---

---

SECURITIES AND EXCHANGE COMMISSIONWashington D.C. 20549FORM 20-F

|  |                                                                                                 
|- | ------------------------------------------------------------------------------------------------
|o | REGISTRATION
 STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF
 1934
|  | OR                                                                                              
|x | ANNUAL
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934           
|  | For the fiscal year ended December 31, 2008                                                     
|  | OR                                                                                              
|o | TRANSITION
 REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934       
|  | For the transition period from _________ to _________                                           
|  | OR                                                                                              
|o | SHELL
 COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 OF 1934   
|  | Date of event requiring this shell company report __________________                            

|                                                                          
|--------------------------------------------------------------------------
|Commission file number: 0-15375                                           
|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)                                 
|                                                                          
|Shiri
 Lazarovich, CFO, +972 9 892 1122 [phone], + 972 9 885 5885 [fax]   
|7 Giborei
 Israel Street, Netanya 42504, Israel                           
|(Name, telephone,
 facsimile number and address of company contact person)

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

|                                      |  |                                           
|------------------------------------- |  | ------------------------------------------
|Title of each class                   |  | Name of each exchange
 on which registered
|                                      |  |                                           
|Ordinary
 Shares, NIS 0.015 Par Value |  | NASDAQ
 Capital Market                    

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

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

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

Ordinary
Shares, par value NIS 0.015 per share8,858,553(As of December 31, 2008)

---

---



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

Yes o          No x

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

Yes o          No x

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 o

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

Large accelerated
filer o
    Accelerated filer o
    Non-accelerated filer x

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

|            |                                                                                                           |        
|----------- | --------------------------------------------------------------------------------------------------------- | -------
|U.S. GAAP x | International
 Financial Reporting Standards as issued
 by the International Accounting Standards Board o | Other o

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

Item 17 o          Item 18 o

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

Yes o          No x

This Report on Form 20-F is incorporated by reference
into our Form F-3 Registration Statements File Nos. 333-12074, 333-115598,
333-117954, and 333-150197, and our Form S-8 Registration Statements File Nos.
333-111437 and 333-12844.

---

---



INTRODUCTION

We
are an Israel based defense electronics contractor. The Company specializes in
the development, manufacture and sale of Data Recording and Management Systems
(Digital Video & data recorders, Ground Debriefing Stations, Head-Up
Display Cameras), Inertial Navigation Systems, Avionics Solutions (Trainer
Aircraft Upgrades, Stores Management Systems, Interface Computers) and Avionics
for UAVs.

Our
shares are traded on the NASDAQ Capital Market, under the symbol RADA. As
used in this annual report, the terms we, us and our mean RADA Electronic
Industries Ltd. and its subsidiaries, unless otherwise indicated.

We
currently use CATS, ACE, FACE and VDS® as trade names. All other trademarks and trade names appearing in this annual
report are owned by their respective holders.

Our
consolidated financial statements appearing in this annual report are prepared
in U.S. dollars and in accordance with generally accepted accounting principles
in the United States, or U.S. GAAP. All references in this annual report to
dollars or $ are to U.S. dollars and all references in this annual report
to NIS are to New Israeli Shekels.

Statements
made in this annual report concerning the contents of any contract, agreement
or other document are summaries of such contracts, agreements or documents and
are not complete descriptions of all of their terms. If we filed any of these
documents as an exhibit to this annual report or to any previous filing with
the Securities and Exchange Commission, you may read the document itself for a
complete recitation of its terms.

Except
for the historical information contained in this annual report, the statements
contained in this annual report are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995, as amended, with respect to our
business, financial condition and results of operations. Such forward-looking
statements reflect our current view with respect to future events and financial
results. We urge you to consider that statements which use the terms
anticipate, believe, do not believe, expect, plan, intend,
estimate, anticipate and similar expressions are intended to identify
forward-looking statements. We remind readers that forward-looking statements
are merely predictions and therefore inherently subject to uncertainties and
other factors and involve known and unknown risks that could cause the actual
results, performance, levels of activity, or our achievements, or industry
results, to be materially different from any future results, performance,
levels of activity, or our achievements expressed or implied by such
forward-looking statements. Such forward-looking statements are also included
in Item 4  Information on the Company and Item 5  Operating and Financial
Review and Prospects.Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. Except as required by applicable law,
including the securities laws of the United States, we undertake no obligation
to publicly release any update or revision to any forward-looking statements to
reflect new information, future events or circumstances, or otherwise after the
date hereof. We have attempted to identify significant uncertainties and other
factors affecting forward-looking statements in the Risk Factors section that
appears in Item 3D. Key Information - Risk Factors.

1

---

---



TABLE
OF CONTENTS

|         |                                                             |                                                          |    |         
|-------- | ----------------------------------------------------------- | -------------------------------------------------------- | -- | --------
|         |                                                             |                                                          |    | Page No.
|         |                                                             |                                                          |    |         
|        
|PART I   |                                                             |                                                          |    | 4       
|         |                                                             |                                                          |    |         
|ITEM 1.  | IDENTITY OF DIRECTORS, SENIOR
 MANAGEMENT AND ADVISERS      |                                                          | 4 
|ITEM 2.  | OFFER STATISTICS AND EXPECTED
 TIMETABLE                    |                                                          | 4 
|ITEM 3.  | KEY INFORMATION                                             |                                                          | 4 
|         | A.                                                          | Selected Financial Data                                  |    | 4       
|         | B.                                                          | Capitalization and Indebtedness                          |    | 5       
|         | C.                                                          | Reasons for the Offer and Use of
 Proceeds               |    | 5       
|         | D.                                                          | Risk Factors                                             |    | 5       
|ITEM 4.  | INFORMATION ON THE COMPANY                                  |                                                          | 13
|         | A.                                                          | History and Development of the
 Company                  |    | 13      
|         | B.                                                          | Business Overview                                        |    | 14      
|         | C.                                                          | Organizational Structure                                 |    | 24      
|         | D.                                                          | Property, Plants and Equipment                           |    | 24      
|ITEM 4A. | UNRESOLVED STAFF COMMENTS                                   |                                                          | 25
|ITEM 5.  | OPERATING AND FINANCIAL REVIEW AND
 PROSPECTS               |                                                          | 25
|         | A.                                                          | Operating Results                                        |    | 25      
|         | B.                                                          | Liquidity and Capital Resources                          |    | 31      
|         | C.                                                          | Research and Development, Patents
 and Licenses          |    | 33      
|         | D.                                                          | Trend Information                                        |    | 33      
|         | E.                                                          | Off-Balance Sheet Arrangements                           |    | 34      
|         | F.                                                          | Tabular Disclosure of Contractual
 Obligations           |    | 34      
|ITEM 6.  | DIRECTORS, SENIOR MANAGEMENT AND
 EMPLOYEES                 |                                                          | 34
|         | A.                                                          | Directors and Senior Management                          |    | 34      
|         | B.                                                          | Compensation                                             |    | 36      
|         | C.                                                          | Board Practices                                          |    | 37      
|         | D.                                                          | Employees                                                |    | 43      
|         | E.                                                          | Share Ownership                                          |    | 44      
|ITEM 7.  | MAJOR SHAREHOLDERS AND RELATED PARTY
 TRANSACTIONS          |                                                          | 46
|         | A.                                                          | Major Shareholders                                       |    | 46      
|         | B.                                                          | Related Party Transactions                               |    | 47      
|         | C.                                                          | Interests of Experts and Counsel                         |    | 48      
|ITEM 8.  | FINANCIAL INFORMATION                                       |                                                          | 48
|         | A.                                                          | Consolidated Statements and Other
 Financial Information |    | 48      
|         | B.                                                          | Significant Changes                                      |    | 49      
|ITEM 9.  | THE OFFER AND LISTING                                       |                                                          | 49
|         | A.                                                          | Offer and Listing Details                                |    | 49      
|         | B.                                                          | Plan of Distribution                                     |    | 50      
|         | C.                                                          | Markets                                                  |    | 50      
|         | D.                                                          | Selling Shareholders                                     |    | 50      
|         | E.                                                          | Dilution                                                 |    | 50      
|         | F.                                                          | Expense of the Issue                                     |    | 50      
|ITEM 10. | ADDITIONAL INFORMATION                                      |                                                          | 50
|         | A.                                                          | Share Capital                                            |    | 50      
|         | B.                                                          | Memorandum and Articles of
 Association NO               |    | 50      
|         | C.                                                          | Material Contracts                                       |    | 53      
|         | D.                                                          | Exchange Controls                                        |    | 53      
|         | E.                                                          | Taxation                                                 |    | 53      
|         | F.                                                          | Dividend and Paying Agents                               |    | 60      
|         | G.                                                          | Statement by Experts                                     |    | 61      
|         | H.                                                          | Documents on Display                                     |    | 61      
|         | I.                                                          | Subsidiary Information                                   |    | 61      
|ITEM 11. | QUANTITATIVE AND QUALITATIVE
 DISCLOSURE ABOUT MARKET RISKS |                                                          | 61
|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN
 EQUITY SECURITIES     |                                                          | 62

2

---

---



|                    |                                                                               |    |    |   
|------------------- | ----------------------------------------------------------------------------- | -- | -- | --
|PART II             |                                                                               |    |    | 63
|                    |                                                                               |    |    |   
|ITEM 13.            | DEFAULTS, DIVIDEND ARREARAGES AND
 DELINQUENCIES                              |    | 63
|ITEM 14.            | MATERIAL MODIFICATIONS TO THE RIGHTS
 OF SECURITY HOLDERS AND USE OF PROCEEDS |    | 63
|ITEM 15.            | CONTROLS AND PROCEDURES                                                       |    | 63
|ITEM 15T.           | CONTROLS AND PROCEDURES                                                       |    | 64
|ITEM 16.            | RESERVED.                                                                     |    | 64
|ITEM 16A.           | AUDIT COMMITTEE FINANCIAL EXPERT                                              |    | 64
|ITEM 16B.           | CODE OF ETHICS                                                                |    | 64
|ITEM 16C.           | PRINCIPAL ACCOUNTANT FEES AND
 SERVICES                                       |    | 64
|ITEM 16D.           | EXEMPTIONS FROM THE LISTING
 REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE   |    | 65
|ITEM 16E.           | PURCHASE OF EQUITY SECURITIES BY THE
 ISSUER AND AFFILIATED PURCHASERS        |    | 65
|ITEM 16F.           | CHANGES IN REGISTRANTS CERTIFYING
 ACCOUNTANT                                |    | 65
|ITEM 16G.           | CORPORATE GOVERNANCE                                                          |    | 65
|                    |                                                                               |    |   
|PART III            |                                                                               |    |    | 67
|                    |                                                                               |    |    |   
|ITEM 17.            | FINANCIAL STATEMENTS                                                          |    | 67
|ITEM 18.            | FINANCIAL STATEMENTS                                                          |    | 67
|ITEM 19.            | EXHIBITS                                                                      |    | 67
|S I G N A T U R E S |                                                                               | 68

3

---

---



PART I

|        |                                                       
|------- | ------------------------------------------------------
|ITEM 1. | IDENTITY OF DIRECTORS, SENIOR
 MANAGEMENT AND ADVISERS

Not
applicable.

|        |                                         
|------- | ----------------------------------------
|ITEM 2. | OFFER STATISTICS AND EXPECTED
 TIMETABLE

Not
applicable.

|        |                
|------- | ---------------
|ITEM 3. | KEY INFORMATION

|   |                        
|-- | -----------------------
|A. | Selected Financial Data

We
derived the following consolidated statements of operations data for the years
ended December 31, 2006, 2007 and 2008 and the consolidated balance sheet data
as of December 31, 2007 and 2008 from our audited consolidated financial
statements included elsewhere in this annual report. We derived the
consolidated statements of operations data for the years ended December 31,
2004 and 2005, and the consolidated balance sheet data as of December 31, 2004,
2005 and 2006 from our audited consolidated financial statements that are not
included in this annual report. All share and per share amounts have been
restated for all prior periods to reflect a one share for three shares reverse
stock split that was effective February 14, 2007.

|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|-------------------------------------------------------------------------------------- |  | ------------------------------------------------------------- | ------ | ---- | - | ------ | - | ---- | ------ | ---- | - | ------ | - | - | ------ | -
|                                                                                       |  | Year Ended December 31,                                       |       
|                                                                                       |  |                                                               |       
|                                                                                       |  | 2004                                                          |        | 2005 |   | 2006   |   | 2007 |        | 2008 |  
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |  
|                                                                                       |  | (U.S. dollars in thousands, except share and per share
 data) |       
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |  
|Revenues                                                                               |  | $                                                             | 14,160 |      | $ | 13,421 |   | $    | 13,037 |      | $ | 14,021 |   | $ | 17,881 |  
|Cost of revenues                                                                       |  |                                                               | 10,287 |      |   | 12,082 |   |      | 10,999 |      |   | 10,681 |   |   | 13,686 |  
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Gross profit                                                                           |  |                                                               | 3,873  |      |   | 1,339  |   |      | 2,038  |      |   | 3,340  |   |   | 4,195  |  
|Research and
 development expenses                                                     |  |                                                               |       |      |   |       |   |      | 181    |      |   | 324    |   |   | 686    |  
|Marketing and selling                                                                  |  |                                                               | 738    |      |   | 1,155  |   |      | 1,316  |      |   | 1,213  |   |   | 1,496  |  
|General and
 administrative expenses                                                   |  |                                                               | 2,093  |      |   | 1,906  |   |      | 1,749  |      |   | 2,190  |   |   | 1,903  |  
|Operating income
 (loss)                                                               |  |                                                               | 1,042  |      |   | (1,722 | ) |      | (1,208 | )    |   | (387   | ) |   | 110    |  
|Financial income
 (expense), net                                                       |  |                                                               | (248   | )    |   | (624   | ) |      | (775   | )    |   | (629   | ) |   | (668   | )
|Minority
 interest in losses (gains) of subsidiary                                     |  |                                                               | 28     |      |   | 17     |   |      | (17    | )    |   | (62    | ) |   | (18    | )
|Net income
 (loss)                                                                     |  | $                                                             | 822    |      | $ | (2,329 | ) | $    | (2,000 | )    | $ | (1,078 | ) | $ | (576   | )
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Basic net income
 (loss) per share                                                     |  | $                                                             | 0.12   |      | $ | (0.31  | ) | $    | (0.23  | )    | $ | (0.12  | ) | $ | (0.07  | )
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Diluted net
 income (loss) per share                                                   |  | $                                                             | 0.09   |      | $ | (0.31  | ) | $    | (0.23  | )    | $ | (0.12  | ) | $ | (0.07  | )
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Weighted average
 number of shares used to compute basic net income (loss) per share   |  |                                                               | 6,458  |      |   | 7,504  |   |      | 8,702  |      |   | 8,706  |   |   | 8,855  |  
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  
|Weighted average
 number of shares used to compute diluted net income (loss) per share |  |                                                               | 7,895  |      |   | 7,504  |   |      | 8,702  |      |   | 8,706  |   |   | 8,855  |  
|                                                                                       |  |                                                               |        |      |   |        |   |      |        |      |   |        |   |   |        |  

4

---

---



|                                                              |  |                             |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|------------------------------------------------------------- |  | --------------------------- | ------ | ---- | - | ------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | 
|                                                              |  | As of December 31,          |       
|                                                              |  |                             |       
|                                                              |  | 2004                        |        | 2005 |   | 2006   |  | 2007 |        | 2008 |  
|                                                              |  |                             |        |      |   |        |  |      |        |      |  
|                                                              |  | (U.S. dollars in thousands) |       
|                                                              |  |                             |       
|BALANCE
 SHEET DATA:                                          |  |                             |        |      |   |        |  |      |        |      |   |        |  |   |        | 
|Working capital                                               |  | $                           | 2,265  |      | $ | 3,575  |  | $    | 510    |      | $ | 4,058  |  | $ | 5,582  | 
|Total assets                                                  |  |                             | 18,297 |      |   | 18,890 |  |      | 17,455 |      |   | 15,368 |  |   | 18,494 | 
|Short-term
 credits and current maturities of Long-term loans |  |                             | 14     |      |   | 877    |  |      | 559    |      |   | 490    |  |   | 162    | 
|Long-term debt,
 net of current maturities                    |  |                             |       |      |   |       |  |      | 142    |      |   | 261    |  |   | 1,546  | 
|Convertible note
 - long terms                                |  |                             | 2,346  |      |   | 2,560  |  |      | 2,858  |      |   | 1,622  |  |   | 1,980  | 
|Shareholders
 equity                                         |  |                             | 7,232  |      |   | 7,735  |  |      | 6,074  |      |   | 6,725  |  |   | 6,996  | 
|                                                              |  |                             |        |      |   |        |  |      |        |      |   |        |  |   |        | 

|   |                                
|-- | -------------------------------
|B. | Capitalization and Indebtedness

Not
applicable.

|   |                                           
|-- | ------------------------------------------
|C. | Reasons for the Offer and Use of
 Proceeds

Not
applicable.

|   |             
|-- | ------------
|D. | Risk Factors

Investing
in our ordinary shares involves a high degree of risk and uncertainty. You
should carefully consider the risks and uncertainties described below before
investing in our ordinary shares. Our business, prospects, financial condition
and results of operations could be adversely affected due to any of the
following risks. In that case, the value of our ordinary shares could decline,
and you could lose all or part of your investment.

Risks
Related to Our Business and Our Industry

We have a history of losses, and may not be able to achieve
or sustain profitability in the future.

In
the year ended December 31, 2008 we recorded a net loss of $576,000 and we have
incurred losses in four out of the last five years. As of December 31, 2008 our
accumulated deficit was $62.9 million. We may not be able to achieve or sustain
profitability in the future.

We may need to raise additional capital in the future, which
may not be available to us.

Our
working capital requirements and the cash flow from our operating activities
are likely to vary greatly from quarter to quarter, depending on the timing of
orders and deliveries, the build-up of inventories, and the payment terms
offered to our customers. As a consequence of our significant losses, we
incurred significant bank debt and sold equity and debt securities in private
placements in the years 1997 through 2008. We may need to raise additional
funds for a number of uses, including:

| |   |                                                               
| | - | --------------------------------------------------------------
| | · | Working capital and operating activities;                     
| |   |                                                               
| | · | Implementing marketing and sales activities for our
 products;
| |   |                                                               
| | · | Maintaining and expanding research and development
 programs; 
| |   |                                                               
| | · | Hiring additional qualified personnel; and                    
| |   |                                                               
| | · | Supporting an increased level of operations.                  

5

---

---



We
may not be able to obtain additional funds on favorable terms. If we cannot
raise needed funds on favorable terms, we may be required to delay, scale back
or eliminate some aspects of our operations and we may not be able to:

| |   |                                                                    
| | - | -------------------------------------------------------------------
| | · | Develop new products;                                              
| |   |                                                                    
| | · | Enhance our existing products;                                     
| |   |                                                                    
| | · | Remain current with evolving industry standards;                   
| |   |                                                                    
| | · | Fulfill our contractual obligations;                               
| |   |                                                                    
| | · | Take advantage of future opportunities;                            
| |   |                                                                    
| | · | Respond to competitive pressures or unanticipated
 requirements; or
| |   |                                                                    
| | · | Retain our listing on the NASDAQ Capital Market.                   

If
adequate funds are not available to us, our business, and results of operations
and financial condition will be materially and adversely affected. Any equity
or debt financings may cause dilution to our then-existing shareholders and may
increase our financing expenses. If additional funds are raised through the
issuance of equity securities, the net tangible book value per share of our
ordinary shares would decrease and the percentage ownership of then current
shareholders would be diluted.

We may not be able to implement our growth strategy which
could adversely affect our business, financial condition and results of
operations.

In
line with our growth strategy, we have entered into teaming agreements and
other co-operation agreements with General Electric Aviation Systems (formerly
Smiths Aerospace Electronic Systems) or GE Aviation to increase our penetration
into the aviation market. We are currently investing and intend to continue to
invest significant resources to develop this relationship. Should our
relationship fail to materialize into significant agreements or should we fail
to work efficiently with such party, we may lose sales and marketing opportunities
and our business, results of operations and financial condition could be
adversely affected.

Our
growth is partially dependant on the development of new products, based on
internal research and development. Although we carefully analyze the market
needs before we invest in the development of a new product, we cannot be sure
that the needs we identify are true, we might face difficulties or
delays in the development process that will result in changes of the market
needs and competing products may emerge during the development and
certification process.

Recent worldwide credit market turmoil may adversely affect
our customers, which directly impacts our business and results of operations.

Our
operations and performance depend on our customers, including those from the
governmental sector, having adequate resources to purchase our products and
services. The unprecedented turmoil in the credit markets and the global
economic downturn generally adversely impact our customers and potential
customers. These economic conditions have continued to deteriorate despite
government intervention globally, and may remain volatile and uncertain for the
foreseeable future. Customers have altered and may continue to alter their
purchasing activities in response to lack of credit, economic uncertainty and
concern about the stability of markets in general, and have reduced or delayed
purchases of our products and services or other sales activities that affect
purchases of our products and services. If we are unable to adequately respond
to changes in demand resulting from deteriorating economic conditions, our
financial condition and operating results may be materially adversely affected.

Competition in the market for defense electronics is
intense. Our products may not achieve market acceptance which could adversely
affect our business, financial condition and results of operations.

The
market for our products is highly competitive, and we may not be able to
compete effectively in our market. Our principal competitors in the defense
electronics market are GE, Rockwell Collins, Honeywell, Elbit Systems, Israel
Aircraft Industries Ltd., Goodrich (thru the acquisition of TEAC Aerospace),
the Zodiac group (thru the acquisition of Enertec), Astronautics C.A., AITech
Defense Systems, and others. We expect to continue to face competition from
these and other competitors. Most of our competitors are far larger, have
substantially greater resources including financial, technological, marketing
and distribution capabilities, and enjoy greater market recognition than we
have. These competitors may be able to achieve greater economies of scale and
may be less vulnerable to price 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.

6

---

---



Our initiative of providing manufacturing services may not
succeed, and as a result, we may be unable to achieve profitability in our
Beit-Shean production facility and may be forced to shut down its operations.

In
June 2000, we began to provide manufacturing services to original equipment
manufacturers in Israel and the United States, using the manufacturing
capabilities of our Beit-Shean plant. The market for our manufacturing
services is highly competitive and we may not be able to compete effectively in
this market. The cost of labor and the efficiency of the production equipment
and production processes are crucial to our success in this market.
Consequently, should we fail to maintain low labor costs, enhance our
production equipment and develop new and more efficient production methods, we
may have to shut down the operations of our Beit-Shean plant, which may harm
our competitiveness and could adversely affect our business, results of
operations and financial condition.

Reduction in defense budgets worldwide may cause a reduction
in our revenues, which would adversely affect our business, operating results
and financial condition.

The
vast majority of our revenues is derived from the sale of products with
military applications. These revenues, on a consolidated basis, totaled
approximately $15.3 million or 86% of revenues in 2008, $11.6 million, or 83%
of revenues in 2007 and$11.6 million, or 89 % of revenues in 2006. The defense
budgets of a number of countries may be reduced in the future. Declines in
defense budgets may result in reduced demand for our products and manufacturing
services. This would result in reduction in our core business revenues and
adversely affect our business, results of operations and financial condition.

Sales of our products are subject to governmental
procurement procedures and practices; termination, reduction or modification of
contracts with our customers, and especially with the Government of Israel, or
a substantial decrease in our customers budgets may adversely affect our
business, operating results and financial condition.

Our
products are sold primarily to government agencies and authorities and
government-owned companies, many of which have complex and time-consuming
procurement procedures. A long period of time often elapses from the time we
begin marketing a product until we actually sell that product to a particular
customer. In addition, our sales to government agencies, authorities and companies
are directly affected by these customers budgetary constraints and the
priority given in their budgets to the procurement of our products.

Further,
our business with the State of Israel and other governmental entities is, in
general, subject to delays in funding and performance of contracts and the
termination of contracts or subcontracts for convenience, among others. The
termination, reduction or modification of our contracts or subcontracts with
the Government of Israel in the event of change in requirements, policies or
budgetary constraints would have an adverse effect on our business, operating
results and financial condition.

If we do not receive the governmental approvals necessary
for the export of our products, our revenues may decrease. Similarly if our
suppliers and partners do not receive government approvals necessary to export
their products or designs to us, our revenues may decrease and we may fail to
implement our growth strategy.

Under
Israeli law, the export of our products and know-how is subject to approval by
the Israeli Ministry of Defense. To initiate sales proposals with regard to
exports of our products and know-how and to export such products or know-how,
we must obtain permits from the Ministry of Defense. We may not be able to
receive in a timely manner all the required permits for which we may apply in
the future.

