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, 2004
                                       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............... 20,448,364

    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/A is incorporated by reference into the
registrant's Registration Statements on Form F-3, Registration Nos. 333-12074,
333-115598 and 333-117954.


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                                Explanatory Note

        This Amendment No. 1 on Form 20-F/A hereby amends Items 4,15, 18 and 19
of RADA Electronic Industries Ltd.'s Annual Report on Form 20-F for the fiscal
year ended December 31, 2004, which was filed on March 31, 2005. This Amendment
No. 1 is being filed for the purpose of providing additional details to our
disclosures in the original report pursuant to comments received from the Staff
of the U.S. Securities and Exchange Commission in connection with its review of
our periodic filings.

        This Amendment is not intended to revise other information presented in
our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 as
originally filed and all such other information in the original filing, which
remains unchanged.

        This Amendment does not reflect events occurring after the filing of the
original Form 20-F and does not modify or update the disclosure therein in any
way other than as required to reflect the amendments discussed above. As a
result, this Amendment continues to speak as of March 31, 2005.



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                                TABLE OF CONTENTS
                                                                        Page No.
                                                                        --------

PART I.........................................................................1

ITEM 4.     INFORMATION ON THE COMPANY.........................................1
            A.    History and Development of the Company.......................1
            B.    Business Overview............................................1
            C.    Organizational Structure....................................14
            D.    Property, Plants and Equipment..............................15

PART II.......................................................................16

ITEM 15.    CONTROLS AND PROCEDURES...........................................16

PART III......................................................................17

ITEM18.     FINANCIAL STATEMENTS..............................................17
ITEM19.     EXHIBITS..........................................................17
S I G N A T U R E S...........................................................19

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                                     PART I

ITEM 4. INFORMATION ON THE COMPANY
        --------------------------

A.      HISTORY AND DEVELOPMENT OF THE COMPANY

        RADA Electronic Industries Ltd. was incorporated under the laws of the
State of Israel on December 8, 1970 for an indefinite term. We are a public
limited liability company under the Israeli Companies Law 1999-5759, or the
Israeli Companies Law, and operate under this law and associated legislation.
Our registered offices and principal place of business are located at 7 Giborei
Israel Street, Netanya 42504, Israel, and our telephone number is
972-9-892-1111. Our address on the internet is www.rada.com. The information on
our website is not incorporated by reference into this annual report.

        We develop, manufacture and sell automated test equipment, avionics
products and ground debriefing systems and provide manufacturing services for
military and commercial use, mainly in Israel, the U.S. and Europe. We refer to
these activities as our core business. We also provide test and repair services
using our CATS(R) testers and test program sets through our Chinese subsidiary.

        In April 1985, we completed an initial public offering. We traded on the
Nasdaq National Market under the symbol "RADIF" since our initial public
offering in 1985 until June 10, 2002 when the listing of our ordinary shares was
transferred to the Nasdaq SmallCap Market. On December 13, 2004, we changed our
symbol to "RADI."

        In February 2005, we purchased all the assets of Vectop Ltd., an Israeli
company specializing in the design, development, marketing and sale of
electro-optic equipment and debriefing systems. Such assets included the
know-how, intellectual property and patents that were used by, or connected to
Vectop's business.

B.      BUSINESS OVERVIEW

Our Core Business

        We provide integrated avionic solutions. Our aim is to provide not only
a state of the art product but also a comprehensive end to end solution for one
or more avionic systems. The first integrated system that we provided was for
the A-4 avionics upgrade program of the Israeli Air Force, or IAF. This program
is the first comprehensive and complete avionics system to be provided entirely
by us. During 2004 we increased our involvement and development efforts in the
area of unmanned aircraft vehicles.

        Our solutions include the following:

          o    Advanced training solutions,  based on our recently completed Net
               Centric Digital Recorder;

          o    Integrated  trainer  aircraft  avionics  packages;

         o    Flight data recorders and supporting ground analysis;


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          o    Integrated weapons management systems;

          o    Video cameras for ground and airborne applications,  based on the
               Vectop's Ltd. products;

          o    Inertial  and  global  positioning  system  based  on  navigation
               solutions; o Unmanned aerial vehicle avionics; and

          o    Automatic testing solutions;

        We also provide manufacturing services to original equipment
manufacturers in Israel and in the United States, using the manufacturing
capabilities of our Beit-She'an plant. We offer production of turnkey solutions,
in "build to print" or "build to specification" modes. To date, we have provided
our manufacturing services to, among others, Smiths, Israeli Aircraft
Industries, or IAI, and RAFAEL Armament Development Authority Ltd., or RAFAEL.
Our China based subsidiary provides test and repair services using our CATS(R)
testers and test program sets.

        Our core business activity is based in Israel. Our U.S.-based
subsidiaries have been inactive since January 1, 2002.

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Advanced Training Solutions

General

        Our training solutions are based on a complete and integrated system
that incorporates an airborne component installed in the aircraft and a
ground-based component, installed in the squadron facilities. Recent
technological developments, undertaken primarily for the IAF, enable system
adaptation to any kind of aircraft, regardless of its onboard avionics systems.
Our recent solutions are based on our newly developed Net Centric Digital
Recorder, that allows the integration of our airborne digital video recordings
with numerous other digital data items and provides the essential building
blocks for a squadron information management network, or SIMNET, as a ground
component.

Autonomous Air Combat Evaluation System  - ACE(TM)

        ACE(TM) is an avionics system used for debriefing air combat missions
and is based on data recordings from digital and analog communication channels
in the aircraft. The system converts the data into digital form and inserts it
on unused portions of the recording tape in the existing aircraft analog
videocassette recorder, or VCR. The data is extracted from the videocassette and
utilized by our ground debriefing station to generate 3-D graphic displays that
portray all the aircraft maneuvers during operational and training missions, and
fully synchronize between all the participating aircrafts. For each individual
aircraft, the graphic display is fully synchronized with the heads-up display
image captured on the VCR media. The IAF (F-16 A/B, A-4) and three other air
forces (F-5, F-16 A/B) currently utilize the ACE(TM) system.

        Debriefing of air combat maneuvers can also be implemented as an
expansion application to our FACE(TM) system. The Royal Netherlands Air Force
has upgraded its FACE(TM) system s with this capability to debrief its aircrews.

        The latest enhancement of the ACE(TM) concept resulted in a contract
with the Israeli Ministry of Defense and the IAF in the first quarter of 2003.
Under the contract we will upgrade all of the existing IAF A-4 aircraft with our
advanced ACE(TM) debriefing capabilities. The absence of advanced avionics
systems and associated data onboard the A-4 aircraft required us to integrate a
stand-alone Internal Navigation System, or INS, and a Global Positioning System,
or GPS, on board the aircraft. We believe this enhanced solution will open the
market segment of aircraft fleets not equipped with modern avionics platforms
for the ACE(TM). We believe that this program uniquely positions us as the
ultimate provider for debriefing solutions for all the advanced IAF trainers.

Squadron Information Management Network (SIMNET)

        Since 1999 we have offered operational ground debriefing stations
complementing our airborne systems. The operational ground debriefing station is
a PC-based application operating in a Windows NT/2000(R) environment, supported
by a proprietary plug-in board. The solution, designed by our employees (IAF
F-16 and F-15 pilots in reserve service), provides a state-of-the-art debriefing
environment, fully capitalizing on all available digital and video information
in a highly synchronized presentation. Further capitalizing on current day
technology, individual

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stations have a networking capability, providing data sharing, as well as
cross-unit and inter-air force debriefing.

        The IAF and two other air forces have purchased ground debriefing
systems for their F-16 A/B, F-5 and A-4 fleets.

Net Centric Digital Recorder (NCDR) Based Training Systems

        Recent developments in digital video recording systems and the
significant reduction in size and cost of solid state memory hardware have
turned solid state digital video recording systems into the de-facto standard
solution for airborne applications. These systems have begun penetrating the
aviation industry, in new aircraft such as the F-16I as well as in the retrofit
market. Identifying this trend, we have ported our debriefing solutions to the
digital domain, with the initial system developed for the new IAF F-16Is,
delivered under the Peace Marble, or PM-V, Program and the new Net Centric
Digital Recorder. We developed our Net Centric Digital Recorder with the view of
capturing sales from the potential retrofit market for airborne video tape
recorders. This new solution focuses on the throughput, data management and
archiving requirements of the massive amounts of information generated by each
aircraft, as well as on seamless data sharing within the squadron and the air
force as a whole.

        Based on the PM-V Program, we delivered two additional debriefing
systems to Lockheed Martin Aerospace during the fourth quarter of 2002 for use
in integration and flight-testing. We are in the midst of the development,
integration and delivery of a complete digital debriefing system for the new
F-16s purchased by the Chilean Air Force. As an extension of the development
work completed as part of the PM-V Program, we are supplying the Chilean Air
Force with a digital video recorder for each F-16 aircraft as well as an
advanced digital video ground debriefing station. This station will be linked to
the F-5 ground debriefing station we previously delivered to the Chilean Air
Force, creating a common network debriefing solution for both front-line
aircraft.

        We have identified a growing need for digital video replacement of aging
analogue airborne tape recorders (approximately 15,000 VTRs are installed
onboard fighter aircraft today) and have initiated a world wide marketing effort
to promote the replacement of these aging VTRs with our new NCDR. The NCDR,
together with our ground debriefing system, enables advanced debriefing at an
affordable price. During 2004, we completed the development of the NCDR and it
is now being proposed to several customers. The NCDR will be marketed jointly by
us and Smiths, utilizing Smiths' better access to some of the world markets,
especially in the U.S.

Integrated Trainer Aircraft Avionics Package

        Following our selection by the IAF to provide the ACE(TM) for their
advanced trainer, the A-4 Skyhawk, we were awarded a follow on program aimed at
total replacement of the aging avionics package of the A-4 aircraft with a new,
upgraded package. The new avionics package replaces the current weapon delivery
and navigation system of the aircraft with a new state of the art system that
will significantly improve the A-4 capabilities, increase its' reliability and
provide it with advanced training capabilities.

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        The upgraded system includes INS, GPS, head up display, or HUD, camera,
central weapon delivery and navigation processor based on enhanced flight
monitoring unit, which is the core of the ACE(TM) system and a control and
display unit.

        The upgraded A-4 prototype began its planned flight testing phase on
schedule and the serial production line is operating at full capacity. We plan
to complete the upgrade of all the IAF A-4 fleet during 2005.

        We believe that this program places us among the few companies that
performed a complete aircraft avionics system upgrade. As a result of the A-4
system development, we have proposed similar, very cost effective, trainer
aircraft avionics packages to other customers. The A-4 avionics package
provides, at a very affordable price, a complete and modern avionics suite
tailored for trainer aircraft. We have already launched marketing efforts to
promote this package for different customers.

Flight Data Recorders and Supporting Ground Analysis

General

        Our fleet maintenance management solutions are based on our existing
programs and products developed and supplied over the course of the past two
years. These programs include airborne data collection and recording equipment
(such as FACE(TM) or DAS) as well as ground support software packages (such as
PERFORMS) that provide the infrastructure for efficient data logging and
analysis to support fleet maintenance management.

Fatigue Analysis and Autonomous Air Combat Evaluation System - FACE(TM)

        The FACE(TM) system is an avionics system designed to acquire, process
and record data from various aircraft systems as well as from strain gauges
(sensors) affixed to an aircraft structure. This data is used to streamline and
manage the ongoing monitoring and maintenance of an aircraft and its systems.
The FACE(TM) system communicates with a squadron's ground support logistic
station, enabling downloading of data from an aircraft, analyzing the data,
managing ongoing maintenance, creating and modifying the set-up configuration
files and determining data for recording, as well as providing an interface to
other applications.

        The FACE(TM) system is capable of communicating in real time with a
voice and data recorder, which is a crash survival unit known as a "black box"
manufactured by Smiths, for the purpose of recording flight safety related data.
We are currently upgrading the FACE(TM) systems supplied to the Royal
Netherlands Air Force for its F-16 aircraft between the years 1996 and 1999 with
this capability. During 2004 we supplied FACE(TM) systems for the F-16 fleets of
the Portuguese Air Force and the U.S. Navy, and we plan to supply FACE(TM)
systems to the Jordanian Air Force for its F-16 fleet starting in 2005.

Data Acquisition System - DAS

        The DAS is an advanced avionics data acquisition system designed to
acquire, process and record data from various aircraft systems. We jointly
developed and marketed the DAS with Smiths for the new IAF F-16I aircraft. DAS
consists of two sub-systems, a data acquisition unit, or DAU, and an enhanced
crash survival memory unit, or ECSMU. The DAU interfaces to numerous data
systems and data channels in the aircraft and acquires, processes and records
data,

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mostly for maintenance purposes. The ECSMU is a "black box" capable of recording
digital data and digitized audio transferred through the DAU. DAS is a form fit
replacement for the CSFDR system, which is currently installed on most F-16
aircraft worldwide. DAS has been offered as a substitute in various projects
that require a flight data recorder with advanced capabilities and growth
potential.

