred  tax  assets and
               liability  account  balances are determined  based on differences
               between financial  reporting and tax based assets and liabilities
               and are  measured  using the enacted tax rates and laws that will
               be in effect when the  differences  are expected to reverse.  The
               Company  provides a valuation  allowance,  if necessary to reduce
               deferred tax assets to their estimated reliable value.


                                      F-14


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 2   -     SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          L.   SEVERANCE PAY

               The Company's  liability for severance pay is calculated pursuant
               to Israeli  severance pay law generally  based on the most recent
               salary  of the  employees  multiplied  by the  number of years of
               employment,  as of the balance sheet date. Employees are entitled
               to one month's  salary for each year of  employment  or a portion
               thereof. The Company's liability for all of its Israeli employees
               is partly  provided by monthly  deposits for  insurance  policies
               and/or  pension  funds  and by an  accrual.  The  value  of these
               policies is recorded as an asset in the Company's  balance sheet.
               The deposited  funds of the Company's  employees  include profits
               accumulated up to the balance sheet date. The deposited funds may
               be withdrawn only upon the fulfillment of the obligation pursuant
               to Israeli  severance pay law or labor  agreements.  The value of
               the  deposited  funds is based on the cash  surrendered  value of
               these policies, and includes immaterial profits.

               Severance  expense recorded in the statement of operations is net
               of  interest  and  other  income  accumulated  in  the  deposits.
               Severance  expense,  for the years ended December 31, 2001,  2000
               and 1999 amounted to $194, $29 and $158, respectively.

          M.   FAIR VALUE OF FINANCIAL INSTRUMENTS

               The  Group  used  the  following   methods  and   assumptions  in
               estimating   their   fair   value   disclosures   for   financial
               instruments:

               The  carrying  amount  of  cash  and  cash   equivalents,   trade
               receivables,   short-term   bank   credits  and  trade   payables
               approximate  their fair value due to the short term  maturity  of
               these instruments.

               The  carrying  amount  of  long  term  debts  are  equivalent  or
               approximate their fair value as they bear interest at approximate
               market rates.

                                      F-15


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 2   -     SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          N.   CONCENTRATION OF CREDIT RISK

               The Groups sells its products and services  mainly to financially
               sound, well-established customers. Credit risk is concentrated in
               the United States, Europe and Israel.

               Financial  instruments  that  potentially  subject  the Groups to
               concentrations  of credit risk  consist  principally  of cash and
               cash equivalent and short-term bank credit.

               Cash and cash  equivalents  are mainly in U.S dollars  with major
               banks  in  Israel.   Management   believes   that  the  financial
               institutions  that hold the Groups  investments  are  financially
               sound and,  accordingly,  minimal credit risk exists with respect
               to these investments.

          O.   ROYALTY BEARING GRANTS

               Royalty-bearing  grants in respect of  research  and  development
               projects from the OCS and the BIRD Foundation,  are recognized at
               the time the  Company is  entitled to such grants on the basis of
               the costs  incurred and are included as a deduction from research
               and development costs.

          P.   SHARE BASED COMPENSATION

               The Company  accounts for stock option grants in accordance  with
               Accounting  Principles  Board  Opinion No. 25 -  "Accounting  for
               Stock Based  Compensation" ("APB No. 25") and FASB Interpretation
               No. 44  "Accounting  for  Certain  Transactions  Involving  Stock
               Compensation"  ("Fin No. 44"). Under APB No.25, when the exercise
               price of the  Company's  share  options  is less than the  market
               price of the underlying shares on the date of grant, compensation
               expense is  recognize.  The pro forma  disclosures,  required  by
               Statement of Financial  Accounting  Standards No. 123 "Accounting
               for Stock-Based  Compensation"  ("SFAS No. 123"), are provided in
               Note 13B.

               The Company  accounts  for  shares,  stock  options and  warrants
               issued to  non-employees  in  accordance  with SFAS No. 123.  The
               Company  uses the  Black-Scholes  Option  Pricing  model to value
               options and warrants granted to non-employees.

                                      F-16


<PAGE>



                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 2   -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          Q.   REVENUE RECOGNITION

               The Group generates revenues mainly from the sale of products and
               from long-term  fixed price contracts for ATE,  avionics,  ground
               debriefing  systems.  In  addition,  the  Group  leases  ATE  and
               provides manufacturing services.

               Revenues from sales of products are recognized in accordance with
               Staff  Accounting  Bulletin  No.  101  "Revenue   Recognition  in
               Financial   Statements"   ("SAB  No.  101"),  when  shipment  has
               occurred,  persuasive  evidence  of an  arrangement  exists,  the
               vendor's  fee is fixed or  determinable,  no  further  obligation
               remains and collectibility is probable.

               Revenues from services are  recognized  upon  performance  of the
               services.

               Revenues from  long-term  fixed price  contracts  are  recognized
               based  on  Statement  of  Position  No.  81-1   "Accounting   for
               Performance of Construction - Type and Certain  Production - Type
               Contracts"   ("SOP  81-1"),   using  contract   accounting  on  a
               percentage  of  completion  method  based on the  ratio of actual
               costs  incurred to total costs  estimated to be incurred over the
               duration of the  contract.  With regard to contracts  for which a
               loss is anticipated, a provision is made for the entire amount of
               the estimated loss at the time such loss becomes evident.

               Revenue under  operating  leases of equipment  are  recognized in
               accordance with Statement of Financial Accounting Standard No. 13
               "Accounting  for Leases" ("SFAS No. 13"),  ratably over the lease
               period.

               Deferred   revenues   include  unearned  amounts  received  under
               services  contract,  and amounts  received from customers but not
               yet recognize as revenues.

                                      F-17


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 2   -  SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          R.   BASIC AND DILUTED NET LOSS PER SHARE

               Basic  net  loss  per  share is  computed  based on the  weighted
               average number of ordinary shares  outstanding  during each year.
               Diluted  net loss per  share is  computed  based on the  weighted
               average number of ordinary shares  outstanding  during each year,
               plus dilutive  potential  ordinary shares considered  outstanding
               during  the year,  in  accordance  with  Statement  of  Financial
               Accounting  Standard  No. 128  "Earnings  per  Share"  ("SFAS No.
               128").  All  outstanding  share  options and  warrants  have been
               excluded from the  computation  of diluted loss per share because
               their effect is anti-dilutive for all periods presented.  Options
               and  warrants  to purchase  1,115,200,  2,511,982  and  2,359,894
               ordinary  shares were not  included in the  computation  of years
               1999,  2000 and 2001 diluted loss per share  because such options
               and warrants were considered anti-dilutive.