Similarly,
under foreign laws the export of certain military products, technical designs
and spare parts require the prior approval of, or export license from, such
foreign governments. In order to maintain our third party production, certain
co-development activities and procurements required for the performance of
certain contracts, we must receive detailed technical designs, products or
products parts samples from our strategic partners or suppliers. We may not be
able to receive all the required permits and/or licenses in a timely manner.
Consequently, our revenues may decrease and we may fail to implement our growth
strategy.

7

---

---



We depend on sales to key customers and the loss of one or
more of our key customers would result in a loss of a significant amount of our
revenues, which would adversely affect our business, financial condition and
results of operations.

A
significant portion of our revenues is derived from a small number of
customers. Our major customers during the three years ended December 31, 2008
were as follows:

|                                |  |                        |   |      |    |      |  |    |   | 
|------------------------------- |  | ---------------------- | - | ---- | -- | ---- |  | -- | - | 
|                                |  | Percentage of Revenues |  
|                                |  |                        |  
|                                |  | 2006                   |   | 2007 |    | 2008 | 
|                                |  |                        |   |      |    |      | 
|                               
|GE Aviation                     |  | 38                     | % |      | 17 | %    |  | 16 | % | 
|Israeli Ministry of Defense     |  | 5                      | % |      | 5  | %    |  | 15 | % | 
|Israel Aerospace Industries     |  | 20                     | % |      | 17 | %    |  | 11 | % | 
|RAFAEL Advanced Defense Systems |  | 2                      | % |      | 10 | %    |  | 9  | % | 
|Hindustan Aeronautics
 Ltd      |  | 10                     | % |      | 14 | %    |  | 29 | % | 

We
anticipate that a significant portion of our future revenues will continue to
be derived from sales to a small number of customers. If our principal
customers do not continue to purchase products from us at current levels or if
such customers are not retained and we are not able to derive sufficient
revenues from sales to new customers to compensate for their loss, our revenues
would be reduced and adversely affect our business, financial condition and
results of operations.

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.

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. Suppliers of some
of the components for manufacturing require us to place orders with significant
lead-time to assure supply in accordance with our manufacturing requirements.
Inadequacy of operating funds may cause us to delays placement of such orders
and may result in delays in supply. Delays in supply may significantly hurt our
ability to fulfill our contractual obligations and may significantly hurt our
business and result of operations. We may not be able to continue to obtain
such components from these suppliers on satisfactory commercial terms.
Temporary disruptions of our manufacturing operations would ensue if we were
required to obtain components from alternative sources, which may have an
adverse effect on our financial results.

Rapid technological changes may adversely affect the market
acceptance of our products and could adversely affect our business, financial
condition and results of operations.

The
defense electronics market in which we compete is subject to technological
changes, introduction of new products, change in customer demands and evolving
industry standards. Our future success will depend upon our ability to keep
pace with technological developments and to timely address the increasingly
sophisticated needs of our customers by supporting existing and new
technologies and by developing and introducing enhancements to our current
products and new products. We may not be successful in developing and marketing
enhancements to our products that will respond to technological change, evolving
industry standards or customer requirements. In addition, we may experience
difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements and such enhancements may not
adequately meet the requirements of the market and may not achieve any
significant degrees of market acceptance. If release dates of our new products
or enhancements are delayed or, if when released, they fail to achieve market
acceptance, our business, operating results and financial condition would be
materially adversely affected.

8

---

---



We may encounter difficulties with our international
operations and sales.

Exports
accounted for 55% of our sales in 2008, 61% of our sales in 2007 and 67% of our
sales in 2006. This subjects us to many risks inherent in engaging in export
international business, including:

| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| | · | Limitations and disruptions resulting from the
 imposition of government controls;             
| |   |                                                                                                
| | · | Changes in regulatory requirements;                                                            
| |   |                                                                                                
| | · | Export license requirements;                                                                   
| |   |                                                                                                
| | · | Economic or political instability;                                                             
| |   |                                                                                                
| | · | Trade restrictions;                                                                            
| |   |                                                                                                
| | · | Changes in tariffs;                                                                            
| |   |                                                                                                
| | · | Currency fluctuations;                                                                         
| |   |                                                                                                
| | · | Longer receivable collection periods and greater
 difficulty in accounts receivable collection;
| |   |                                                                                                
| | · | Greater difficulty in safeguarding intellectual
 property;                                     
| |   |                                                                                                
| | · | Difficulties in managing overseas subsidiaries and
 international operations; and              
| |   |                                                                                                
| | · | Potential adverse tax consequences.                                                            

We
may not be able to sustain or increase revenues from international operations
and may encounter significant difficulties in connection with the sale of our
products in international markets. Any of those events will have a material
adverse affect on our business, operating results and financial condition.

Currency exchange rate fluctuations in the world markets in
which we conduct business could have a material adverse effect on our business,
results of operations and financial condition.

We
may be adversely affected by fluctuations in currency exchange rates. While our
revenues are generally denominated in U.S. dollars, a significant portion of
our expenses is incurred in NIS. We do not currently engage in any currency
hedging transactions intended to reduce the effect of fluctuations in foreign
currency exchange rates on our results of operations. If we were to determine
that it was in our best interests to enter into any hedging transactions in the
future, we may not be able to do so. Furthermore, such transactions, if entered
into, may not materially reduce the effect of fluctuations in foreign currency
exchange rates on our results of operations. In addition, if for any reason
exchange or price controls or other restrictions on the conversion of foreign
currencies into NIS were imposed, our business could be adversely affected. In
the future, such fluctuations may have a material adverse effect on revenues
from international sales, operating expenses and consequently, on our business,
operating results and financial condition.

We are dependent on our senior management and key personnel,
in particular Herzle Bodinger, the chairman of our Board of Directors, and our
president, and Mr. Zvi Alon our chief executive officer, whose loss could
adversely affect our business.

Our
future success depends in large part on the continued services of our senior
management and key personnel. In particular, we are dependent on the services
of Herzle Bodinger, the chairman of our Board of Directors and our president,
and Mr. Zvi Alon our chief executive officer. Any loss of their services other
members of senior management or other key personnel could negatively and
materially affect our business.

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

Third
parties may assert infringement claims against us or claims that we have
violated a patent or infringed on a copyright, trademark or other proprietary
right belonging to them. In addition, any infringement claim, even one without
merit, could result in the expenditure of significant financial and managerial
resources to defend.

9

---

---



The status of our Chinese subsidiary and its joint venture
with Beijing Tianzu Forestry Company is uncertain and we may be required to
initiate litigation in order to enforce our rights.

Beijing
Huarui Aircraft Components Maintenance and Services Co., Ltd. or CACS, our
Chinese subsidiary, 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.
Although Tianzu is legally obligated to complete such transfer of title to the
land and the buildings, such transfer may not be completed and we may be
required to initiate litigation in order to enforce our rights to receive title
to the land and buildings. We have reached an understanding with our Chinese
partner pursuant to which the Chinese partner will surrender its shares in CACS
in consideration for retaining title to the land and the building. The
agreement between the parties has not been finalized yet and it is subject to
approval from the various Chinese regulatory authorities and other legal
procedures.

We may fail to maintain effective internal
controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002,
which could have an adverse effect on our financial results and the market
price of our ordinary shares.

The Sarbanes-Oxley Act of 2002 imposes certain duties
on us and our executives and directors. Our efforts to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 governing
internal controls and procedures for financial reporting, which started in
connection with this Annual Report on Form 20-F, have resulted in increased
general and administrative expense and a diversion of management time and
attention, and we expect these efforts to require the continued commitment of
significant resources. To comply with this statute, we will be required to
document and test our internal control procedures, and our management will be
required to assess and issue a report concerning our internal controls over
financial reporting. The rules governing the standards that must be met for
management to assess our internal controls over financial reporting are
relatively new and complex and require significant documentation, testing and
possible remediation to meet the detailed standards under the rules. We may identify
material weaknesses or significant deficiencies in our assessments of our
internal controls over financial reporting. Failure to maintain effective
internal controls over financial reporting could result in investigation or
sanctions by regulatory authorities and could have a material adverse effect on
our operating results, investor confidence in our reported financial
information and the market price of our ordinary shares may suffer.

Risk
Factors Related to Our Ordinary Shares

Our share price has been volatile in the past and may
decline in the future.

Our
ordinary shares have experienced significant market price and volume
fluctuations in the past and may experience significant market price and volume
fluctuations in the future in response to factors such as the following, some
of which are beyond our control:

| |   |                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------
| | · | Quarterly variations in our operating results;                                                                                                 
| |   |                                                                                                                                                
| | · | Operating results that vary from the expectations of
 securities analysts and investors;                                                       
| |   |                                                                                                                                                
| | · | Changes in expectations as to our future financial
 performance, including financial estimates by securities analysts and
 investors;          
| |   |                                                                                                                                                
| | · | Announcements of technological innovations or new
 products by us or our competitors;                                                          
| |   |                                                                                                                                                
| | · | Announcements by us or our competitors of significant
 contracts, acquisitions, strategic partnerships, joint ventures or capital
 commitments;
| |   |                                                                                                                                                
| | · | Changes in the status of our intellectual property
 rights;                                                                                    
| |   |                                                                                                                                                
| | · | Announcements by third parties of significant claims
 or proceedings against us;                                                               
| |   |                                                                                                                                                
| | · | Additions or departures of key personnel;                                                                                                      

10

---

---



| |   |                                                             
| | - | ------------------------------------------------------------
| | · | Future sales of our ordinary shares;                        
| |   |                                                             
| | · | Delisting of our shares from the NASDAQ Capital
 Market; and
| |   |                                                             
| | · | Stock market price and volume fluctuations.                 

Domestic
and international stock markets often experience extreme price and volume
fluctuations. Market fluctuations, as well as general political and economic
conditions, such as a recession or interest rate or currency rate fluctuations
or political events or hostilities in or surrounding Israel, could adversely
affect the market price of our ordinary shares.

In
the past, securities class action litigation has often been brought against
companies following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and divert managements
attention and resources both of which could have a material adverse effect on
our business and results of operations.

Substantial future sales of our ordinary shares may depress
our share price.

If
our principal shareholders sell substantial amounts of their ordinary shares,
including shares registered under effective registration statements and shares
issuable upon the exercise of outstanding warrants, or convertible notes, or if
the perception exists that our principal shareholders may sell a substantial
number of our ordinary shares, the market price of our ordinary shares may
fall. Any substantial sales of our shares in the public market also might make
it more difficult for us to sell equity or equity related securities in the
future at a time, in a place and on terms we deem appropriate.

We may be delisted from the Nasdaq Stock
Market if we fail to meet its listing maintenance requirements.

Our
shares have traded on the Nasdaq Stock Market since 1985 and on the Nasdaq
Capital Market since June 10, 2002. During the last twelve months, we have from
time to time not been in compliance with Nasdaqs continued listing requirement
that the share price of our ordinary shares exceed $1.00. While we met this
requirement as of December 31, 2008 and March, 2009, we cannot assure you that
our share price will continue to be greater than $1.00 per share or that we
will be able to satisfy the other listing maintenance requirements. Should we
fail to satisfy such requirements, our ordinary shares may be delisted from the
Nasdaq Capital Market and transferred to the OTC Bulletin Board.

The
Securities and Exchange Commission has adopted regulations which generally
define Penny Stocks to be an equity security that has a market price less than
$5.00 per share, subject to certain exemptions. If we were delisted from
the Nasdaq Capital Market we would lose our exemption. As a Penny Stock, our
ordinary shares may become subject to Rule 15g-9 under the Securities Exchange
Act of 1934, as amended (Exchange Act), or the Penny Stock Rule. This rule
imposes additional sales practice requirements on broker-dealers that sell such
securities to persons other than established customers and accredited
investors (generally, individuals with a net worth in excess of $1,000,000 or
annual incomes exceeding $200,000, or $300,000 together with their spouses).
For transactions covered by Rule 15g-9, a broker-dealer must make a special
suitability determination for the purchaser and have received the purchasers
written consent to the transaction prior to sale. As a result, this rule may
affect the ability of broker-dealers to sell our securities and may affect the
ability of purchasers to sell any of our securities in the secondary market.

We do not intend to pay dividends.

We
have never declared or paid cash dividends on our ordinary shares and do not
expect to do so in the foreseeable future. The declaration of dividends is
subject to the discretion of our board of directors and will depend on various
factors, including our operating results, financial condition, future prospects
and any other factors deemed relevant by our board of directors. You should not
rely on an investment in our company if you require dividend income from your
investment in our company. The success of your investment will likely depend
entirely upon any future appreciation of the market price of our ordinary
shares, which is uncertain and unpredictable. There is no guarantee that our
ordinary shares will appreciate in value or even maintain the price at which
you purchased your ordinary shares.

11

---

---



Risks
Relating to Our Location in Israel

Political, economic and military instability in Israel may
disrupt our operations and negatively affect our business condition, harm our
results of operations and adversely affect our share price.

We are incorporated under the laws of the State
of Israel, and our principal executive offices and manufacturing and research
and development facilities are located in Israel. Political, economic and
security conditions in Israel directly influence us. Since the establishment of
the State of Israel in 1948, Israel and its Arab neighbors have engaged in a
number of armed conflicts. A state of hostility, varying in degree and
intensity, has led to security and economic problems for Israel. Major
hostilities between Israel and its neighbors may hinder Israels international
trade and lead to economic downturn. This, in turn, could have a material
adverse effect on our operations and business. There has been an increase in unrest and terrorist activity in Israel,
which began in September 2000 and which has continued with varying levels of
severity through 2008. In
December of 2008 the IDF has operated in Gaza strip in response to continuing
attacks over the Southern settlements of Israel by Hamas activists. The
operation has ended in the beginning of 2009, however, the cease fire has not
entered into effect to this time. Ongoing
violence between Israel and the Palestinians as well as tension between Israel
and the neighboring Syria and Lebanon may have a material adverse effect on our
business, financial conditions and results of operations.

Many
of our employees in Israel are obligated to perform annual military reserve
duty and are subject to being called for active duty under emergency
circumstances. If a military conflict or war arises, these individuals could be
required to serve in the military for extended periods of time. Our operations
could be disrupted by the absence for a significant period of one or more of
our executive officers or key employees or a significant number of other
employees due to military service. Any disruption in our operations could
adversely affect our business.

Fluctuations
in the exchange rate between the U.S. dollar and foreign currencies may affect
our operating results.

A
significant portion of the cost of our operations, mainly personnel and
facility-related, is incurred in NIS. Therefore, our NIS related costs, as
expressed in U.S. dollars, are influenced by the exchange rate between the U.S.
dollar and the NIS. In addition, if the rate of inflation in Israel will exceed
the rate of devaluation of the NIS in relation to the U.S. dollar, or if the
timing of such devaluations were to lag considerably behind inflation, our cost
as expressed in U.S. dollars may increase. NIS linked balance sheet items may
create foreign exchange gains or losses, depending upon the relative dollar
values of the NIS at the beginning and end of the reporting period, affecting
our net income and earnings per share. Although we may use hedging techniques
we may not be able to eliminate the effects of currency fluctuations. Thus,
exchange rate fluctuations could have a material adverse impact on our
operating results and share price.

Service and enforcement of legal process on us and our
directors and officers may be difficult to obtain.

Service
of process upon our directors and officers and the Israeli experts named
herein, most of whom reside outside the United States, may be difficult to
obtain within the United States. Furthermore, since substantially all of our
assets, most of our directors and officers and the Israeli experts named in
this annual report are located outside the U.S., any judgment obtained in the
United States against us or these individuals or entities may not be
collectible within the United States.

There
is doubt as to the enforceability of civil liabilities under the Securities Act
and the Securities Exchange Act in original actions instituted in Israel.
However, subject to certain time limitations and other conditions, Israeli
courts may enforce final judgments of United States courts for liquidated
amounts in civil matters, including judgments based upon the civil liability
provisions of those Acts.

Your rights and responsibilities as a shareholder will be
governed by Israeli law and differ in some respects from those of a typical
U.S. corporation.

Because
we are an Israeli company, the rights and responsibilities of our shareholders
are governed by our articles of association and by Israeli law. These rights
and responsibilities differ in some respects from the rights and
responsibilities of shareholders in a typical U.S. corporation. In particular,
a shareholder of an Israeli company has a duty to act in good faith towards the
company and other shareholders and to refrain from abusing his, her or its
power in the company, including, among other things, in voting at the general
meeting of shareholders on certain matters. Israeli law provides that these
duties are applicable to shareholder votes on, among other things, amendments
to a companys articles of association, increases in a companys authorized
share capital, mergers and interested party transactions requiring shareholder
approval. In addition, a shareholder who knows that it possesses the power to
determine the outcome of a shareholders vote or to appoint or prevent the
appointment of a director or executive officer in the company has a duty of
fairness towards the company. However, Israeli law does not define the
substance of this duty of fairness. Because Israeli corporate law has undergone
extensive revisions in recent years, there is little case law available to
assist in understanding the implications of these provisions that govern
shareholder behavior.

12

---

---



As a foreign private issuer whose shares are listed on the
NASDAQ Capital Market, we may follow certain home country corporate governance
practices instead of certain NASDAQ requirements.

As
a foreign private issuer whose shares are listed on The NASDAQ Capital Market,
we are permitted to follow certain home country corporate governance practices
instead of certain requirements of The NASDAQ Marketplace Rules. A foreign
private issuer that elects to follow a home country practice instead of such
requirements, must submit to NASDAQ in advance a written statement from an independent
counsel in such issuers home country certifying that the issuers practices
are not prohibited by the home countrys laws. In addition, a foreign private
issuer must disclose in its annual reports filed with the Securities and
Exchange Commission or on its website each such requirement that it does not
follow and describe the home country practice followed by the issuer instead of
any such requirement. As a foreign private issuer listed on The NASDAQ Capital
Market, we may follow home country practice with regard to, among other things,
composition of the board of directors, director nomination procedure,
compensation of officers, and quorum at shareholders meetings. In addition, we
may follow our home country law, instead of the NASDAQ Marketplace Rules, which
require that we obtain shareholder approval for certain dilutive events, such
as for the establishment or amendment of certain equity based compensation
plans, an issuance that will result in a change of control of the company,
certain transactions other than a public offering involving issuances of a 20%
or more interest in the company and certain acquisitions of the stock or assets
of another company.

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

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

We
were incorporated under the laws of the State of Israel on December 8, 1970. 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 defense electronics (solid-state recorders,
computers, inertial navigation systems, and alike) and their supporting ground
systems (automated testers, data debriefing stations). We also provide test and
repair services using our CATS testers and test program sets for commercial
aviation electronic systems through our Chinese subsidiary. Our U.S.-based
subsidiaries have been inactive since January 1, 2002.

In April
1985, we completed our initial public offering. Our ordinary shares are traded
on the NASDAQ National Market from our initial public offering in 1985 until
June 10, 2002 when the listing of our ordinary shares was transferred to the
NASDAQ Capital Market. We are listed under the symbol RADA.

In
February 2005, we purchased certain assets and assumed certain liabilities
related to the operations of Vectop, 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, as well as
full access to customer lists related to the products acquired.

Our
capital expenditures for the years ended December 31, 2006, 2007 and 2008 were
approximately $236,000, $353,000 and $498,000, respectively. These expenditures
were principally for machinery equipment and office furniture and equipment.

13

---

---



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

Industry
Overview

Our
activity is focused on the defense electronics market. This market has been
growing in recent years and is currently a large part of the defense business
reflects two contradictory trends, the proliferation of defense electronics on
one hand, which has been offset by the significant reduction in the price of
electronic systems and is reducing the dollar value of the market. Today, new
military vehicles of all kinds are equipped with significantly more electronic
systems than they used to carry in the past. The increasing usage of advanced
electronics in modern vehicles, including upgrades of existing technology and
the growing use of unmanned vehicles of all kinds, have provided significant
growth to the market.

Advanced
defense electronics systems of today, typically try to incorporate components
that are derived from the industrial or the consumer electronics markets,
especially from the telecom markets. Most of the defense electronics systems
are built with commercial components and even sub-systems, a fact that reduces
the overall price, and at the same time generates complex obsolescence issues.

Customers
of defense electronics products are either governments or major integrators.
Engagement in business relationships with these customers is complex, has a
long sales cycle and requires long term commitments for future support of
delivered hardware. Production batches of such products are usually small.

Suppliers
of defense electronic systems are either providers of sub-systems to major
integrators or providers of integrated systems to the industry or to the armed
forces. These companies are typically very large and have diversified product
offerings.

New
products in the defense electronic market are usually developed utilizing
internal and customer research and development funds, and are tailored to
specific customer needs. In many cases, the customer who pays for the design
and adaptation, limits the use of intellectual property that was funded by it
for other applications, due to either financial or security reasons.

Products
and Services

We
primarily provide integrated solutions. Our aim is to provide not only
state-of-the-art products but also comprehensive end-to-end solutions for one
or more systems.

Our current product lines are:

| |   |                                       
| | - | --------------------------------------
| | · | Data Recording & Management           
| |   |                                       
| | · | Inertial Navigation Systems           
| |   |                                       
| | · | Unmanned Aerial Vehicle (UAV) Avionics
| |   |                                       
| | · | Avionics Solutions                    

In addition, we continue to sell and support our
 legacy products and services, as follows:

| |   |                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------
| | · | Commercial aviation test stations - CATS                                                              
| |   |                                                                                                        
| | · | Test and repair services through our China based
 subsidiary using our CATS testers and test programs.

14

---

---



Based
on our accumulated experience in ruggedized data storage and management for the
military market, we began in 2007 to develop a new and revolutionary
information disaster recovery solution for the commercial market. Disaster
recovery is the process of regaining access to the data, hardware and software
necessary to resume critical business operations after a natural or
human-induced disaster. A disaster recovery plan, or DRP, is part of a larger
process known as business continuity planning, or BCP. Disaster recovery is
becoming an increasingly important aspect of enterprise computing. As devices,
systems, and networks become ever more complex, there are simply more things
that can go wrong. As a consequence, recovery plans have also become more
complex. Interruption of service or loss of data can have serious financial
impact on current enterprises, whether directly or through loss of customer
confidence. In 2008, we completed the development and delivered a few
prototypes to our customer for initial field tests. We see this activity as a
potential new line of business and one of the growth engines for our company in
the future, as this business is huge and fast growing.

Data
Recording & Management

RADA
is a world leader in the field of mission data recording, management, and
post-mission analysis and debriefing. Over the past 25 years we have developed,
fielded and supported a wide range of solid-state digital recorders, cameras
and debriefing systems for aerospace and military applications, including:

| |   |                                                                          
| | - | -------------------------------------------------------------------------
| | · | Flight Data Recorders for fighter aircraft                               
| |   |                                                                          
| | · | Video/Audio/Data Recorders (with Data Transfer
 functions)               
| |   |                                                                          
| | · | High-Rate (no compression) Data Recorders for
 aircraft and airborne pods
| |   |                                                                          
| | · | Airborne Data Servers  the latest approach to
 avionic data management  
| |   |                                                                          
| | · | A wide range of HUD Video Cameras for fighter
 aircraft                  
| |   |                                                                          
| | · | A variety of Ground Debriefing Solutions (GDS)                           

Featuring
state-of-the-art technologies, RADAs digital recorders are designed for both
airborne and military applications. RADAs high-performance recorders feature
simultaneous, high-capacity video, audio and data recording, high throughput
and mass storage handling capabilities, supporting rapid dissemination and real
time playback. RADAs Video Recorders implement MPEG-2 and/or MPEG-4 (H.264)
compression formats, supporting up to 128GB of solid state memory, facilitating
continuous recording over extended mission durations.

RADAs
Ground Debriefing Stations, or GDS, feature synchronized video, audio, data,
and Air Combat Maneuvering Instrumentation (ACMI) debriefing. GDS solutions
vary from personal, laptop-size debriefing units, through robust desktop
multi-channel systems supporting the mission debriefing of four-aircraft
formations up to large-scale simultaneous debriefing systems. These
network-based systems support large numbers of participants operating from
different locations, and provide advanced data management features.

RADAs
products are fully qualified and operational with fixed and rotary-wing
aircraft and land vehicles, and are backed by our teams of experts dedicated to
providing global technical and maintenance support. Our customers include
leading air forces and prime integrators worldwide, such as General Electric,
Lockheed Martin, Boeing, Hindustan Aeronautics Ltd, Embraer, the Israeli Air
Force, Israel Aircraft Industries and others.