        The DAS is designed to meet all commercial aviation requirements for
"black box" recorders, thus expanding its market potential. During 2004, we
started supplying production DAS units to the IAF and entered into contracts to
supply DAS units to the Polish Air Force and the Korean Air Force starting in
2005.

PERFORMS  (Processing,  Evaluating,  and  Reporting  of  Force  Management  Data
Software)

         Starting in mid-2001 we have been the primary sub-contractor to
Lockheed Martin Aerospace in the development of a new aircraft data logging and
analysis software package; accordingly, we provide design and development
services for the new product, known as PERFORMS. PERFORMS is designed to replace
the aging and hard to support data processing station, or DPS, that was
developed to provide data logging and fatigue analysis for all F-16 aircraft
users. PERFORMS is a Windows 2000R-based software package, utilizing a state of
the art graphics user interface, and provides all the required infrastructure to
perform any type of analysis on data acquired by all F-16 airborne flight data
recorders.

         The analysis includes fatigue monitoring, engine usage monitoring and
other applications that may be added, as required by different users. The
recorded data is downloaded to the station and stored in a commercial off the
shelf database with an interface for "plug-in" applications, allowing those
applications to access the data, manipulate and analyze it and provide a variety
of maintenance management tools. The program is managed by Lockheed Martin
Aerospace and is supplied to F-16 users in evolving software "builds" delivered
every 12 months starting in April 2003. Under the agreement, we were granted a
non-exclusive license to use the developed software in support of our FACE and
DAS products to supply the application to our flight data recorder customers.

        The first PERFORMS delivery in June 2003, exposed us to F-16 users at a
higher level than we had ever previously experienced. This exposure led us to
initiate business development activities with regard to PERFORMS add-on
packages. Since 2004, we have presented this product to the F-16 user's
community in seminars and conferences.

        Updated and upgraded PERFORMS software packages were delivered during
2004 and are scheduled for delivery in 2005. Various air force customers already
use the software, and we expect to receive requests to support the installation
and operation of the software from these users.

Integrated Weapons Management Systems

        In the early 1980s we started to develop, manufacture and sell an
armament interface unit which controls the various weapon stations of an
aircraft based on commands from the main on-board computer. The unit interfaces
between the digital commands of the main controller and the analog weapons
stations, performing a unique hybrid task. The armament interface unit was
designed for IAI's worldwide upgrade programs. Later versions of the system are
designed for

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installation in attack helicopters as well as in fighter aircraft. We are
currently in the process of supplying a derivative of the system to IAI for a
F-5 upgrade program in Spain and are proposing the system and its offshoots for
multiple other applications in Israel and abroad. One of the major potential
sales channels for the armament interface unit is IAI, through its upgrade
programs and other ongoing projects.

        We also provide complete armament testing solutions for aircraft using a
variety of weapons management systems. The test unit verifies the serviceability
of the armament management system during periodic maintenance or prior to
installation of sophisticated weapons.

Video Cameras for Airborne and Ground Vehicles

        The recent acquisition of the Vectop Ltd.'s assets in February 2005
provides us with a new product line. Airborne cameras are integral part of any
training and debriefing system airborne onboard military platforms. Our
customers include major Israeli integrators (such as IAF, IAI and Elbit) as well
as foreign customers. In 2005, our products in this line include:

        Eye Witness

        An airborne HUD camera, sold to many customers in different
configurations represents a significant part of the future revenues related to
the assets purchased from Vectop Ltd.

        Night Witness

        A night vision camera installed on any night vision goggles enables
the recording of the pilot's view through the night vision goggles. Its unique
capability has been integrated in several fighter aircraft and helicopter
programs.

        Armor Sentry

        A video camera developed for ground armored vehicles and tanks. This
system is being delivered to the Israeli ground forces for installation in the
new "Merkava" battle tank and is generating interest in foreign markets.

        Sniper Witness

        The Sniper Witness enables sniper training facilities to better analyze
the activities of the trainees as well as accurately debrief the operation
resulting in better training. The system is based on a miniature video camera
attached to the sniper sight and portable video recorder. The system is used by
the Israeli armed forces training facility and is currently being demonstrated
to other armed forces around the world.

Inertial and GPS based Navigation Solutions

        During 2003, we developed low cost navigation systems based on a ring
laser gyro, or RLG, and GPS. Our RLG based system is now qualified and
operational as part of the IAF A-4 upgrade program. This development provided us
with the know-how to further develop navigation solutions based on other
sensors.

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        During 2005, we plan to integrate two different sensors into our
navigation system, which is based on attitude sensors and fiber optic gyros.
Navigation systems based on these sensors are significantly more cost effective
and provide good performance at a -low price.

        We are offering our customers the existing RLG Navigation System, or
RNS, as part of our avionics packages and as a stand alone system and we plan to
propose the new navigation systems by the end of 2005.

Unmanned Aerial Vehicles (UAV) Avionics

        We identified the UAV avionics market as a fast growing area that will
gradually replace the manned military airborne avionics market. This market has
many common aspects with the manned avionics product lines; however, it requires
slightly different technology and understanding of the various requirements.

        Typically, a UAV avionics package needs to be smaller, lighter, more
reliable and inexpensive than its comparable manned aircraft suite. The major
advantage of UAV avionics systems is the envisioned large number of UAVs.

        We initiated efforts to penetrate this market during 2001. Since then we
have entered into a contract with IAI, to develop and provide them with an Input
Output Controller, or IOC, a unit that is part of our data acquisition systems
product line, for IAI's next generation UAV. We are continuing our efforts to
widen our participation in this important program as well as in other programs.

        During 2004, we developed and delivered a miniature avionics module to
IAI. This unit is aimed at the miniature UAV market and provides complete
avionics capabilities in a single, miniaturized unit. This product can be
proposed to other customers and we have initiated marketing activities for that
purpose.

Automatic Testing Solutions

General

        Our business expansion into the automatic test equipment, or ATE, market
is based on our existing products as well as the added value we deliver with the
dedicated expertise and the wide-range experience we have acquired in this area.
We rely on the preference indicated by OEMs to outsource the acquisition of ATE
and have positioned our company as a strategic supplier/partner to provide ATEs
and test solutions. We offer our ATEs with our own Advanced Test Environment,
including all the required development tools. After a long period of inactivity
in this market, we see some growing interest, especially from small maintenance
houses rather than airlines, especially in the U.S.

CATS(R) - Commercial Aviation Test Stations

        The Commercial Aviation Test Stations, or CATS(R), is a family of
multi-purpose, computerized automatic test equipment that meets the specific
needs of airlines and third party maintenance companies. The CATS(R) stations
test and repair a variety of electronic units in existing commercial aircraft,
incorporating tools for testing, troubleshooting, and performing

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diagnostic procedures. CATS(R) replaces or augments test stations from aircraft
manufacturers or avionics OEM suppliers, while automating multiple manual test
procedures.

Manufacturing Services

        In 2000 we began providing manufacturing services to OEMs located in
Israel and the United States, using the excess manufacturing capacity at our
Beit-She'an plant. We offer manufacturing turnkey solutions, either in "build to
print" or "build to specification" modes. To date, we have provided our
manufacturing services to Smiths, IAI, RAFAEL, and other Israeli companies, both
in the defense and commercial sectors.

Test and Repair Stations

        We operate a test and repair shop based on the use of our CATS(R) tester
in Beijing, China through CACS, our 80% owned Chinese subsidiary. CACS was
established as a joint venture company with Tianzu Forest Development Company,
which owns the remaining 20% equity interest. Pursuant to the joint venture
agreement, Tianzu Forest Development provided the facilities for CACS'
operations while we provided CATS(R) testers and test program set services.

Sales and Marketing

Strategy

        Our sales and marketing strategy is based on the following principles:

          o    Maintaining  our  business  focus on  avionics  for the  military
               market and our family of testing solutions for the commercial and
               military markets.

          o    Expanding   our  product   line  by  adding  new   products   and
               applications  to our  existing  products  by  using  our  current
               development programs as the basis for new developments.

          o    Expanding   our  customer  base  by  including  our  products  in
               solutions and  integrated  systems.  This approach was successful
               both in Chile  where,  in 2002,  we were  awarded a  contract  to
               provide a  complete  debriefing  solution  for the F-16  aircraft
               purchased by the Chilean Air Force,  and with the IAF, to whom we
               supply complete weapon delivery and navigation system for the A-4
               aircraft.

          o    Establishing marketing channels with system integrators and major
               aircraft  manufacturers  such  as The  Boeing  Company,  Lockheed
               Martin Aerospace, Smiths, IAI and RAFAEL.

          o    Expanding large potential markets, especially in the military and
               the  unmanned  combat  air  vehicle  areas,  and  developing  new
               marketing channels aimed directly at these customers.

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        As part of this strategy, we have entered into a number of strategic
relationships and have focused our marketing and sales efforts to support these
relationships.

        Lockheed Martin Aerospace. Our sales of avionics products focus mainly
on the F-16 aircraft manufactured by Lockheed Martin Aerospace, the most popular
fighter aircraft in the Western world today. In February 1999, we signed a
memorandum of understanding with Lockheed Martin pursuant to which we will
provide certain avionics systems for the F-16 aircraft under the PM-V Program.
In September 1999, the U.S. and the State of Israel signed a letter of
acceptance pursuant to which the U.S. will provide the IAF with 50 F-16I
aircraft and an option for an additional 52 aircraft, which was exercised in
June 2001 for a total of 102 F-16I aircraft. In cooperation with Smiths, we are
developing and supplying the data acquisition system that includes the advanced
data acquisition unit and an enhanced crash survivable memory unit, which will
be manufactured in our Beit-She'an facility. We are currently negotiating with
Lockheed Martin with respect to the development of additional capabilities of
this system for different applications.

        In addition, in March 2001 we signed an agreement with the Aircraft
Structural Integrity Program Group of Lockheed Martin pursuant to which we are
assisting in the development of a fatigue analysis system based on a PC computer
for analyzing structural fatigue of the F-16 aircraft. As the main
subcontractor, our principal task is to develop the software for the fatigue
analysis system. The fatigue analysis system will utilize data collected from
the data acquisition unit and our FACE(TM) system, as well as other systems used
by air forces operating F-16 aircraft. This five year development program will
end in March 2006.

        Smiths Aerospace Electronic Systems. In February 1999, we entered into
an agreement with Smiths that outlines joint marketing activities for our
FACE(TM) system and Smiths' voice and data recorder for F-16 A/B aircraft.
Smiths is a worldwide leader in avionics systems for fighter and commercial
aircraft. The two systems successfully passed flight tests conducted on the
Royal Netherlands Air Force's F-16 aircraft by Lockheed Martin and the Royal
Netherlands Air Force. The FACE(TM) system and the voice and data recorder
complement each other and are intended to replace outdated data recording
systems, mechanical strain recorders and flight load recorders. No sales under
this agreement have been made to date.

        In June 2000, we signed a memorandum of understanding with Smiths
pursuant to which the parties agreed to establish a team for worldwide
marketing, developing and manufacturing of the data acquisition system and its
associated ground support that is intended to grow into an infrastructure for
recording, processing and managing all data types available on board the
aircraft. No sales of the systems have been made to date under this agreement.
We cannot assure you that we will successfully negotiate a definitive agreement
with a customer nor can we provide at present any forecast that the agreement
with Smiths will result in future sales of avionics systems.

        In October 2003, we signed a teaming agreement with Smiths. The teaming
agreement establishes cooperation in connection with the products developed
jointly by Smiths and us for the PM-V Program and its derivatives. In addition,
the agreement details commitments made by Smiths to purchase production services
from us in the coming years.

        During 2004, we expanded our cooperation with Smiths to include our
newly developed Net Centric Digital Recorder and have jointly offered this
product to potential customers.

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        Smiths was a principal customer in 2002 and 2003 and we expect that it
will be one of our principal customers in 2005. In addition to the PM-V
cooperation with Smiths, we are currently supplying the Royal Netherlands Air
Force with an integration package for our FACE(TM) System and Smiths' black box
for its F-16 MLU fleet. A similar package is also being supplied to the
Portuguese Air Force.

        Israel Aircraft Industries. IAI was our fourth largest customer in 2004,
accounting for approximately 8% of our total annual revenues. We are actively
supplying avionics and test equipment to four different divisions of IAI. We
have identified the Israeli government-owned aerospace industries as a potential
customers and cooperation entities. In particular the Lahav and Malat divisions
of IAI, major aircraft integrators, require our services as avionics and test
equipment providers. During 2004, in the IAF avionics upgrade program, where we
are the prime contractor, we have cooperated with IAI, as our sub-contractor, to
support various parts of this program.