          S.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

               In July 2001,  the Financial  Accounting  Standards  Board issued
               Statements of Financial  Accounting  Standards No. 141, "Business
               Combinations"  ("SFAS  141")  and No.  142,  "Goodwill  and Other
               Intangible  Assets" ("SFAS 142").  SFAS 141 requires all business
               combinations  initiated  after June 30, 2001, to be accounted for
               using  the  purchase  method.   Under  SFAS  142,   goodwill  and
               intangible  assets with indefinite  lives are no longer amortized
               but are  reviewed  annually  (or more  frequently  if  impairment
               indicators  arise) for impairment.  All other  intangible  assets
               will continue to be amortized over their estimated  useful lives.
               The  amortization  provisions  of SFAS 142 apply to goodwill  and
               intangible  assets  acquired after June 30, 2001. With respect to
               goodwill and  intangible  assets  acquired prior to July 1, 2001,
               the Company is required  to adopt SFAS 142  effective  January 1,
               2002. The adoption of SFAS 141 and 142 will not have an impact on
               the Company's  financial  position or results of operations since
               there is no goodwill  and no  intangible  assets with  indefinite
               lives.

                                      F-18


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 2   -     SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          S.   RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS (Cont.)

               In August 2001, the Financial  Accounting  Standards Board issued
               Statement of Financial  Accounting Standards No. 144, "Accounting
               for the  Impairment  or Disposal  of  Long-Lived  Assets"  ("SFAS
               144").  Although SFAS 144  supersedes  FASB Statement No. 121, it
               retains the  requirements  of SFAS 121 regarding  recognition  of
               impairment loss for long-lived  assets to be held and used (based
               on undiscounted  cash flows) and resolves certain  implementation
               issues.   Also,  the  accounting  model  used  in  SFAS  121  for
               long-lived  assets to be  disposed  of by sale (lower of carrying
               amount or fair value less cost to sell) is  broadened by SFAS 144
               to include  discontinued  operations and supersedes the reporting
               provision  of APB  Opinion  No.  30,  "Reporting  the  Results of
               Operations of a Segment of a Business".  Therefore,  discontinued
               operations  will no longer be measured on a net realizable  value
               basis and future  operating  losses will no longer be  recognized
               before they occur.  SFAS 144 also  broadens the  presentation  of
               discontinued  operations  to  include  a  component  of an entity
               (rather than a segment of a business). The provisions of SFAS 144
               are effective for  financial  statements  issued for fiscal years
               beginning  after  December 15, 2001,  and interim  periods within
               those years.  The Company  believes that the adoption of SFAS 144
               will  not  have a  material  impact  on the  Company's  financial
               statements.


NOTE 3   -  OTHER RECEIVABLES AND PREPAID EXPENSES

                                                              DECEMBER 31,
                                                              ------------
                                                             2001      2000
                                                             ----      ----

           Advances to suppliers                             $ 19      $483
           Prepaid expenses                                    47       143
           Other                                                1        61
                                                               --        --
                                                             $ 67      $687
                                                             ====      ====


                                      F-19


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 4   -  CONTRACTS IN PROCESS

          Amounts   included  in  the  financial   statements  which  relate  to
          recoverable  costs and accrued  profits not yet billed on contracts in
          process are  classified  as current  assets.  Billings on  uncompleted
          contracts  in  excess  of  incurred  cost  and  accrued   profits  are
          classified as current liabilities. Summarized below are the components
          of the amounts:

          A.   RECOVERABLE COSTS AND ACCRUED PROFITS NOT YET BILLED:

                                                           DECEMBER 31,
                                                           ------------
                                                        2001          2000
                                                        ----          ----
                Costs incurred on uncompleted
                  Contracts                            $ 1,425     $   732
                Accrued profits                          1,709         546
                                                         -----         ---
                                                         3,134       1,278
                Less - amount billed and progress
                  Payments                               3,021       1,086
                Less - estimated loss on contracts           4           -
                                                            --          --
                                                       $   109     $   192
                                                       =======     =======



          B.   BILLING IN EXCESS OF INCURRED COSTS AND PROFITS

                Costs incurred on uncompleted
                  Contracts                            $   994     $ 2,276
                Accrued profits                          1,090       2,112
                                                         -----       -----
                                                         2,084       4,388
                Less - amount billed and progress
                  payments                               2,308       4,514
                                                         -----       -----
                                                       $  (224)    $  (126)
                                                       =======     =======


                                      F-20


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 5   -  INVENTORIES
                                                               DECEMBER 31,
                                                               ------------
                                                             2001       2000
                                                             ----       ----
           Current:
             Raw materials and components                $  1,199   $    933
             Work in process                                  417        302
             Finished goods                                   406        406
                                                              ---        ---
                                                         $  2,022   $  1,641
                                                         ========   ========
           Inventories in excess of amounts expected
             to be sold currently:
              Aircraft spare parts                       $      -   $    347
                                                         ========   ========

            Write-off  of  inventories,  for the years ended  December 31, 2001,
            2000 and 1999 amounted to $0, $200 and $2,718 respectively.


NOTE 6   -  LONG-TERM RECEIVABLES
                                                              DECEMBER 31,
                                                              ------------
                                                             2001      2000
                                                             ----      ----

           Loan to former Chief Executive Officer (1)    $    605   $   632
           Loan to a former officer (1)                       239       250
           Loans to employees                                  29        29
           Loan to Jetborne (2)                               290         -
                                                              ---        --
                                                         $  1,163   $   911
                                                         ========   =======

          (1)  The loans to former  officers are linked to the Israeli  Consumer
               Price Index ("CPI") and bears interest of 4% per annum. The loans
               were granted from 1989 through 1997.  The Company is currently in
               litigation  with its former CEO and the former officer - see Note
               16.

          (2)  Loan to Jetborne - On December 31, 2001, the Company sold its 75%
               ownership in Jetborne in consideration  for one dollar.  Jetborne
               will  repay the  Company  within  ten years  from the date of the
               agreement  the  outstanding  loan  and  debt  including   accrued
               interest as of December 31, 2001. In addition,  Jetborne will pay
               the Company  royalties as a percentage  of the gross  revenues of
               Jetborne  which derived from the inventory held by Jetborne as of
               December 31, 2001. It is agreed that the first payment on account
               of the royalties shall be deducted from the outstanding  loan and
               debt.  In any event,  all payments  due to the Company  under the
               agreement will be paid no later than the tenth anniversary of the
               agreement.  The  outstanding  loan and debt are  presented  at an
               estimated discounted fair value of $290. Accordingly, the Company
               recorded  a loss  of $30 as a  result  of the  sale  of  Jetborne
               pursuant to the agreement.