Data
Acquisition System - DAS

The
DAS is an advanced avionics data acquisition system designed to acquire,
process and record data from various aircraft systems. DAS consists of two
sub-systems, a data acquisition unit, or DAU, and an enhanced crash survival
memory unit, or ECSMU. The DAU interfaces with numerous data systems and data
channels in the aircraft and acquires, processes and records data, mostly for
maintenance purposes. The ECSMU is a black box capable of recording digital
data and digitized audio transferred through the DAU. The DAS is a form fit
replacement to the crash-survivable flight data recording, or CSFDR, system
which is currently installed on most of F-16 aircraft worldwide. The DAS is
designed to meet all commercial aviation requirements for black box
recorders, thus expanding its market potential beyond the defense electronics
market. DAS is being offered as a substitute in various projects that require a
flight data recorder with advanced capabilities and growth potential.

The
DAS is a product of GE Aviation. We have developed significant parts of the DAU
as a subcontractor to GE Aviation, and are assembling and testing the unit in
our production plant at Beit Shean. To dater, the majority of the DAU units
(just under 200 units) were produced by us and shipped to GE Aviation. While
production is ongoing, additional DAS contracts between GE and the U.S. Air
force and other air forces are expected to be signed during 2009 and should
contribute to our revenues for the next several years.

15

---

---



Digital
Video & Data Recorder - DVDR

RADAs
Digital Video & Data Recorder, or DVDR, is a military-off-the-shelf, or
MOTS, mission data recorder. Form and fit to all common airborne analog
recorders, we believe our DVDR has become the replacement-of-choice for these
ageing, near-obsolete products. The video and audio recording functions are
empowered by synchronized recording of various data sources, real-time
playback, and mass storage management. The DVDR records up to six video
channels, two audio channels, MIL-STD-1553 Mux-Bus channels, and Fast Ethernet
channels - all stamped with precise time for post-mission synchronized
debriefing. The system supports two video playback outputs. It incorporates a
removable mass-memory unit, or RMU, which stores up to 128Gbytes of flash
memory. The DVDR can be installed in cockpits or equipment bays, and is
qualified to the harshest military environment. It is accompanied by RADAs
family of ground debriefing solutions, or GDS, displaying synchronized playback
of the recorded video, audio and data along with ACMI displays.

Our
marketing activities have been successful in several programs around the world,
especially in our strategic markets of Israel, USA and India. We have signed a
teaming agreement with GE Aviation to jointly market our DVDR in the USA and
some other markets, where GE Aviation is a prime contractor and we produce and
deliver the equipment. Through this teaming agreement, Boeing awarded us the
U.S. Navy T-45 advanced trainer digital recorder and processor program at end
of 2005 and we delivered recording and ground debriefing system to Lockheed
Martin for its new F-16 production programs in mid-2006. We completed the
deliveries to the Chilean Air Force for its modern F-16 fleet in 2006 and
recently received a follow-on order for their F-16A/B fleet. We also won a
program for the delivery of recorders for the Indian Navy aircraft. In 2008, we
signed a contract with a strategic customer in Southeast Asia to equip most of
its fighter aircraft fleet with the DVDRs, including the transfer of production
technology. We are actively pursuing, directly and through our teaming
agreement with GE Aviation, upgrade programs of recorders replacements
worldwide.

High-Rate
Data Recorder - HRDR

RADAs
High Rate Data Recorder, or HRDR, provides a solution for the extremely high
data recording rates typically required by modern reconnaissance and targeting
pods. The HRDR provides extremely-high data recording and reading rates,
combined with the NATO Standard STANAG 4575 file system management
capabilities. It implements copper fibre channel physical interface per STANAG
4575, along with SCSI-over-fibre channel data transfer protocol. It can operate
as a standard Fibre Channel disk, enabling the user to implement any standard
file system.

The
HRDR provides multi-partitions mode, where any access to the first partition is
treated according to STANAG 4575, while access to the second partition is
treated as a standard disk access. It possesses a high capacity of up to 256
GBytes of solid-state flash memory, and supports secure erase according to the
AFSSI 5020 standard. The HRDR is packaged in a compact mechanical structure,
shaped to fit pods internal curvatures. It withstands harsh military
environment, providing high reliability and operating life.

The
HRDR is under production and is being delivered to Zeiss/Rafael for their
RecceLite program. The system is being offered to various producers of pods in
Israel and overseas.

Video
Recorder & Data Server System - VRDS

RADAs
Video Recorder & Data Server System, or VRDS, is a solution for video and
data recording and mass-storage management onboard combat platforms. The VRDS
baseline functions of video, audio and multiple data sources recording are
complemented by mass storage management, powerful processing and extremely fast
distribution of mass data over Gigabit Ethernet channels, facilitating advanced
capabilities with todays avionics which involve mass data processing.

The
VRDS records up to six video channels, two audio channels, MIL-STD-1553 Mux-Bus
channel and Gigabit Ethernet channels  all stamped with precise time for
post-mission synchronized debriefing. The system supports two video playback
outputs. It incorporates a Removable Mass-Memory Unit, or RMU, which stores up
to 128Gbytes of flash memory and implements an autonomous secure-erase
mechanism. The VRDS is form-fit to the widely-used Data Transfer Equipment or
DTE and is qualified for use in cockpit military environments. It is
accompanied by RADAs family of Ground Debriefing Solutions, or GDS, displaying
synchronized playback of the recorded video, audio and data along with ACMI
displays.

16

---

---



The
VRDS was ordered by the Israeli Air Force, or IAF, in 2008. Serial deliveries
will commence in the second half of 2009 and are expected to be completed
during 2010, with the aim to equip the vast majority of the IAFs aircraft. The
system is being actively offered to air forces globally.

HUD
Color Video Cameras - HCVC

With
over 1,500 units installed globally, RADAs EyeWitness HUD Color Video
Camera, or HCVC, is an advanced, widely-used and highly affordable MOTS family
of products. This mature camera is designed to fit any Head-Up Display, or HUD,
which is currently operational in fighter aircraft cockpits. The HCVC captures
the image of the HUD symbols superimposed over the outside world view, as seen
by the pilot during the mission. The color video signal produced by the HCVC is
recorded in-flight and used for post-flight ground debriefing.

The
EyeWitness HCVC is installed on the HUD mechanical frame either between the
pilots eyes and the HUD combiner, or beyond the HUD combiner. In the latter
installation position, the HUD symbol is superimposed over the camera video by
the aircraft display processor prior to recording. EyeWitness cockpit cameras
employ CCD technology to produce perfect images through high video quality,
while their field-of-view is designed to capture the entire HUD display. The
HCVCs are highly reliable and are qualified for use in cockpit military
environments.

The
EyeWitness HCVC family of products has been sold to numerous customers
worldwide, including, Boeing/IAI, Hindustan Aeronautics Ltd, or HAL, Embraer
and Elbit, and air forces such as the IAF, the Indian air force, the Turkish
air force, and others. The production line for the HCVC is active, enabling
follow-on sales and support to the majority of our current customers, and
deliveries to new customers to which we are actively marketing these products

Ground
Debriefing Stations - GDS

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/XP® environment. The solution
provides a state-of-the-art debriefing environment, fully capitalizing on all
available digital and video information in a completely synchronized
presentation. Further capitalizing on current technologies, individual stations
have a networking capability, providing data sharing, as well as cross-unit and
ground debriefing station inter-air force debriefing.

As
part of Lockheed Martin Aerospace Peace Marble V (PM-V) Program, we developed
the next generation of our ground debriefing solutions by advancing it to the
digital video era. This development has resulted in significant growth in the
systems capability as well as establishing our system as a major and central
device in the day-to-day operation of air force squadrons. We have delivered 24
stations in total to the PM-V Program.

Currently,
all of our DVDR/VRDS programs incorporate this or similar ground debriefing
solutions and are being delivered to our customers worldwide.

Inertial
Navigation Systems

Leveraging
on our in-depth scientific research and algorithmic expertise, utilizing
state-of-the-art Fiber Optic Gyro, or FOG, and Micro-Electro Mechanical Systems
(MEMS) sensors, and taking advantage of its experience in electronic and
mechanical design, RADA is introducing a line of advanced - yet affordable -
inertial navigation solutions, or INS. RADAs INS are adaptable to the
performance and interface requirements of multiple combat platforms and weapon
systems.

Among
RADAs navigation products are:

| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| | · | R-100F: FOG-based, navigation-grade Embedded GPS-INS
 (EGI)                                                                       
| |   |                                                                                                                                   
| | · | R-200M: Compact, MEMS-based, multiple-sensor aided
 INS for combat platforms and weapons                                          
| |   |                                                                                                                                   
| | · | MAVINS  Modular Avionics and MEMS-Based INS: Specially-designed
 compact integrated solution for UAVs and disposable applications
| |   |                                                                                                                                   
| | · | Inertial Measurement Unit (IMU)                                                                                                   

17

---

---



RADAs
navigation solutions introduce sophisticated and proprietary sensor fusion
algorithms, and embed modular design principles leading to minimal integration
efforts into larger mission systems. The compact, reliable, and affordable INS
are applicable to manned and unmanned platforms, as well as to disposable
applications.

Our
INS line ranges from inertial measuring units, or IMU, through fully-integrated
and compact modular avionics and INS/GPS for UAVs, to navigation-grade,
high-performance systems. RADAs navigation products are backed by our global,
dedicated, and professional technical and maintenance services. We are
continuing our research and development efforts and intend to design a complete
family of applications that will provide solutions for various manufacturers
needs. At the same time, we are marketing our products to our strategic
customers and together with them are working to define the next versions of
this family of solutions.

Among
RADAs customers for navigation solutions are leading air forces and prime
integrators worldwide, including IAI, RAFAEL
Advanced Defense Systems Ltd, Embraer, ADE (Indias DRDO) IAF, and
others.

R-100F
Embedded GPS/INS (EGI)

The
R-100F is a high performance, navigation-grade Inertial Navigation System,
based on advanced FOG technology. It integrates navigation sensors with an
embedded 16-channels CA-code GPS receiver, providing independent INS-only and
blended INS/GPS solutions. The R-100F characteristics and performance make it
suitable for a broad spectrum of INS applications, including mission control
and flight control systems. The system is qualified to military environment.

The
R-100F advantages are: usage of advanced FOG sensor technology; implementation
of three independent navigation solutions (INS Only, Blended INS/GPS, GPS
Only); steering calculations for various coordinate systems and datum; powerful
interface capabilities; low weight and volume; high reliability; and
affordability.

RADA
received a contract in 2008 from one of its strategic customers to install the
R-100F on board fighter aircraft. Serial production is scheduled to commence at
the end of 2009.

R-200M
MEMS-Based INS

The
R-200M is an extremely compact, highly reliable and affordable INS, embedding
inertial MEMS sensors, 16-channel GPS, air pressure sensors and a magnetic heading
sensor, providing multi-sensor aided navigation solution. The characteristics
and performance of the R-200M make it suitable for a broad spectrum of inertial
data applications in Unmanned Aircraft Vehicles, or UAV, and weapon systems, as
a full INS solution, as an Attitude and Heading Reference System, or AHRS, as a
data source for stabilization functions onboard combat platforms, and other
utilizations.

The
R-200M advantages are: usage of calibrated low-cost MEMS sensors, high accuracy
INS data in blended INS/GPS mode, accurate attitude data with baro aiding (for
non-GPS navigation), stable INS data during GPS outages, low weight and volume,
high reliability and affordability.

The
R-200M is being offered to UAV manufacturers and weapon producers in our
strategic markets.

Modular
Avionics and INS - MAVINS

The
MAVINS is an all-in-one, dual-redundant and compact modular avionics system,
providing a complete core-avionics solution for small-size UAVs, disposable
applications and back-up solutions for manned platforms. It integrates
MEMS-based sensors, GPS receivers, powerful processors and extended I/O
channels to facilitate platform flight control, mission management, navigation
functions and payload control applications.

The
MAVINS can perform in any combination of the following core-avionics
applications:

| |   |                                                           
| | - | ----------------------------------------------------------
| | · | Flight Control  computations and flight surfaces
 control
| |   |                                                           
| | · | Mission Computing and Management                          

18

---

---



| |   |                                                               
| | - | --------------------------------------------------------------
| | · | Inertial navigation  full solution, AHRS
 sub-functionalities
| |   |                                                               
| | · | Air Data Center (ADC)                                         
| |   |                                                               
| | · | Magnetometer                                                  
| |   |                                                               
| | · | Payloads and data-link control through extended I/O           

In
addition to its inherent, by-design high reliability, the MAVINS introduces
full dual-redundancy, thus ensuring increased mission reliability for all its
functionalities.

In
2007 we received our first order for the MAVINS from an Asian customer and
signed an agreement with IAI during 2008. Deliveries for both customers will
commence in 2009.

Inertial
Measurement Unit - IMU

The
Inertial Measurement Unit, or ISU, is a FOG-based replacement for ageing
mechanical-gyro based units, used in pods and combat vehicles. It provides
inertial data (attitude angles and accelerations) to mission/navigation
computers onboard the vehicles or pods. The system is qualified for use in
military environments and introduces high reliability and affordability
compared to its predecessors.

In
2007 we received the first order for the IMU from RAFAEL Advanced Defense
Systems, or RAFAEL. We expect to start serial deliveries of the system at the
end of 2009.

Unmanned
Aerial Vehicle Avionics

Based
on 30 years of defense electronic systems development experience, RADA has
taken its core avionics expertise a step further, offering a wide spectrum of
avionic products optimized for UAVs of all sizes.

RADAs
UAV Avionics offer:

| |                                               |                                                               
| | --------------------------------------------- | --------------------------------------------------------------
| | ·                                             | Extremely compact through modern board connectivity
 solutions
| | ·                                             | Innovative conductive cooling techniques                      
| | ·                                             | Withstanding extreme environmental conditions                 
| | ·                                             | Very high reliability                                         
| | ·                                             | Affordability                                                 
| |                                               |                                                               
| | RADAs UAV avionics product family comprises:
| |                                               |                                                               
| | ·                                             | Interface Control Processors (ICP)                            
| |                                               |                                                               
| | ·                                             | Engine Control Computers (ECC)                                
| |                                               |                                                               
| | ·                                             | Payload Management Computers (PMC)                            
| |                                               |                                                               
| | ·                                             | Payload Interface Units (PIU)                                 
| |                                               |                                                               
| | ·                                             | All-in-one Modular Avionics and INS (MAVINS)                  
| |                                               |                                                               
| | ·                                             | Electrical Power Management Units (EPMU)                      

RADAs
MOTS UAV avionics solutions are operational onboard tactical and medium
altitude long endurance and high altitude long endurance aerial vehicles.
RADAs extremely-compact MAVINS provides a complete core-avionics single unit
solution for miniature aerial vehicles. Our solutions can be easily adapted to
specific built-to-spec requirements for all types of Unmanned Aerial Systems,
or UAS.

19

---

---



RADAs
UAV avionics solutions are provided to world leading UAS manufacturers, and are
supported by our globally-available, dedicated, and professional technical and
maintenance services.

There
are up to 26 units of all of the abovementioned units installed onboard IAIs
next-generation UAV. Serial production of these units is expected to commence
during 2009.

Avionics
Solutions

RADA,
a developer and manufacturer of core avionics systems for over 30 years,
currently offers a wide spectrum of military avionics systems designed for
integration in new and upgraded aircraft and unmanned systems worldwide.

RADA offers the following solutions:

| |   |                                                
| | - | -----------------------------------------------
| | · | Complete Integrated Avionics Upgrade Suits     
| |   |                                                
| | · | Mission and Display Computers                  
| |   |                                                
| | · | Weapon Management Systems                      
| |   |                                                
| | · | Data Interface and Processing Computers        
| |   |                                                
| | · | Mission Data Recorders and Debriefing Solutions
| |   |                                                
| | · | HUD Video Cameras                              
| |   |                                                
| | · | Inertial Navigation Systems                    
| |   |                                                
| | · | Air Data Sensors                               

RADAs
avionics solutions range from fully integrated avionics suites, MOTS core
avionics subsystems, to tailor-made built-to-spec units, backed by our teams
of experts dedicated to providing global technical and maintenance support.

Our
avionics systems are easily adapted to Western, Eastern, and indigenous-origin
platforms of all kinds. We provide our avionic expertise as team members and
subcontractors, and as prime contractors for avionic upgrades.

Our
avionics are currently onboard the F-16, F-15, A-4, Jaguar, MiG-27, Su-30MKI,
Dhruv Helicopter, and a growing number of UAVs.

RADAs
avionics solutions are accepted by leading air forces and prime integrators
worldwide, such as Lockheed Martin, Boeing, General Electric, HAL, Embraer,
IAF, IAI, Rafael and many others.

Integrated
Avionics Upgrade Suit

We
conducted an avionics upgrade program of all of the avionics systems of the A-4
Skyhawk fleet of the IAF. The aging avionics of the A-4 aircraft were
completely replaced by a new, upgraded avionics package designed by us. Our new
avionics package replaced the legacy weapon delivery and navigation system of
the aircraft with a new state-of-the-art system that significantly improved the
capabilities of the A-4, increased its reliability and provided advanced
training capabilities. The upgrade package includes an INS, GPS, HUD, HUD
Camera, central Mission and Display Computer, and a control and display unit.
The A-4 upgrade program was completed in 2005.

We
believe that this program places RADA among the few companies worldwide that
have performed a complete aircraft avionics system upgrade. The A-4 avionics
package provides, at a very affordable price, a complete and modern avionics
package. We are actively marketing this solution to several international
customers.

20

---

---



Commercial
Aviation Test Stations - CATSTM

CATS
is a family of multi-purpose, computerized automatic test equipment that meets
the specific needs of airlines and third party maintenance companies. The CATS
stations, which were developed in the 90s, test a variety of electronic units
installed onboard commercial aircraft, incorporating tools for testing, troubleshooting,
and performing diagnostic procedures. We are continuing to support our CATS
customers by providing maintenance and repair services through product support
agreements.

Test and
Repair Services

We
operate a test and repair shop based on the use of our CATS 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 testers and test program set services.

Sales
and Marketing

Strategy

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

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Maintaining our business focus on electronic systems
 for the defense market;                                                                                                                                                                                                                                                                                                                                         
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Expanding our product offerings by adding new
 applications to our existing product lines and by adapting our products to
 land systems;                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Expanding our customer base by including our
 products in solutions and integrated systems for airborne and land vehicles;                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Establishing marketing channels with system
 integrators and major manufacturers such as The Boeing Company, Lockheed
 Martin Aeronautics, GE Aviation, IAI, RAFAEL, HAL, Embraer and others; and                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | · | Expanding our products base and marketing activities
 to large potential markets, especially in the land systems and the UAVs
 segments, thru identification of current and future applications that may
 become affordable by the injection of advanced COTS technologies that offer
 superior performance and/or significant price savings, and developing new
 marketing channels aimed directly at these segments.

Strategic
Relationships and Customers

As
part of our strategy, we have entered into a number of strategic relationships
with Lockheed Martin Aeronautics, GE Aviation, Israel Aerospace Industries,
Hindustan Aeronautics Ltd., Embraer and Rafael Advanced Defense Systems Ltd. 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 cooperation with GE Aviation, we are supplying the data acquisition system
that includes the advanced data acquisition unit which is manufactured in our
Beit Shean production facility. In 2006 Lockheed Martin chose the GE Aviation
- RADA team to supply our DVDR and GDS to its U.S. Sponsored F-16 Foreign
Military Sales, or FMS, and upgrades.

GEAviation. GE Aviation is a worldwide
leader in avionics systems for fighter and commercial aircraft. In October
2003, we signed a teaming agreement. The teaming agreement establishes
cooperation in connection with the products for the PM-V Program and its
derivatives. In addition, the agreement details commitments made by GE to
purchase production services from RADA. During 2004, we expanded our
cooperation to include our newly developed DVDR and have jointly offered this
advanced product to potential customers. In late 2006, we entered into a
contract with GE for the adaptation and production of the DVDR in the U.S., for
various platforms, including the U.S. NAVY T-45 and for foreign military sales
of F-16. Together with GE Avionics we are currently exploring several
additional opportunities in the U.S. for this product. In 2007, and after
fruitful and successful cooperation in recent years, the teaming agreement was
extended by three more years.

21

---

---



Israel Aircraft Industries. We are
actively supplying avionics and test equipment to four different divisions of
IAI. In particular, the Lahav and Malat divisions of IAI, major aircraft
integrators, require our services as an avionics and test equipment provider.

Hindustan Aeronautics Ltd. HAL is the
major aerospace integrator in India. We are cooperating with four divisions of
HAL, and are supplying DVDRs, HCVCs, debriefing stations, support equipment and
other services to HAL in growing figures.

Embraer. The Military Aircraft Division of
the Brazilian world-known aircraft manufacturer is gradually becoming a
strategic customer for RADA as a result of our marketing efforts and
applicability of our product range (HCVC, DVDR, INS, and general avionics
solutions).

RAFAEL Advanced Defense Systems Ltd.
RAFAEL is a world leader in the development and supply of missiles, smart
weapons and pods of various types. RAFAEL has gradually become a strategic
customer for us as a result of our development and production of a few advanced
built-to-spec products in recent years to both divisions of RAFAEL.

Marketing

Our
chairman, Herzle Bodinger, our chief executive officer, Zvi Alon, and our vice
president of Marketing & Sales, Dov Sella, lead our business development
and marketing efforts. We currently employ four additional persons in marketing
of our core business products. Our chief technology officer and our engineering
department support our marketing efforts with respect to product pricing,
technical and management proposals preparations, and technical demonstrations.
In addition, we have sales consultants, agents and representatives in Europe,
South America, and Asia who receive commissions for sales affected through
them.

The
Israeli Ministry of Defense has historically supported and continues to support
our marketing efforts through its Defense Export Assistance branch, or SIBAT,
and various projects for the Israeli Defense Forces and its related divisions.
The Israeli Ministry of Industry and Commerce supports our marketing efforts
through its Industrial Cooperation Authority by the exploitation of offset
commitments by Lockheed Martin Aerospace and the Boeing Company to the State
of Israel. There is no guarantee that this kind of assistance will be available
to us in the future.

Fixed
Price Contracts

The
vast majority of our contracts are 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 losses. This risk can be particularly significant under a
fixed-price contract for research and development involving new technologies.

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.

Principal
Customers

Generally,
we complete a few major 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 in 2007 and
2008:

|                                |  |      |   |      |    |   | 
|------------------------------- |  | ---- | - | ---- | -- | - | 
|                                |  | 2008 |   | 2007 |   
|                                |  |      |   |      |   
|                               
|GE Aviation                     |  | 16   | % |      | 17 | % | 
|Israeli Ministry of Defense     |  | 15   | % |      | 5  | % | 
|Israel Aerospace Industries     |  | 11   | % |      | 17 | % | 
|Hindustan Aeronautics
 Ltd      |  | 29   | % |      | 14 | % | 
|RAFAEL Advanced Defense Systems |  | 9    | % |      | 10 | % | 
|                                |  |      |   |      |    |   | 

22

---

---



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. The Israeli Government or any other
government may discontinue funding the purchase of our products over the long
term.

Markets

We
sell our products to various air forces and companies worldwide. The following
table presents our revenues by geographical market for the periods indicated:

|                               |  |      |   |      |    |      |  |    |   | 
|------------------------------ |  | ---- | - | ---- | -- | ---- |  | -- | - | 
|                               |  | 2008 |   | 2007 |    | 2006 | 
|                               |  |      |   |      |    |      | 
|                              
|Israel                         |  | 45   | % |      | 39 | %    |  | 33 | % | 
|Asia (mainly India)            |  | 32   | % |      | 21 | %    |  | 11 | % | 
|North America                  |  | 21   | % |      | 32 | %    |  | 48 | % | 
|Europe                         |  | 1    | % |      | 5  | %    |  | 6  | % | 
|Other (mainly Central America) |  | 1    | % |      | 3  | %    |  | 2  | % | 

Competition

The
markets for our products are highly competitive. Our principal competitors in
the avionics and military electronics market are GE, Rockwell Collins,
Honeywell, Elbit Systems, Israel Aircraft Industries Ltd., Goodrich (thru the
acquisition of TEAC Aerospace), the Zodiac group (thru the acquisition of
Enertec), Astronautics C.A., AITech Defense Systems, and others. 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 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 marketing license to initiate a sales proposal and ultimately an
export license for each product delivery. We may not obtain marketing or export
licenses in the future and the Israeli governmental policy with respect to
military exports may be altered. However, to date we have not encountered any
significant difficulties in obtaining necessary licenses for sale of our
products.

23

---

---



Proprietary
Information

We
hold a patent for our ACE system in Israel and the U.S., U.S. Patent No.
5467274. 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 in 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 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
production plant is 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 structure allows us
flexibility and versatility.