        RAFAEL Armament Development Authority Ltd. RAFAEL was one of our largest
Israeli customers in 2004. Our sales to RAFAEL during 2004 were primarily for
test equipment and build to print services. The addition of the Solid State
Recording, or SSR, family of products to the products we supply to RAFAEL adds
our own developed products to these sales. We expect that the SSR will result in
significant sales to RAFAEL.

Marketing

        Our chairman and president, Herzle Bodinger, our chief executive
officer, Adar Azancot, and our vice president business development, Zvi Alon,
lead our marketing efforts. We currently employ four other persons in marketing
our core business products and plan to employ an additional person. Our
engineering department supports our marketing staff with respect to product
pricing and technical demonstrations. In addition, we have sales consultants,
agents and representatives in Europe, South America, China and India who receive
commissions for sales effected through them.

        The Israeli Ministry of Defense has historically supported and continues
to support our marketing efforts through its Export and Defense Assistance
division, or SIBAT, through various projects for the Israeli Defense Forces and
its related divisions. The Israeli Ministry of Industry and Commerce supports
our marketing efforts via its Industrial Cooperation Authority through the
exploitation of "offset commitments" by Lockheed Martin Aerospace and The Boeing
Company to the State of Israel. Such future assistance is not guaranteed.

                                       11



<PAGE>




Principal Customers

        Generally, we complete a few transactions each year, each in an amount
comprising approximately 10% of our revenues for such year. As a result, each
year a significant portion of our revenues is derived from a small number of
customers. The following table sets forth our principal customers for the years
2003 and 2004:

                                                       2003        2004
                                                       ----        ----
Smiths Electronic Systems......................         22%          5%
The Boeing Company.............................         14%         10%
Israeli Ministry of Defense....................         11%         19%
Israel Aviation Industries.....................         12%          6%
Portuguese Air Force...........................         19%         17%
U.S. Navy......................................          -          11%


        Although we are striving to increase the number of our customers, we
anticipate that a significant portion of our future revenues will continue to be
derived from sales to a small number of customers.

        Like many companies deriving a substantial portion of their revenues
from government contracts, we are subject to business risks, including changes
in governmental appropriations and changes in national defense policies and
priorities. Although many of the programs in which we participate as a
contractor or subcontractor may extend for several years, our business is
dependent upon annual appropriations and funding of new and existing contracts.
Most of the contracts are subject to termination for the convenience of the
customer, pursuant to which the customer pays only for reimbursement of costs
incurred and the applicable profit on work performed. We cannot assure you that
the Israeli Government or any other government will continue to fund the
purchase of our products over the long term.

Markets

        We sell our products to various air forces and companies. Our main
market is in Israel with 35% of our sales in 2004, 26% in 2003 and 14% in 2002.
The second largest market is the U.S. with 33% of our sales in 2004, 42% in 2003
and 64% in 2002. Western Europe is our third largest market with 21% of our
sales in 2004, 28% in 2003 and 15% in 2002. Sales to the rest of the world
accounted for 10%, 4% and 7% of our sales in 2004, 2003 and 2002, respectively.

Competition

        The markets for our products are highly competitive, and we may not be
able to compete effectively in those markets. Our principal competitors in the
avionics market are Harris, Rockwell Collins, Honeywell, Elbit Systems Ltd.,
IAI, R.S.L. Ltd., TEAK and Elisra Systems Ltd.  We expect to continue to face
competition from these and other competitors.  Most of our competitors are
larger, have greater resources including financial, technological, marketing and
distribution capabilities, and enjoy greater market recognition than we do.
These competitors may be able to achieve greater economies of scale and may be
less vulnerable to price

                                       12



<PAGE>


competition than us. We may not be able to offer our products as part of
integrated systems to the same extent as our competitors or successfully develop
or introduce new products that are more cost effective or offer better
performance than those of our competitors. Failure to do so could adversely
affect our business, financial condition and results of operations.

Export Policy

        Exports of military related products are subject to the military export
policy of the State of Israel. Current Israeli Government policy encourages
export to approved customers of military products similar to those manufactured
by us, provided that such export does not run counter to Israeli policy or
national security considerations. We must obtain a permit to initiate a sales
proposal and ultimately an export license for the transaction is required. We
cannot assure you that we will obtain export permits or licenses in the future
or that governmental policy with respect to military exports will not be
altered. However, to date we have not encountered any significant difficulties
in obtaining necessary permits or licenses for sale of our products.

Fixed Price Contracts

        Most of our contracts, especially with the Government of Israel, its
agencies and other foreign governments, are generally fixed-price contracts.
Under fixed-price contracts, the price is not subject to adjustment by reason of
the costs incurred in the performance of the contracts, as long as the costs
incurred and work performed fall within governmental guidelines. Under our
fixed-price contracts, we assume the risk that increased or unexpected costs may
reduce our profits or generate a loss. This risk can be particularly significant
under a fixed-price contract for research and development involving a new
technology.

        Our books and records may be subject to audits by the Israeli Ministry
of Defense and other governmental agencies including the U.S. Department of
Defense. These audits may result in adjustments to contract costs and profits.
To date, we have not incurred any liability as a result of such audits.

Proprietary Information

        We were granted a patent for our ACE(TM) system in both Israel and the
United States (No. 5467274.) Nevertheless, we generally do not consider patent
protection significant to our current operations and rely upon a combination of
security devices, copyrights, trademarks, trade secret laws and contractual
restrictions to protect our rights in our products. Our policy is to require
employees and consultants to execute confidentiality agreements upon the
commencement of their relationships with us. These measures may not be adequate
to protect our technology from third-party infringement, and our competitors
might independently develop technologies that are substantially equivalent or
superior to ours. Additionally, our products may be sold in foreign countries
that provide less protection for intellectual property rights than that provided
under U.S. or Israeli laws.

        The Israeli Government usually retains certain rights to technologies
and inventions resulting from our performance as a prime contractor or
subcontractor under Israeli Government contracts and may generally disclose such
information to third parties, including other defense contractors. When the
Israeli Government funds research and development, it may acquire rights to
proprietary data and title to inventions; we may retain a non-exclusive,
royalty-free license for

                                       13



<PAGE>


such inventions. However, if the Israeli Government purchases only the end
product, we may retain the principal rights and the Government may use the data
and take an irrevocable, non-exclusive, royalty-free license.

Manufacturing and Supply

        Our main production facilities are located in Beit-She'an, Israel. The
plant is equipped to handle most of our manufacturing processes and testing
requirements. For several specific processes we utilize subcontractors. This
approach is a key to our flexibility and versatility.

        We stress quality control in our product realization process. Commencing
with customer requirements and expectations via raw material inspection through
completion, specifications are repeatedly checked. We maintain a quality
assurance team that participates in every stage of the design and manufacture of
our products. Our quality management standards are certified by the Standards
Institute of Israel, or SII, pursuant to ISO 9001 for hardware design and
production and ISO 9000.3 for software, both since 1995. SII performs quality
system audits twice a year and various customers perform audits four to six
times a year. In April 2001, SII certified our Environmental Management System
pursuant to ISO 14001. Our Quality Management System was revised to comply with
ISO 9001:2000. This process was concluded in June 2003.

        According to the standard warranty incorporated in most of our sales
contracts, we warrant that our products will be free from defects in design,
materials or workmanship, and guarantee repair or replacement of defective parts
for the twelve months following delivery of a product to the customer. We also
provide maintenance services to customers who sign maintenance contracts.

Source and Availability of Raw Materials

        We acquire most of the components for the manufacturing of our products
from a limited number of suppliers and subcontractors, most of whom are located
in Israel and the United States. Certain of these suppliers are currently the
sole source of one or more components upon which we are dependent. Since many of
our purchases require long lead-times, a delay in supply of an item can
significantly delay the delivery of a product. To date, we have not experienced
any particular difficulty in obtaining timely deliveries of necessary
components. See Item 3D "Risk Factors." We depend on a limited number of
suppliers of components for our products and if we are unable to obtain these
components when needed, we would experience delays in manufacturing our products
and our financial results could be adversely affected.

C.      ORGANIZATIONAL STRUCTURE

        We had one active subsidiary in 2004, Beijing Huarui Aircraft Components
Maintenance and Services Co., an 80% owned subsidiary based in China that is
engaged in aircraft repair services.

                                       14

<PAGE>




D.      PROPERTY, PLANTS AND EQUIPMENT

Facilities

        We own a 30,000 square feet building in Beit-She'an, Israel. The
building, which includes manufacturing facilities, warehouse space and a portion
of our development facilities, is situated on land leased from the Israel Land
Authority for a period of 49 years until 2034. The plant has sufficient capacity
to meet our current requirements. If volume was to increase significantly, we
would be able to increase the number of workers or shifts at the plant, or use
more subcontractors.

        Our executive offices and research and development facilities are
located in a 12,500 square foot office facility in Netanya, Israel. The lease
for this facility expires in January 2006 and we have an option to extend the
lease until January 2008.

        Our Chinese subsidiary, CACS, conducts its business in an approximately
16,000 square foot facility in Beijing that includes offices and test and repair
facilities. The land for this facility was leased by Beijing Tianzu Forestry
Company or Tianzu, the minority shareholder in CACS, from the Chinese government
for 30 years. Under a joint venture agreement, and in consideration for its
equity investment in CACS, Tianzu granted CACS usage rights in the land,
constructed the buildings and granted CACS the ownership of these buildings.
However, the transfer of the title to the land and the buildings has not been
completed, which may prevent the disposition of these assets should CACS desire
to do so. Although Tianzu is legally obligated to complete such transfer of
title to the land and the buildings, we can not guarantee that such transfer
will be completed, or that we will not be required to initiate litigation in
order to enforce our rights to receive title to the land and buildings.

        The aggregate annual rent for our offices in Israel and China was
approximately $152,000 in 2004.

                                       15

<PAGE>




                                     PART II

ITEM 15.  CONTROLS AND PROCEDURES
          -----------------------

        Our management, including our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rule 13a-15(e)) as of the end of the
period covered by this annual report on Form 20-F. Based upon that evaluation,
our chief executive officer and chief financial officer have concluded that, as
of such date, our disclosure controls and procedures were effective to ensure
that information required to be disclosed by our company in the reports that we
file or submit under the U.S. Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.

        There were no changes to our internal control over financial reporting
that occurred during the period covered by this annual report on Form 20-F that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting

        Although our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives, all internal control
systems, no matter how well designed, have inherent limitations. Therefore, even
those systems determined to be effective may not prevent or detect misstatements
and can provide only reasonable assurance with respect to financial statement
preparation and presentation. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

                                       16

<PAGE>




                                    PART III

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


        Consolidated Financial Statements

        Index to Financial Statements.....................................F-1

        Report of Independent Registered Public Accounting Firm...........F-2

        Report of Independent Auditors....................................F-3

        Consolidated Balance Sheets.......................................F-4

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

        Statements of Changes in Shareholders' Equity ....................F-6

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

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



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

          8****         List of Subsidiaries of the Registrant

         10.1*          1994 Employee Stock Option Plan, as amended

         10.2*          1996 Employee Stock Option Plan, as amended

         10.3*          1999 Employee Stock Option Plan, as amended

         10.4***        2003 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


                                       17



<PAGE>


                        part of the issued share capital of New Reef Holding
                        Ltd. dated June 3, 2001

         10.8***        Memorandum of Agreement  dated June 23 2003 between the
                        Registrant and Bank Hapoalim B.M. and Bank Leumi
                        Le-Israel B.M.

         12.1           Certification of the Chief Executive Officer pursuant to
                        Rule 13a-14(a) and Rule 15d-14(a) of the Securities
                        Exchange Act, as amended

         12.2           Certification of the Chief Financial Officer pursuant to
                        Rule 13a-14(a) and Rule 15d-14(a) of the Securities
                        Exchange Act, as amended

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

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

         23.1           Consent of Kost Forer Gabbay & Kasierer, a Member of
                        Ernst & Young Global, Independent Registered Public
                        Accounting Firm (Israel) with respect to our
                        Registration  Statements on Form F-3 and S-8

         23.2           Consent of Luboshitz Kasierer, an affiliate member of
                        Ernst & Young International, Independent Auditors
                        (Israel) with respect to our Registration Statements on
                        Form F-3 and S-8

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

*       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.
***     Filed as an exhibit to our Annual Report on Form 20-F for the year ended
        December 31, 2002 and incorporated herein by reference.
****    Filed as an exhibit to our Annual Report on Form 20-F for the year ended
        December 31, 2004 and incorporated herein by reference.