                                      F-21


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 7   -  PROPERTY AND EQUIPMENT, NET

                                                            DECEMBER 31,
                                                            ------------
                                                         2001          2000
                                                         ----          ----
           COST
             Factory building                         $   1,940     $   1,940
             Other building                               1,042         1,042
             Machinery and equipment                     14,386        15,548
             Motor vehicles                                 623           623
             Office furniture and equipment                 422           412
             Leasehold improvements                          20            20
             Tools and implements - base stock              198           198
                                                            ---           ---
                                                         18,631        19,783
                                                         ------        ------
           ACCUMULATED DEPRECIATION
             Factory building                             1,030           958
             Other building                                 104            78
             Machinery and equipment                     10,158        10,110
             Motor vehicles                                 483           414
             Office furniture and equipment                 231           206
             Leasehold improvements                           4             2
                                                             --            --
                                                         12,010        11,768
                                                         ------        ------
             Depreciated cost                         $   6,621     $   8,015
                                                      =========     =========



            The Company's  factory building in Beit-Shean,  Israel is located on
            land  leased  from the Israel  Lands  Administration  until the year
            2034.


            Depreciation  expense  was  $1,103,  $1,071 and $1,398 for the years
            ended December 31, 2001, 2000 and 1999,  respectively.  Write-off of
            property and  equipment  was $200,  $47 and $720 for the years ended
            December 31, 2001, 2000 and 1999, respectively.

            Machinery and equipment, net includes self constructed machinery and
            equipment  under  rental  as of  December  31,  2001 and 2000 in the
            amount of approximately $1,800 and $1,900, respectively.

            Liens - see Note 12G.

                                      F-22


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 8   -  OTHER ASSETS, NET
                                                            DECEMBER 31,
                                                            ------------
                                                          2001       2000
                                                          ----       ----
             COST
               Test Systems Programs Sets (TPS)         $ 8,275    $ 8,171
               Product masters and enhancements           1,411      1,411
                                                          -----      -----
                                                        $ 9,686    $ 9,582
                                                        -------    -------

             ACCUMULATED AMORTIZATION
               Test Systems Programs Sets               $ 4,449    $ 4,073
               Product masters and enhancements           1,129        847
                                                          -----      -----
               Amortized cost                             5,578      4,920
                                                          -----      -----
                                                        $ 4,108    $ 4,662
                                                        =======    =======


          Amortization  expense  was $607,  $879 and $1,039 for the years  ended
          December 31, 2001, 2000 and 1999, respectively.

          Write-off  of other  assets was $51,  $170,  $178 for the years  ended
          December 31, 2001, 2000 and 1999, respectively.


NOTE  9  -  SHORT-TERM BANK CREDITS AND LOANS

                                                               DECEMBER 31,
                                                               ------------
                                                             2001      2000
                                                             ----      ----

           Loans in U.S. dollars (1)                      $  4,043   $  2,082
           Short-term bank credits in U.S. Dollars           1,000        773
           Short-term bank credits in NIS (2)                  869      1,580
           Loans in NIS (3)                                      -      1,146
                                                                --      -----
                                                          $  5,912   $  5,581
                                                          ========   ========


          (1)  The interest  rate at December 31, 2001 is between 4.5% and 4.9%.
               (December 2000 - 7%-8.75%)

          (2)  The interest rate at December 31, 2001 is approximately 6.8%.

          (3)  The  interest  rate at  December  31,  2000 is between  10.5% and
               11.8%.

          The  weighted  average  interest  rate  on  the  aggregate  amount  of
          short-term bank credits and loans at December 31, 2001 is 5% (December
          2000 - 10%).

          The total  authorized  credit line of the Company at December 31, 2001
          is $5,795.

          Liens - see Note 12G.

                                      F-23


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data



NOTE 10  -  OTHER LIABILITIES AND ACCRUED EXPENSES

                                                              DECEMBER 31,
                                                              ------------
                                                             2001       2000
                                                             ----       ----
           Payroll and related expenses                  $  1,083    $ 1,131
           Accrued professional fees                          141        237
           Accrued royalties (see Note 13B and 13C)           469        450
           Provision for legal proceedings                    394        427
           Other                                              738        679
                                                              ---        ---
                                                         $  2,825    $ 2,924
                                                         ========    =======

NOTE 11  -  LONG-TERM DEBT, NET OF CURRENT MATURITIES

                                                               DECEMBER 31,
                                                               ------------
                                                             2001       2000
                                                             ----       ----

           Lease obligations and others                      $  8      $  51
           Less - current maturities                            8         43
                                                               --         --
                                                             $  -      $   8
                                                             ----      -----

            Liens - see Note 12G.

                                      F-24


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED


             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 12  -  CONTINGENCIES, COMMITMENTS AND LIENS

          A.   As of December 31, 2001, the Company was a party to various legal
               proceedings, including the following:

               (1)  In June 1998, the Company's Board of Directors  accepted the
                    resignation  of the Company's  former CEO. In November 1998,
                    the former  CEO  commenced  legal  proceedings  against  the
                    Company in the Tel Aviv Regional  Court for Labor  Disputes,
                    claiming approximately $500 in respect of salary,  severance
                    pay, vacation pay and other fringe benefits.  The former CEO
                    also claimed  that a personal  loan that was provided to him
                    by the Company had been forgiven. In May 2001, an additional
                    claim of  approximately  $250 was  filed by the  former  CEO
                    against  the  Company  in the  Tel-Aviv  District  Court for
                    damages  allegedly  caused to him as a result of  attachment
                    imposed on certain  of his  assets by the  Company  that was
                    subsequently  cancelled by the Court. In addition,  in 2001,
                    the Company filed a claim against a former Board member that
                    in case  the  former  CEO's  claim  in the  Labor  Court  is
                    accepted by the court, damages in the amount of $250 will be
                    covered by the former Board member. Furthermore, the Company
                    filed  additional  suits against the former CEO and a former
                    director in the amount of $250 for funds that they allegedly
                    transferred  from the Company to a third party. In September
                    1999 and in 2001, the Company filed suits against the former
                    CEO and the former Board member in the District Court of Tel
                    Aviv in the  amount  of  $1,650  for  damages  caused to the
                    Company in the purchase of a subsidiary  and  negligence  of
                    management.  In August 2000, the Company filed an additional
                    suit  against the former CEO in the amount of  approximately
                    $500  regarding  the  repayment of the loan  provided to the
                    former CEO.  Legal  counsel  believes that the Company has a
                    valid defense against the claims.  Although these claims are
                    in preliminary  stages,  management believes that there will
                    be no material  adverse  effect on the  Company's  financial
                    position or result of operations.

                                      F-25


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 12  -   CONTINGENCIES,  COMMITMENTS  AND LIENS (CONT.)

               (2)  In 1999 and  2000,  the  former  CEO and his son filed a few
                    complaints against the President and are seeking damages for
                    alleged   slander  by  the   defendant   in  the  amount  of
                    approximately $800.