We
place great emphasis on quality control in our production processes. 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 manufacturing
of the products. Our quality management system is certified by the Standards
Institute of Israel, or SII, pursuant to ISO 9001:2000 for hardware design and
production and ISO 90003:2004 for software design. SII performs quality system
audits twice a year and various customers perform audits four to six times a
year. Our environmental management
system is certified by SII to ISO 14001 Our quality management system is
certified also according to AS-9100B, a quality management system for aerospace
requirements.

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 a
typical periods between one year to year and a half, following delivery of a
product to a 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 U.S. Some 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 2008, Beijing Huarui Aircraft Components
Maintenance and Services Co., an 80% owned subsidiary that is based in China
that is engaged in aircraft repair services.

|   |                               
|-- | ------------------------------
|D. | Property, Plants and Equipment

We
own a 30,000 square feet building in Beit Shean, Israel. The building, which
includes manufacturing facilities and warehouse space, 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 believe that we will be able to increase the
number of workers or shifts at the plant, or use more subcontractors.

24

---

---



Our
executive offices and research and development facilities are located in a
17,200 square feet office facility in Netanya, Israel. The lease for this
facility expires in January 2010. The aggregate annual rent for our offices in
Israel was approximately $268,000 in 2008.

Our
Chinese subsidiary, CACS, conducts its business in an approximately 16,000
square feet 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. 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. We have reached an understanding with our Chinese partner pursuant
to which the Chinese partner will surrender its shares in CACS in consideration
for retaining title to the land and the building. The agreement between the
parties has not been finalized yet and it is subject to approval from the
various Chinese regulatory authorities and other legal procedures.

|         |                          
|-------- | -------------------------
|ITEM 4A. | UNRESOLVED STAFF COMMENTS

Not
applicable.

|        |                                              
|------- | ---------------------------------------------
|ITEM 5. | OPERATING AND FINANCIAL REVIEW AND
 PROSPECTS

|   |                  
|-- | -----------------
|A. | Operating Results

The
following discussion of our results of operations should be read together with
our consolidated financial statements and the related notes, which appear
elsewhere in this annual report. The following discussion contains
forward-looking statements that reflect our current plans, estimates and
beliefs and involve risks and uncertainties. Our actual results may differ
materially from those discussed in the forward-looking statements. Factors that
could cause or contribute to such differences include those discussed below and
elsewhere in this annual report.

Overview

We
develop, manufacture and sell defense electronics (solid-state recorders,
computers, inertial navigation systems, and alike) and their supporting ground
systems (automated testers, data debriefing stations). We also provide test and
repair services using our CATS testers and test program sets for commercial
aviation electronic systems through our Chinese subsidiary.

General

Our consolidated financial statements appearing in
this annual report are prepared in U.S. dollars and in accordance with
generally accepted accounting principles in the United States, or U.S. GAAP.
All references in this annual report to dollars or $ are to U.S. dollars
and all references in this annual report to NIS are to New Israeli Shekels.
Transactions and balances originally denominated in dollars are presented at
their original amounts. Transactions and balances in other currencies are
remeasured into dollars in accordance with the principles set forth in
Financial Accounting Standards Board Statement No. 52. The majority of our
sales are made outside Israel and a substantial part of them are in dollars. In
addition, a substantial portion of our costs are incurred in dollars. Since the
dollar is the primary currency of the economic environment in which we operate,
the dollar is our functional and reporting currency and, accordingly, monetary
accounts maintained in currencies other than the dollar are remeasured using
the foreign exchange rate at the balance sheet date. Operational accounts and
non monetary balance sheet accounts are measured and recorded at the exchange
rate in effect at the date of the transaction. All monetary balance sheet accounts
have been remeasured using the exchange rates in effect at the balance sheet
date. Statement of operations amounts have been remeasured using the average
exchange rate for the period. The financial statements of the Companys foreign
subsidiary, whose functional currency is not the U.S. dollar, have been
translated into dollars. All balance sheet amounts have been translated using
the exchange rates in effect at balance sheet date. Statement of operation
amounts have been translated using the average exchange rate prevailing during
the year. Such translation adjustments are reported as a component of
accumulated other comprehensive income (loss) in shareholders equity.

25

---

---



On February 14, 2007, we effected a 3
to 1 reverse stock split with respect to our ordinary shares. All share and per
share amounts in this report have been restated for all prior periods to
reflect the reverse stock split.

Discussion
of Critical Accounting Policies and Estimations

Our
critical accounting policies, including the assumptions and judgments
underlying them, are disclosed in the notes to our consolidated financial
statements. These policies have been consistently applied in all material
respects. While the estimates and judgments associated with the application of
these policies may be affected by different assumptions or conditions, we
believe the estimates and judgments associated with the reported amounts are
appropriate in the circumstances.

We
believe the following accounting policies are the most critical in fully
understanding and evaluating our financial condition and results of our
operations under U.S. generally accepted accounting principles.

Revenue
Recognition. Our revenues mainly derived from sales of defense
electronics (solid-state recorders, computers, inertial navigation systems, and
alike) and their supporting ground systems (automated testers, data debriefing
stations). In addition, we lease ATE and provide manufacturing, development and
product support services. 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 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 we can objectively and reliably demonstrate that the criteria
specified in the acceptance provisions are satisfied.

Revenues
from long-term fixed price contracts are recognized by the
percentage-of-completion method in accordance with the Input Method. We apply
this method when the total of the costs and revenues of the contract can
reasonably be estimated. 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. 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 determined by management, on a cumulative catch-up basis.
Revenues under long-term fixed-price contracts that involve both development
and production are recorded using the cost-to-cost method (development phase)
and units-of-delivery method (production phase) as applicable to each phase of
the contract, as the basis to measure progress toward completion.

Revenues
from services are recognized when the service is performed. Revenues under operating
leases of equipment are recognized ratably over the lease period.

Revenues
from certain arrangements may include multiple elements within a single
contract. Generally, our multiple element arrangements are accounted for as
separate units of accounting when it is possible to determine objective and
reliable evidence of fair value of the undelivered elements in order to
separate the fees among the elements. Revenues are recognized when the element
is delivered and all other criteria for revenue recognition are met.

Revenues
from software arrangements are recognized when persuasive evidence of an
arrangement exists, delivery of the product has occurred, the fee is fixed or
determinable, and collectability is probable. Arrangements with payment terms
extending beyond customary payment terms are considered not to be fixed or
determinable. If the fee is considered not to be fixed or determinable, revenue
is deferred and recognized when payments become due from the customer or are
actually collected when collectability is not probable, providing that all
other revenue recognition criteria have been met.

26

---

---



Intangible
Assets. Costs of producing our TPS software library, which can be
integrated with our CATS test station, incurred subsequent to achieving
technological feasibility, were capitalized, and are amortized by the greater
of the amount computed using the: (i) ratio that current gross revenues from
sales of the software to the total of current and anticipated future gross
revenues from sales of that software, or (ii) the straight-line method over the
estimated useful life of the product. We assess 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 products sold. An intangible
asset related to customer relationships has been recorded as a result of our
acquisition of certain assets and liabilities of Vectop, in February 2005, and
is being amortized over the expected useful life of five years. For the year
ended December 31, 2008, no impairment was required.

Impairment
of Long-Lived Assets.We are required to assess the impairment of long-lived
assets whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. We assess the impairment of our assets based on a
number of factors, including any significant changes in the manner of our use
of the respective assets or the strategy of our overall business and
significant negative industry or economic trends. Upon determination that the
carrying value of a long-lived asset may not be recoverable, based upon a
comparison of expected undiscounted future cash flows to the carrying amount of
the asset, an impairment charge is recorded in the amount of the carrying value
of the asset exceeds its fair value. For the year ended December 31, 2008, no
impairment was required.

Impairment
of Goodwill: We are required to assess the impairment of goodwill at
least annually (or more frequently if impairment indicators arise. SFAS No. 142
prescribes a two-phase process for impairment testing of goodwill. The first
phase screens for impairment while the second phase (if necessary) measures
impairment. In the first phase of impairment testing, goodwill attributable to
each of the reporting units is tested for impairment by comparing the fair
value of each reporting unit with its carrying value. In our case, the Company
has only one reporting unit. The Company determines its fair value according to
the Companys market capitalization and the goodwill was tested for impairment
by comparing the fair market value with its carrying amount. As of December 31,
2008, no impairment losses have been identified. As a result, step two was not
required.

Share-Based
Compensation.Effective January 1, 2006, we account for stock-based
compensation in accordance with FASB Statement No. 123 (Revised 2004),
Share-Based Payment, or SFAS 123(R), applying the modified prospective
method, and with Securities and Exchange Commission Staff Accounting Bulletin
No. 107, Share-Based Payment, or SAB 107. In accordance with SFAS 123(R), we
measure the compensation cost associated with share-based payment transactions
based on the fair value at the grant date of the options. The value of the
portion of the award that is ultimately expected to vest is recognized as an
expense over the requisite service periods, according to the straight-line
method.

For
employee option grants, the fair value of each option granted is estimated on
the date of grant using the Black-Scholes option-pricing model with weighted
average assumptions relating to the dividend yield, expected volatility, risk
free interest rate and expected life of the option by the employee, in
accordance with SFAS 123 (R) and SAB 107. Our assumptions with respect to these
components will impact the compensation award costs and amounts expensed in
each period and consequently the results of our operations. For the year ended
December 31, 2008 we incurred share-based compensation expense of $131,000. As
of December 31, 2008, there was $151,000 of total unrecognized compensation
cost related to non-vested share-based compensation arrangements granted under
our stock option plans, which are expected to be recognized over a
weighted-average period of two year.

Provision
for Litigation.We were engaged in legal actions with few of our
former officers concerning, among other things, the repayment of loans that
were granted to them by RADA and allegedly forgiven by our company In March
2008, a counter claim of the former officer was dismissed, our claim was
allowed almost in full and his appeal was denied resulting in such employees
obligation of repay the outstanding loan amount. In addition, in February 2009,
the Regional Labor Court in Tel-Aviv denied substantially all of the claims
filed against us by our former CEO. Furthermore the court accepted our claim
and ordered that the loan we granted to him be repaid. We recorded a provision
for the loans receivable in the amount that we believe is sufficient to reflect
the recoverability of the asset, based on managements estimation. In addition,
we have several additional legal proceedings outstanding. We have recorded
provisions for litigation for claims that were estimable and for which there is
a high probability that we will be held responsible based on our legal
consultants opinions and managements estimations. If our estimations are
wrong, we may incur additional litigation expenses.

27

---

---



Accounting
for income taxes. On January 1, 2007, we adopted FIN 48, Accounting for
Uncertainty in Income Taxes, which contains a two-step approach to recognizing
and measuring uncertain tax positions accounted for in accordance with
Statement 109, Accounting for Income Taxes. The first step is to evaluate the
tax position taken or expected to be taken in a tax return by determining if
the weight of available evidence indicates that it is more likely than not
that, on an evaluation of the technical merits, the tax position will be
sustained on audit, including resolution of any related appeals or litigation
processes. The second step is to measure the tax benefit as the largest amount
that is more than 50% likely to be realized upon ultimate settlement. Prior to
January 1, 2007, we estimated our uncertain income tax obligations in
accordance with SFAS No. 109, Accounting for Income Taxes, or SFAS
No. 109, and SFAS No. 5 Accounting for Contingencies, or SFAS
No. 5. No provision was recorded as a result of the adoption of FIN 48 and
for the years ended December 31, 2007 and 2008.

The
Company has provided a valuation allowance in respect to the deferred tax assets
resulting from operating loss carryforwards and other temporary differences.
Our management currently believes that since our company has a history of
losses it is more likely than not that the deferred tax regarding the loss
carryforwards and other temporary differences will not be realized in the
foreseeable future.

Significant
Expenses

Cost of
Revenues. Cost of revenues consist primarily of manufacturing costs,
depreciation of fixed assets, project development costs, amortization of capitalized
software and inventories write-downs.

Marketing,
Selling, General and Administrative Expenses. Marketing and selling
expenses consist primarily of expenses for sales and marketing personnel, sales
commissions, marketing activities, public relations, promotional materials,
amortization of customer relationship assets, travel expenses and trade show
exhibit expenses. General and administrative expenses consist primarily of
salaries and related expenses for executive, accounting, administrative
personnel, professional fees, provisions for doubtful accounts, and other
general corporate expenses.

Research and Development Expenses.Research
and Development Expenses consist primarily salary expenses for Research and
Development personnel, use of subcontractors and other costs incurred in the
process of developing product masters.

Financial Income (Expenses), Net.
Financial expenses consist of interest and bank expenses, interest on
convertible note and loans, amortization expenses of discount on convertible
note, deferred charges and currency remeasurement losses. Financial income
consists of interest on cash and cash equivalent balances and currency
remeasurement gains.

Recent
Accounting Pronouncements

In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business
Combinations, or SFAS 141R. SFAS 141R establishes principles and
requirements for how an acquirer recognizes and measures in its financial
statements the identifiable assets acquired, the liabilities assumed, any non
controlling interest in the acquiree and the goodwill acquired. SFAS 141R
also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. SFAS 141R is effective
for fiscal years beginning after December 15, 2008. Earlier adoption is
prohibited. We do not expect the adoption of SFAS 141R will have material
impact on our consolidated results of operations and financial condition.

In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51, or SFAS
No. 160. SFAS No. 160 establishes accounting and reporting standards
that require that the ownership interests in subsidiaries held by parties other
than the parent be clearly identified, labeled, and presented in the
consolidated statement of financial position within equity, but separate from
the parents equity; the amount of consolidated net income attributable to the
parent and to the noncontrolling interest be clearly identified and presented
on the face of the consolidated statement of income; and changes in a parents
ownership interest while the parent retains its controlling financial interest
in its subsidiary be accounted for consistently. SFAS No. 160 is effective
for fiscal years and interim periods within those fiscal years, beginning on or
after December 15, 2008. We do not expect the adoption of SFAS No. 160
will have any significant impact on our consolidated financial statement.

28

---

---



In February
2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
Date of FASB Statement No. 157 (FSP FAS 157-2), to delay the effective date
of FASB Statement 157 for one year for certain nonfinancial assets and
nonfinancial liabilities, excluding those that are recognized or disclosed in
financial statements at fair value on a recurring basis (that is, at least
annually). For purposes of applying the FSP FAS 157-2, nonfinancial assets and
nonfinancial liabilities include all assets and liabilities other than those
meeting the definition of a financial asset or a financial liability in FASB
Statement 159. FSP FAS 157-2 defers the effective date of Statement 157 to
fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years for items within the scope of this FSP FAS 157-2. The
Company does not expect the adoption of FAS 157 with respect to certain
nonfinancial assets and nonfinancial liabilities that are under the scope of
FSP FAS 157-2 to have a material impact on its financial position, results of
operations or cash flows.

In April 2008,
the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP FAS 142-3 is
effective for fiscal years beginning after December 15, 2008 and early
adoption is prohibited. The Company does not expect that the adoption of
FAS 142-3 will have material impact on the Companys consolidated
financial statement.

In
June 2008, the FASB issued EITF No. 07-5 Determining whether an Instrument (or
Embedded Feature) is indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5
is effective for financial statements issued for fiscal years beginning after
December 15, 2008, and interim periods within those fiscal years. Early application
is not permitted. Paragraph 11(a) of SFAS No. 133 specifies that a contract
that would otherwise meet the definition of a derivative but is both (a)
indexed to the Companys own stock and (b) classified in stockholders equity
in the statement of financial position would not be considered a derivative
financial instrument. EITF 07-5 provides a new two-step model to be applied in
determining whether a financial instrument or an embedded feature is indexed to
an issuers own stock and thus able to qualify for the SFAS 133 paragraph 11(a)
scope exception. The Company believes adopting this statement will have no
material impact on the consolidated financial statements

Year Ended December 31, 2008 Compared with Year Ended
December 31, 2007

Revenues.
Our revenues increased 27.4% to $17.9 million in 2008 from $14.0 million in
2007 mainly due to traditional and off-the-shelf products. Based on our current
estimates of market demand, we expect that our revenues in 2009 will continue
to increase from sales of our off-the-shelf products. However, our revenues are
subject to government budgets and we cannot assure that the worsening economic
climate will not result in the cancellation or suspension of certain projects
or programs.

Cost
of Revenues. Cost of revenues increased 27.4% to $13.7
million in 2008 from $10.7 million in 2007. The increase is mainly due to the
increase in revenues. In 2009, we expect that our cost of revenues as a
percentage of revenues will be consistent with 2008.

Gross
Profit. Our gross profit increased 26% to $4.2 million
in 2008 from $3.3 million in 2007. Our profit margin was approximately 24% in
2008 and in 2007. In 2009, we expect that our gross margin will slightly
increase due to more sales of our off-the-shelf products.

Research
and Development Expenses. Research and development
expenses increased 117 % to approximately $686,000 in 2008 from $324,000 in
2007. The increase is mainly due to a development project which began in 2007.
In 2009, we expect that our research and development expense will continue to
increase, but at a lower rate.

Marketing, Selling, General and Administrative
Expenses. Marketing, selling, general and administrative expenses
were approximately $3.4 million in 2008 and in 2007. We expect that marketing, selling, general and administrative
expenses will remain at the same level in 2009.

Financial
Income (Expenses), Net. Our financial expenses, net,
were $668,000 in 2008 compared to $629,000 in 2007. Our interest expense, net,
was $220,000 in 2008 compared with $203,000 in 2007. Our amortization expense
on a convertible note in 2008 was $473,000 as compared to $193,000 of
amortization expense in 2007. Foreign
currency exchange differences resulted in income of $190,000 in 2008 and
expenses of $181,000 in 2007, mainly due to changes in the NIS/dollar exchange
rate.

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

Revenues.
Our revenues increased 7.7% to $14.0 million in 2007 from $13.0 million in
2006.

29

---

---



Cost
of Revenues. Cost of revenues decreased 3% to $10.7 million in 2007 from $11.0
million in 2006. The decrease is mainly due to the decreased revenues from
development programs which have lower profit margins.

Gross Profit.
Our gross profit increased 65% to approximately $3.4 million in 2007 from $2.0
million in 2006. Our profit margin increased to 24% in 2007 from 16% in 2006.
The improved margin reflects the mix between our traditional and our off the
shelf product that have higher margins and which accounted for a greater
percentage of our 2007 sales.

Research and Development Expenses.
Research and development expenses were approximately $324,000 in 2007 compared
to $181,000 in 2006.

Marketing, Selling, General and Administrative
Expenses. Marketing, selling, general and administrative expenses
were approximately $3.4 million in 2007 compared to $3.1 million in 2006.

Financial
Income (Expenses), Net. Our financial expenses, net, were $629,000
in 2007 compared to $775,000 in 2006. Our decreased financial expenses in 2007
was attributable primarily to a lower level of borrowings on which interest was
payable.

Our Location in Israel

We
are incorporated under the laws of the State of Israel, and our principal
executive offices and principal manufacture, research and development
facilities are located in Israel. See Item 3D Key Information  Risk Factors 
Risks Relating to Our Operations in Israel for a description of governmental,
economic, fiscal, monetary or political polices or factors that have materially
affected or could materially affect our operations.

Corporate Tax Rate

Israeli
companies are generally subject to income tax at the corporate tax rate. The
applicable rate for 2008 of 27% will be reduced to 26% in 2009 and will be
further reduced to 25% in 2010 and thereafter.

As
of December 31, 2008, our carry forward net operating loss for Israeli tax
purposes was approximately $59.5 million including a carry forward capital loss
amounting to approximately $3.6 million.

Impact of Currency Fluctuation and of
Inflation

A
significant portion of the cost of our Israeli operations, mainly personnel and
facility-related, is incurred in NIS. Therefore, our NIS related costs, as
expressed in U.S. dollars, are influenced by the exchange rate between the U.S.
dollar and the NIS. In addition, if the rate of inflation in Israel will exceed
the rate of devaluation of the NIS in relation to the U.S. dollar, or if the
timing of such devaluations were to lag considerably behind inflation, our cost
as expressed in U.S. dollars may increase. NIS linked balance sheet items, may
also create foreign exchange gains or losses, depending upon the relative
dollar values of the NIS at the beginning and end of the reporting period,
affecting our net income and earnings per share. Although we may use hedging
techniques, we may not be able to eliminate the effects of currency
fluctuations. Thus, exchange rate fluctuations could have a material adverse
impact on our operating results and share price. The caption Financial
expenses, net in our consolidated financial statements includes the impact of
these factors as well as traditional interest income or expense. See Note 13 to
our consolidated financial statements.

The
following table sets forth, for the periods indicated, (i) the devaluation of
the NIS against the most important currency for our business, the U.S. dollar,
and (ii) inflation as reflected in changes in the Israeli consumer price index.

|                                    |  |                         |    |      |     |      |  |      |    |      |      |    |  |      |   
|----------------------------------- |  | ----------------------- | -- | ---- | --- | ---- |  | ---- | -- | ---- | ---- | -- |  | ---- | --
|                                    |  | Year Ended December 31,
|                                    |  |                        
|                                    |  | 2004                    |    | 2005 |     | 2006 |  | 2007 |    | 2008
|                                    |  |                         |    |      |     |      |  |      |    |     
|                                    |  |                         |    |      |     |      |  |      |    |      |      |    |  |      |   
|Devaluation
 of NIS vs. U.S. Dollar |  | (1.6                    | )% |      | 6.8 | %    |  | (8.2 | )% |      | (8.9 | )% |  | (1.1 | )%
|Israeli
 Consumer Price Index       |  | 1.2                     | %  |      | 2.4 | %    |  | (0.1 | )% |      | 3.4  | %  |  | 3.8  | % 

Because
exchange rates between the NIS and the dollar fluctuate continuously, exchange
rate fluctuations, particularly larger periodic devaluations, may have an
impact on our profitability and period-to-period comparisons of our results. We
cannot assure you that in the future our results of operations may not be
materially adversely affected by currency fluctuations.

30

---

---



B.      Liquidity
and Capital Resources

We
have historically met our financial requirements primarily through cash
generated by operations, funds generated by our public offering in 1985,
private placements of our ordinary shares and issuance of debt securities,
loans from our principal shareholders, short-term loans and credit facilities
from Bank Hapoalim B.M., Bank Leumi Le-Israel B.M. and the Israeli branch of
State Bank of India, or the Banks, research and development grants from the
Government of Israel and the Israel-U.S. Binational Industrial Research and
Development Foundation, and investment grants for approved enterprise programs
and marketing grants from the Government of Israel.

On
July 12, 2004 we entered into a stock purchase agreement with certain
institutional investors, pursuant to which such investors purchased 600,000 of
our ordinary shares at a price of $4.80 per share, together with additional
investment rights to purchase up to an aggregate of an additional 366,667
ordinary shares at an exercise price of $6.30 per share, for a period of 24
months from August 11, 2004. In addition, we issued to such investors an
aggregate of $3.0 million principal amount of convertible notes. Such
convertible notes bore interest at a rate of six month LIBOR plus 2.5% and were
convertible at the investors option at a conversion price of $6.30. The
investors also received warrants exercisable for a period of five years
beginning on January 12, 2005 to purchase up to an aggregate of 312,500
ordinary shares at an exercise price of $7.50 per share. Such convertible notes
matured on July 12, 2007. We repaid the $3.0 million of convertible notes and
the balance of the interest accrued thereon, in July 2007 utilizing funds
obtained from a loan from Mr. Yeung, our controlling shareholder, we issued Mr
Yeung a convertible note and warrants, as described below.

On
April 6, 2005 we entered into a stock purchase agreement with the same
institutional investors, pursuant to which such investors purchased 321,978 of
our ordinary shares. In addition, we issued the investors new warrants to
purchase an additional 625,000 of our ordinary shares at a purchase price of
$6.30 per share for a period of 24 months. These warrants expired on April 2007
without being exercised. As part of this transaction the investors exercised
303,022 additional investment rights for the purchase of 303,022 ordinary
shares that were issued to them in the July 12, 2004 transaction. As a result,
we received proceeds of approximately $3.0 million.

On
June 29, 2007 we entered into an amendment and exchange agreement with certain
shareholders who participated in a private placement of our shares in June
2002. Pursuant to such agreement we received a loan in the principal aggregate
amount of $400,000 for a period of three years which bears interest at a rate
of 8% per annum, paid in arrears on a quarterly basis. In consideration for
such loan our audit committee and board of directors approved the extension
until June 30, 2010 of warrants to purchase up to an aggregate of 155,782
ordinary shares that were issued to these shareholders as part of the June 2002
private placement, and the re-pricing of the exercise price of warrants to
purchase up to an aggregate of 606,803 ordinary shares issued to some of the
investors in the 2002 private placement, to $1.88 per share which were also
extended until June 30, 2010.