                                       18

<PAGE>







               RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY


                        CONSOLIDATED FINANCIAL STATEMENTS


                             AS OF DECEMBER 31, 2004


                            U.S. DOLLARS IN THOUSANDS




                                      INDEX


                                                                        Page
                                                                    ------------

 Report of Independent Registered Public Accounting Firm                F-2

 Report of Independent Auditors                                         F-3

 Consolidated Balance Sheets                                            F-4

 Consolidated Statements of Operations                                  F-5

 Statements of Changes in Shareholders' Equity                          F-6

 Consolidated Statements of Cash Flows                               F-7 - F-8

 Notes to Consolidated Financial Statements                          F-9 - F-31




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

                                       F-1


<PAGE>



ERNST & YOUNG






                         REPORT OF INDEPENDENT AUDITORS

                             To the Shareholders of

                         RADA ELECTRONIC INDUSTRIES LTD.




     We have  audited  the  accompanying  consolidated  balance  sheets  of Rada
Electronic Industries Ltd. (the "Company") and its subsidiary as of December 31,
2004 and 2003 and the related consolidated statements of operations,  changes in
shareholders'  equity  and cash flows for each of the years  then  ended.  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 the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial statements are free of material  misstatement.  We were not engaged to
perform an audit of the Company's internal control over financial reporting. Our
audit included  consideration of internal control over financial  reporting as a
basis for designing audit procedures that are appropriate in the  circumstances,
but not for the purpose of  expressing  an opinion on the  effectiveness  of the
Company's internal control over financial  reporting.  Accordingly we express no
such  opinion.  An audit also  includes  examining,  on a test  basis,  evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiary as of December 31, 2004 and 2003, and the results
of its  operations  and its cash  flows for each of the  years  then  ended,  in
conformity with U.S. generally accepted accounting principles.





                                            /s/Kost Forer Gabbay and Kasierer
 Tel-Aviv, Israel                              KOST FORER GABBAY & KASIERER
 March 1, 2005                               A Member of Ernst & Young Global

                                      F-2


<PAGE>



ERNST & YOUNG


              REPORT OF INDEPENDENT AUDITORS PUBLIC ACCOUNTING FIRM

                             To the Shareholders of

                         RADA ELECTRONIC INDUSTRIES LTD.



     We have audited the  accompanying  consolidated  statement  of  operations,
changes in  shareholders'  equity and cash flows of Rada  Electronic  Industries
Ltd. (the  "Company")  and its  subsidiary for the year ended December 31, 2002.
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 audit.


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


     In our opinion,  the consolidated  financial  statements  referred to above
present  fairly,  in all material  respects,  the results of operations and cash
flows of the Company and its subsidiary for the year ended December 31, 2002, in
conformity with U.S. generally accepted accounting principles



                                         /s/Luboshitz Kasierer
 Tel-Aviv, Israel                          Luboshitz Kasiserer
                              An affiliate member of Ernst & Young International
 June 23, 2003

                                      F-3

<PAGE>
                            RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data
<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                           ------------------------
                                                                   Note       2004        2003
                                                                  -------  ----------- ------------
<S>                                                                  <C>   <C>         <C>
   ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                                                $  3,464    $    467
  Trade receivables (net of allowance for doubtful accounts
   of $ 221 and $ 214, at December 31, 2004 and 2003,
   respectively)                                                              1,643       3,496
  Other receivables and prepaid expenses                                        208         250
  Costs and estimated earnings in excess of billings on
  uncompleted contracts                                               3       1,385         176
  Inventories                                                         4       1,824         873
                                                                           --------    --------
 Total current assets                                                         8,524       5,262
 -----                                                                     --------    --------

LONG-TERM RECEIVABLES AND DEPOSITS:
  Long-term receivables                                               5         988         990
  Long-term restricted cash                                                   1,002           -
  Leasing deposits                                                               94          71
  Severance pay fund                                                          1,638       1,511
                                                                           --------    --------
Total long-term receivables and deposits                                      3,722       2,572
-----                                                                      --------    --------

PROPERTY, PLANT AND EQUIPMENT, NET                                    6       4,283       4,728
                                                                           --------    --------

OTHER ASSETS:
  Intangible assets, net                                              7       1,709       1,987
  Deferred charges, net                                                          59           -
                                                                           --------    --------
Total other assets                                                            1,768       1,987
-----                                                                      --------    --------
Total assets                                                               $ 18,297    $ 14,549
-----                                                                      ========    ========

   LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Short-term bank credit and loans                                    8    $     14    $  1,123
  Trade payables                                                              1,080         640
  Other payables and accrued expenses                                 9       3,612       3,317
  Deferred revenues                                                             488       1,062
  Billings in excess of costs and estimated earnings on
   uncompleted contracts                                              3       1,065       1,836
                                                                           --------    --------
Total current liabilities                                                     6,259       7,978
-----                                                                      --------    --------
LONG-TERM LIABILITIES:
  Convertible note                                                   11       2,346           -
  Long-term loans                                                     8           -       1,220
  Accrued severance pay                                                       2,063       2,048
                                                                           --------    --------
Total long-term liabilities                                                   4,409       3,268
-----                                                                      --------    --------

COMMITMENTS AND CONTINGENT LIABILITIES                               10

MINORITY INTERESTS                                                              397         425
                                                                           --------    --------

SHAREHOLDERS' EQUITY:                                                11
  Share capital-
   Ordinary shares of NIS 0.005 par value - Authorized:
     45,000,000 shares at December 31, 2004 and 2003; Issued
     and outstanding: 20,448,364 and 18,510,716 shares at
     December 31, 2004 and 2003, respectively                                   110         108
  Additional paid-in capital                                                 61,851      59,139
  Warrants                                                                    2,223       1,405
  Accumulated deficit                                                       (56,952)    (57,774)
                                                                           --------    --------
Total shareholders' equity                                                    7,232       2,878
-----                                                                      --------    --------
Total liabilities and shareholders' equity                                 $ 18,297    $ 14,549
-----                                                                      ========    ========
</TABLE>

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

                                      F-4
<PAGE>

                            RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except per share data

<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                                                             -----------------------------------------
                                                    Note        2004           2003           2002
                                                  --------   -----------    -----------   ------------
 <S>                                                 <C>       <C>            <C>           <C>
 Revenues:                                           15
   Products                                                    $ 11,123       $  8,977      $   6,773
   Services                                                       3,037          3,338          3,626
                                                               --------       --------      ---------
                                                                 14,160         12,315         10,399
                                                               --------       --------      ---------
 Cost of revenues:
   Products                                                       9,111          6,933          6,685
   Services                                                       1,176          2,659          2,538
                                                               --------       --------      ---------
                                                                 10,287          9,592          9,223
                                                               --------       --------      ---------
 Gross profit                                                     3,873          2,723          1,176
                                                               --------       --------      ---------
 Operating expenses:
   Research and development                                           -              -            122
   Marketing and selling                                            738            781            808
   General and administrative                                     2,116          1,917          2,281
                                                               --------       --------      ---------
 Total operating expenses                                         2,854          2,698          3,211
 -----                                                         --------       --------      ---------

 Operating income (loss)                                          1,019             25         (2,035)
 Financial income (expenses), net                   13a            (248)           708           (364)
 Other income (expenses), net                       13b              23             (2)          (290)
                                                               --------       --------      ---------
                                                                    794            731         (2,689)
 Minority interests in losses of subsidiary                          28             27            206
                                                               --------       --------      ---------
 Net income (loss)                                   16        $    822       $    758      $  (2,483)
                                                               ========       ========      =========
 Net income (loss) per share:

   Basic net income (loss) per share                           $   0.04       $   0.04      $   (0.15)
                                                               ========       ========      =========
   Diluted net income (loss) per share                         $   0.03       $   0.04      $   (0.15)
                                                               ========       ========      =========
</TABLE>



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

                                      F-5

<PAGE>


                            RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHARHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data

<TABLE>
<CAPTION>
                                Number of              Additional                           Total
                                Ordinary      Share     paid-in               Accumulated shareholders'
                                 shares      capital    capital   Warrants     Deficit      equity
                               -----------  ---------- ---------- ----------  ----------- -----------

<S>                              <C>          <C>        <C>        <C>          <C>         <C>
  Balance at January 1, 2002     13,816,839   $  103     $56,646    $    -       $(56,049)   $   700

    Issuance of Ordinary
     shares and warrants,
     net *)                       1,938,775        2         792        41              -        835
    Conversion of loan into
     Ordinary shares and
     warrants                     2,755,102        3       1,347        83              -      1,433
    Net loss                              -        -           -         -         (2,483)    (2,483)
                                 ----------   ------     -------    ------       --------    -------
  Balance at December 31,
    2002                         18,510,716      108      58,785       124        (58,532)       485

    Adjustment of accrual
     for issuance expenses                -        -         354         -              -        354
    Fair value of warrants
     issued in connection
     with settlement of
     debt, net   *)                       -        -           -     1,267              -      1,267
    Fair value of warrants
     issued to suppliers                  -        -           -        14              -         14
    Net income                            -        -           -         -            758        758
                                 ----------   ------     -------    ------       --------    -------
  Balance at December 31,
    2003                         18,510,716      108      59,139     1,405        (57,774)     2,878

    Issuance of Ordinary
     shares and warrants,
     net *)                       1,864,313        2       2,482       818              -      3,302
    Beneficial conversion
     feature
      on convertible note                 -        -         180         -              -        180
    Exercise of options              73,335    **) -          50         -              -         50
    Net income                            -        -           -         -            822        822
                                 ----------   ------     -------    ------       --------    -------

  Balance at December 31,
    2004                         20,448,364   $  110     $61,851    $2,223      $ (56,952)   $ 7,232
                                 ==========   ======     =======    ======      =========    =======
</TABLE>


*)   Net of  issuance  expenses  of  approximately  $ 95, $ 38 and $ 115 for the
     years ended December 31, 2004, 2003 and 2002, respectively.

**)  Less than $ 1.


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

                                      F-6

<PAGE>

                            RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands

<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                              -----------------------------------
                                                                 2004        2003        2002
                                                              -----------  --------   ----------
<S>                                                             <C>        <C>        <C>
Cash flows from operating activities:
-------------------------------------
  Net income (loss)                                             $   822    $   758    $(2,483)
  Adjustments required to reconcile net income (loss) to net
   cash provided by (used in) operating activities:
   Depreciation and amortization                                  1,066      2,072      2,388
   Loss (gain) on extinguishment of debt                            -       (1,013)        83
   Provision of long-term receivable                                -          -          290
   Stock compensation expense - fair value of warrants issued
     to suppliers                                                   -           14        -
   Minority interests in losses of subsidiary                       (28)       (27)      (206)
   Accrued interest and translation differences on long-term
     receivables                                                      2        (97)       (40)
   Amortization expenses on convertible note                        106        -          -
   Capital loss on property, plant and equipment                     16        -          -
    Decrease (increase) in trade receivables, net                 1,853     (1,664)    (1,015)
    Decrease (increase) in other receivables and prepaid
     expenses                                                        42       (157)       (26)
   Decrease (increase) in costs and estimated earnings in
     excess of billings, net                                     (1,980)     1,085        460
   Decrease (increase) in inventories                              (951)       204        539
   Increase (decrease) in trade payables                            440          5       (162)
   Increase in other payables and accrued expenses                  295        722         63
   Decrease in deferred revenues                                   (574)      (709)      (592)
   Accrued severance pay, net                                      (112)      (172)       276
                                                                -------    -------    -------
Net cash provided by (used in) operating activities                 997      1,021       (425)
                                                                -------    -------    -------

Cash flows from investing activities:
-------------------------------------
  Investment in long- term restricted cash                       (1,002)       -          -
  Purchase of property, plant and equipment                        (349)       (49)       (85)
  Proceeds from sale of property and equipment                      -          -           94
  Repayment of loans granted to employees                           -          -           20
  Investments in leasing deposits                                   (23)        (1)       (70)
                                                                -------    -------    -------
Net cash used in investing activities                            (1,374)       (50)       (41)
                                                                -------    -------    -------

Cash flows from financing activities:
-------------------------------------
  Proceeds from issuance of shares, net                           2,484        -          835
  Proceeds from issuance of convertible note, net                 2,351        -          -
  Proceeds of short-term loans                                      -          946      4,397
  Repayments of short-term loans                                 (1,359)    (4,096)      (888)
  Decrease (increase) in short-term bank credits, net              (970)     2,076     (3,732)
  Issuance of warrants                                              818        -          -
  Exercise of options                                                50        -          -
  Proceeds from issuance of loan to a related party                 -          -          550
  Repayment of loan to a related party                              -          -         (200)
                                                                -------    -------    -------
Net cash provided by (used in) financing activities               3,374     (1,074)       962
                                                                -------    -------    -------
Increase (decrease) in cash and cash equivalents                  2,997       (103)       496
Cash and cash equivalents at the beginning of the year              467        570         74
                                                                -------    -------    -------
Cash and cash equivalents at the end of the year                $ 3,464    $   467    $   570
                                                                =======    =======    =======
</TABLE>