               (3)  In 1999,  a supplier  filed a claim  against  the  Company's
                    former  subsidiary,  Vectronics.  As  part  of the  sale  of
                    Vectronics,  the Company agreed to take  responsibility  for
                    former claims against Vectronics. The claim is in the amount
                    of  $2,500  for  damages  relating  to  Vectronic's  alleged
                    failure to manufacture a certain component for the supplier.
                    In the opinion of the Company's  legal  counsel,  Vectronics
                    has a strong defense against the allegations.

               (4)  In 2000, a former  employee and officer of the Company filed
                    a claim against the Company in the Tel Aviv  District  Court
                    for Labor Disputes claiming approximately $580 in respect of
                    severance pay,  vacation pay and other fringe  benefits.  In
                    2001,  the Company  filed a  counter-claim  in the amount of
                    $300 in respect of the repayment of a personal loan that was
                    provided  to the  former  employee.  In the  opinion  of the
                    Company's  legal  counsel,  the Company has a strong defense
                    against the allegations.

               (5)  In May 2001,  a former  director  filed a claim  against the
                    Company,  whereby he claims  that he is  entitled to 600,000
                    options to purchase  Ordinary  shares of the Company.  Legal
                    counsel believes that the claim does not have any merit.

               (6)  The Company is involved  from time to time in various  legal
                    claims in the ordinary course of business,  including claims
                    by  agents  for  commissions   and  others.   The  Company's
                    management,  based  on  the  advice  of its  legal  counsel,
                    believes such claims will not have a material adverse effect
                    on the  financial  position or results of  operations of the
                    Company.

               Presently,  the Company is unable to predict the final outcome of
               the above  claims.  The Company  has  accrued an amount  which it
               believes is  sufficient  to cover any damages,  if any,  that may
               result from these claims.

                                      F-26


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 12  -   CONTINGENCIES,  COMMITMENTS  AND LIENS (CONT.)

               B.   The  Company's  research and  development  efforts have been
                    partially   financed   through  royalty   bearing   programs
                    sponsored by the OCS. In return for the OCS's participation,
                    the Company is committed to pay  royalties at a rate ranging
                    from 3 % to 5% of sales  of the  products  supported  by the
                    OCS,  up  to  100%  of  the  amount  of  such  participation
                    received. The Company's total obligation for royalties,  net
                    of royalties paid or accrued totaled  approximately  $686 as
                    of December 31, 2001.

                    The total amount of royalties  charged to  operations in the
                    years  ended   December   31,   1999,   2000  and  2001  was
                    approximately $73, $2 and $153, respectively.

               C.   Research and development  projects undertaken by the Company
                    and a  subsidiary  abroad were  partly  financed by the BIRD
                    Foundation.  The Company and the subsidiary are committed to
                    pay  royalties to the BIRD  Foundation  at a rate of 2.5% of
                    sales  proceeds  for  which  the  BIRD  Foundation  provided
                    funding  up  to  150%  of  the  sum  financed  by  the  BIRD
                    Foundation.  The Company's and subsidiaries total obligation
                    for  royalties,  net of royalties  paid or accrued,  totaled
                    approximately $1,918 as of December 31, 2001.

                    The total amount of royalties  charged to operations  for in
                    the  years  ended  December  31,  1999,  2000  and  2001 was
                    approximately $0, $29 and $13, respectively.

               D.   The offices of the Company and its  subsidiaries  are rented
                    under  non-cancelable  operating  leases expiring by January
                    31, 2003.  Annual minimum  future rental  payments under the
                    leases,  at exchange  rates in effect on December  31, 2001,
                    are approximately as follows:

                    2002                                    $ 150
                    2003                                       12
                                                               --
                                                            $ 162
                                                            =====


                    Rent expense for the years ended December 31, 2001, 2000 and
                    1999 was $171, $200 and $179, respectively.

                                      F-27


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 12  -  CONTINGENCIES, COMMITMENTS AND LIENS (CONT.)

          E.   The  vehicles of the Company are rented  under  operating  leases
               expiring by July 1, 2005.  Annual minimum future rental  payments
               under the  leases,  at exchange  rates in effect on December  31,
               2001, are approximately as follows:

                2002                                                   $ 107
                2003                                                     107
                2004                                                      92
                2005                                                      18
                                                                          --
                                                                       $ 324
                                                                       =====


               Rent expense for the years ended December 31, 2001, 2000 and 1999
               was $24, $7 and $0, respectively.

          F.   The Company has certain offset  obligations  with the Ministry of
               Economic  Affairs of the Netherlands to purchase  equipment.  The
               offset obligations expire August 16, 2003.

          G.   The Company has recorded  floating liens on all of its assets and
               specific liens on certain assets for liabilities to the banks and
               other creditors.


NOTE 13  -  SHAREHOLDERS' EQUITY

          A.   SHARE CAPITAL

               Ordinary  Shares confer upon their  holders  voting  rights,  the
               right to receive cash  dividends and the right to share in excess
               assets upon liquidation of the Company.

               In March  2001,  the  Company  effected a 2.5 to 1 reverse  stock
               split with  respect to its  ordinary  shares.  All shares,  stock
               options  and  warrants  and net loss per share  amounts  in these
               financial  statements  have  been  restated  for all  periods  to
               reflect the reverse stock split.

               In February 1999, the Company issued 1,360,000 Ordinary shares in
               a private  placement to certain investors in consideration for an
               aggregate amount of $2,125.

               In February 1999, the Company issued 270,592  Ordinary  shares in
               connection  with the  conversion of a short-term  loan granted to
               the Company in June 1998 in the amount of $677, including accrued
               interest as of the date of  conversion.  Since these  shares were
               not registered,  as required by the loan  agreement,  the Company
               issued an additional 80,000 shares for no further  consideration.
               Expense  for the value of these  shares was not  recorded  as the
               amount is not material.

                                      F-28


<PAGE>

                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 13  -  SHAREHOLDERS' EQUITY (CONT.)

          A.   SHARE CAPITAL (Cont.)

               In March  1999,  the Company  issued  40,000  Ordinary  shares in
               connection with services provided to the Company in the amount of
               $90.  Since these shares were not  registered as agreed upon with
               the service  provider,  the Company agreed to issue an additional
               20,000 unregistered shares for no further consideration.  Expense
               for the value of the 20,000  unregistered shares was not recorded
               as the amount is not material.

               In June 1999,  the Company issued  320,000  Ordinary  shares in a
               private  placement to a shareholder in consideration for $460 and
               1,280,000  Ordinary shares in consideration for the conversion of
               a loan in the  amount of $2,037  granted  to the  Company  in May
               1998.

               In August 1999, the Company issued 1,310,000 Ordinary shares in a
               private  placement to certain  investors in consideration  for an
               aggregate amount of $3,865.