On
December 10, 2007 we issued $3.0 million principal amount of convertible notes
to Mr. Yeung, our controlling shareholder. The convertible notes will mature on
December 10, 2010, bear interest at a rate of six month LIBOR plus 3.5% and are
convertible into ordinary shares at a conversion price of $2.09. Mr. Yeung also
received warrants exercisable for a period of five years beginning on December
10, 2007 to purchase up to an aggregate of 1,578,947 ordinary shares at an
exercise price of $2.375 per share.

In
January 2008, the Company repaid $300,000 of the $400,000 loan received in June
2007 in consideration for 152,765 ordinary shares.

In
July 2008, the Company entered into a $1.5 million loan agreement with a
company controlled by Mr. Yeung, our controlling shareholder, in order to
facilitate further development of our inertial navigation system technology.
The loan was drawn down in July ($1.0 million) and in December 2008 ($0.5
million). The loan bears interest of 3% + LIBOR payable at the beginning of
every quarter. Principal payments equal to U.S. $90,000 are payable in six equal
installments commencing July 1, 2009 and the remaining principal amount will be
payable in eight equal installments, commencing April 1, 2011. Subject to the
approval of the IMOD, we will grant the lender a non-exclusive license to use
the technology developed for non-military/commercial purposes. The non-exclusive
license will automatically convert into an exclusive license should we default
on any of our obligations under the loan agreement. We have also agreed in the
future, subject to the approval of several governmental authorities including
the IMOD, to establish a joint venture with Mr. Yeung or an affiliated entity
that will be engaged in the production and marketing of such non-military/commercial products and technology.

31

---

---



As
of December 31, 2008, we owed our Banks $33,000 under long-term loans, and
$132,000 under credit facilities. In addition, the Banks provided $2.5 million
of guarantees on our behalf to our customers and suppliers in the ordinary
course of business. The guarantees are secured by a first priority floating
charge on all of our assets and by a fixed charge on goodwill (intangible
assets), unpaid share capital and insurance rights (rights to proceeds on
insured assets in the event of loss). Our agreements with the Banks prohibit us
from selling or otherwise transferring any assets except in the ordinary course
of business, from placing a lien on our assets without the Banks consent and
from declaring dividends to our shareholders. In addition, the Israeli Tax
Authority has a first priority fixed charge on our fixed assets in the Beit
Shean facility. This charge will be released when the litigation between us
and our former chief executive officer is resolved.

We
had capital expenditures of $498,000 in 2008 and $353,000 in 2007. We currently
do not have any significant capital spending or purchase commitments.

Cash Flows

The
following table summarizes our cash flows for the periods presented:

|                                                              |  |                             |   |      |      |      |  |       |  
|------------------------------------------------------------- |  | --------------------------- | - | ---- | ---- | ---- |  | ----- | -
|                                                              |  | Year ended December 31,    
|                                                              |  |                            
|                                                              |  | 2006                        |   | 2007 |      | 2008
|                                                              |  |                             |   |      |      |     
|                                                              |  | (U.S. dollars in thousands)
|                                                              |  |                             |   |      |      |      |  |       |  
|Net cash
 provided by (used in) operating activities          |  | 717                         |   |      | (118 | )    |  | (316  | )
|Net cash
 provided by (used in) investing activities          |  | 71                          |   |      | (226 | )    |  | (927  | )
|Net cash
 provided by (used in) financing activities          |  | (148                        | ) |      | 189  |      |  | 1,333 |  
|Effect of
 exchange rate changes on cash and cash equivalents |  |                            |   |      |     |      |  | 39    |  
|Net increase
 (decrease) in cash and cash equivalents         |  | 640                         |   |      | (155 | )    |  | 129   |  
|Cash and
 cash equivalents at beginning of the year           |  | 350                         |   |      | 990  |      |  | 835   |  
|Cash and
 cash equivalents at end of the year                 |  | 990                         |   |      | 835  |      |  | 964   |  

Net
cash used in operating activities was $316,000 in 2008. This was primarily due
to increase in inventories of $2.2 million due to customers orders backlog for
2009, an increase in costs and estimated earnings in excess of billings, net of
$1.6 million and increase in other accounts receivable and prepaid expenses of
$250,000. This was offset by an increase in trade receivables of $1.5 million
and a decrease in trade payables of $950,000. Net cash used in operating
activities was $118,000 in 2007. This was primarily attributable to an increase
in trade receivables of $611,000, an increase in costs and estimated earnings
in excess of billings of $230,000 and a decrease in trade payables of $139,000.
This was offset by a increase in other accounts payables of $199,000 and a
decrease in inventories of $104,000.

Net
cash used in investing activities was approximately $927,000 in 2008. This was
mainly due to our investment of $498,000 in property, plant and equipment,
$235,000 paid in conjunction with the acquisition of certain assets and
liabilities of Vectop and an increase in restricted cash of $195,000. Net cash
used in investing activities was approximately $226,000 in 2007. This was
mainly due to our investment of $353,000 in property, plant and equipment,
which was offset by a decrease in restricted cash of $106,000.

Net cash provided by financing activities
was $1.3 million in 2008, reflecting net proceeds of $1.5 million of
shareholder loans, which was offset by repayments of $490,000 of long term
loans to a bank and short term bank credit. Net cash provided by financing activities was $189,000 in 2007,
reflecting net proceeds of $3.4 million of shareholder loans, which was offset
by repayments of $3.3 million of long term loans.

As
a result of the foregoing, at December 31, 2008, we had working capital of $5.6
million and cash and cash equivalents of $964,000 as compared to working
capital of $4.0 million and cash and cash equivalents of $835,000 at December
31, 2007.

We
expect to fund our short-term liquidity needs, including our obligations under
our credit facilities, other contractual agreements and any other working
capital requirements, from our cash and cash equivalents, operating cash flow
and our credit facilities. We believe that our current cash and cash
equivalents, credit facilities and our expected cash flow from operations in
2009, as well as continued financial support from our Company controlling
shareholder, will be sufficient to meet our cash requirements in 2009.

32

---

---



As of March 31, 2009 there were 2,654,032 warrants outstanding to purchase
2,654,032 of our ordinary shares. Of such warrants, 606,803 warrants have an
exercise price of $1.88 per share which will be expired on June 30, 2010,
1,578,947 warrants have an exercise price of $2.38 per share which will expire
on December 10, 2012, 155,782 warrants have an exercise price of $6.00 which
will expire on June 30, 2010 and 312,500 warrants have an exercise price of
$7.50 per share which expire on January 12, 2010. To the extent any warrants
are exercised, the proceeds will be added to our working capital.

C.      Research
and Development, Patents and Licenses

Research and Development

Our
research and development investments focus on improvements to our existing
products and the development of complementary products that would provide
continued support for our current customers and would improve our capability to
market our products to new customers.

In
2008, 2007 and 2006 we incurred $686,000, $324,000 and $181,000 respectively of
research and development expenses. The vast majority of those expenses is
attribute to our INS line of products. In 2009, we expect that we will continue
to enter into new development projects and develop products through customer
orders, and we will continue our internally funded research in existing
products.

As
of December 31, 2008, we employed 41 engineers in research and development who
spend most of their time on research and development activities generated
through customer orders and an immaterial part of their time on internal
research and development activities.

The
Office of the Chief Scientist of the Israeli Ministry of Industry and Trade
encourages research and development by providing grants to Israeli companies.
The terms of such grants prohibit manufacture of the developed products outside
Israel and the transfer of technologies developed using the grants to any
person without the prior written consent of the Chief Scientist. We have not
received any grants from the Office of the Chief Scientist since 1996.

Pursuant
to applicable Israeli law, we are currently required to pay royalties at the
rate of 3-5% of sales of products developed with certain grants received from
the Chief Scientist, up to 100% of the amount of such grants, linked to the
U.S. dollar. As of December 31, 2008, our total obligation for royalties
payments, net of royalties paid or accrued is approximately $424,000.

We
are committed to pay royalties to the Israel - United States Binational
Industrial Research and Development Foundation at the rate of 5% of the sales
proceeds up to 150% of the research and development expenses financed by the
foundation. Our total obligation for royalties, net of royalties paid or
accrued, totaled approximately $2.1 million as of December 31, 2008.

D.      Trend
Information

In
2008 our revenues increased by 27.4% from 2007. We expect that in 2009 our
revenues will continue to increase and the proportion of sales of off-the-shelf
products will continue to increase in comparison to revenues from development
programs and that as a result of such change in our product mix, our operating
results will improve. However, our revenues are subject to government budgets
and we cannot assure you that the worsening economic climate will not result in
the cancellation or suspension of certain projects or programs.

Our
future revenues will, in great measure, be dependent upon the success of our
sales and marketing strategy. We are currently focusing our sales efforts on:

| |   |                                                               
| | - | --------------------------------------------------------------
| | · | Digital
 Video & Data Recorders and Ground Debriefing Systems;
| |   |                                                               
| | · | Inertial
 Navigation Systems                                  
| |   |                                                               
| | · | Avionics for
 UAVs; and                                       
| |   |                                                               
| | · | Data Acquisition
 Systems                                     

33

---

---



We
cannot provide any assurances that we will be successful in meeting our targets
in the future. As a result of the unpredictable business environment in which
we operate, we are unable to provide any specific guidance as to sales and
profitability trends. If we are unsuccessful in our sales efforts, it is
unlikely that we will be able to achieve profitability in the future and we
will require additional capital.

E.      Off-Balance
Sheet Arrangements

We
are not a party to any material off-balance sheet arrangements. In addition, we
have no unconsolidated special purpose financing or partnership entities that
are likely to create material contingent obligations.

F.      Tabular
Disclosure of Contractual Obligations

The
following table summarizes our minimum contractual obligations and commercial
commitments, as of December 31,
2008 and the effect we expect them to have on our liquidity and cash flow in
future periods.

|                             |  |                        |           |                   |   |           |  |           |           |                    |  |   |  |  |   | 
|---------------------------- |  | ---------------------- | --------- | ----------------- | - | --------- |  | --------- | --------- | ------------------ |  | - |  |  | - | 
|                             |  | Payments due by Period |          
|                             |  |                        |          
|Contractual Obligations      |  | Total                  |           | Less than
 1 year |   | 1-3 Years |  | 3-5 Years |           | More than
 5 years | 
|                             |  |                        |           |                   |   |           |  |           |           |                    | 
|                             |  |                        |           |                   |   |           |  |           |           |                    |  |   |  |  |   | 
|Long-term
 debt obligations  |  | $                      | 3,865,000 |                   | $ | 190,000   |  | $         | 3,675,000 |                    |  |  |  |  |  | 
|Operating
 lease obligations |  |                        | 1,295,000 |                   |   | 751,000   |  |           | 544,000   |                    |  |  |  |  |  | 
|                             |  |                        |           |                   |   |           |  |           |           |                    |  |   |  |  |   | 
|Total                        |  | $                      | 5,160,000 |                   | $ | 941,000   |  | $         | 4,219,000 |                    |  |  |  |  |  | 

In addition,
for few employees we have long-term liabilities for severance pay that 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. As of December 31, 2008 our severance
pay liability was $439,000.

We
have attempted to identify additional significant uncertainties and other
factors affecting forward-looking statements in the Risk Factors section that
appears in Item 3  Key Information.

|        |                                           
|------- | ------------------------------------------
|ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.      Directors
and Senior Management

Set
forth below are the name, age, principal position and a biographical
description of each of our directors and executive officers:

|                    |  |     |  |                                     
|------------------- |  | --- |  | ------------------------------------
|Name                |  | Age |  | Position                            
|                    |  |     |  |                                     
|                    |  |     |  |                                     
|Herzle
 Bodinger    |  | 66  |  | Chairman of
 the board and President
|Zvi Alon            |  | 55  |  | Chief
 Executive Officer            
|Dov Sella           |  | 53  |  | Vice
 President Marketing and Sales 
|Shiri
 Lazarovich   |  | 34  |  | Chief
 Financial Officer            
|Oleg
 Kiperman      |  | 55  |  | Chief
 Technology Officer           
|Adrian Berg         |  | 61  |  | Director                            
|Roy Kui
 Chuen Chan |  | 62  |  | Director                            
|Ben Zion Gruber     |  | 50  |  | Director                            
|Michael
 Letchinger |  | 53  |  | Director                            
|Nurit Mor           |  | 65  |  | Outside
 director                   
|Eli Akavia          |  | 61  |  | Outside
 director                   

Messrs.
Chan and Gruber will serve as directors until our 2009 annual general meeting
of shareholders. Mr. Berg will serve as a director until our 2011 annual
general meeting of shareholders. Messrs. Bodinger and Letchinger will serve as
directors until our 2010 annual general meeting of shareholders.

34

---

---



Ms.
Mor and Mr. Akavia will serve as outside directors pursuant to the provisions
of the Israeli Companies Law for three-year terms until our 2009 annual general
meeting of shareholders. Pursuant to the provisions of the Israeli Companies
Law their term may be extended for one additional three-year period. However,
the term of office of outside Directors in a company whose shares are traded
outside of Israel may be further extended by additional periods of three years
if: (i) the audit committee and, subsequently, the board of directors of
the Company confirms that the reelection for an additional term is for the
benefit of the company, taking into account the outside directors expertise
and special contribution to the function of the board of directors and its
committees, (ii) the reelection was approved the shareholders in accordance
with the special majority requirements for the election of outside directors
outside directors and (iii) the shareholders, were informed of the term
previously served by such outside director and of the grounds for the audit
committee and board of directors resolution to recommend the extension of the
outside directors term of office..

Herzle Bodinger has
served as our chairman of the Board of Directors since July 1998 and since 2001 has served as our president as well.
General (Res.) Bodinger first joined us in May 1997 as the president of our
U.S. subsidiary and was appointed our chief executive officer in June 1998. He
served as our chief executive officer from 1998 until 2001 and served once
again in this position from June 2006 until July 2007. General (Res.) Bodinger
served as the Commander of the Israeli Air Force from January 1992 through July
1996. During the last 35 years of his service, he also served as a fighter
pilot while holding various command positions. General (Res.) Bodinger holds a
B.A. degree in Economics and Business Administration from the Bar-Ilan
University and completed the 100th Advanced Management Program at Harvard
University.

Zvi Alonhas served as our chief executive
officer since July 2007. Mr. Alon joined
us in January 2000 and served as our vice president and chief operating officer
until March 2003 when he was appointed vice president of marketing and sales.
From 1982 to 1999, Mr. Alon served in various managerial positions with the
Israel Aircraft Industries, as director of business development and marketing,
director of electrical and avionics engineering, avionics programs manager and
group leader and operational definition officer of the Lavi project office.
Previously, Mr. Alon served in the Israeli Air Force for ten years. Mr. Alon
holds a B.Sc. degree in Mathematics and Computer Science and a M.Sc. degree in
Computer Science, both from Tel Aviv University.

Shiri Lazarovich has
served as our chief financial officer since December 2007. Ms. Lazarovich
served as our controller since September 2004. Prior to that and from January
2000 she served as a manager in the accountant, assurance and business advisory
services department of PricewaterhouseCoopers, Israel. Ms. Lazarovich holds
bachelor degrees in Accounting and in Economics from the Hebrew University of
Jerusalem and is a Certified Public Accountant in Israel.

Dov Sellahas served as our vice president of
marketing and sales since July 2007. Prior to that, and since January 2003, Mr.
Sella served as our chief operating officer. Mr. Sella has over 20 years of
senior management and product development experience. From 1982 until 1997 Mr.
Sella worked for Elbit Systems Ltd., a leading Israeli defense contractor.
Among his positions at Elbit were director of programs, director of avionics
engineering and director of business development. Between 1997 and 2000, Mr.
Sella served as executive vice president and vice president of business
development and vice president
of research and development of UltraGuide Ltd., a medical devices start-up.
During the three years prior to joining our company, Mr. Sella was the
president of NeuroVision Inc., a medical technology start-up. Mr. Sella has a
B.Sc. degree (cum laude) in Computer Engineering from the Technion Israel
Institute of Technology (Technion), He served as a fighter aircraft navigator
in the Israeli Air Force.

Oleg Kiperman has served as our chief technology officer since
July 2007. Mr. Kiperman joined us in
1984 as project manager of several embedded avionics development programs and
in 2000 was nominated as our director of engineering. From 1982 until 1984 Mr.
Kiperman served as a hardware development team leader at Tadiran (developing
digital communication systems). From 1977 until 1982 Mr. Kiperman served as a
senior engineer in the IAF Weapons Control Branch. Mr. Kiperman holds a B.Sc.
in Electrical Engineering from the Technion.

Adrian Berg has
served as a director since November 1997. Mr. Berg is a designee of Horsham
Enterprises Ltd. Since 1976, Mr. Berg has been a chartered accountant and
senior partner at the U.K. firm, Alexander & Co., Chartered Accountants.
Mr. Berg holds a B.Sc. degree in Industrial Administration from the University
of Salford and received his qualification as a fellow of the U.K. Institute of
Chartered Accountants in 1973 after he completed three years of training at
Arthur Andersen & Co.

35

---

---



Roy Kui Chuen Chan
has served as a director since November 1997. Mr. Chan is a designee of Horsham
Enterprises Ltd. Mr. Chan has been legal consultant to Yeung Chi Shing Estates
Limited, a Hong Kong holding company with major interests in hotels and real
estate in Hong Kong, China, the U.S., Canada and Australia, and its
international group of companies, since 1984. Mr. Chan presently serves as
legal counsel to several Hong Kong companies, including Horsham Enterprises
Ltd. Mr. Chan received his qualification as a solicitor and has been a member
of the U.K. bar since 1979 after he completed five years of training at Turners
Solicitors.

Ben Zion Gruberwas
elected as a director designee of the shareholders (excluding Howard Yeung)
that participated in the private placement of our shares in June 2002. Mr.
Gruber is a founder and manager of several real estate and construction
companies and an entrepreneur involved in several hi-tech companies. Mr. Gruber
is a Colonel (Res.) of the Israeli Defense Forces serving as Brigadier
Commander of a tank battalion. Mr. Gruber holds an M.A. degree in Behavioral
Sciences from Tel Aviv University, a B.Sc. degree in Engineering of
microcomputers from Lev Technology Institute and is currently studying for
his PhD degree in Behavioral Sciences at the University of Middlesex, England.
In addition Mr. Gruber is a graduate of a summer course in Business
Administration at Harvard University, as well as several other courses and
training in management, finance and entrepreneurship. Mr. Gruber is a member of
the Board of Employment Service of the Government of Israel. He also serves on
the boards of directors of the Company for Development of Efrat Ltd., and the
Association of Friends of Kefar Shaul Hospital. Mr. Gruber serves on the
Ethics Committees of the Eitanim and Kefar Shaul Hospitals as well as a
director of several other charitable organizations.

Michael Letchingerwas elected as a director designee of
Horsham Enterprises Ltd. in November 2004. Since 2000, Mr. Letchinger has been
General Counsel and Senior Vice President-Managing of Potomac Golf Properties,
LLC, a company engaged in real estate development and free standing golf
facilities. From 1994 to 2000, Mr. Letchinger was General Counsel and Senior
Vice President-Managing of Potomac Development Associates, a sister company of
Potomac Golf Properties, LLC. Mr. Letchinger holds a B.A. degree in economics
from Brandeis University, Waltham, Massachusetts, and a JD from University of
Chicago Law School.

Nurit Morhas served as one of our outside directors
since August 2006. Ms. Mor has since September 2005 served as an outside
director of Aspen Real Estate Ltd. and from May 2004 Ms. Mor has served as an
outside director of I.B.I Investment House Ltd., both Israeli public companies.
From 1973 to 2003 Ms. Mor served in senior positions in the Bank of Israel,
including public complaints and banking supervision department. Ms. Mor holds a
B.A. degree in Economics and Statistics a diploma in Business Administration
from the Hebrew University, Jerusalem, and an M.A. degree in Labor Studies form
the Tel Aviv University.

Eli Akaviahas served
as one of our outside directors since August 2006. Mr. Akavia has since
August 2002 served as an independent consultant in accounting and audit issues.
From 1979 to 2002, Mr. Akavia served as partner in various positions in
Luboshitz Kasierer, which was merged into Kost, Forer, Gabbay & Kasierer
which is currently a member firm of Ernst & Young Global. Mr. Akavia also
serves as a director of Eden Springs Ltd., On Track Innovation Ltd, Starling
Ltd and in Eshld Ltd Direct funds, all of which are public Israeli companies.
Mr. Akavia has been a Certified Public Accountant (Israel) since 1975 and holds
a B.Sc. degree in Mathematics and Economics from the Hebrew University in
Jerusalem and an M.B.A. degree from the Tel Aviv University.

Yuval
Dan-Gur, our former VP of engineering, resigned as of December 2008.

B.      Compensation

The
following table sets forth all compensation we paid with respect to all of our
directors and executive officers as a group for the year ended December 31,
2008.

|                                                                           |  |                                         |         |                                          |   |         | 
|-------------------------------------------------------------------------- |  | --------------------------------------- | ------- | ---------------------------------------- | - | ------- | 
|                                                                           |  | Salaries, fees, commissions and bonuses |         | Pension, retirement and similar benefits |  
|                                                                           |  |                                         |         |                                          |  
|                                                                           |  |                                         |         |                                          |   |         | 
|All
 directors and executive officers as a group, consisting of 12 persons |  | $                                       | 836,544 |                                          | $ | 322,617 | 

During
the year ended December 31, 2008, we paid each of our outside directors a per
meeting attendance fee of NIS 1,000 ($279) plus an annual fee of NIS
18,000 ($5,017).

36

---

---



As
of December 31, 2008, our directors and executive officers as a group,
consisting of twelve persons, held options to purchase an aggregate of 589,666
ordinary shares, at exercise prices ranging from $2.07 to $3.42 per share,
vesting over three years. These options were issued under our 2003 Stock Option
Plan and expire in 2013. In 2008, 261,000 options having an exercise price of
$2.14 were granted under the 2003 Plan repricing 258,000 options with an exercise
price of $4.02 that were cancelled.

C.      Board
Practices

Introduction

According
to the Israeli Companies Law and our articles of association, the management of
our business is vested in our board of directors. The board of directors may
exercise all powers and may take all actions that are not specifically granted
to our shareholders. Our executive officers are responsible for our day-to-day
management. The executive officers have individual responsibilities established
by our chief executive officer and board of directors. Executive officers are
appointed by and serve at the discretion of the board of directors, subject to
any applicable agreements.

Election of Directors

Our
articles of association provide for a board of directors consisting of no less
than two and no more than eleven members or such other number as may be
determined from time to time at a general meeting of shareholders. All the
directors in the company must be qualified to serve as a director and the time
required for such position, taking into consideration the type and size of the
company and the scope and complexity of its operation. The directors must
provide the electing general meeting with a detailed declaration as to the
compliance with the above-listed requirements. Our board of directors is
currently composed of seven directors.

Pursuant
to our articles of association, the board of directors is divided into three
classes (other than outside directors). Generally, at each annual meeting of
shareholders one class of directors (other than outside directors) is elected
for a term of three years by a vote of the holders of a majority of the voting
power represented and voting at such meeting. All the members of our board of
directors (except the outside directors as detailed below) may be reelected
upon completion of their term of office. The majority of directors may appoint
additional directors to fill any vacancies in the board of directors until the
next general meeting; provided, however that the total number of directors will
not exceed the maximum number, if any, fixed by or in accordance with our
articles of association, and that if the total number of directors decreases
below six, the board of directors may call a general meeting of shareholders,
so that following such meeting there will be at least six directors in office.

Messrs. Chan and Gruber are Class A
directors and will hold office until the Annual General Meeting of Shareholders
to be held in 2009. Messrs. Bodinger and
Letchinger are Class B
directors and will hold office until the Annual General Meeting of Shareholders
to be held in 2010. Mr. Berg is a Class
C director and will hold office until the Annual General Meeting of
Shareholders to be held in 2011.

Ms.
Mor and Mr. Akavia are outside directors and will hold office until our 2009
Annual General Meeting of Shareholders.

We
do not follow the requirements of the NASDAQ Marketplace Rules with regard to
the nomination process of directors and instead follow Israeli law and
practice. See below in this Item 6C. Directors, Senior Management and
Employees - Board Practices - NASDAQ Marketplace Rules and Home Country
Practices.