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

                                      F-6

<PAGE>

                            RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars in thousands


<TABLE>
<CAPTION>
                                                                    Year ended December 31,
                                                             --------------------------------------
                                                               2004           2003           2002
                                                             --------       --------     ----------
  <S>                                                        <C>            <C>           <C>
  Non-cash transactions:
  ----------------------
    Conversion of shareholder's loan into Ordinary
     shares and warrants                                     $      -       $      -      $   1,350
                                                             ========       ========      =========
    Fair value of warrants issued in connection with
     settlement of debt                                      $      -       $  1,305      $       -
                                                             ========       ========      =========

    Adjustment of accrual for issuance expenses              $      -       $    354      $       -
                                                             ========       ========      =========

  Supplemental disclosures of cash flow activities:
  -------------------------------------------------
    Net cash paid during the year for:
     Income taxes                                            $      3       $      5      $       7
                                                             ========       ========      =========

     Interest                                                $    290       $    240      $     326
                                                             ========       ========      =========

</TABLE>




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

                                      F-8

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share and per share data


NOTE 1:- GENERAL

          a.   RADA Electronic  Industries  Ltd., an Israeli  corporation  ("the
               Company"), is engaged in the development, manufacture 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, 2004,  the Company had an  accumulated  deficit of $
               56,952. During 2004, the Company concluded a private placement of
               1,800,000   Ordinary  shares  and  issued  convertible  notes  to
               investors in the amount of  approximately  $ 5,800 (see Note 11).
               Management  believes that the  abovementioned  round of financing
               and  anticipated  cash  flows  from  operations  will  enable the
               Company to finance its  operations at least through  December 31,
               2005.

          c.   The  Company  operates  a test  and  repair  shop  using  its ATE
               products  in  Beijing,   China  through  its  80%  owned  Chinese
               subsidiary,  Beijing Huari Aircraft  Components  Maintenance  and
               Services Co. Ltd. ("CACS" or "subsidiary").  CACS was established
               with a third party, which owns the remaining 20% equity interest.

          d.   As for major customers, see Note 15.

          e.   In 2003,  the Company  changed the  estimated  useful life of the
               remaining  intangible  assets  associated  with its Aircraft Test
               Systems  Programs Sets ("TPSs") from a range of eight to eighteen
               years to a range of five to ten  years.  The effect of the change
               in  estimated  useful life of these  assets on the net income and
               net income per share for the years  ended  December  31, 2004 and
               2003  resulted  in a decrease  of $ 221 (or $ 0.01 per share) and
               $ 136 (or $ 0.01 per share), respectively.


NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

          The consolidated financial statements have been prepared in accordance
          with U.S. generally accepted  accounting  principles.  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 U.S.
               generally accepted  accounting  principles requires management to
               make estimates and assumptions  that affect the reported  amounts
               in  the  financial  statements  and  accompanying  notes.  Actual
               results could differ from those estimates.

                                       F-9

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

          b.   Financial statements in U.S. dollars:

               Most  of the  revenues  of the  Company  and its  subsidiary  are
               generated in U.S. dollars ("dollar").  In addition, a substantial
               portion  of the  costs  of the  Company  and  its  subsidiary  is
               incurred in dollars.  The Company's  management believes that the
               dollar is the primary  currency of the  economic  environment  in
               which the Company  operates.  Thus,  the functional and reporting
               currency of the Company is the dollar.

               Accordingly,  monetary  accounts  maintained in currencies  other
               than the dollar are  remeasured  into U.S.  dollars in accordance
               with Statement of the Financial Accounting Standard Board No. 52,
               "Foreign Currency  Translation"  ("SFAS No. 52"). All transaction
               gains and losses of the remeasured  monetary  balance sheet items
               are reflected in the statement of operations as financial  income
               or expenses, as appropriate.  The representative exchange rate at
               December 31, 2004 was U.S. $ 1.00 = NIS 4.308  (December 31, 2003
               - NIS 4.379).

          c.   Basis of consolidation:

               The consolidated financial statements include the accounts of the
               Company  and  its  subsidiary.   Inter-company  transactions  and
               balances have been eliminated upon consolidation.

          d.   Cash equivalents and restricted cash:

               All highly liquid  investments  that are readily  convertible  to
               cash  and  are not  restricted  as to  withdrawal  or use and the
               period to maturity of which did not exceed  three  months at time
               of deposit, are considered cash equivalents.

               Restricted cash is invested in a long-term bank deposit, which is
               used as security for the Company's  guarantees to customers.  The
               deposit is in U.S.  dollars and bears interest at an average rate
               of 2.3%

          e.   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. As for  write-offs  included in these  financial
               statements, see Note 4.

               Cost is determined as follows:

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

               Work in progress  and  finished  goods -  represents  the cost of
               manufacturing   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
               "Costs and estimated earnings in excess of billings."

                                      F-10


<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

          f.   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:

                                                             %
                                                        ------------
                 Factory and other buildings              2.5 - 4
                 Machinery and equipment                 10 - 15, 33
                 Office furniture and equipment            6 - 15

               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.

          g.   Intangible assets:

               Capitalized  software  costs are  amortized by the greater of the
               amount  computed  using the: (i) ratio of 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.  The Company  assesses the  recoverability  of these
               intangible  assets 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. As for  impairment  charges
               included in these financial statements, see Note 7.

          h.   Impairment of long-lived assets:

               The Company's  long-lived  assets are reviewed for  impairment in
               accordance with Statement of Financial  Accounting  Standards No.
               144"  Accounting  for the  Impairment  or Disposal of  Long-Lived
               Assets"   ("SFAS  No.  144")   whenever   events  or  changes  in
               circumstances indicate that the carrying amount of the assets may
               not be recoverable.  Recoverability of assets to be held and used
               is measured by a comparison  of the carrying  amount of an assets
               to the future undiscounted cash flows expected to be generated by
               the assets.  If such assets are  considered  to be impaired,  the
               impairment  to be  recognized  is measured by the amount by which
               the carrying  amount of the assets  exceeds the fair value of the
               assets.  As for write-down  charges  included in these  financial
               statements, see Note 6.

          i.   Research and development costs:

               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's product development process,  technological feasibility
               is established upon completion of a working model.

                                      F-11

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

               Research  and  development  costs  incurred  in  the  process  of
               developing   product  masters,   product   enhancements  and  the
               Company's  Test System  Programs Sets ("TPS")  software  library,
               integrated  with the  Company's  test  station,  are  charged  to
               expenses as incurred.

               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.

          j.   Income taxes:

               The  Company   accounts  for  income  taxes  in  accordance  with
               Statement of Financial  Accounting Standard No. 109,  "Accounting
               for Income Taxes" ("SFAS 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 realizable value.

          k.   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 expenses recorded in the statement of operations is net
               of  interest  and  other  income  accumulated  in  the  deposits.
               Severance  expenses for the years ended  December 31, 2004,  2003
               and 2002 amounted to $ 76, $ 132 and $ 541, respectively.

          l.   Fair value of financial instruments:

               The following methods and assumptions were used by the Company in
               estimating fair value and disclosures for financial instruments.

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

               Long-term   loans  and   convertible   notes  are   estimated  by
               discounting  the future cash flows using current  interest  rates
               for loans of similar terms and maturities. The carrying amount of
               the long-term loans and convertible  notes approximate their fair
               value.

                                      F-12

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

          m.   Concentrations of credit risk:

               Financial  instruments  that  potentially  subject the Company to
               concentrations  of credit risk  consist  principally  of cash and
               cash  equivalents,   long-term  deposit,  trade  receivables  and
               long-term receivables.

               The Company's cash and cash equivalents and long-term deposit are
               mainly  held  in  U.S.   dollars  with  major  banks  in  Israel.
               Management believes that the financial institutions that hold the
               Company's  investments  are financially  sound and,  accordingly,
               minimal credit risk exists with respect to these investments.

               The Company's  trade  receivables are derived from sales to large
               and solid  organizations  located  mainly in the  United  States,
               Europe  and  Israel.   The  Company   performs   ongoing   credit
               evaluations of its customers and to date has not  experienced any
               material losses. An allowance for doubtful accounts is determined
               with respect to these amounts that the Company has  determined to
               be doubtful of collection. The allowance is computed for specific
               debts  and  the  collectibility  is  determined  based  upon  the
               Company's experience. The Company granted loans in prior years to
               its former CEO and a former officer  amounting to approximately $
               983 as of December 31, 2004 and 2003.  These loans are  unsecured
               and the Company is currently in  litigation  with these  officers
               regarding such loans. If the Company's claims for recovery of the
               loans will be  dismissed,  the Company will incur a loss equal to
               the amount of the loans, net of the respective  provision against
               these  loans.  See also Note 10a (1) for  additional  information
               about the  various  legal  proceedings  with the  former  CEO and
               officer.

               The Company has no off-balance sheet credit risks.

          n.   Warranty:

               In connection with the sale of its products, the Company provides
               product warranties for periods between one to two years. Based on
               past  experience and  engineering  estimates,  the liability from
               these warranties is immaterial at balance sheet date.

          o.   Share based compensation:

               The Company accounts for employee stock based  compensation under
               the  intrinsic   value  model  in  accordance   with   Accounting
               Principles Board Opinion No. 25,  "Accounting for Stock Issued to
               Employees" ("APB 25") and FASB Interpretation No. 44, "Accounting
               for Certain Transactions  Involving Stock Compensation" ("FIN No.
               44").  In  accordance   with  SFAS  No.  123,   "Accounting   for
               Stock-Based Compensation" ("SFAS No. 123"), the Company discloses
               pro forma data  assuming  the group had  accounted  for  employee
               stock option grants using the fair value-based  method defined in
               SFAS No. 123.

               Pro forma  information  regarding  the Company's net loss and net
               loss  per  share  is  required  by SFAS  No.  123  and  has  been
               determined as if the Company had accounted for its employee stock
               options  under the fair value method  prescribed by SFAS No. 123.
               The following  table  illustrates  the effect on net loss and net
               loss  per  share  if the  Company  had  applied  the  fair  value
               recognition  provisions of SFAS No. 123 to  stock-based  employee
               compensation.

                                      F-13

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

<TABLE>
<CAPTION>
                                                                        Year ended December 31,
                                                                 -------------------------------------
                                                                     2004         2003         2002
                                                                 -----------  -----------  -----------
                <S>                                              <C>          <C>          <C>
                Net income (loss), as reported                   $     822    $     758    $  (2,483)
                Add:  Stock-based employee compensation
                  included in reported net income (loss)                 -            -            -
                Deduct:  Total stock-based employee
                  compensation expense under fair value
                  based methods                                        (73)         (58)           -
                                                                 ---------    ---------    ---------
                Pro forma net income (loss)                      $     749    $     700    $  (2,483)
                                                                 =========    =========    =========
                Basic and diluted net income (loss) per share:
                Basic net income (loss) per share as reported    $    0.04    $    0.04     $  (0.15)
                Pro forma basic net income (loss) per share      $    0.04    $    0.04     $  (0.15)
                Basic net income (loss) per share as reported    $    0.03    $    0.04     $  (0.15)
                Pro forma basic net income (loss) per share      $    0.03    $    0.04     $  (0.15)

</TABLE>

               The fair value for  options  granted  in 2004,  2003 and 2002 was
               estimated  at the date of  grant  using a  Black-Scholes  options
               pricing model with the following weighted average assumptions:

                                                    Year ended December 31,
                                             -----------------------------------
                                                2004         2003         2002
                                             -----------  -----------  ---------
               Expected life of option        2 years      2 years      2 years
               Dividend yield                    0%           0%           0%
               Expected volatility              68%          31%          24%
               Risk-free interest rate          2.6%         1.0%         2.0%


               The Company  applies SFAS No. 123 and Emerging  Issues Task Force
               No. 96-18  "Accounting for Equity  Instruments That Are Issued to
               Other Than  Employees  for  "Acquiring,  or in  Conjunction  with
               Selling,  Goods or  Services"  ("EITF  96-18"),  with  respect to
               options  and  warrants  issued  to  non-employees.  SFAS No.  123
               requires the use of option  valuation  models to measure the fair
               value of the options and warrants at the measurement date.

          p.   Revenue recognition:

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

                                      F-14

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

               Product revenues:

               The  Company  recognizes  revenue  from  sales  of  products  and
               aircraft spare parts in accordance with Staff Accounting Bulletin
               ("SAB")  No.  104,  "Revenue  Recognition".  Product  revenue  is
               recognized  when there is persuasive  evidence of an arrangement,
               the fee is fixed or determinable,  delivery of the product to the
               customer  has  occurred  and  the  Company  has  determined  that
               collection  of the  fee is  probable.  If  the  product  requires
               specific customer acceptance,  revenue is deferred until customer
               acceptance occurs or the acceptance  provisions lapse, unless the
               Company  can  objectively  and  reliably   demonstrate  that  the
               criteria specified in the acceptance provisions are satisfied.