               In August 1999,  the Company issued  865,424  Ordinary  shares in
               connection  with a loan granted to the Company in September  1998
               in the  amount of $2,142  including  interest  not paid as of the
               date of the conversion.

               In February 2000, the Company issued 518,372 Ordinary shares in a
               private  placement to certain  investors in consideration  for an
               aggregate amount of approximately $2,758.

               In May 2000,  the Company  issued  940,000  Ordinary  shares in a
               private  placement to certain  investors in consideration  for an
               aggregate amount of approximately $2,249.

               During  2000,  the Company  issued  36,230  Ordinary  shares to a
               services  provider in connection with settlement of a debt in the
               amount of $304. All shares issued to the above mentioned  service
               provider  were  issued at market  price  which  represented  fair
               market value.

               During 2000,  the Company issued  117,587  Ordinary  shares to an
               additional  service  provider in connection  with settlement of a
               debt in the  amount  of $500.  All  shares  issued  to the  above
               mentioned  service  provider  were  issued at market  price which
               represented fair market value.

               In August  2000,  the Company  issued  7,292  Ordinary  shares in
               respect  of a loan in the  amount of $28 given to the  Company in
               December 1997.

                                      F-29

<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 13  -  SHAREHOLDERS' EQUITY (CONT.)

          B.   STOCK OPTION PLANS

               In 1993, the Company's  Board of Directors  approved the adoption
               of an  Employee  Stock  Option  Plan  (the  "1993  Plan"),  which
               authorizes the grant of options to purchase up to an aggregate of
               200,000 ordinary shares to officers,  directors,  consultants and
               key  employees  of the  Company  and  its  subsidiaries.  Options
               granted  under the 1993 Plan expire  within  maximum of ten years
               from the date of grant. The 1993 Plan will expire on November 23,
               2003  unless  sooner   terminated  by  action  of  the  Board  of
               Directors. Options granted under the Company's Plans vest ratably
               over three years, one third on each anniversary of the grant.

               The exercise price of an option granted to an employee may not be
               less than 60% of the fair market value of the Company's  ordinary
               shares on the date of grant of the option.  The exercise price of
               an option  granted to a  non-employee  director or consultant may
               not be less than 80% of the fair  market  value of the  Company's
               ordinary shares on the date of grant of the option.

               In 1994, the Company's  Board of Directors  approved the adoption
               of an  Employee  Stock  Option  Plan  (the  "1994  Plan"),  which
               authorizes the grant of options to purchase up to an aggregate of
               200,000 ordinary shares to officers,  directors,  consultants and
               key employees of the Company and its  subsidiaries.  The terms of
               the 1994 Plan are  substantially  identical  to those of the 1993
               Plan.

               In 1996, the Company's  Board of Directors  approved the adoption
               of an  Employee  Stock  Option  Plan  (the  "1996  Plan"),  which
               authorizes the grant of options to purchase up to an aggregate of
               240,000 ordinary shares to officers,  directors,  consultants and
               key employees of the Company and its  subsidiaries.  The terms of
               the 1996  Plan are  substantially  identical  to the terms of the
               plan described above.

               In 1999,  the  Company's  Board  of  Directors  and  shareholders
               approved the adoption of an Employee Stock Option Plan (the "1999
               Plan"),  which  authorizes the grant of options to purchase up to
               an aggregate of 800,000  ordinary shares to employees,  officers,
               and directors of the Company and its  subsidiaries.  The terms of
               the 1999 Plan are substantially  identical to the Plans described
               above.

                                      F-30


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 13  -  SHAREHOLDERS' EQUITY (CONT.)

          B.   STOCK OPTION PLANS (Cont.)

               In  addition,  in 1999,  the  Board  of  Directors  approved  the
               issuance of 840,000  warrants to purchase  ordinary shares to the
               President and certain directors of the Company. The warrants were
               granted at an exercise  price  equal to or greater  than the fair
               market  value of an  ordinary  share at the  date of  grant.  The
               remaining  terms of the warrants are  substantially  identical to
               the terms described  above. In November 2000, the shareholders of
               the Company approved the increase in the number of shares subject
               to the 1999 Plan by an additional  240,000  ordinary  shares.  At
               December 31, 2001, 642,000 options were available for grant under
               the Plans described above.

               All  options  were  granted at fair  market  value.  Transactions
               related to the above plans during the years  ending  December 31,
               2001, 2000 and 1999 were as follows:
<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                          -------------------------------------------------------------------
                                      WEIGHTED               WEIGHTED               WEIGHTED
                           NUMBER      AVERAGE     NUMBER    AVERAGE     NUMBER     AVERAGE
                             OF       EXERCISE       OF      EXERCISE      OF       EXERCISE
                           OPTIONS      PRICE     OPTIONS     PRICE      OPTIONS     PRICE
                           -------    --------    -------    --------    -------    ----------
                                   2001                   2000                   1999
                          --------------------   --------------------  -----------------------
<S>                       <C>           <C>      <C>          <C>      <C>           <C>
Options outstanding at
  beginning of the year   1,742,000     $ 5.40   1,155,200    $  5.98    360,000     $  4.90
Granted                           -       -        664,800       4.50    854,000        6.30
Forfeited or cancelled     (104,000)      4.78     (78,000)      5.85    (58,800)       4.35
                           --------       ----     -------       ----    -------        ----
Options outstanding at
  end of the year         1,638,000     $ 5.48   1,742,000    $  5.40  1,155,200        5.98
                          =========     ======   =========    =======  =========        ====
Exercisable at end
  of year                   949,200     $ 4.71     531,867    $  4.08    237,067     $  5.43
                            =======     ======     =======    =======    =======     =======
Weighted average
  fair value of options
  granted                               $    -                $     -                $     -
                                        ======                =======                =======

</TABLE>

                                      F-31


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 13  -  SHAREHOLDERS' EQUITY (CONT.)

          B.   STOCK OPTION PLANS (Cont.)

               The  following  table   summarizes   information   about  options
               outstanding and exercisable at December 31, 2001:
<TABLE>
<CAPTION>
                                  OPTIONS OUTSTANDING                 OPTIONS EXERCISABLE
                       ----------------------------------------     -------------------------
                          NUMBER       WEIGHTED-                      NUMBER
                       OUTSTANDING      AVERAGE       WEIGHTED-     OUTSTANDING     WEIGHTED-
                            AT         REMAINING       AVERAGE           AT          AVERAGE
RANGE OF EXERCISE      DECEMBER 31,   CONTRACTUAL     EXERCISE      DECEMBER 31,    EXERCISE
PRICES                    2001        LIFE (YEARS)      PRICE           2001          PRICE
----------------       ------------   ------------    ---------     ------------    ---------
<S>                     <C>               <C>          <C>              <C>         <C>
$  2.25-6.25            1,202,400         7.87         $ 4.24           781,600     $  3.80
$  6.50-10.00             427,600         7.67           8.82           159,600        8.72
$  13.70                    8,000         2.00          13.70             8,000       13.70
                            -----                       -----             -----       -----
                        1,638,000(*)                   $ 5.48           949,200     $  4.71
                        ==========                     ======           =======     =======
</TABLE>


               (*)  Includes  840,000  warrants  outstanding to directors of the
                    Company.