Outside and Independent Directors

Outside
Directors. Under the Israeli Companies Law, companies incorporated
under the laws of the State of Israel whose shares have been offered to the
public are required to appoint at least two outside directors. The Israeli
Companies Law provides that a person may not be appointed as an outside
director if the person, or the persons relative, partner, employer or an
entity under that persons control, has or had during the two years preceding
the date of appointment any affiliation with the company, or any entity
controlling, controlled by or under common control with the company. The term
relative means a spouse, sibling, parent, grandparent, child or child of
spouse or spouse of any of the above. The term affiliation includes an
employment relationship, a business or professional relationship maintained on
a regular basis, control and service as an office holder, as such term is
defined below, excluding service as an outside director of a company that is
offering its shares to the public for the first time.

37

---

---



In
addition, no person may serve as an outside director if the persons position
or other activities create, or may create a conflict of interest with the
persons responsibilities as director or may otherwise interfere with the
persons ability to serve as director. If, at the time an outside director is
appointed, all current members of the board of directors are of the same
gender, then that outside director must be of the other gender. A director of
one company may not be appointed as an outside director of another company if a
director of the other company is acting as an outside director of the first
company at such time.

As
of 2006, at least one of the elected outside directors must have accounting
and financial expertise and any other outside director must have accounting
and financial expertise or professional qualification, as such terms are
defined by regulations promulgated under the Israeli Companies Law. This
requirement does not apply to outside directors appointed prior to 2006. However,
if at least one of our directors meets the independence requirements of the
Securities Exchange Act of 1934, as amended, and the standards of The Nasdaq
Global Market rules for membership on the audit committee and also has
financial and accounting expertise as defined in the Companies Law and
applicable regulations, then our outside directors are required to meet the
professional requirement only.

Outside
directors are elected at our annual general meeting of shareholders. The
shareholders voting in favor of their election must include at least one-third
of the shares of the non-controlling shareholders of the company who voted on
the matter. This minority approval requirement need not be met if the total
shareholdings of those non-controlling shareholders who vote against their
election represent 1% or less of all of the voting rights in the company. The
initial term of an outside director is three years and he or she may be
reelected to additional terms of three years. However, the term of office of
an outside director in a company whose shares are traded also outside of
Israel, may further extended if all of the following conditions are met:
(i) the audit committee and, subsequently, the board of directors of the
Company confirms that the reelection for an additional term is for the benefit
of the company, taking into account the outside directors expertise and
special contribution to the function of the board of directors and its
committees, (ii) the reelection was approved the shareholders in accordance
with the special majority requirements for the election of outside directors
outside directors and (iii) the shareholders, were informed of the term
previously served by such outside director and of the grounds for the audit
committee and board of directors resolution to recommend the extension of the
outside directors term of office..

Outside
directors can be removed from office only by the same special percentage of
shareholders as can elect them, or by a court, and then only if the outside
directors cease to meet the statutory qualifications with respect to their
appointment or if they violate their duty of loyalty to the company. If the
vacancy of an outside director position causes the company to have fewer than
two outside directors, the board of directors is required under the Companies
Law to call a special general meeting of the companys shareholders as soon as
possible to appoint a new outside director.

Any
committee of the board of directors must include at least one outside director
and the audit committee must include all of the outside directors. An outside
director is entitled to compensation as provided in regulations promulgated
under the Israeli Companies Law and is otherwise prohibited from receiving any
other compensation, directly or indirectly, in connection with such service.
All outside directors shall receive the same annual compensation from the
company; however, if the company has declared an outside director as an expert
outside directors, as such term is defined under the Companies Regulations; it
can pay him or her a higher remuneration in comparison to the other outside
directors. Moreover, if an outside director also serves as an independent
director under NASDAQ Market Rules and therefore has additional liability, he
or she is entitled to receive the highest remuneration permitted under the
Companies Regulations.

Independent
Directors. In general, NASDAQ Marketplace Rules require that the
board of directors of a NASDAQ-listed company have a majority of independent
directors and its audit committee must have at least three members and be
comprised only of independent directors, each of whom satisfies the respective
independence requirements of NASDAQ and the Securities and Exchange
Commission. However, foreign private issuers, such as our company, may follow
certain home country corporate governance practices instead of certain
requirements of the NASDAQ Marketplace Rules. We do not follow the requirement
of the NASDAQ Marketplace Rules to maintain a majority of independent directors
on our board and instead follow Israeli law and practice. See below in this
Item 6C. Directors, Senior Management and Employees - Board Practices - NASDAQ
Marketplace Rules and Home Country Practices. However, in accordance with the
rules of the Securities and Exchange Commission and NASDAQ, we have the
mandated three independent directors, as defined by the rules of the Securities
and Exchange Commission and NASDAQ Marketplace, on our audit committee.

38

---

---



Our
board of directors has determined that Ms. Mor and Mr. Akavia both qualify as
independent directors under the Securities and Exchange Commission and NASDAQ
requirements and as outside directors under the Israeli Companies Law requirements.
Our board of directors has further determined that Mr. Gruber qualifies as an
independent director under the Securities and Exchange Commission and NASDAQ
requirements.

We
do not follow the requirements of the NASDAQ Marketplace Rules with regard to
regularly scheduled meetings of independent directors. Under Israeli law
outside directors are not required to hold executive sessions. See below in
this Item 6C. Directors, Senior Management and Employees - Board Practices -
NASDAQ Marketplace Rules and Home Country Practices.

Pursuant
to a recent amendment to the Israeli Companies Law, an Israeli company whose
shares are publicly traded may elect to adopt a provision in its articles of
association pursuant to which a majority of its board of directors will
constitute individuals complying with certain independence criteria prescribed
by the Israeli Companies Law. We have not included such a provision in our
articles of association since our board of directors complies with the independent
director requirements of the NASDAQ Marketplace Rules described above.

A
recent amendment to the Israeli Companies Law provides that publicly traded
company is entitled to nominate independent directors, which shall have all the
qualifications of an outside director; however, he or she is not subject to the
accounting and financial expertise or professional qualification
requirements and may be elected and removed from office by a simple majority
vote of the general shareholders meeting. The nomination of independent
directors shall be made only after the company has incorporated into its
Articles of Association a provision regarding the number or percentage of
independent and outside directors to be nominated in the company.

Committees of the Board of Directors

Audit Committee. Under the Companies Law, the board of directors of any public company
must also appoint an audit committee comprised of at least three directors
including all of the outside directors, but excluding the chairman of the board
of directors; controlling shareholder or a relative of a controlling
shareholder; and any director employed by the company or who provides
services to the company on a regular basis. Our audit committee, established in
accordance with Section 114 of the Israeli Companies Law and Section
3(a)(58)(A) of the Securities Exchange Act of 1934, assists our board of
directors in overseeing the accounting and financial reporting processes of our
company and audits of our financial statements, including the integrity of our
financial statements, compliance with legal and regulatory requirements, our
independent public accountants qualifications and independence, the
performance of our internal audit function and independent public accountants,
finding any defects in the business management of our company for which purpose
the audit committee may consult with our independent auditors and internal
auditor, proposing to the board of directors ways to correct such defects, and
such other duties as may be directed by our board of directors.

Our audit committee also has the responsibility
of approving related-party transactions as required by Israeli law. Under
Israeli law, an audit committee may not approve an action or a transaction with
a controlling shareholder, or with an office holder, unless at the time of
approval two outside directors are serving as members of the audit committee
and at least one of the outside directors was present at the meeting in which
an approval was granted.

Our
audit committee is generally authorized to investigate any matter within the
scope of its responsibilities and has the power to obtain from our internal
auditing unit, our independent auditors or any other officer or employee any
information that is relevant to such investigations. Our Audit Committee also
has the right to hire independent counsel and accountants to assist it in any
investigation that it may instigate.

The
current members of our audit committee are Ms. Nurit Mor and Messrs Eli Akavia
and Ben Zion Gruber, each of whom satisfies the independence requirements of
both the Securities and Exchange Commission and NASDAQ. We also comply with
Israeli law requirements for audit committee members. The audit committee meets
at least once each quarter.

Compensation
committee. Our board of directors established a compensation
committee composed of Ms. Nurit Mor and Mr. Adrian Berg. The compensation
committee is authorized to determine all compensations issues, including the
administration of our option plans subject to general guidelines determined by
our board of directors from time to time. The compensation committee will also
make recommendations to our board of directors in connection with the terms of
employment of our chief executive officer and president.

39

---

---



Internal Audit

The
Israeli Companies Law also requires the board of directors of a public company
to appoint an internal auditor nominated by the audit committee. An internal
audit must satisfy the Israeli Companies Laws independence requirements. The
role of the internal auditor is to examine, among other things, the compliance
of the companys conduct with applicable law and orderly business practice. Our
internal auditor complies with the requirements of the Israeli Companies Law.

Directors Service
Contracts

We
do not have any service contracts with our directors. There are no arrangements
or understandings between us and any of our subsidiaries, on the one hand, and
any of our directors, on the other hand, providing for benefits upon
termination of their employment or service as directors of our company or any
of our subsidiaries.

Approval of Related Party Transactions Under
Israeli Law

Fiduciary Duties of Office Holders

The
Israeli Companies Law codifies the fiduciary duties that office holders,
including directors and executive officers, owe to a company. An office
holder is defined in the Israeli Companies Law as a director, general manager,
chief business manager, deputy general manager, vice general manager, other
manager directly subordinate to the general manager or any other person
assuming the responsibilities of any of the foregoing positions without regard
to such persons title. An office holders fiduciary duties consist of a duty
of care and a duty of loyalty. The duty of care requires an office holder to
act at a level of care that a reasonable office holder in the same position
would employ under the same circumstances. This includes the duty to utilize reasonable
means to obtain (i) information regarding the appropriateness of a given action
brought for his approval or performed by him by virtue of his position and (ii)
all other information of importance pertaining to the foregoing actions. The
duty of loyalty includes (i) avoiding any conflict of interest between the
office holders position in the company and any other position he holds or his
personal affairs, (ii) avoiding any competition with the companys business,
(iii) avoiding exploiting any business opportunity of the company in order to
receive personal gain for the office holder or others, and (iv) disclosing to
the company any information or documents relating to the companys affairs that
the office holder has received due to his position as an office holder.

Disclosure of Personal Interests of an Office
Holder

The
Israeli Companies Law requires that an office holder promptly, and no later
than the first board meeting at which such transaction is considered, disclose
any personal interest that he or she may have and all related material
information known to him or her and any documents in their position, in
connection with any existing or proposed transaction by us. In addition, if the
transaction is an extraordinary transaction, that is, a transaction other than
in the ordinary course of business, other than on market terms, or likely to
have a material impact on the companys profitability, assets or liabilities,
the office holder must also disclose any personal interest held by the office
holders spouse, siblings, parents, grandparents, descendants, spouses
descendants and the spouses of any of the foregoing, or by any corporation in
which the office holder or a relative is a 5% or greater shareholder, director
or general manager or in which he or she has the right to appoint at least one
director or the general manager.

Approval of Transactions with Office Holders

Under
the Israeli Companies Law, all arrangements as to compensation of office
holders who are not directors require approval by the board of directors, and
exculpation, insurance and indemnification of, or an undertaking to, indemnify
an office holder who is not a director requires both board of directors and
audit committee approval. The compensation of office holders who are directors
must be approved by our audit committee, board of directors and shareholders.

40

---

---



Some
transactions, actions and arrangements involving an office holder (or a third
party in which an office holder has an interest) must be approved by the board
of directors or as otherwise provided for in a companys articles of
association, however, a transaction that is adverse to the companys interest
may not be approved. In some cases, such a transaction must be approved by the audit
committee and by the board of directors itself, and under certain circumstances
shareholder approval may be required. A director who has a personal interest in
a transaction that is considered at a meeting of the board of directors or the
audit committee may not be present during the board of directors or audit
committee discussions and may not vote on the transaction, unless the
transaction is not an extraordinary transaction or the majority of the members
of the board or the audit committee have a personal interest, as the case may
be. In the event the majority of the members of the board of directors or the
audit committee have a personal interest, then the approval of the general
meeting of shareholders is also required.

Disclosure of Personal Interests of a
Controlling Shareholder; Approval of Transactions with Controlling Shareholders

The
disclosure requirements which apply to an office holder also apply to a
controlling shareholder with respect to his or her personal interest in any
existing or proposed transaction by us. The Israeli Companies Law provides that
an extraordinary transaction with a controlling shareholder or an extraordinary
transaction with another person in whom the controlling shareholder has a
personal interest or a transaction with a controlling shareholder or his
relative regarding terms of service and employment, must be approved by the
audit committee, the board of directors and shareholders. The shareholder
approval for such a transaction must include at least one-third of the
shareholders who have no personal interest in the transaction who voted on the
matter (not including abstentions). The transaction can be approved by
shareholders without this one-third approval if the total shareholdings of
those shareholders who have no personal interest and voted against the
transaction do not represent more than one percent of the voting rights in the
company.

Under
the Companies Regulations (Relief from Related Party Transactions), 5760-2000,
promulgated under the Israeli Companies Law, as amended, certain extraordinary
transactions between a public company and its controlling shareholder(s) do not
require shareholder approval. In addition, under such regulations, directors
compensation and employment arrangements in a public company do not require the
approval of the shareholders if both the audit committee and the board of
directors agree that such arrangements are solely for the benefit of the
company. Also, employment and compensation arrangements for an office holder
that is a controlling shareholder of a public company do not require
shareholder approval if certain criteria are met. The foregoing exemptions from
shareholder approval will not apply if one or more shareholders holding at
least 1% of the issued and outstanding share capital of the company or of the
companys voting rights, objects to the use of these exemptions provided that
such objection is submitted to the company in writing not later than fourteen
days from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli
Securities Law. If such objection is duly and timely submitted, then the
transaction or compensation arrangement of the directors will require
shareholders approval as detailed above.

In
addition, a private placement of securities that will (i) cause a person to
become a controlling shareholder or (ii) increase the relative holdings of a
shareholder that holds 5% or more of the companys outstanding share capital,
or (iii) will cause any person to become, as a result of the issuance, a holder
of more than 5% of the companys outstanding share capital in a private
placement in which 20% or more of the companys outstanding share capital prior
to the placement are offered, the payment for which (in whole or in part) is
not in cash or not under market terms, requires approval by the board of
directors and the shareholders of the company.

The
Israeli Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% or greater shareholder of the
company. This rule does not apply if there is already another 25% or greater
shareholder of the company. Similarly, the Israeli Companies Law provides that
an acquisition of shares in a public company must be made by means of a tender
offer if as a result of the acquisition the purchaser would hold greater than a
45% interest in the company, unless there is another shareholder holding more
than a 45% interest in the company. These requirements do not apply if, in
general, the acquisition was made in a private placement that received
shareholder approval, (i) was from a 25% or greater shareholder of the company
which resulted in the acquirer becoming a 25% or greater shareholder of the
company, if there is not already a 25% or greater shareholder of the company,
or (ii) was from a shareholder holding a 45% interest in the company which
resulted in the acquirer becoming a holder of a 45% interest in the company if
there is not already a 45% or greater shareholder of the company.

41

---

---



If,
as a result of an acquisition of shares, the acquirer will hold more than 90%
of a public companys outstanding shares or a class of shares, the acquisition
must be made by means of a tender offer for all of the outstanding shares or a
class of shares. If less than 5% of the outstanding shares are not tendered in
the tender offer, all the shares that the acquirer offered to purchase will be
transferred to the acquirer. The Israeli Companies Law provides for appraisal
rights if any shareholder files a request in court within three months
following the consummation of a full tender offer. If more than 5% of the
outstanding shares are not tendered in the tender offer, then the acquirer may
not acquire shares in the tender offer that will cause his shareholding to
exceed 90% of the outstanding shares.

Exculpation,
Indemnification and Insurance of Directors and Officers

Exculpation of Office Holders

The
Israeli Companies Law provides that an Israeli company cannot exculpate an
office holder from liability with respect to a breach of his or her duty of
loyalty. If permitted by its articles of association, a company may exculpate
in advance an office holder from his or her liability to the company, in whole
or in part, with respect to a breach of his or her duty of care. However, a
company may not exculpate in advance a director from his or her liability to
the company with respect to a breach of his duty of care in the event of
distributions.

Insurance of Office Holders

The
Israeli Companies Law provides that a company may, if permitted by its articles
of association, enter into a contract to insure office holders in respect of
liabilities incurred by the office holder with a respect to an act performed in
his or her capacity as an office holder, as a result of:

| |   |                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | a breach of
 the office holders duty of care to the company or to another person;                                                                                                                                           
| |   |                                                                                                                                                                                                                              
| | · | a breach of
 the office holders duty of loyalty to the company, provided that the office
 holder acted in good faith and had reasonable cause to assume that his or her
 act would not prejudice the companys interests; or
| |   |                                                                                                                                                                                                                              
| | · | a financial
 liability imposed upon the office holder in favor of another person.                                                                                                                                            

Indemnification of Office Holders

The
Israeli Companies Law provides that a company may, if permitted by its articles
of association, indemnify an office holder for acts or omissions performed by
the office holder in such capacity for:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | a monetary
 liability imposed on the office holder in favor of another person by any
 judgment, including a settlement or an arbitrators award approved by a
 court;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | reasonable
 litigation expenses, including attorneys fees, actually incurred by the
 office holder as a result of an investigation or proceeding instituted
 against him or her by a competent authority, provided that such investigation
 or proceeding concluded without the filing of an indictment against the
 office holder or the imposition of any monetary liability in lieu of criminal
 proceedings, or concluded without the filing of an indictment against the
 office holder and a monetary liability was imposed on the officer holder in
 lieu of criminal proceedings with respect to a criminal offense that does not
 require proof of criminal intent; and
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | · | reasonable
 litigation expenses, including attorneys fees, incurred by the office holder
 or which were imposed on him or her by a court, in an action instituted by
 the company or on the companys behalf or by another person, against the
 office holder, or in a criminal charge from which he was acquitted, or in a
 criminal proceeding in which the office holder was convicted of a criminal
 offense which does not require proof of criminal intent.                                                                                                                                                                                                               

42

---

---



In
accordance with the Israeli Companies Law, a companys articles of association
may permit the company to:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | prospectively
 undertake to indemnify an office holder, except that with respect to a
 monetary liability imposed on the office holder by any judgment, settlement
 or court-approved arbitration award, the undertaking must be limited to types
 of events which the companys board of directors deems foreseeable considering
 the companys actual operations at the time of the undertaking, and to an
 amount or standard that the board of directors has determined as reasonable
 under the circumstances.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | · | retroactively
 indemnify an office holder of the company.                                                                                                                                                                                                                                                                                                                                                                                                                                                          

Limitations on Exculpation, Insurance and
Indemnification

The
Israeli Companies Law provides that neither a provision of the articles of
association permitting the company to enter into a contract to insure the
liability of an office holder, nor a provision in the articles of association
or a resolution of the board of directors permitting the indemnification of an
office holder, nor a provision in the articles of association exculpating an
office holder from duty to the company shall be valid, where such insurance,
indemnification or exculpation relates to any of the following:

| |   |                                                                                                                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | a breach by
 the office holder of his duty of loyalty unless, with respect to insurance
 coverage or indemnification, the office holder acted in good faith and had a
 reasonable basis to believe that the act would not prejudice the company;
| |   |                                                                                                                                                                                                                                                 
| | · | a breach by
 the office holder of his duty of care if such breach was committed
 intentionally or recklessly, unless the breach was committed only
 negligently.                                                                                
| |   |                                                                                                                                                                                                                                                 
| | · | any act or
 omission done with the intent to unlawfully yield a personal benefit; or                                                                                                                                                            
| |   |                                                                                                                                                                                                                                                 
| | · | any fine or
 forfeiture imposed on the office holder.                                                                                                                                                                                           

Pursuant
to the Israeli Companies Law, exculpation of, procurement of insurance coverage
for, and an undertaking to indemnify or indemnification of, our office holders
must be approved by our audit committee and our board of directors and, if the
office holder is a director, also by our shareholders.

Our
Articles of Association allow us to insure, indemnify and exempt our office
holders to the fullest extent permitted by law, subject to the provisions of
the Israeli Companies Law. We currently maintain a directors and officers
liability insurance policy with per claim and aggregate coverage limit of $7.5
million.

D.      Employees

On
December 31, 2008, we employed 98 persons, of whom 41 were employed in
research, development and engineering, 44 persons in manufacturing and
logistics, 4 persons in sales and marketing, and 9 persons in administration
and management and finance. All of our employees are located in Israel. In
addition, CACS (our 80% owned subsidiary) employed 21 persons in China.

On
December 31, 2007, we employed 92 persons, of whom 32 were employed in
research, development and engineering, 47 persons in manufacturing and
logistics, 4 persons in sales and marketing, and 9 persons in administration
and management and finance. All of our employees are located in Israel. In
addition, CACS (our 80% owned subsidiary) employed 24 persons in China.

On
December 31, 2006, we employed 97 persons, of whom 30 were employed in
research, development and engineering, 55 persons in manufacturing and
logistics, 5 persons in sales and marketing, and 7 persons in administration
and management and finance. All of our employees are located in Israel. In
addition, CACS (our 80% owned subsidiary) employed 15 persons in China.

43

---

---



Our
technical employees have signed nondisclosure agreements covering all
proprietary information that they might possess or to which they might have
access. Employees are not organized in any union, although they are employed
according to provisions established by the Israeli Ministry of Labor. Certain
provisions of the collective bargaining agreements between the Histadrut
(General Federation of Labor in Israel) and the Coordination Bureau of Economic
Organizations (including the Industrialists Association) are applicable to our
Israeli employees by order of the Israeli Ministry of Labor. These provisions
concern mainly the length of the workday, minimum daily wages for professional
workers, contributions to a pension fund, insurance for work-related accidents,
procedures for dismissing employees, determination of severance pay and other
conditions of employment. We generally provide our employees with benefits and
working conditions beyond the required minimums. Under the collective
bargaining agreements, the wages of most of our employees are linked to the
Israeli consumer price index, although the extent of the linkage is limited.

Israeli
law generally requires severance pay upon the retirement or death of an
employee or termination of employment without due cause. Further, Israeli
employees and employers are required to pay predetermined sums to the National
Insurance Institute which is similar to the United States Social Security
Administration; such amounts also include payments for national health
insurance. Most of our ongoing severance obligations for our Israeli employees
are provided for by monthly payments made by us for insurance policies to cover
these obligations.