               Revenues  from  certain   long-term  fixed  price  contracts  are
               recognized  in  accordance  with  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 in accordance
               with  the  "Input  Method".   The  percentage  of  completion  is
               determined  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.  As of December 31, 2004, the
               estimated losses identified are $ 392.  Estimated gross profit or
               loss from  long-term  contracts  may  change  due to  changes  in
               estimates  resulting from differences  between actual performance
               and original forecasts. Such changes in estimated gross profit or
               loss  are  recorded  in  results  of  operations  when  they  are
               reasonably  determinable by management,  on a cumulative catch-up
               basis.

               The Company believes that the use of the percentage of completion
               method is  appropriate  as the  Company  has the  ability to make
               reasonably dependable estimates of the extent of progress towards
               completion,  contract  revenues and contract  costs. In addition,
               contracts  executed  include  provisions that clearly specify the
               enforceable rights regarding services to be provided and received
               by  the  parties  to  the  contracts,  the  consideration  to  be
               exchanged  and the manner and terms of  settlement.  In all cases
               the Company  expects to perform its  contractual  obligations and
               its licensees are expected to satisfy their obligations under the
               contract.

               According  to SOP 81-1,  costs that are incurred and are directly
               associated  with  a  specific   anticipated  contract  are  being
               deferred, subject to evaluation of their probable recoverability,
               and recorded as unbilled contract costs.

               Revenues from certain  arrangements may include multiple elements
               within  a  single  contract.   The  Company's  accounting  policy
               complies with the provisions of Emerging  Issues Task Force Issue
               00-21, "Revenue  Arrangements with Multiple  Deliverables" ("EITF
               00-21"), relating to the separation of multiple deliverables into
               individual  accounting  units with  determinable  fair value. The
               Company's   arrangements   are  accounted  for  as  one  unit  of
               accounting  since there is no objective and reliable  evidence of
               fair value of the undelivered elements in the contract.  When the
               undelivered  elements are not essential to the  functionality  of
               the delivered elements, revenues are recognized for the delivered
               element when the respective fee is payable and  noncontingent and
               all other revenue recognition criteria are met.

                                      F-15

<PAGE>





                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands, except share data

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

               Service revenues:

               Revenues  from  services  are  recognized  as  the  services  are
               performed.

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

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

          q.   Basic and diluted net income (loss) per share:

               Basic  net  income  (loss)  per  share is  computed  based on the
               weighted  average number of Ordinary  shares  outstanding  during
               each year.  Diluted net income (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  Standards No. 128,  "Earnings
               Per  Share".   Options  and  warrants  to  purchase   16,005,112,
               14,862,237 and 13,718,037 Ordinary shares have been excluded from
               the  computation  of diluted net income  (loss) per share for the
               years  ended  December  31,  2004,  2003 and 2002,  respectively,
               because their effect is anti-dilutive for all periods presented.

          r.   Recently issued accounting pronouncements:

               SFAS No. 123 (Revised 2004) Share-based Payment

               On December 16, 2004, the FASB issued  Statement No. 123 (revised
               2004),  Share-Based  Payment  ("Statement  123(R)"),  which  is a
               revision of FASB Statement No. 123,  Accounting  for  Stock-Based
               Compensation   ("Statement  123").  Generally,  the  approach  in
               Statement  123(R)  is  similar  to  the  approach   described  in
               Statement  123.  However,   Statements  123  permitted,  but  not
               required,  share-based  payments to  employees  to be  recognized
               based on their fair values while  Statement  123(R)  requires all
               share-based payments to employees to be recognized based on their
               fair values. Statement 123(R) also revises, clarifies and expands
               guidance  in  several  areas,  including  measuring  fair  value,
               classifying an award as equity or as a liability and  attributing
               compensation cost to reporting periods.  The new standard will be
               effective for the Company in the first interim  period  beginning
               after June 15, 2005 (July 1, 2005 for the  Company).  The Company
               does not expect this  Statement to have a material  effect on the
               Company's  financial  statements  or its results of operations in
               future periods.

                                      F-16

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

               FAS 151 Inventory Costs - an amendment of ARB 43, Chapter 4:

               In  November  2004,  the  FASB  issued   Statement  of  Financial
               Accounting  Standard No. 151,  "Inventory  Costs, an Amendment of
               ARB No. 43, Chapter 4". ("SFAS 151").  SFAS 151 amends Accounting
               Research  Bulletin  ("ARB")  No. 43,  Chapter 4, to clarify  that
               abnormal amounts of idle facility expense, freight handling costs
               and  wasted   materials   (spoilage)   should  be  recognized  as
               current-period  charges. In addition,  SFAS 151 requires that the
               allocation  of  fixed  production   overheads  to  the  costs  of
               conversion  be based on the  normal  capacity  of the  production
               facilities.  SFAS 151 is effective for inventory  costs  incurred
               during  fiscal years  beginning  after June 15, 2005  (January 1,
               2006 for the Company).  The provisions of this Statement shall be
               applied prospectively. The Company does not expect this Statement
               to have a  material  effect on its  financial  statements  or its
               results of operations.

               FAS 153  Exchanges  of  Nonmonetary  Assets - An Amendment of APB
               Opinion No. 29:

               In  December  2004,  the  FASB  issued   Statement  of  Financial
               Accounting  Standard No. 153, Exchanges of Nonmonetary Assets, an
               Amendment of APB Opinion No. 29 ("SFAS 153"). The guidance in APB
               Opinion No. 29,  Accounting for  Nonmonetary  Transactions  ("APB
               29"), is based on the  principle  that  exchanges of  nonmonetary
               assets  should be measured  based on the fair value of the assets
               exchanged.  APB 29 includes certain exceptions to that principle.
               SFAS 153 amends APB 29 to eliminate the exception for nonmonetary
               exchanges  of similar  productive  assets and  replaces it with a
               general exception for exchanges of nonmonetary assets that do not
               have  a  commercial   substance.   A  nonmonetary   exchange  has
               commercial  substance  if the future cash flows of the entity are
               expected  to change  significantly  as a result of the  exchange.
               SFAS 153 is effective for nonmonetary assets exchanges  occurring
               in fiscal periods beginning after June 15, 2005. The Company does
               not  expect  that the  adoption  of SFAS 153 will have a material
               effect on its financial position or results of operations.

                                      F-17


<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 3:- CONTRACTS IN PROGRESS

          Amounts  included in the financial  statements,  which relate to costs
          and estimated earnings in excess of billings on uncompleted  contracts
          are  classified  as current  assets.  Billings  in excess of costs and
          estimated earnings on uncompleted  contracts are classified as current
          liabilities. Summarized below are the components of the amounts:

          a.   Costs and estimated earnings in excess of billings on uncompleted
               contracts:

                                                                December 31,
                                                        ------------------------
                                                            2004          2003
                                                        ----------    ----------
               Costs incurred on uncompleted contracts  $    5,774    $      862
               Estimated earnings                               50           324
                                                        ----------    ----------
                                                             5,824         1,186
               Less - billings and progress payments         4,439         1,010
                                                        ----------    ----------
                                                        $    1,385    $      176
                                                        ==========    ==========

          b.   Billings in excess of costs and estimated earnings on uncompleted
               contracts:

                                                              December 31,
                                                         ---------------------
                                                            2004        2003
                                                         ---------   ---------

               Costs incurred on uncompleted contracts   $   4,336   $   3,711
               Estimated earnings                            1,454       1,019
                                                         ---------   ---------
                                                             5,790       4,730
               Less - billings and progress payments         6,855       6,566
                                                         ---------   ---------
                                                         $  (1,065)  $  (1,836)
                                                         =========   =========


NOTE 4:- INVENTORIES

                                                            December 31,
                                                     ---------------------------
                                                        2004             2003
                                                     ----------       ----------
            Raw materials and components             $    1,178       $      668
            Work in progress                                447              112
            Finished goods                                  199               93
                                                     ----------       ----------
                                                     $    1,824       $      873
                                                     ==========       ==========

          Write-down of inventories  for the years ended December 31, 2004, 2003
          and 2002 amounted to $ 0, $ 0 and $ 623, respectively.  The write-down
          in 2002 was due to excess and slow moving inventories and was included
          in cost of revenues.

                                      F-18

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 5:- LONG-TERM RECEIVABLES

                                                            December 31,
                                                     ---------------------------
                                                        2004             2003
                                                     ----------       ----------
         Loan to former chief executive officer *)   $      705       $      705
         Loan to a former officer *)                        278              278
         Loans to employees                                   5                7
                                                     ----------       ----------
                                                     $      988       $      990
                                                     ==========       ==========

         *) See also Note 10a.

NOTE 6:- PROPERTY, PLANT AND EQUIPMENT, NET

                                                             December 31,
                                                     ---------------------------
                                                        2004             2003
                                                     ----------       ----------
         Cost:
           Factory building                          $    1,940       $    1,940
           Other building                                 1,042            1,042
           Machinery and equipment                       13,321           13,044
           Office furniture and equipment                   512              459
           Leasehold improvements                            23               20
                                                     ----------       ----------
                                                         16,838           16,505
                                                     ----------       ----------
         Accumulated depreciation:
           Factory building                               1,203            1,132
           Other building                                   219              175
           Machinery and equipment                       10,779           10,145
           Office furniture and equipment                   334              305
           Leasehold improvements                            20               20
                                                     ----------       ----------
                                                         12,555           11,777
                                                     ----------       ----------
         Depreciated cost                            $    4,283       $    4,728
                                                     ==========       ==========

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

         Depreciation expenses were $ 778, $ 932 and $ 918 for the years
         ended December 31, 2004, 2003 and 2002, respectively. Write-down of
         property and equipment, which is not in use by the Company, was $ 0,
         $ 0 and $ 490 for the years ended December 31, 2004, 2003 and 2002,
         respectively. The write-downs were included in cost of revenues.

         As for charges, see Note 10e.

                                      F-19

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 7:- INTANGIBLE ASSETS, NET

                                                            December 31,
                                                     ---------------------------
                                                        2004             2003
                                                     ----------       ----------
             Test Systems Programs Sets:
               Cost                                  $    8,275       $    8,275
               Less - accumulated amortization            6,566            6,288
                                                     ----------       ----------

               Amortized cost                        $    1,709       $    1,987
                                                     ==========       ==========

          Amortization  expenses were $ 278, $ 382 and $ 730 for the years ended
          December  31,  2004,  2003  and  2002,   respectively.   The  expected
          amortization  expenses  in the next five  years are  approximately  as
          follows:

            2005                                          $  275
            2006                                             275
            2007                                             275
            2008                                             177
            2009                                             177
                                                          ------
                                                          $1,179
                                                          ======

          Impairment of intangible assets was $ 0, $ 758 and $ 251 for the years
          ended December 31, 2004, 2003 and 2002,  respectively included in cost
          of  revenues.  The  impairment  was  recorded in prior years since the
          Company did not  anticipate  future  revenues on specific Test Systems
          Program  Sets  ("TPSs").  The  weighted  average  useful  life  of the
          intangible assets is six years.

NOTE 8:- SHORT-TERM BANK CREDIT AND LOANS

                                                              December 31,
                                                       -------------------------
                                                          2004           2003
                                                       ----------     ----------
           Short-term:
            Current maturities of long-term loan
              in U.S. dollars (1)                      $        -     $      180
            Short-term bank credit in NIS (2)                  14            943
                                                       ----------     ----------
                                                       $       14     $    1,123
                                                       ==========     ==========
          Long-term:
            Loans in U.S. dollars (1)                  $        -     $    1,220
                                                       ==========     ==========

          (1)  The  interest  rate at  December  31,  2003 is  4.25%-5.13%.  The
               weighted average interest rate as of December 31, 2003 - 4.25 %.

          (2)  The  interest  rate at December 31, 2004 is 11.7%  (December  31,
               2003 - 8%).

          During 2003,  the Company  restructured a portion of its debt with the
          banks (see Note 11c).

          The total  authorized  credit line of the Company at December 31, 2004
          is $4,123.

          As for collateral, see Note 10e.