               The Company  accounts  for stock option  grants to employees  and
               directors in  accordance  with APB No. 25. Pro forma  information
               regarding net loss and net loss per share is required by SFAS No.
               123 as if the  Company  had  accounted  for  its  employee  stock
               options under the fair value method of that  Statement.  The fair
               value for these options was estimated at the date of grant, using
               the Black and Scholes Option Valuation Model,  with the following
               weighted-average  assumptions  for each of the three years in the
               period ended  December 31, 2001:  (1) expected  life of option of
               two years;  (2) dividend yield of 0%; (3) expected  volatility of
               36%;  and (4)  risk-free  interest  rate of 1.75%  (5%  -2000 and
               1999). If deferred  compensation  had been  determined  under the
               above  mentioned  fair value method,  the effect on the Company's
               net loss and net loss per share  would have been  immaterial  for
               all the reported periods.


                                      F-32


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 13  -  SHAREHOLDERS' EQUITY (CONT.)

          C.   WARRANTS

               In May 2001, in connection  with the loan described in Note 16, a
               warrant  to  purchase  91,912  ordinary  shares  was  issued to a
               shareholder  at an exercise  price of $2.176 per  ordinary  share
               exercisable  until June 2003.  As of December 31, 2001, no shares
               were issued in respect to the above mentioned warrant.

               In May 2000,  warrants to purchase  388,778  ordinary shares were
               issued to investors who participated in the February 2000 private
               placements,  at an exercise price of $2.75 per share, exercisable
               until June 2003.  As of December 31, 2001,  no shares were issued
               in respect to the abovementioned warrants.

               In May 1998, in connection  with a loan granted to the Company by
               a shareholder,  warrants to purchase 144,000 ordinary shares were
               issued,  to the  shareholder at exercise prices between $3.75 and
               $6.25  per  share,  exercisable  until  June  2003.  The  Company
               accounted for this warrant grant in  accordance  with  Accounting
               Principles  Board  Opinion No. 14 - "Accounting  for  Convertible
               Debt and Debt Issued with Purchase  Warrants"  ("APB No. 14"). As
               of  December  31,  2001,  no shares were issued in respect to the
               above mentioned warrants.

               During 1997 and 1998, warrants to purchase 80,000 ordinary shares
               were issued to the  President  of the company at exercise  prices
               between $3.06 and $6.13 per ordinary share,  with no expiry date.
               As of December 31, 2001,  no shares were issued in respect to the
               above  mentioned  warrants.  The above  mentioned  warrants  were
               issued at a market price which  represented  fair market value at
               each of the dates of grant.

          D.   DIVIDENDS

               The Company has never paid cash  dividends to  shareholders.  The
               Company intends to retain future earnings for use in its business
               and does not  anticipate  paying cash  dividends  on its ordinary
               shares in the foreseeable future. Any future dividend policy will
               be  determined  by the Board of Directors  and will be based upon
               conditions  then  existing,   including  results  of  operations,
               financial   condition,   current  and  anticipated   cash  needs,
               contractual  restrictions  and other  conditions  as the Board of
               Directors may deem relevant.


                                      F-33


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 14  -  TAXES ON INCOME

          A.   TAX  BENEFITS  UNDER  THE LAW FOR THE  ENCOURAGEMENT  OF  CAPITAL
               INVESTMENT, 1959.

               The Company has been granted an "Approve  Enterprise"  status for
               one investment program in the alternative program, by the Israeli
               Government   under   the  Law  for   Encouragement   of   Capital
               Investments,  1959 ("the  Law").  Since the Company is a "foreign
               investors'  company",  as defined by the Law, it is entitled to a
               ten-years  period of benefits,  for  enterprises  approved  after
               April  1993.  The main tax  benefits  from said  status are a tax
               exemption  for two years,  and a reduced  tax rate  (based on the
               percentage  of foreign  shareholding  in each tax year) on income
               from its approved  enterprise,  for the  remainder of the benefit
               period.  These tax benefits  are subject to a  limitation  of the
               earlier  of twelve  years from  commencement  of  operations,  or
               fourteen  years  from  receipt  of  approval.  In the  event of a
               distribution  of a cash dividends out of tax-exempt  income,  the
               Company  will  be  liable  to  corporate  tax at a rate of 25% in
               respect of the amount  distributed.  As the  Company  has not yet
               reported  any  taxable  income,  the  benefit  period has not yet
               commenced.

               Income from sources other than the Approved Enterprise during the
               benefit  period will be subject to tax at the  regular  corporate
               tax rate of 36%.

               The  Company is entitled to charge  accelerated  depreciation  in
               respect  of  machinery  and   equipment   used  by  the  Approved
               Enterprise.

               The  entitlement to the above  mentioned  benefits is conditional
               upon the Company's  fulfilling the  conditions  stipulated by the
               above  mentioned law,  regulations  published  thereunder and the
               certificates of approval for the specific investments in approved
               enterprises.  In the  event  of  failure  to  comply  with  these
               conditions,  the  benefits may be canceled and the Company may be
               required  to refund  the amount of the  benefits,  in whole or in
               part,  with the addition of linkage  differences,  to the CPI and
               interest.


                                      F-34


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 14  -  TAXES ON INCOME (CONT.)

          B.   MEASUREMENT  OF TAXABLE  INCOME  UNDER THE INCOME TAX  (INFLATION
               ADJUSTMENTS) LAW

               Results for tax purposes are measured and adjusted in  accordance
               with  the  change  in the  CPI.  As  explained  in Note  2B,  the
               consolidated  financial statements are presented in U.S. dollars.
               The differences  between the change in the Israeli CPI and in the
               NIS/U.S.  dollar exchange rate cause a difference between taxable
               income or loss and the income or loss before  taxes  reflected in
               the  consolidated   financial  statements.   In  accordance  with
               paragraph  9(f) of SFAS No. 109,  the  Company  has not  provided
               deferred  income taxes on this  difference  between the financial
               reporting basis and the tax basis of assets and liabilities.

          C.   THE LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

               The  Company  is an  "Industrial  Company"  under the Law for the
               Encouragement   of  Industry.   The  principal   benefit  is  the
               deductibility of expenses in connection with a public offering.