E.      Share
Ownership

Beneficial Ownership of Executive Officers
and Directors

The
following table sets forth certain information as of March 31, 2009 regarding
the beneficial ownership by each of our directors and executive officers:

|                                                              |  |                                                   |  |                             |     |  
|------------------------------------------------------------- |  | ------------------------------------------------- |  | --------------------------- | --- | -
|Name                                                          |  | Number of Ordinary Shares
 Beneficially Owned (1) |  | Percentage of
 Ownership(2)
|                                                              |  |                                                   |  |                            
|                                                              |  |                                                   |  |                             |     |  
|Herzle Bodinger (3) (4)                                       |  | 118,333                                           |  |                             | 1.3 | %
|Zvi Alon (3) (5)                                              |  | 100,000                                           |  |                             | 1.1 | %
|Dov Sella (3) (5)                                             |  | 100,000                                           |  |                             | 1.1 | %
|Shiri Lazarovich (3) (6)                                      |  | 18,666                                            |  |                             | *   |  
|Oleg Kiperman (3) (7)                                         |  | 57,667                                            |  |                             | *   |  
|Adrian Berg (8) (9)                                           |  | 31,283                                            |  |                             | *   |  
|Roy Kui Chuen Chan (10) (11)                                  |  | 21,833                                            |  |                             | *   |  
|Ben Zion Gruber (3)(12)                                       |  | 40,314                                            |  |                             | *   |  
|Michael Letchinger (13)                                       |  |                                                  |  |                             |    |  
|Nurit Mor (3)                                                 |  |                                                  |  |                             |    |  
|Eli Akavia (3)                                                |  |                                                  |  |                             |    |  
|All directors and executive officers as a
 group (11 persons) |  | 488,096                                           |  |                             | 5.2 | %

|                    |  | 
|------------------- |  | 
|                    |  | 
|*     Less
 than 1% | 

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Beneficial
 ownership is determined in accordance with the rules of the Securities and
 Exchange Commission and generally includes voting or investment power with
 respect to securities. Ordinary shares relating to options and warrants
 currently exercisable or exercisable within 60 days of the date of this table
 are deemed outstanding for computing the percentage of the person holding
 such securities but are not deemed outstanding for computing the percentage
 of any other person. Except as indicated by footnote, and subject to
 community property laws where applicable, the persons named in the table above
 have sole voting and investment power with respect to all shares shown as
 beneficially owned by them.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(2) | The
 percentages shown are based on 8,858,553 ordinary shares issued and
 outstanding as of March 31, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(3) | The business
 addresses of Messrs. Bodinger, Alon, Sella, Kiperman, Gruber and Akavia and
 Ms. Mor and Ms. Lazarovich is c/o RADA Electronic Industries Ltd., 7
 Giborei Israel Street, Netanya, Israel.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|(4) | All such
 ordinary shares are subject to currently exercisable options granted under
 our 2003 stock option plan. 35,000 options at an exercise price of $2.14 per
 share and 83,333 options at an exercise price of $2.91 per share. The options
 expire in January 2013.                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

44

---

---



|     |                                                                                                                                                                                                                                                                                                                                                                                         
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(5)  | All such
 ordinary shares are subject to currently exercisable options granted under
 our 2003 stock option plan. 33,333 options at an exercise price of $2.07 per
 share and 66,667 options at an exercise price of $2.40 per share. The options
 expire in January 2013.                                                                                                              
|     |                                                                                                                                                                                                                                                                                                                                                                                         
|(6)  | All such
 ordinary shares are subject to currently exercisable options granted under
 our 1999 and 2003 stock option plans. 5,333 options at an exercise price of
 $3.42 per share and 13,333 options at an exercise price of $2.40 per share.
 16,000 options expire in January 2013 and 2,666 options expire in December
 2009.                                                       
|     |                                                                                                                                                                                                                                                                                                                                                                                         
|(7)  | All such
 ordinary shares are subject to currently exercisable options granted under
 our 1999 and 2003 stock option plan. 6,000 options at an exercise price of
 $9.85 per share, 25,000 options at an exercise price of $2.07 per share and
 26,667 options at an exercise price of $2.40 per share. 51,667 options expire
 in January 2013 and 6,000 options expire in December 2009.
|     |                                                                                                                                                                                                                                                                                                                                                                                         
|(8)  | The business
 address of Mr. Berg is Alexander & Co., 17 St. Anns Square, Manchester
 M2 7 PW, U.K.                                                                                                                                                                                                                                                                                    
|     |                                                                                                                                                                                                                                                                                                                                                                                         
|(9)  | Includes
 29,750 ordinary shares subject to currently exercisable options granted under
 our stock option plan at an exercise price of $2.14 per share. The options
 expire in January 2013.                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                         
|(10) | The business
 address of Mr. Roy Chan is Gearhart Holdings (H.K.) Limited, 2202 Kodak
 House II, 39 Healthy Street, E. North Point, Hong Kong.                                                                                                                                                                                                                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                         
|(11) | Includes
 20,300 ordinary shares subject to currently exercisable options granted under
 our stock option plan at an exercise price of $2.14 per share. The options expire
 in January 2013.                                                                                                                                                                                            
|     |                                                                                                                                                                                                                                                                                                                                                                                         
|(12) | Includes
 34,014 ordinary shares issuable upon currently exercisable warrants at an
 exercise price of $1.88 per share that were issue in June 2007, and 6,300
 ordinary shares subject to currently exercisable options granted under our
 stock option plans, at an exercise price of $2.14 per share. Such options
 expire in January 2013.                                          
|     |                                                                                                                                                                                                                                                                                                                                                                                         
|(13) | The business
 address of Mr. Letchinger is 2709 Rittenhouse Street, Washington DC, 20015,
 USA.                                                                                                                                                                                                                                                                                         

Stock Option Plans

1999 Stock Option Plan

Our
1999 Stock Option Plan, or the 1999 Plan, provides for the issuance of stock
options to purchase an aggregate of 108,400 of our ordinary shares. The1999
Plan, authorizes the issuance of options to key employees and consultants,
including officers and directors of our company and its subsidiaries, who, are
in position to contribute significantly to our success, in the judgment of the
board of directors or, if appointed in the future, a committee which will
administer the 1999 Plan. The board of directors or the committee will
determine the number of shares covered by each option, and the formulation,
within the limitations of the 1999 Plan, of the form of option.

Options
granted under the 1999 Plan may be for a maximum term of ten years from the
date of grant. The exercise price of an option granted to an employee may not
be less than 60% of the fair market value of our ordinary shares on the date of
grant of the option. The exercise price of an option to a non-employee director
or consultant may not be less than 80% of the fair market value of our ordinary
shares on the date of grant of the option. If any option expires without having
been fully exercised, the shares with respect to which such option has not been
exercised will be available for future grants.

Options
may not be transferable by the optionee otherwise than by will or the laws of
descent and distribution and during the optionees lifetime are exercisable
only by the optionee. Options terminate before their expiration dates one year
after the optionees death while in our employ, three months after the
optionees retirement for reasons of age or disability or involuntary
termination of employment other than for cause, and immediately upon voluntary
termination of employment or involuntary termination of employment for cause.

Our
board of directors may, at its discretion, modify, revise or terminate the 1999
Plan at any time, except that the aggregate number of shares issuable pursuant
to options may not be increased (except in the event of certain changes in our
capital structure), the eligibility provisions and minimum option price may not
be changed, or the permissible maximum term of options may not be increased
without the consent of our shareholders.

45

---

---



The
1999 Plan also contains provisions protecting optionees against dilution of the
value of their options in the case of stock splits, stock dividends or other
changes in our capital structure, in the event of any proposed reorganization
or merger involving our company or in the event of any spin-off or distribution
of assets to our shareholders.

As
of March 31, 2009 options to purchase 165,400 ordinary shares were granted
under the 1999 Plan at an average exercise price of $9.63 per share. Of such
options, 102,800 have been cancelled or forfeited. 62,600 options having an
average exercise price of $8.19 per share are outstanding and currently
exercisable.

2003 Stock Option Plan

Our
2003 Stock Option Plan, or the 2003 Plan, provides for the issuance of stock
options to purchase an aggregate of 666,667 of our ordinary shares. At the
Companys Annual General meeting held in August, 2006, shareholder approve a
500,000 share increase in the number ordinary shares available for grant under
the plan. Consequently, 1,166,667 shares are subject to this plan. Options
under the 2003 Plan may be issued to employees including officers and directors
of our company and its subsidiaries who, in the judgment of the board of
directors based on the recommendation of our compensation committee, are in a
position to contribute significantly to our success. The provisions of our 2003
Plan are designated to allow for the tax benefits promulgated under the Israeli
Income Tax Ordinance [New Version]. Our board of directors has resolved that
all options that will be granted to Israeli residents under the 2003 Plan will
be taxable under the capital gains path. Pursuant to this path the profit
realized by the employee is taxed as a capital gain (25%) if the options or
shares are held by a trustee for at least 24 months from the end of the tax
year in which such options were granted. If the shares are sold before the
lapse of said 24 months period, the profit is re-characterized as ordinary
income. The company is not allowed a corresponding salary expense, even in the
event the profit is taxed as ordinary income. Otherwise, the terms of the 2003
Plan are substantially the same as those of the 1999 Plan.

In
2008, 261,000 options having an exercise price of $2.14 were granted replacing
258,000 options that were granted in 2003; the options were cancelled and
granted under the 2003 Plan to four directors of the Company.

As
of March 31, 2009 options to purchase 1,452,000 ordinary shares were granted
under the 2003 Plan at an average exercise price of $2.80 per share of such
options, 51,168 options have been exercised and 626,166 options were cancelled,
expired or forfeited and 774,666 options remain outstanding of which options to
purchase 571,972 ordinary shares having an average exercise price of $2.54 per
share are currently exercisable.

|        |                                                  
|------- | -------------------------------------------------
|ITEM 7. | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.      Major
Shareholders

Mr.
Howard Yeung is the beneficial holder of 46% of our outstanding shares. In
addition, Mr. Yeung currently holds convertible notes under which 1,435,407
ordinary shares are issuable upon conversion and currently exercisable warrants
pursuant to which 1,578,947 ordinary shares are issuable. Accordingly, Mr.
Howard Yeung may be deemed to control our company.

The
following table sets forth certain information as of March 31, 2009, regarding
the beneficial ownership by all shareholders known to us to own beneficially 5%
or more of our ordinary shares:

|                               |  |                                                   |  |                              |      |  
|------------------------------ |  | ------------------------------------------------- |  | ---------------------------- | ---- | -
|Name                           |  | Number of
 Ordinary Shares
 Beneficially Owned(1) |  | Percentage of 
 Ownership(2)
|                               |  |                                                   |  |                             
|                               |  |                                                   |  |                              |      |  
|Howard P.L.
 Yeung (3) (4) (5) |  | 7,061,872                                         |  |                              | 59.5 | %
|Kenneth
 Yeung (3) (6)         |  | 450,029                                           |  |                              | 5.1  | %

|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Beneficial
 ownership is determined in accordance with the rules of the Securities and
 Exchange Commission and generally includes voting or investment power with
 respect to securities. Ordinary shares relating to options currently
 exercisable or exercisable within 60 days of the date of this table are
 deemed outstanding for computing the percentage of the person holding such
 securities but are not deemed outstanding for computing the percentage of any
 other person. Except as indicated by footnote, and subject to community
 property laws where applicable, the persons named in the table above have
 sole voting and investment power with respect to all shares shown as
 beneficially owned by them.

46

---

---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The
 percentages shown are based on 8,858,553 ordinary shares outstanding as of
 March 31, 2009.                                                                                                                                                                                                                                                                                                                   
|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|(3) | Of the
 7,061,872 ordinary shares, 450,029 shares are held by Horsham Enterprises
 Ltd., a corporation incorporated in the British Virgin Islands. Messrs.
 Howard P.L. Yeung and his brother Kenneth Yeung are the beneficial owners, in
 equal shares, of Horsham Enterprises Ltd. Accordingly, Messrs. Yeung may be
 deemed to be the beneficial owners of the ordinary shares held by Horsham
 Enterprises Ltd.
|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|(4) | Includes
 1,435,407 ordinary shares issuable upon conversion of convertible notes and
 1,578,947 ordinary shares issuable upon the exercise of currently exercisable
 warrants.                                                                                                                                                                                                                                    
|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|(5) | The address
 of Messrs. Howard P.L. Yeung is 2202 Kodak House II, 39 Healthy Street, North
 Point, Hong Kong.                                                                                                                                                                                                                                                                                                      
|    |                                                                                                                                                                                                                                                                                                                                                                                                                    
|(6) | The address
 of Mr. Kenneth Yeung is 2202 Kodak Houge II, 39 Healthy Street, North Point,
 Hong Kong.                                                                                                                                                                                                                                                                                                              

Significant Changes in the Ownership of Major
Shareholders

On
December 10, 2007 we entered into a loan agreement with Mr. Yeung. Pursuant to
such agreement, in consideration for a loan in the amount of $3.0 million, we
issued $3.0 million principal amount of convertible notes to Mr. Yeung. The
convertible notes will mature on December 10, 2010, bear interest at a rate of
six month LIBOR plus 3.5% and are convertible into ordinary shares at a
conversion price of $2.09 per share. In addition, Mr. Yeung received warrants
exercisable for a period of five years beginning on December 10, 2007 to
purchase up to an aggregate of 1,578,947 ordinary shares at an exercise price
of $2.375 per share.

Major Shareholders Voting
Rights

Our
major shareholders do not have different voting rights.

Record Holders

Based
on a review of the information provided to us by American Stock Transfer &
Trust Company, our transfer agent, as of March 31, 2009, there were 163 holders
of record of our ordinary shares, of which 144 record holders holding approximately 60.7% of our ordinary
shares had registered addresses in the United States, including banks, brokers
and nominees. These numbers are not representative of the number of beneficial
holders of our shares nor are they representative of where such beneficial
holders reside, since many of these ordinary shares were held of record by
banks, brokers or other nominees

B.      Related
Party Transactions

On
December 10, 2007 we sold $3.0 million of convertible notes to Mr. Yeung. The
convertible notes will mature on December 10, 2010, bear interest at a rate of
six month LIBOR plus 3.5% and are convertible into ordinary shares at a
conversion price of $2.09 per share. In addition, Mr. Yeung received warrants
exercisable for a period of five years beginning on December 10, 2007 to
purchase up to an aggregate of 1,578,947 ordinary shares at an exercise price
of $2.375 per share.

In
July 2008, entered into a $1.5 million loan agreement with Mr. Yeung in order
to facilitate further development of our inertial navigation system technology.
The loan was drawdown in two installments: in July ($1.0 million) and in
December 2008 ($0.5 million). The loan bears interest at LIBOR plus 3% payable
at the beginning of every quarter. Principal payments of $90,000 are payable in
six equal installments commencing on July 1, 2009 and the remaining principal
is payable in eight equal installments, commencing on April 1, 2011. Subject to
the approval of the IMOD, he will be granted a non-exclusive license to use the
technology for non-military/commercial purposes. The non-exclusive license will
automatically convert to an exclusive license should we default on any of our
obligations under the loan agreement. We have also agreed in the future,
subject to the approval of several governmental authorities including the IMOD,
to establish a joint venture with Mr. Yeung or an affiliated entity that will
be engaged in the production and marketing of such non-military/ commercial
products and technology.

47

---

---



C.      Interests
of Experts and Counsel

Not
applicable.

|        |                      
|------- | ---------------------
|ITEM 8. | FINANCIAL INFORMATION

A.      Consolidated
Statements and Other Financial Information

Legal Proceedings

In
December 1998, Mr. Haim Nissenson, our former president and chief executive
officer, filed a complaint against us and Mr. Herzle Bodinger, chairman of our
Board of Directors and our president, in the Regional Labor Court of Tel Aviv
(Case No. 3/4074/98 H. Nissenson v. RADA Electronic Industries Ltd. and
others), seeking approximately NIS 2.0 million for salary, vacation and
severance payments and other benefits that he was allegedly entitled to
pursuant to his retirement agreement with us. In addition, Mr. Nissenson has
also sought a permanent injunction and declarative relief, stating that a
personal loan that was provided to him by us had been forgiven. In August 2000,
we filed a claim against Mr. Nissenson in the Regional Court for Labor Disputes
in Tel Aviv (Case No. 7049/00 RADA Electronic Industries Ltd. v. Nissenson.)
for the amount of NIS 2.0 million the repayment of the loan we granted to Mr.
Nissenson that allegedly was forgiven by us in Mr. Nissensons retirement agreement,
as mentioned above. The hearings of both Mr. Nissensons and our claims in the
Regional Court for Labor Disputes were joined. In February 2009, the Regional
Labor Court determined that Mr., Nissenson is required to repay the $485,000 of
loans he received from us together with accrued interest and linkage
differences as provided by law. The Court also denied all of Mr. Nissensons
claims and allegations against Mr. Herzle Bodinger, our current Chairman of the
Board, as well as substantially all of Mr. Nissensons claims against us,
except for payment of recuperation fees and vacation fees in the aggregate
amount of NIS 109,000, together with accrued interest and linkage differences,
as provided by law. The Court found that the retirement agreement between us
and Mr. Nissenson is null and void since it was not legally approved, tainted
with misleading information provided by Mr. Nissenson and included provisions
that were not properly approved by our Board of Directors.

We
have reached a settlement in all other pending claims involving Messrs
Nissenson, Dobronski, other current and former directors and officers and us.
Pursuant to this settlement, it was agreed that all the claims that were filed
in the following cases 6152-08-07 (old number 2514/99), 6159-08-07 (old number
1751/01), 2600-03-08 (old number 1158/01), 1845/05 in the District Court of
Tel-Aviv, 56365/04 in the magistrate Court of Tel-Aviv and 29334/06 in the
Magistrate Court of Tel Aviv were dismissed, while such agreement does not
constitute a waiver by each party of any of its claims or otherwise an
admission of the parties claims. Pursuant to such agreement, we do not insist
in our claims that Mr. Nissenson and Mr, Dobronski did not disclose their
personal interest in Jetborne International, Ltd., as previously stated in our
reports.

In
January 2000, Vertical Integration Limited filed a claim against us with the
District Court of Tel Aviv (Case No. 1120/00 Vertical Integration Limited v.
RADA Electronic Industries Ltd) for the amount of $250,000. It was alleged
that at the beginning of 1997 Plaintiff entered into an agreement with us,
whereby it was entitled to remuneration in the event that it would find an
investor for us. The claim was dismissed by the District Court and it was held,
inter alia, that the witnesses for the Plaintiffs were not credible. Plaintiffs
appealed to the Supreme Court and their appeal was denied on 4.2.2009.

In
May 2001, Mr. David Kenig, a former member of our board of directors, filed a
claim against us in the District Court of Tel Aviv (Civil Case 1791/01 Kenig
v. RADA Electronic Industries Ltd.) seeking a declaration that he is
entitled to receive options to purchase 200,000 of our ordinary shares (after
the reverse split) under the same terms and conditions as those granted by us
to other directors in 1999, and an injunction enforcing us to issue such
options to him. Based on legal advice, we believe that the claim has no merits.
In July 2001, we filed a counter-claim in the amount of NIS 500,000. In the
counter-claim we maintain that Mr. Kenig is personally responsible for
executing Mr. Nissensons retirement agreement and that in such capacity he
breached his fiduciary and care duties towards us and should the Labor Court
decide that the retirement agreement is valid and enforceable against us, then
Mr. Kenig has to indemnify us for all the damages caused to us as a result of
such Labor Court decision. The District Court has issued a stay of the hearings
pending resolution of the Labor Court proceedings detailed above.

48

---

---



In
March 2007, Mr. David Kenig commenced an action against us in New York State
Supreme Court alleging that we failed to provide him certain stock options
to which he was entitled as a result of his service on the Board of Directors
in the 1990s. Mr. Kenig alleged in his complaint that he was entitled to
recover $1.8 million from us. We moved to dismiss this complaint on several
grounds. In December 2007, the court granted our motion to dismiss the
action in its entirety. Mr. Kenig attempted to appeal from the
dismissal, but did not do so in a timely fashion and his appeal was
rejected. He subsequently made a motion to the appellate court in New York
seeking additional time to prosecute his appeal. That motion was denied. Mr.
Kenig has made a motion to the appellate court asking that court to reconsider
its denial of his request for additional time to appeal. That motion was denied
and Mr. Kenigs appeal from the order dismissing his claims was dismissed.

From
time to time we are involved in legal proceedings arising from the operation of
our business. Based on the advice of our legal counsel, management believes
such other current proceedings will not have a material adverse effect on our
financial position or results of operations.

Dividend Distribution Policy

We
have never paid cash dividends to our shareholders. We intend to retain future
earnings for use in our business and do not anticipate paying cash dividends on
our ordinary shares in the foreseeable future. Any future dividend policy will
be determined by the board of directors and will be based upon conditions then
existing, including our results of operations, financial condition, current and
anticipated cash needs, contractual restrictions and other conditions as the
board of directors may deem relevant.

According
to the Israeli Companies Law, a company may distribute dividends out of its
profits, so long as the company reasonably believes that such dividend distribution
will not prevent the company from paying all its current and future debts.
Profits, for purposes of the Israeli Companies Law, means the greater of
retained earnings or earnings accumulated during the preceding two years. In
the event cash dividends are declared, such dividends will be paid in NIS.

B.      Significant
Changes

Since
the date of the annual consolidated financial statements included in this
annual report, no significant changes have occurred.

|        |                      
|------- | ---------------------
|ITEM 9. | THE OFFER AND LISTING

A.      Offer
and Listing Details

Annual
Stock Information

The
following table sets forth for each of the years indicated, the range of high
ask and low bid prices of our ordinary shares on the NASDAQ National Market or
the NASDAQ Capital Market:

|     |  |       |  |     |      |  | 
|---- |  | ----- |  | --- | ---- |  | 
|Year |  | High  |  | Low |     
|     |  |       |  |     |     
|     |  |       |  |     |      |  | 
|2004 |  | 10.32 |  |     | 3.42 |  | 
|2005 |  | 5.64  |  |     | 3.18 |  | 
|2006 |  | 3.90  |  |     | 1.95 |  | 
|2007 |  | 3.00  |  |     | 1.95 |  | 
|2008 |  | 2.80  |  |     | 0.50 |  | 

Quarterly
Stock Information

The
following table sets forth for each of the full financial quarters in the years
indicated, the range of high ask and low bid prices of our ordinary shares on
the NASDAQ Capital Market:

|                |  |      |      |     |   |      | 
|--------------- |  | ---- | ---- | --- | - | ---- | 
|2007            |  | High |      | Low |  
|                |  |      |      |     |  
|                |  |      |      |     |   |      | 
|First
 Quarter  |  | $    | 2.15 |     | $ | 1.74 | 
|Second
 Quarter |  |      | 2.20 |     |   | 1.42 | 
|Third
 Quarter  |  |      | 2.55 |     |   | 1.52 | 
|Fourth
 Quarter |  |      | 3.00 |     |   | 1.95 | 

|                |  |      |      |     |   |      | 
|--------------- |  | ---- | ---- | --- | - | ---- | 
|2008            |  | High |      | Low |  
|                |  |      |      |     |  
|                |  |      |      |     |   |      | 
|First
 Quarter  |  | $    | 2.80 |     | $ | 1.52 | 
|Second
 Quarter |  |      | 2.20 |     |   | 1.68 | 
|Third
 Quarter  |  |      | 1.90 |     |   | 1.20 | 
|Fourth
 Quarter |  |      | 1.54 |     |   | 0.50 | 

49

---

---



Monthly Stock Information

The
following table sets forth, for the most recent six months, the range of high
ask and low bid prices of our ordinary shares on the NASDAQ Capital Market:

|                                |  |      |      |     |   |      | 
|------------------------------- |  | ---- | ---- | --- | - | ---- | 
|                                |  | High |      | Low |  
|                                |  |      |      |     |  
|                                |  |      |      |     |   |      | 
|2008                            |  |      |      |     |   |      | 
|October                         |  | $    | 1.54 |     | $ | 0.50 | 
|November                        |  |      | 1.33 |     |   | 0.53 | 
|December                        |  |      | 0.98 |     |   | 0.53 | 
|                                |  |      |      |     |   |      | 
|2009                            |  |      |      |     |   |      | 
|January                         |  | $    | 0.94 |     | $ | 0.62 | 
|February                        |  |      | 1.10 |     |   | 0.52 | 
|March
 (through March 30, 2009) |  |      | 1.26 |     |   | 0.77 | 

B.      Plan
of Distribution

Not
applicable.

C.      Markets

Our
ordinary shares traded on the NASDAQ National Market under the symbol RADIF
from 1985 until June 10, 2002 when the listing of our ordinary shares was
transferred to the NASDAQ National Market. On December 13, 2005, we changed our
symbol to RADI, and on March 15, 2007, we changed our symbol to RADA.

D.      Selling
Shareholders

Not
applicable.

E.      Dilution

Not
applicable.

F.      Expense
of the Issue

Not
applicable.

|         |                       
|-------- | ----------------------
|ITEM 10. | ADDITIONAL INFORMATION

A.      Share
Capital

Not
applicable.

B.      Memorandum
and Articles of Association

Purposes and Objects of the Company

We
are registered with the Israeli Companies Registry and have been assigned
company number 52-003532-0. Section 2 of our memorandum of association provides
that we were established for the purpose of engaging in the business of
providing services of planning, development, consultation and instruction in
the electronics field. In addition, the purpose of our company is to perform
various corporate activities permissible under Israeli law.

50

---

---



On
February 1, 2000, the Israeli Companies Law came into effect and superseded
most of the provisions of the Israeli Companies Ordinance (New Version), 5743-1983,
except for certain provisions which relate to liens, bankruptcy, dissolution
and liquidation of companies. Under the Israeli Companies Law, as recently
amended, various provisions, some of which are detailed below, overrule the
current provisions of our articles of association.

The Powers of the Directors

Under
the provisions of the Israeli Companies Law, and our articles of association, a
director cannot participate in a meeting nor vote on a proposal, arrangement or
contract in which he or she is materially interested. In addition, our
directors cannot vote compensation to themselves or any members of their body
without the approval of our audit committee and our shareholders at a general
meeting. See Item 6A. Directors, Senior Management and Employees  Approval of
Related Party Transactions Under Israeli Law.

The
authority of our directors to enter into borrowing arrangements on our behalf
is not limited, except in the same manner as any other transaction by us.

Under
our articles of association, retirement of directors from office is not subject
to any age limitation and our directors are not required to own shares in our
company in order to qualify to serve as directors.