                                      F-20

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 9:- OTHER PAYABLES AND ACCRUED EXPENSES

                                                         December 31,
                                                  ---------------------------
                                                     2004             2003
                                                  ----------       ----------
            Payroll and related accruals          $      969       $      860
            Provision for legal proceedings              567              748
            Accrued royalties                            679              644
            Accrued commissions                          480              491
            Contracts in progress - provision
              for estimated losses                       392                -
            Other                                        525              574
                                                  ----------       ----------
                                                  $    3,612       $    3,317
                                                  ==========       ==========

NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES

          a.   As of December 31, 2004, 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 December 1998,
                    the former  CEO  commenced  legal  proceedings  against  the
                    Company in the Tel Aviv Labor Court, 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  and that the  Company  is to bear the tax in
                    respect  thereof.  In  May  2001,  an  additional  claim  of
                    approximately  $ 230 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  director.  In the event the  former
                    CEO's  claim in the Labor  Court is  accepted  by the Court,
                    damages  in the  amount of $ 250  should be  covered  by the
                    former  director.  The  Company  filed  additional  lawsuits
                    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,  the Company
                    filed a  lawsuit  against  the  former  CEO  and the  former
                    director  with the District  Court of Tel Aviv in the amount
                    of $ 1,400 for damages caused to the Company in the purchase
                    of a subsidiary  and  negligence  of  management.  In August
                    2000,  the Company filed an additional  lawsuit  against the
                    former CEO in the amount of  approximately  $ 460  regarding
                    the  repayment  of the  loan  provided  to  him.  Management
                    believes, based on the advice of its legal counsel, that the
                    Company has valid  defenses  against all claims made against
                    it.

               2.   In 1999 and 2000,  the former CEO and his son filed a number
                    of  complaints  against  the  Company's  president  and  are
                    seeking  damages for alleged slander by the defendant in the
                    amount of  approximately  $ 750. The claim by the former CEO
                    was  withdrawn  and  replaced  by a new claim filed in 2004,
                    while his son's claim was dismissed and an appeal is pending
                    in the  Supreme  Court.  Management  believes,  based on the
                    advice of its legal  counsel,  that the  Company  has strong
                    defenses  against the  allegations  and  accordingly did not
                    record any provision.

                                      F-21

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

               3.   In 2001, a former  employee and officer of the Company filed
                    a claim  against the  Company  with the Tel Aviv Labor Court
                    claiming  approximately  $ 580 in respect of severance  pay,
                    vacation pay and other fringe benefits. This claim was filed
                    as a counter-claim  to a claim filed by the Company in 2000,
                    in the  amount of $ 300 in  respect  of the  repayment  of a
                    personal  loan that was  provided  to the  former  employee.
                    Management  believes  based on its legal counsel advice that
                    the Company  has a strong  defense  against  the  employee's
                    counter-claim and accordingly did not record any provision.

               4.   In  2001,  a  former  director  filed  a claim  against  the
                    Company,  claiming that he is entitled to 600,000 options to
                    purchase Ordinary shares of the Company. Management believes
                    based on its legal  counsel  advice  that the claim does not
                    have  any  merit  and   accordingly  did  not  recorded  any
                    provision.

               5.   In 2002,  a claim was  filed by an  individual  against  the
                    Company, claiming that he served as a broker in an agreement
                    signed between the Company and a customer and is entitled to
                    commissions  (or  finder's  fee)  in  the  amount  of $ 250.
                    Management  believes  based on its legal counsel advice that
                    the Company has a strong defense against the allegations.

               6.   The Company is involved  from time to time in various  legal
                    claims in the ordinary course of business,  including claims
                    by agents and others for  commissions,  royalties and others
                    The  Company  has  accrued an amount  which it  believes  is
                    sufficient  to cover any  damages,  if any,  that may result
                    from these claims.  The Company's  management,  based on the
                    advice of its legal counsel,  believes that such claims will
                    not have a material adverse effect on the financial position
                    or results of operations of the Company.

          b.   The  Company's   research  and  development   efforts  have  been
               partially financed through royalty-bearing  programs sponsored by
               the Office of the Chief Scientist of the Ministry of Industry and
               Trade of Israel ("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 linked to the
               U.S. dollar.  The obligation to pay these royalties is contingent
               on actual sales of the products and in the absence of such sales,
               no  payment is  required.  The  Company's  total  obligation  for
               royalties, net of royalties paid or accrued totaled approximately
               $ 641 as of December 31, 2004.

               The total amount of royalties  charged to operations in the years
               ended December 31, 2004, 2003 and 2002 was  approximately $ 60, $
               73 and $ 98, respectively.

          c.   Research and development  projects undertaken by the Company were
               partially  financed by the  Binational  Industrial  Research  and
               Development Fund ("BIRD") Foundation. The Company is committed to
               pay  royalties  to the BIRD  Foundation  at a rate of 5% of sales
               proceeds  generating  from projects for which the BIRD Foundation
               provided  funding  up to  150% of the sum  financed  by the  BIRD
               Foundation.  The Company's total obligation for royalties, net of
               royalties paid or accrued,  totaled  approximately  $ 1,958 as of
               December  31,  2004.  The  obligation  to pay these  royalties is
               contingent  on actual sales of the products and in the absence of
               such sales, no payment is required.

                                      F-22

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)

               The total amount of royalties charged to operations for the years
               ended December 31, 2004, 2003 and 2002 was  approximately $ 20, $
               15 and $ 13, respectively.

          d.   The  Netanya   offices  of  the   Company  are  rented   under  a
               non-cancelable  operating  lease  expiring  January  31, 2006 and
               there is an option  to renew it again,  until  January  2008.  In
               addition,  certain of the  Company's  vehicles and  computers are
               under operating leases.  Annual minimum future rental commitments
               under these leases,  at exchange  rates in effect on December 31,
               2004, are approximately as follows:

                    2005             $   468
                    2006                 306
                    2007                 235
                                     -------
                                     $ 1,009
                                     =======

               Lease  expenses for the years ended  December 31, 2004,  2003 and
               2002 were $ 508, $ 447 and $ 277, respectively.

          e.   Floating  charges have been  registered  on all of the  Company's
               assets  and  specific  charges  have been  registered  on certain
               assets in respect of the Company's  liabilities  to its banks and
               other creditors.

          f.   The Company  obtains  mainly  short-term  bank  guarantees to its
               customers in the ordinary  course of business.  These  guarantees
               are  provided  to  customers  to  secure  advances   received  at
               commencement of a project or to secure performance of operational
               milestones.  The total  amount  of bank  guarantees  provided  to
               customers as of December 31, 2004 is approximately $ 4,123.

NOTE 11:- 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 July 2004, the Company issued 1,800,000  shares,  an aggregate
               of $3,000  principal  amount  of  convertible  notes,  additional
               investment  rights to purchase up to an  aggregate  of  1,100,000
               Ordinary shares at an exercise price of $ 2.10 per share, (with a
               term of two years  commencing  six months  following the closing)
               and warrants to purchase up to an  aggregate of 937,500  Ordinary
               shares at an  exercise  price of $ 2.50 per share  (for a term of
               five years  commencing  six months  following  the  closing)  .to
               investors in a private  placement for a total  consideration of $
               5,880 ($ 5,712 net of issuance expenses) (see also c. below). The
               consideration  was allocated based on the relative fair values of
               the Ordinary  shares,  notes and warrants in accordance  with APB
               No. 14,  "Accounting  for  Convertible  Debt and Debt Issued with
               Stock Purchase Warrants".  The convertible notes bear interest at
               a rate of six-month LIBOR plus 2.5%. The principal is due in July
               2007 and the interest is payable in quarterly  installments until
               July 2007.  The notes are  convertible  to  Ordinary  shares at a
               conversion  price of $ 2.10. In  connection  with the issuance of
               the notes,  additional of investment rights and warrant, $180 was
               recorded as a beneficial  conversion  feature in accordance  with
               EITF 98-5, "Accounting for Convertible Securities with Beneficial
               Conversion Features or

                                      F-23

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)

               Contingently  Adjustable  Conversion Ratios". The total amount of
               the  deemed  discount  on the notes as a result  of the  warrants
               issuance and the  beneficial  conversion  feature  amounting to $
               760, is  amortized  over the term of the notes using the interest
               method.  At December 31,  2004,  the  unamortized  balance on the
               deemed  discount  on the  convertible  notes was $ 654.  The fair
               value of the warrants  (including  additional  investment rights)
               was based on a valuation prepared using the Black-Scholes pricing
               model   assuming  a  risk  free  interest  of  2.64%  and  3.69%,
               respectively, a volatility factor of 0.67 and 0.68, respectively,
               dividend yield of 0% and  contractual  life of two years and five
               years,  respectively.  In addition, the valuation considered that
               the  warrants  were  restricted  for the  first six  months,  the
               warrants  were not  traded on the  market  at any  time,  and the
               underlying asset had low marketability.  The valuation result was
               judged to be  reasonable  by  comparison to benchmarks in similar
               circumstances.  The Company's  management is responsible  for the
               valuation.

               Costs  incurred  with respect to the issuance of the  convertible
               notes of $69 have  been  recorded  as  deferred  charges  and are
               amortized as financial  expenses over the term of the notes using
               the interest method.

               In June 2002, the Company issued  1,938,775  Ordinary shares in a
               private  placement to certain  investors in consideration  for an
               aggregate amount of $ 950 ($ 835, net of issuance expenses).  The
               shares  were issued at a 30%  discount  from the  Ordinary  share
               price on NASDAQ at the date of  issuance,  which was deemed to be
               the fair value of a "restricted"  Ordinary share.  See (c). below
               for warrants issued to investors.

               In June 2002, the Company issued  2,755,102  Ordinary shares in a
               private   placement  to  a  shareholder  in   consideration   for
               conversion  of a loan that was given to the Company in the amount
               of $ 1,350.  The  shares  were  issued  at the same  price as the
               shares issued in the 2002 private placement  described above. See
               (c). below for warrants issued to a shareholder.

          b.   Stock option plans:

               In 1996, 1999 and 2003, the Company's Board of Directors approved
               the adoption of Employee Stock Option Plans (the "Plans"),  which
               authorized the grant of options to purchase up to an aggregate of
               240,000,  1,040,000 and 2,000,000 Ordinary shares,  respectively,
               to  officers,  directors,  consultants  and key  employees of the
               Company  and its  subsidiary.  Options  granted  under  the Plans
               expire  within a maximum of ten years from  adoption of the plan.
               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 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  Ordinary  shares on the
               date of grant of the option.  Any options  that are  cancelled or
               forfeited before expiration,  become available for future grants.
               At December 31, 2004,  226,032  options were  available for grant
               under the Plans described above.

                                      F-24

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)

               In 2003, the Company  granted  suppliers/consultants,  options to
               purchase  100,000  Ordinary  shares at an exercise  price ranging
               from $ 0.69 - $ 2.00.  At the grant  date,  the fair value of the
               options was determined  using the Black and Scholes pricing model
               assuming a risk free rate of 1%, a volatility factor ranging from
               30% to 70%, dividend yield of 0% and a contractual life of two to
               five years. In relation to the options, the Company recorded $ 14
               as operating expenses.

               Transactions  related to the above Plans  (including  warrants to
               directors)  during the years ended  December 31,  2004,  2003 and
               2002 were as follows:
<TABLE>
<CAPTION>
                                                          Year ended December 31,
                                      ---------------------------------------------------------------
                                               2004                 2003                  2002
                                      -------------------- --------------------- --------------------
                                                  Weighted              Weighted             Weighted
                                        Amount    average   Amount      average   Amount     average
                                          of      exercise    of        exercise    of       exercise
                                       options     price    options      price    options     price
                                      ---------- --------- ----------  --------- ---------- ---------
                 <S>                 <C>           <C>      <C>          <C>      <C>         <C>
                 Options outstanding
                   at  beginning
                   of year           2,223,200     $  1.60    526,000    $  4.89  1,638,000   $  5.48
                    Granted            100,000     $  1.29  1,852,000    $  1.07          -   $     -
                    Exercised          (73,335)    $  0.69          -    $    -           -   $     -
                    Expired            (36,400)    $  4.58          -    $    -           -   $     -
                    Forfeited or                                                              $  5.76
                     cancelled        (182,032)    $  1.89   (154,800)   $  6.34 (1,112,000)
                                      ----------            ---------            ----------
                 Options
                   outstanding at
                   end of year       2,031,433     $  1.56  2,223,200    $  1.60    526,000    $  4.89
                                     =========     =======  =========    ======= ==========    =======

                 Exercisable
                   options at end
                   of year           1,425,434     $  1.71  1,045,200    $  2.23    411,600    $  4.85
                                     =========     =======  =========    ======= ==========    =======
</TABLE>

               No options  were  granted in 2002.  No  compensation  expense was
               recorded for the years ended December 31, 2004, 2003 and 2002.

               The  options  outstanding  as of  December  31,  2004  have  been
               separated into ranges of exercise price, as follows:
<TABLE>
<CAPTION>
                                           Options outstanding                Options exercisable
                                 ----------------------------------------  --------------------------
                                               Weighted
                                     At         average       Weighted                     Weighted
                   Range of       December     remaining      average          At          average
                   exercise          31,       contractual    exercise     December 31,    exercise
                     price          2004          life         price           2004          price
                 --------------  ------------  -----------  -------------  --------------  ----------
                                                 (years)
                                               -----------
                  <S>              <C>           <C>          <C>          <C>               <C>
                  $ 0.69 - 1.00      685,500     9.00         $   0.70       522,501         $   0.70
                  $ 1.29 - 2.00    1,082,333     8.95         $   1.37       639,333         $   1.38
                  $ 3.09 - 4.13      135,600     5.46         $   3.52       135,600         $   3.52
                  $ 4.88 - 6.75      128,000     5.49         $   5.63       128,000         $   5.63
                                   ---------                               ---------
                                   2,031,433                  $   1.56     1,425,434         $   1.71
                                   =========                  ========     =========         ========
</TABLE>


                                      F-25

<PAGE>
                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)

          c.   Warrants:

               As of December 31, 2004, warrants to purchase 19,486,840 Ordinary
               shares were outstanding.