          D.   As of December 31, 2001, the net operating loss carryforwards for
               tax  purposes  relating  to the  Company  in Israel  amounted  to
               approximately  $43,745.  Carryforward  losses  in  Israel  may be
               carried  forward  indefinitely  and may be offset  against future
               taxable  income.  The Company  expects  that during the period in
               which  these  tax  losses  are   utilized  its  income  would  be
               substantially tax-exempt, and accordingly,  no deferred tax asset
               has been recorded.

               As  of  December  31,  2001,   carryforward  losses  relating  to
               non-Israeli companies,  approximately $4,255. Carryforward losses
               in non-Israeli  companies may be carried forward indefinitely and
               may be offset  against  future  taxable  income.  As the  Company
               believes that the  realization of this  carryforward  loss is not
               more likely than not to be  realized,  the Company has recorded a
               valuation  allowance  in  respect  of the  entire  amount  of the
               deferred tax asset relating to the carryforward losses.

          E.   Final tax assessments have been received by the Company in Israel
               through  the  tax  year  1998.  Based  on  certain  disputed  tax
               assessments  of the  Company's  U.S.  subsidiaries  an  amount of
               approximately  $50 is due to the Internal  Revenue  Service.  The
               Company is appealing the  assessment and does not believe it will
               ultimately be required to pay this balance.

                                      F-35


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 14  -  TAXES ON INCOME (CONT.)

          F.   LOSS BEFORE INCOME TAXES

                                                    YEAR ENDED DECEMBER 31,
                                                ------------------------------
                                                 2001       2000       1999
                                                 ----       ----       ----

                Israel                          $ 2,837   $ 5,869    $ 4,146
                Others                              532       230      3,071
                                                    ---       ---      -----
                                                $ 3,369   $ 6,099    $ 7,217
                                                =======   =======    =======

          G.   The main reconciling  items between the statutory tax rate of the
               Company and the effective tax rate are the non-recognition of tax
               benefits from accumulated net operating  losses  carryforward and
               other  temporary   differences  among  the  various  subsidiaries
               worldwide due to the  uncertainty of the  realization of such tax
               benefits.

NOTE 15  -  SELECTED STATEMENTS OF OPERATIONS DATA

          A  - COST OF REVENUES

                                                      YEAR ENDED DECEMBER 31,
                                                      -----------------------
                                                     2001       2000       1999
                                                     ----       ----       ----


           Salaries and employee benefits            2,598      1,232      2,322
           Procurement                               1,928        908      3,291
           Estimated loss (profit) on
             contracts                                   -       (142)       342
           Depreciation and amortization             1,592      1,885      2,268
           Write-off of inventories                      -        200      2,718
           Other manufacturing costs                   263        321        477
           Cost of sale of aircraft spare parts
             and repair and maintenance services     1,035        903      1,289
                                                     -----        ---      -----
                                                    $7,416     $5,307    $12,707
                                                    ======     ======    =======


                                      F-36


<PAGE>

                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data

NOTE 15  -  SELECTED STATEMENTS OF OPERATIONS DATA (CONT.)

          B - RESEARCH AND DEVELOPMENT EXPENSES

                                                      YEAR ENDED DECEMBER 31,
                                                      -----------------------
                                                   2001       2000       1999
                                                   ----       ----       ----

             Salaries and employee benefits      $  373    $    559   $  488
             Subcontractors                          55          63       74
             Materials                               16          48        -
             Other                                  194         303      174
                                                    ---         ---      ---
                                                    638         973      736
             Capitalization of software
               development costs                   (104)       (243)    (308)
                                                   ----        ----     ----
                                                 $  534    $    730   $  428
                                                 ======    ========   ======

          C - FINANCING EXPENSES, NET

                                                      YEAR ENDED DECEMBER 31,
                                                      -----------------------
                                                     2001     2000       1999
                                                     ----     ----       ----
             INCOME:
               Translation adjustments           $   335    $     -   $      -
               Interest income on cash
                 equivalents and bank deposits        33          -         10
               Other                                   -          -         84
                                                      --         --         --
                                                     368          -         94
                                                     ---         --         --
             EXPENSES:
               Translation adjustments                 -        185        102
               Interest on long-term debt              6         27        230
               Interest on short-term
                 loans and other credit balances     418        540        462
               Bank commissions                       63         97        152
               Interest to related parties            61          -        289
               Other                                  30         12          -
                                                      --         --         --
                                                     578        861      1,235
                                                     ---        ---      -----
                                                 $  (210)   $  (861)  $ (1,141)
                                                 =======    =======   ========

          D - OTHER INCOME (EXPENSES), NET

                                                     YEAR ENDED DECEMBER 31,
                                                     -----------------------
                                                   2001         2000       1999
                                                   ----         ----       ----
           Loss on sale of subsidiary (1999 -
             loss on investment in affiliated
             company)                             $  (30)     $    -     $ (300)
           Other                                       -         563        805
                                                  ------      ------     ------
                                                  $  (30)     $  563     $  505
                                                  ======      ======     ======


                                      F-37

<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 16  -  RELATED PARTY BALANCES AND TRANSACTIONS

          Related party balances  reflected in the balance sheets as of December
          31, 2001 and 2000 are as follows:

                                                               DECEMBER 31,
                                                               ------------
                                                              2001    2000
                                                              ----    ----

           Loan due to a related party (1)                   $1,061   $  -
                                                             ======   ====
           Balance due to related party                      $   12   $  -
                                                             ======   ====

          (1)  In 2001, a Company's  shareholder and director  granted a loan to
               the Company in the amount of $1,000 at an annual interest rate of
               10%  until  December  31,  2001  and  15%  annual  interest  rate
               commencing January 1, 2002. In June 2002 the loan and the accrued
               interest were converted into 2,775,201 ordinary shares. (See Note
               18(2)).

          Related  party  transactions  reflected in the statement of operations
          for the years ended December 31, 2001, 2000, and 1999 are as follows:

                                                   YEAR ENDED DECEMBER 31,
                                                   -----------------------
                                                   2001    2000     1999
                                                   ----    ----     ----
           Affiliated company:
             Sales revenues                        $  -   $  24     $ 24
             Commission expense to former
               Director                               -      -        32
             Loss on investment in affiliated
               company                                -      -       300
             Purchases                               43      -         -
             Other                                    -    183         -
           Shareholder:
             Interest expense                        61      -       289

                                      F-38


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 17  -  CUSTOMERS AND GEOGRAPHIC INFORMATION

          In  accordance  with SFAS No. 131  "Disclosures  About  Segments of an
          Enterprise  and Related  Information",  the Company is  organized  and
          operates as one business  segment,  which develops,  manufactures  and
          sales ATE products,  avionics  equipment and aviation data acquisition
          and debriefing systems.