               In July 2004, in connection  with the issuance of Ordinary shares
               and convertible  notes described in a. above, the Company granted
               the investors  additional  investment rights to purchase up to an
               aggregate of 1,100,000  Ordinary shares at an exercise price of $
               2.10 per share,  (with a term of two years  commencing six months
               following  the  closing)  and  warrants  to  purchase  up  to  an
               aggregate of 937,500  Ordinary  shares at an exercise  price of $
               2.50 per share  (for a term of five years  commencing  six months
               following the closing).

               In September  2003,  the Company  signed an  agreement  with Bank
               Hapoalim  B.M. and Bank Leumi  Le-Israel  B.M.  (the  "Banks") to
               restructure a portion of the debt owed to the Banks. The carrying
               value  of the  restructured  debt  was $  3,451.  As  part of the
               restructuring,  the  Company  issued  3,781,995  warrants  to the
               Banks,  paid cash of $ 1,100 and the Banks  forgave the remaining
               debt.  The  warrants  issued to the Banks have an exercise  price
               equal to par value of the  shares  and a term of 2.5  years.  The
               warrants have a lock-up period of 21 months. The Banks have a put
               option to sell the warrants to the  Company's  major  shareholder
               for a consideration  of $ 1,251. The put option is exercisable by
               the Banks only once during the period of 45 days commencing after
               the  end  of  the  period  of 18  months  from  the  date  of the
               agreement.  In addition,  the Banks granted the  Company's  major
               shareholder  a call  option that  requires  the Banks to sell the
               warrants  to the  shareholder  at the  exercise  price of the put
               option with an additional payment equal up to 25% of the increase
               in the market share price from the date of the  agreement up to a
               maximum of $ 0.14 per  warrant.  The call option may be exercised
               by the  shareholder  during the period of 18 months from the date
               of the agreement and during a period of 45 days commencing  after
               the  termination of the put option.  In addition,  as part of the
               restructuring, the Company issued to the Banks 1,100,000 warrants
               having an exercise price of $ 2.00 per share,  and a term of five
               years.

               The  transaction  was  recorded in  accordance  with SFAS No. 15,
               "Accounting   by  Debtors  and   Creditors   for  Troubled   Debt
               Restructurings".  The  above  warrants  (3,781,995  warrants  and
               1,100,000  warrants)  that were issued to the Banks were recorded
               at fair value ($ 1,267, net of issuance expenses). The fair value
               of  the  warrants  was  based  on a  valuation  prepared  at  the
               consummation  date of the  transaction.  The valuation  took into
               consideration   the  long  lock-up  period  and  a  marketability
               discount.  The  valuation  result was judged to be  reasonable by
               comparison to benchmarks in similar circumstances.  The Company's
               management is responsible for the valuation.

               The difference  between the consideration paid to the Banks (cash
               and warrants) and the carrying amount of the debt of $ 1,013, was
               recognized as a gain on  restructuring  of debt,  net of issuance
               expenses,  presented in financial income (expenses),  net, in the
               statement of operations.

               In June 2002, in connection with the private placement  described
               in a.  above,  the  investors  were  issued  warrants to purchase
               4,302,041 of the  Company's  Ordinary  shares.  Such warrants are
               valid for five  years  and are  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  the  exercise  date.  The  proceeds  allocated  to the
               warrants,  based on the  relative  fair value of the warrants and
               shares issued amounted to $ 41.

                                      F-26
<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)

               In June 2002,  in connection  with the  conversion of a loan that
               was given to the  Company  by a  shareholder  in the  amount of $
               1,350  as  described  in  a.  above,   the  Company   issued  the
               shareholder  warrants to purchase 8,265,306 Ordinary shares. Such
               warrants have the same terms as the warrants described above. The
               proceeds  allocated to the  warrants,  based on the relative fair
               value of warrants and shares issued amounted to $ 78. The benefit
               arising on conversion of the loan amounting to $ 83, was recorded
               as interest expense.

               The fair  value of the  warrants  described  above was  estimated
               using  Black-Scholes  option-pricing  model  with  the  following
               weighted-average  assumptions:  risk-free  interest  rate  of 2%,
               dividend  yield of 0%,  expected  volatility of 24%, and expected
               life of warrant of five years.


NOTE 12:- TAXES ON INCOME

          a.   Measurement of taxable income under the Income Tax  (Inflationary
               Adjustments) Law, 1985:

               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 bases of assets and liabilities.

          b.   Tax  benefits  under 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 from the above
               law is the  deduction  of  expenses in  connection  with a public
               offering.

          c.   The  Company  in Israel is  subject  to tax at the rate of 35% of
               taxable  income for 2004,  34% for 2005, 32% for 2006 and 30% for
               2007 onwards.  As of December 31, 2004,  the net  operating  loss
               carryforward  for tax purposes  relating to the Company in Israel
               amounted to approximately $ 44,400. Carryforward losses in Israel
               may be carried  forward  indefinitely  and may be offset  against
               future taxable income.

               As  of  December  31,  2004,   carryforward  losses  relating  to
               non-Israeli companies (U.S. and China), amounted to approximately
               $9,750.

               As the Company  believes  that the tax assets in respect of these
               carryforward  losses amounting to  approximately  $19,000 are 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.

                                      F-27

<PAGE>


                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 12:- TAXES ON INCOME (Cont.)

          d.   Income (loss) before income taxes:

                                         Year ended December 31,
                                -----------------------------------------
                                    2004           2003          2002
                                ------------   ------------   -----------
                 Domestic         $     937      $     867      $ (2,175)
                 Foreign               (115)          (109)         (308)
                                ------------   ------------   -----------
                                  $     822      $     758      $ (2,483)
                                ============   ============   ===========

          e.   The main reconciling  items between the statutory tax rate of the
               Company and the  effective  tax rate is the  valuation  allowance
               recorded in respect of the tax assets  relating to net  operating
               loss  carryforwards  and other  temporary  differences due to the
               uncertainty of the realization of such tax assets.

NOTE 13:- SELECTED STATEMENTS OF OPERATIONS DATA

<TABLE>
<CAPTION>
          a.   Financial income (expenses), net:

                                                                    Year ended December 31,
                                                            ---------------------------------------
                                                               2004           2003          2002
                                                            ---------      ---------       --------
                 <S>                                        <C>            <C>             <C>
                 Income:
                   Gain on restructuring of debt, net
                     (see Note 11c)                         $       -      $   1,013       $      -
                   Foreign currency exchange differences          234              -            169
                   Interest on cash equivalents                     4              9              4
                                                            ---------      ---------       --------
                                                                  238          1,022            173
                                                            ---------      ---------       --------
                 Expenses:
                   Interest on convertible note                    64              -              -
                   Amortization of beneficial conversion
                     feature on convertible note                  115              -              -
                   Foreign currency exchange differences           79             22              -
                   Interest on short-term loans and
                     other credit balances                         82            230            253
                   Bank commissions                               116             59             96
                   Interest to related parties                      -              -             89
                   Loss on extinguishment of debt                   -              -             83
                   Others                                          30              3             16
                                                            ---------      ---------       --------
                                                                  486            314            537
                                                            ---------      ---------       --------
                                                            $    (248)     $     708       $   (364)
                                                            =========      =========       ========

          b.   Other income (expenses), net:

                 Impairment of loan                         $       -      $       -       $   (290)
                 Others, net                                       23             (2)             -
                                                            ---------      ---------       --------
                                                            $      23      $      (2)      $   (290)
                                                            =========      =========       ========
</TABLE>

                                      F-28

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 14:- RELATED PARTY TRANSACTIONS

          There are no related party  balances as of December 31, 2004 and 2003.
          Related  party  transactions  reflected in the statement of operations
          for the years ended December 31, 2004, 2003 and 2002 are as follows:

                                                      Year ended December 31,
                                               --------------------------------
                                                 2004        2003       2002
                                               ---------   ---------   --------
          Related party (*):

            Revenues                           $       -   $       -   $    394
                                               =========   =========   ========
          Shareholder:
            Interest expense                   $       -   $       -   $     89
                                               =========   =========   ========
            Loss on extinguishment of loan     $       -   $       -   $     83
                                               =========   =========   ========

          (*)  A company controlled by a Company shareholder. See also Note 11c.


NOTE 15:- MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION

          a.   In accordance  with Statement of Financial  Accounting  Standards
               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 sells ATE
               products,  avionics  equipment and aviation data  acquisition and
               debriefing systems.

          b.   Revenues by geographic areas:

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

                                             Year ended December 31,
                                      -------------------------------------
                                         2004          2003          2002
                                      ---------     ---------      --------

               North America          $   4,715     $   5,115      $  6,671
               Europe                     3,022         3,436         1,599
               Israel                     4,998         3,224         1,442
               Others                     1,425           540           687
                                      ---------     ---------      --------
               Total                  $  14,160     $  12,315      $ 10,399
                                      =========     =========      ========

                                      F-29

<PAGE>

                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands

NOTE 15:- MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION

          c.   Major customers:

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

                                                Year ended December 31,
                                       ---------------------------------------
                                          2004           2003          2002
                                       -----------    ----------    ----------
                                                           %
                                       ---------------------------------------
                 Customer A                19             11            *)
                 Customer B                *)             12            *)
                 Customer C                *)             22            34
                 Customer D                10             14            19
                 Customer E                11             -              -
                 Customer F                17             19            *)


               *)   Less than 10%.

          d.   Long lived assets by geographic areas:

                                                   December 31,
                                       ------------------------------------
                                        2004           2003           2002
                                       ------         ------         ------

                 Israel                $4,718         $5,179         $6,977
                 China                  1,333          1,536          1,761
                                       ------         ------         ------
                                       $6,051         $6,715         $8,738
                                       ======         ======         ======

                                      F-30


<PAGE>
                              RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars in thousands


NOTE 16:- NET INCOME (LOSS) PER SHARE

          The following  table sets forth the  computation  of basic and diluted
          net earnings (loss) per share:
<TABLE>
<CAPTION>
                                                                       Year ended December 31,
                                                               ----------------------------------------
                                                                  2004           2003          2002
                                                               -----------   ------------   -----------
            <S>                                                <C>            <C>            <C>
            Numerator:

            Net income (loss)                                  $      822     $      758     $   (2,483)
                                                               ===========    ==========     ==========
            Denominator:

            Weighted average number of shares of Ordinary
              stock outstanding during the year used to
              compute basic net income (loss) per share
              (in thousands)                                       19,374         18,511         16,555
            Incremental shares attributable to exercise of
              outstanding options and warrants (assuming
              proceeds would be used to purchase Treasury
              stock) (in thousands)                                 4,310          1,193              -
                                                               ----------     ----------     ----------
            Weighted average number of shares of Ordinary
              stock outstanding during the year used to
              compute diluted net income (loss) per
              share(in thousands)                                  23,684         19,704         16,555
                                                               ==========     ==========     ==========
            Basic net income (loss) per share                  $     0.04     $     0.04     $    (0.15)
                                                               ==========     ==========     ==========
            Diluted net income (loss) per share                $     0.03     $     0.04     $    (0.15)
                                                               ==========     ==========     ==========
</TABLE>


NOTE 17:- SUBSEQUENT EVENT


          On February  2005,  the  Company's  Board of  Directors  approved  the
          purchase  of all the  assets  that  are  used by,  or  related  to the
          operation   of  Vectop   Limited   ("Vectop"),   an  Israeli   company
          specializing  in  the  design,  development,  marketing  and  sale  of
          electro-optic  equipment and  debriefing  systems  business.  Vectop's
          assets also include  know-how,  patents and  intellectual  property to
          produce  off-the-shelf  products such as cameras and video  recorders,
          which are currently  operational  onboard aircraft and tanks in Israel
          and other countries. The Company purchased Vectops assets for $ 280 in
          cash and future  consideration  based on revenues  derived from Vectop
          projects. In addition,  the Company is assuming $ 800 of Vectop's bank
          debt,  payable  commencing in 2006 over a two-year period,  as well as
          other operational liabilities.

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

                                      F-31

<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/A and that it has duly caused and authorized the
undersigned to sign this annual report on its behalf.



                                            RADA ELECTRONIC INDUSTRIES LTD.


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








Dated:  September 1, 2005

                                       19