          A.   REVENUES BY GEOGRAPHIC AREAS

          Revenues are  attributed to  geographic  area based on the location of
          the end customers as follows:

                                                    YEAR ENDED DECEMBER 31,
                                                    -----------------------
                                                    2001      2000      1999
                                                    ----      ----      ----

                North America                     $  3,931  $ 1,416  $    944
                Europe                               1,826      721     6,597
                Israel                               1,963    1,326     2,297
                Other                                  622      353       535
                                                       ---      ---       ---
                      Total                       $  8,342  $ 3,816  $ 10,373
                                                  ========  =======  ========


          B.   REVENUES

          Revenues from single  customers which exceed 10% of the total revenues
          in the  reported  year  as a  percentage  of  total  revenues,  are as
          follows:

                                              YEAR ENDED DECEMBER 31,
                                              -----------------------
                                            2001        2000        1999
                                            ----        ----        ----
                                             %           %           %
                                            ----        ----        ----

                  Customer A                  12          13          16
                  Customer B                 (*)          12         (*)
                  Customer C                 (*)          12          16
                  Customer D                   -           -          20
                  Customer E                 (*)         (*)          15
                  Customer F                  16          16         (*)
                  Customer G                  17           -           -

                (*)  Less than 10%.


                                      F-39


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 17  -  CUSTOMERS AND GEOGRAPHIC INFORMATION (CONT.)

          C.   LONG LIVED ASSETS BY GEOGRAPHIC AREAS

                                                            AS OF DECEMBER 31,
                                                            ------------------
                                                             2001      2000
                                                             ----      ----

                Israel                                     $ 8,285   $ 9,833
                China                                        2,444     2,844
                                                             -----     -----
                                                           $10,729   $12,677
                                                           =======   =======

NOTE 18  -  SUBSEQUENT EVENT (UNAUDITED)

          1.   In June 30, 2002, the Company issued 1,938,766 ordinary shares in
               a private  placement to certain investors in consideration for an
               aggregate  amount of $950. In addition,  such  investors  will be
               issued warrants to purchase  4,302,041 of the Company's  ordinary
               shares.  Such  warrants  will be valid for five years and will be
               exercisable  during  the first 36  months  after  issuance  at an
               exercise  price  of $2 per  share,  and  thereafter,  during  the
               following  24 month  period,  at an exercise  price which will be
               equal  to the  higher  of:  (i) $2 per  share  or (ii) 50% of the
               average  closing  price  during the ten trading  days prior to an
               exercise date.

          2.   In June 2002, the Company issued  2,775,201  ordinary shares in a
               private  placement to a shareholder in  consideration  for a loan
               that was given to the  company  in the  amount of $1,350  ($1,000
               outstanding  as of December 31, 2001).  In addition,  the Company
               will  issue  the  shareholder   warrants  to  purchase  8,265,306
               ordinary  shares.  Such warrants will be valid for five years and
               will be  exercisable  during  the first 36 months at an  exercise
               price of $2 per  share,  and  thereafter,  during  an  additional
               period of 24 months, at an exercise price which shall be equal to
               the  higher  of:  (i) $2 per  share  or (ii)  50% of the  average
               closing price of one ordinary  shares during the ten trading days
               prior to the exercise date.

                                      F-40


<PAGE>


                       RADA ELECTRONIC INDUSTRIES LIMITED

             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
          In thousands of U.S. dollars, except share and per share data


NOTE 18  -  SUBSEQUENT EVENT (UNAUDITED)(CONT.)

          3.   On June 6, 2002, the Company  announced that its ordinary  shares
               will trade on the Nasdaq SmallCap Market effective as of the open
               of business on June 10, 2002. The Company's  ordinary shares will
               continue to be listed on Nasdaq  SmallCap Market via an exception
               from the minimum $2.5 million net  tangible  assets  requirement.
               While the Company failed to meet this requirement as of September
               30, 2001, the Company was granted a temporary exception from this
               standard subject to the Company meeting certain  conditions.  The
               exception  will expire on August 30, 2002.  In the event that the
               Company  is  deemed to have met the  terms of the  exception,  it
               shall continue to be listed on the Nasdaq  SmallCap  market.  The
               Company  believes  that it can meet  these  conditions,  however,
               there can be no  assurance  that it will do so. If at some future
               date the Company's  ordinary  shares should cease to be listed on
               the Nasdaq SmallCap market, they may continue to be listed in the
               OTC-Bulletin Board.




                                    # # # # #


                                      F-41









<PAGE>




                               S I G N A T U R E S


         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 AMENDED REGISTRATION STATEMENT ON ITS BEHALF.



                                            RADA ELECTRONIC INDUSTRIES LTD.


                                            By: /s/ Herzle Bodinger
                                                -----------------------
                                            Name:  Herzle Bodinger
                                            Title:  President








Dated:  August 29, 2002



                                       76


<PAGE>



                            EXHIBIT INDEX



   Exhibit      Description                                             Page No.
   -------      -----------                                             --------

     3.1*       Memorandum of Association of the Registrant

     3.2*       Articles of Association of the Registrant

     4.1*       Specimen of Share Certificate

   10.1*        1993 Employee Stock Option Plan, as amended

   10.2*        1994 Employee Stock Option Plan, as amended

   10.3*        1996 Employee Stock Option Plan, as amended

   10.4*        1999 Employee Stock Option Plan, as amended

   10.5*        Form of warrants to directors

   10.6*        Loan Agreement dated June 3, 2001 between the Registrant
                and Howard Yeung

   10.7*        Deed of Termination of Joint Venture  Agreement dated June
                3, 2001, effective as of January 1, 2000 and Agreement for
                the acquisition of part of the issued share capital of New
                Reef  Holding  Ltd.  dated June 3, 2001,  effective  as of
                January 1, 2000

   10.8**       Letter Agreement  dated May 15, 2002 between the  Registrant and
                the authorized representative of Howard P.L. Yeung re Conversion
                of Outstanding Loans into Ordinary Shares and Warrants

   10.9**       Letter  Agreements  dated May 15, 2002 between the Registrant
                and the Investors re Private Placement of Ordinary Shares and
                Warrants

   23.1         Consent of Kost, Forer & Gabbay, Certified Public Accountants
                (Israel)

   99.1         CEO Certification Pursuant To 18 U.S.C. Section 1350 As Adopted
                Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002





<PAGE>


   99.2         CFO Certification Pursuant To 18 U.S.C. Section 1350 As Adopted
                Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002

-------------------
*    Filed as an exhibit  to our  Annual  Report on Form 20-F for the year ended
     December 31, 2000 and incorporated herein by reference.

**   Filed as an exhibit  to our  Annual  Report on Form 20-F for the year ended
     December 31, 2001 and incorporated herein by reference.