Rights Attached to Shares

Our
authorized share capital consists of 16,333,333 ordinary shares of a nominal
value of NIS 0.015 each. All outstanding ordinary shares are validly issued,
fully paid and non-assessable. The rights attached to the ordinary shares are
as follows:

The
rights attached to the ordinary shares are as follows:

Dividend
rights. Holders of our ordinary shares are entitled to the full
amount of any cash or share dividend subsequently declared. The board of
directors may declare interim dividends and propose the final dividend with
respect to any fiscal year only out of the retained earnings, in accordance
with the provisions of the Israeli Companies Law. Our articles of association
provide that the declaration of a dividend requires approval by an ordinary
resolution of the shareholders, which may decrease but not increase the amount
proposed by the board of directors. See Item 8A. Financial Information 
Consolidated and Other Financial Information  Dividend Distribution Policy.
If after one year a dividend has been declared and it is still unclaimed, the
board of directors is entitled to invest or utilize the unclaimed amount of
dividend in any manner to our benefit until it is claimed. We are not obligated
to pay interest or linkage differentials on an unclaimed dividend.

Voting
rights. Holders of ordinary shares have one vote for each ordinary
share held on all matters submitted to a vote of shareholders. Such voting
rights may be affected by the grant of any special voting rights to the holders
of a class of shares with preferential rights that may be authorized in the
future.

An
ordinary resolution, such as a resolution for the declaration of dividends,
requires approval by the holders of a majority of the voting rights represented
at the meeting, in person, by proxy or by written ballot and voting on the
matter. Under our articles of association, a special resolution, such as
amending our memorandum of association or articles of association, approving
any change in capitalization, winding-up, authorization of a class of shares
with special rights, or other changes as specified in our articles of
association, requires approval of a special majority, representing the holders
of no less than 75% of the voting rights represented at the meeting in person,
by proxy or by written ballot, and voting on the matter.

Pursuant
to our articles of association, our directors are elected at our annual general
meeting of shareholders for a term of three years by a vote of the holders of a
majority of the voting power represented and voting at such meeting. and hold
office until the third next annual general meeting of shareholders and until
their successors have been elected. All the members of our Board of Directors
(except the outside directors) may be reelected upon completion of their term
of office. For information regarding the election of outside directors, see
Item 6C. Directors, Senior Management and Employees  Directors and Senior
Management - Board Practices - Election of Directors.

51

---

---



Rights to share in the companys profits.
Our shareholders have the right to share in our profits distributed as a
dividend and any other permitted distribution. See this Item 10B. Additional
Information  Memorandum and Articles of Association  Rights Attached to
Shares  Dividend Rights.

Rights to
share in surplus in the event of liquidation. In the event of our
liquidation, after satisfaction of liabilities to creditors, our assets will be
distributed to the holders of ordinary shares in proportion to the nominal
value of their holdings. This right may be affected by the grant of
preferential dividend or distribution rights to the holders of a class of
shares with preferential rights that may be authorized in the future.

Liability to
capital calls by the company.Under our memorandum of association
and the Israeli Companies Law, the liability of our shareholders is limited to
the par value of the shares held by them.

Limitations
on any existing or prospective major shareholder. See Item 6A.
Directors and Senior Management  Approval of Related Party Transactions Under
Israeli Law.

Changing Rights Attached to Shares

According
to our articles of association, in order to change the rights attached to any
class of shares, unless otherwise provided by the terms of the class, such
change must be adopted by a general meeting of the shareholders and by a
separate general meeting of the holders of the affected class with a majority
of 75% of the voting power participating in such meeting.

Annual and Special General Meetings

The
board of directors must convene an annual meeting of shareholders at least once
every calendar year, within fifteen months of the last annual meeting.
Depending on the matter to be voted upon, notice of at least 21 days or 35 days
prior to the date of the meeting is required. Our board of directors may, in
its discretion, convene additional meetings as special general meetings. In
addition, the board must convene a special general meeting upon the demand of
two of the directors, 25% of the nominated directors, one or more shareholders
having at least 5% of the outstanding share capital and at least 1% of the
voting power in the company, or one or more shareholders having at least 5% of
the voting power in the company.

The
quorum required for an ordinary meeting of shareholders consists of at least
two shareholders present in person or represented by proxy who hold or
represent, in the aggregate, at least one third of the voting rights of the
issued share capital. A meeting adjourned for lack of a quorum generally is
adjourned to the same day in the following week at the same time and place or
any time and place as the directors designate in a notice to the shareholders.
At the reconvened meeting, the required quorum consists of any two members
present in person or by proxy.

Limitations on the Rights to Own Securities
in Our Company

Neither
our memorandum of association or our articles of association nor the laws of
the State of Israel restrict in any way the ownership or voting of shares by
non-residents, except with respect to subjects of countries which are in a
state of war with Israel.

Provisions Restricting Change in Control of
Our Company

The
Israeli Companies Law requires that mergers between Israeli companies be
approved by the board of directors and general meeting of shareholders of both
parties to the transaction. The approval of the board of directors of both
companies is subject to such boards confirmation that there is no reasonable
doubt that after the merger the surviving company will be able to fulfill its
obligations towards its creditors. Each company must notify its creditors about
the contemplated merger. Generally, under the Israeli Companies Law, our
articles of association are deemed to include a requirement that such merger be
approved by a special resolution of the shareholders, as explained above. The
approval of the merger by the general meetings of shareholders of the companies
is also subject to additional approval requirements as specified in the Israeli
Companies Law and regulations promulgated thereunder. See also Item 6A.
Directors, Senior Management and Employees  Directors and Senior Management  Approval of Related Party Transactions Under Israeli Law. In
addition, the purchase of 25% or more of the outstanding share capital of a
company or the purchase of substantial assets of a company requires, under
certain conditions the approval of the Restrictive Practices Authority.
Furthermore if the target company has received tax incentives of grants from
the Office of the Chief scientist, changes in ownership may require also the
approval of the tax authorities or the Office of the Chief Scientist, as
applicable.

52

---

---



Disclosure of Shareholders Ownership

The
Israeli Securities Law and regulations promulgated thereunder do not require a
company whose shares are publicly traded solely in a stock exchange outside of
Israel, as in the case of our company, to disclose its share ownership.

Changes in Our Capital

Changes
in our capital are subject to the approval of the shareholders at a general
meeting by a special majority of 75% of the votes of shareholders participating
and voting in the general meeting.

C.      Material
Contracts

None.

D.      Exchange
Controls

Israeli
law and regulations do not impose any material foreign exchange restrictions on
non-Israeli holders of our ordinary shares. In May 1998, a new general permit
was issued under the Israeli Currency Control Law, 1978, which removed most of
the restrictions that previously existed under such law, and enabled Israeli
citizens to freely invest outside of Israel and freely convert Israeli currency
into non-Israeli currencies.

Non-residents
of Israel who purchase our ordinary shares will be able to convert dividends,
if any, thereon, and any amounts payable upon our dissolution, liquidation or
winding up, as well as the proceeds of any sale in Israel of our ordinary
shares to an Israeli resident, into freely repairable dollars, at the exchange
rate prevailing at the time of conversion, provided that the Israeli income tax
has been withheld (or paid) with respect to such amounts or an exemption has
been obtained.

Non-residents
of Israel who purchase our ordinary shares will be able to convert dividends,
if any, thereon, and any amounts payable upon our dissolution, liquidation or
winding up, as well as the proceeds of any sale in Israel of our ordinary shares
to an Israeli resident, into freely repairable dollars, at the exchange rate
prevailing at the time of conversion, provided that the Israeli income tax has
been withheld (or paid) with respect to such amounts or an exemption has been
obtained.

E.      Taxation

The
following is a discussion of Israeli and United States tax consequences
material to us and our shareholders. To the extent that the discussion is based
on new tax legislation which has not been subject to judicial or administrative
interpretation, the views expressed in the discussion might not be accepted by
the tax authorities in question. The discussion is not intended, and should not
be construed, as legal or professional tax advice and does not exhaust all
possible tax considerations.

Holders of our ordinary shares should consult their own tax advisors as to the
United States, Israeli or other tax consequences of the purchase, ownership and
disposition of ordinary shares, including, in particular, the effect of any
foreign, state or local taxes.

Israeli Tax Considerations

The
following is a summary of the current tax structure applicable to companies in
Israel, with special reference to its effect on us. The following also contains
a discussion of the material Israeli tax consequences to purchasers of our
ordinary shares and Israeli government programs benefiting us. This summary
does not discuss all the aspects of Israeli tax law that may be relevant to a
particular investor in light of his or her personal investment circumstances or
to some types of investors subject to special treatment under Israeli law.
Examples of this kind of investor include residents of Israel or traders in securities who are subject
to special tax regimes not covered in this discussion. Since some parts of this
discussion are based on new tax legislation that has not yet been subject to
judicial or administrative interpretation, we cannot assure you that the
appropriate tax authorities or the courts will accept the views expressed in
this discussion.

53

---

---



General Corporate Tax Rate

Israeli companies are subject to income tax on
their worldwide income regardless of the territorial source of such income. The
applicable rate for 2008 was 27%. The rate will be further reduced to 26% in
2009 and 25% in 2010 and thereafter. Capital gains derived
after January 1, 2003 (the gains derived from the sale of listed securities
that are taxed at the prevailing corporate tax rates) are subject to tax at a
rate of 25%.

Law for the Encouragement of Industry
(Taxes), 1969

The
Law for the Encouragement of Industry (Taxes), 1969, generally referred to as
the Industry Encouragement Law, provides several tax benefits for industrial
companies. We believe that we currently qualify as an Industrial Company
within the meaning of the Industry Encouragement Law. The Industry
Encouragement Law defines Industrial Company as a company resident in Israel,
of which 90% or more of its income in any tax year, other than of income from
defense loans, capital gains, interest and dividend, is derived from an
Industrial Enterprise owned by it. An Industrial Enterprise is defined as
an enterprise whose major activity in a given tax year is industrial production
activity.

The
following corporate tax benefits, among others, are available to Industrial
Companies:

| |   |                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Amortization
 of the cost of purchased know-how and patents and/or right to use a patent
 and know-how which are used for the development or advancement of the
 company, over an eight-year period;
| |   |                                                                                                                                                                                                     
| | · | Accelerated
 depreciation rates on equipment and buildings;                                                                                                                                         
| |   |                                                                                                                                                                                                     
| | · | Under
 specified conditions, an election to file consolidated tax returns with
 additional related Israeli Industrial Companies; and                                                                
| |   |                                                                                                                                                                                                     
| | · | Expenses
 related to a public offering are deductible in equal amounts over three
 years.                                                                                                           

Eligibility
for the benefits under the Industry Encouragement Law is not subject to receipt
of prior approval from any governmental authority. We cannot assure that we
qualify or will continue to qualify as an Industrial Company or that the
benefits described above will be available in the future.

Law for the Encouragement of Industrial
Research and Development, 1984

Under the Law for the Encouragement of Industrial
Research and Development, 1984, research and development programs approved by a
governmental committee of the Office of the Chief Scientist are eligible for
grants, in exchange for payment of royalties from revenues generated by the
products developed in accordance with the program. Once a project is approved,
the Office of the Chief Scientist will award grants between 20-50% of the
projects approved budget, in exchange for royalties at a rate of 3% to 6%,
depending on the date of approval of the project, of the proceeds from the
sales of the products that are developed from projects funded by the Office of
the Chief Scientist. These royalties must be paid beginning with the
commencement of sales of those products and ending when 100% of the dollar
value of the grant was repaid or, for projects approved after January 1,
1999, the dollar amount of the grant plus interest at the rate LIBOR for dollar
deposits in a twelve-month period.

The terms of this Israeli governmental
participation also require that the products developed with government grants
be manufactured in Israel, unless a special governmental committee, in its
discretion consents to manufacturing abroad. In addition, in the event that any
of the manufacturing rights are transferred out of Israel, if approved by the
special governmental committee, we may be required to pay royalties at a higher
rate and be liable to an increased aggregate pay back amount depending on the
portion of manufacturing performed outside of Israel, up to a maximum of 300%
of the dollar amount of the grant, or of the dollar amount plus interest, as
applicable. The technology developed pursuant to the terms of these grants may
not be transferred outside of Israel, excluding several exceptions, which will
be detailed below, and may be transferred to third parties within Israel only
with the prior approval of the governmental committee. This approval is not
required for the export of any products resulting from that research
development. Approval of the transfer of technology within Israel may be
granted only if the recipient abides by all of the provisions of this law and
the regulations promulgated thereunder, including the restrictions on the
transfer of know-how and the obligation to pay royalties in an amount that may
be increased. There can be no assurance that this consent, requested at the
time of a future transfer of technology, will be granted.

54

---

---



In June 2005, an amendment to the Research Law
became effective, which amendment was intended to make the Research Law more
compatible with the global business environment by, among other things,
relaxing restrictions on the transfer of manufacturing rights outside Israel
and on the transfer of Office of the Chief Scientist-funded know-how outside of
Israel.

The amendment permits the Office of the Chief
Scientist, among other things, to approve the transfer of manufacturing rights
outside Israel in exchange for an import of different manufacturing into Israel
as a substitute, in lieu of demanding the recipient to pay increased royalties
as described above.

The
amendment further permits, under certain circumstances and subject to the
Office of the Chief Scientists prior approval, the transfer outside Israel of
know-how that has been funded by Office of the Chief Scientist, generally in
the following cases: (a) the grant recipient pays to the Office of the Chief
Scientist a portion of the consideration paid for such funded know-how
(according to certain formulas), (b) the grant recipient receives know-how from
a third party in exchange for its funded know-how, or (c) such transfer of
funded know-how arises in connection with certain types of cooperation in
research and development activities.

The Research Law imposes reporting requirements
with respect to certain changes in the ownership of a grant recipient. The law
requires the grant recipient and its controlling shareholders and interested
parties to notify the Office of the Chief Scientist of any change in control of
the recipient or a change in the holdings of the means of control of the
recipient that results in a foreign resident becoming an interested party
directly in the recipient.

In addition, the rules of the Office of the Chief
Scientist may require prior approval of the Office of the Chief Scientist or
additional information or representations in respect of certain of such events.
For this purpose, control is defined as the ability to direct the activities
of a company other than any ability arising solely from serving as an officer
or director of the company. A person is presumed to have control if such person
holds 50% or more of the means of control of a company. Means of control
refers to voting rights or the right to appoint directors or the chief executive
officer. An interested party of a company includes a holder of 5% or more of
its outstanding share capital or voting rights, its chief executive officer and
directors, someone who has the right to appoint its chief executive officer or
at least one director, and a company with respect to which any of the foregoing
interested parties owns 25% or more of the outstanding share capital or voting
rights or has the right to appoint 25% or more of the directors.

Accordingly, any foreign resident who acquires 5%
or more of our ordinary shares will be required to notify the Office of the
Chief Scientist that it has become an interested party and to sign an
undertaking to comply with the Research Law.

Additionally, procedures regulated under the
Research Law require the grant recipient to obtain the approval of the Office
of the Chief Scientist, or the OCS, prior to a change in the holdings of the
recipient or change in the holdings of the means of control of the recipient if
the recipients shares are being issued to a foreign person or entity and
require the new foreign party to undertake to the Office of the Chief Scientist
to comply with the Research Law.

We
cannot assure you that we will receive OCS grants in the future. In addition,
each application to the OCS is reviewed separately, and grants are based on the
program approved by the research committee. Generally, expenditures supported
under other incentive programs of the State of Israel are not eligible for
grants from the OCS.

In order to meet certain conditions in connection
with the grants and programs of the Office of the Chief Scientist, we have made
some representations to the Israeli government about our future plans for our
Israeli operations. From time to time the extent of our Israeli operations has
differed and may in the future differ, from our representations. If, after
receiving grants under certain of such programs, we fail to meet certain
conditions to those benefits or if there is any material deviation from the
representations made by us to the Israeli government, we could be required to
refund to the State of Israel tax or other benefits previously received
(including interest and consumer price index linkage difference) and would
likely be denied receipt of such grants or benefits, and participation of such
programs, thereafter.

55

---

---



Taxation under Inflationary Conditions

The Income Tax Law (Inflationary Adjustments),
1985, generally referred to as the Inflationary Adjustments Law, represents an
attempt to overcome the problems presented to a traditional tax system by an
economy undergoing rapid inflation. On February 26, 2008, the Inflationary
Adjustments Law was abolished effective as of January 1, 2008, subject however
to transition provisions and other special provisions for prevention of
distortion in tax calculations. The Inflationary Adjustments Law was highly
complex. Its features, which were material to us, can be generally described as
follows:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | Where a companys equity, as calculated under the Inflationary
 Adjustments Law, exceeds the depreciated cost of its fixed assets (as defined
 in the Inflationary Adjustments Law), a deduction from taxable income is
 permitted equal to the excess multiplied by the applicable annual rate of
 inflation. The maximum deduction permitted in any single tax year is 70% of
 taxable income, with the unused portion permitted to be carried forward,
 based on the change in the consumer price index. The unused portion that is
 carried forward may be deducted in full in the following year. Beginning in
 2008 and thereafter no deduction will be permitted. However, the unused
 portion of deduction accumulated until December 31, 2007, will be deducted
 from the taxable income of 2008, with no adjustment to the inflation at 2008.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | If the companys depreciated cost of fixed assets exceeds its equity,
 then the excess multiplied by the applicable annual rate of inflation is
 added to the companys ordinary income beginning in 2008 and thereafter no
 excess will be added.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | · | Subject to certain limitations, depreciation deductions on fixed
 assets and losses carried forward are adjusted for inflation based on the
 change in the consumer price index. Depreciation regulation will continue to
 apply but losses carried forward will be adjusted for inflation only until
 December 31, 2007. In February 2008, the Income Tax law (Inflation adjustment)
 was cancelled.                                                                                                                                                                                                                                                                                                                                                                                                                                                  

Capital Gains Tax on
Sales of Our Ordinary Shares

Under income tax regulations shareholders that
are not Israeli residents are generally exempt from Israeli capital gains tax
on any gains derived from the sale, exchange or disposition of our ordinary
shares, provided that (1) such shareholders did not acquire their shares prior
to first initial public offering on a recognized stock exchange outside of
Israel, (2) the provisions of the Income Tax Law (inflationary adjustments),
1985 do not apply to such gain, and (3) such gains did not derive from a
permanent establishment or business activity of such shareholders in Israel.
However, non-Israeli corporations will not be entitled to the foregoing
exemptions if an Israeli resident (i) has a controlling interest of 25% or more
in such non-Israeli corporation, or (ii) is the beneficiary of or is entitled to
25% or more of the revenues or profits of such non-Israeli corporation, whether
directly or indirectly.

Under the U.S.-Israel Tax Treaty, the sale,
exchange or disposition of our ordinary shares by a shareholder who is a U.S.
resident (for purposes of the U.S.-Israel Tax Treaty) holding the ordinary
shares as a capital asset is exempt from Israeli capital gains tax unless
either (i) the shareholder holds, directly or indirectly, shares representing
10% or more of our voting capital during any part of the 12-month period
preceding such sale, exchange or disposition or (ii) the capital gains arising
from such sale are attributable to a permanent establishment of the shareholder
located in Israel. However, under the U.S.-Israel Tax Treaty, U.S. Residents
would be permitted to claim a credit for such taxes against the U.S. federal
income tax imposed with respect to such sale, exchange or disposition, subject
to limitations in U.S. laws applicable to foreign tax credits. The treaty does
not relate to U.S. state or local taxes.

Taxation of Foreign
Resident Holders of Shares

Non-residents of Israel
are generally subject to Israeli income tax on the receipt of dividends paid on
our ordinary shares at the rate of
20%, which tax will be withheld at source, unless a different rate is provided in a treaty between Israel and the
shareholders country of residence. With
respect to a substantial shareholder, the applicable tax rate is at 25%. Under
the U.S.-Israel Tax Treaty, the maximum rate of tax withheld in Israel on
dividends paid to a holder of our ordinary shares who is a U.S. resident (for purposes of
the U.S.-Israel Tax Treaty) is 25%. However, generally, the maximum rate of
withholding tax on dividends, not generated by our Approved Enterprise, that
are paid to a U.S. corporation holding 10% or more of our outstanding voting
capital throughout the tax year in which the dividend is distributed as well as
the previous tax year, is 12.5%.

56

---

---



A non-resident of Israel who receives dividends
from which tax was withheld is generally exempt from the duty to file returns
in Israel in respect of such income, provided such income was not derived from
a business conducted in Israel by the taxpayer, and the taxpayer has no other
taxable sources of income in Israel.

Foreign Exchange
Regulations

Dividends (if any) paid to the holders of our
ordinary shares, and any amounts payable with respect to our ordinary shares
upon dissolution, liquidation or winding up, as well as the proceeds of any
sale in Israel of the ordinary shares to an Israeli resident, may be paid in
non-Israeli currency or, if paid in Israeli currency, may be converted into
freely reparable U.S. dollars at the rate of exchange prevailing at the time of
conversion, however, Israeli income tax is required to have been paid or
withheld on these amounts.

Controlled Foreign
Corporation

In general, and subject to the provisions of all
relevant legislation, an Israeli resident who holds, directly of indirectly,
10% or more of the rights in a foreign corporation whose shares are not
publicly traded, in which more than 50% of the rights are held directly or
indirectly by Israeli residents, and a majority of whose income in a tax year
is considered passive income (generally referred to as a Controlled Foreign
Corporation, or CFC), is liable for tax on the portion of his income attributed
to holdings in such corporation, as if such income was distributed to him as a
dividend.

Share Allocations to
Employees

In general, the section of the Tax Ordinance that
deals with taxation of share allocations to employees and/or officers
(excluding controlling members) provides that a company may choose one of three
courses of taxation which course must be approved by the assessing officer: (i)
work income course for shares held 12 months in trust; (ii) capital gains
course for shares held 24 months in trust; and (iii) allocation not through a
trustee. Each of these courses has different tax consequences.

As of January 1, 2006, the periods mentioned in
the first two courses commence as of the date of grant and not as of the end of
the tax year in which the shares were granted.

Stamp Duty

Documents signed after January 1, 2006 are not
subject to stamp tax.

United States Federal Income Tax Consequences

The
following is a summary of certain material U.S. federal income tax consequences
that apply to U.S. Holders who hold ordinary shares as capital assets. This
summary is based on the United States Internal Revenue Code of 1986, as amended
(the Code), Treasury regulations promulgated thereunder, judicial and
administrative interpretations thereof, and the U.S.-Israel Tax Treaty, all as
in effect on the date hereof and all of which are subject to change either
prospectively or retroactively. This summary does not address all tax
considerations that may be relevant with respect to an investment in ordinary
shares. This summary does not discuss all the tax consequences that may be
relevant to a U.S. Holder in light of such holders particular circumstances or
to U.S. Holders subject to special rules, including persons that are non-U.S.
Holders, broker-dealers, financial institutions, certain insurance companies,
investors liable for alternative minimum tax, tax-exempt organizations,
regulated investment companies, foreign resident aliens of the U.S. or
taxpayers whose functional currency is not the U.S. dollar, persons who hold
the ordinary shares through partnerships or other pass-through entities,
persons who acquired their ordinary shares through the exercise or cancellation
of employee stock options or otherwise as compensation for services, investors
that actually or constructively own 10 percent or more of our voting shares,
and investors holding ordinary shares as part of a straddle or appreciated
financial position or as part of a hedging or conversion transaction.

57

---

---



If
a partnership or an entity treated as a partnership for U.S. federal income tax
purposes owns ordinary shares, the U.S. federal income tax treatment of a
partner in such a partnership will generally depend upon the status of the
partner and the activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their tax advisors
about the U.S. federal income tax consequences of holding and disposing of
ordinary shares.

This summary does not address the effect of
any U.S. federal taxation other than U.S. federal income and gift and estate
taxation. In addition, this summary does not include any discussion of state,
local or foreign taxation.

You are urged to consult your tax advisors
regarding the foreign and United States federal, state and local tax
considerations of an investment in ordinary shares.

For
purposes of this summary, the term U.S. Holder means an individual who is a
citizen or, for U.S. federal income tax purposes, a resident of the United
States, a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any political
subdivision thereof, an estate whose income is subject to U.S. federal income
tax regardless of its source, or a trust that (a) is subject to the primary
supervision of a court within the United States and the control of one or more
U.S. persons or (b) has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a U.S. person.

Taxation of Dividends

Subject
to the discussion below under Passive Foreign Investment Companies, the gross
amount of any distributions received with respect to ordinary shares, including
the amount of any Israeli taxes withheld therefrom, will constitute dividends
for U.S. federal income tax purposes to the extent of our current and accumulated
earnings and profits, as determined under U.S. federal income tax principles.
You will be required to include this amount of dividends in gross income as
ordinary income. Distributions in excess of our current and accumulated
earnings and profits will be treated as a non-taxable return of capital to the
extent of your tax basis in the ordinary shares and any amount in excess of
your tax basis will be treated as gain from the sale of ordinary shares. See
-Disposition of Ordinary Shares below for the discussion on the taxation of
capital gains. Dividends will not qualify for the dividends-received deduction
generally available to corporations under Section 243 of the Code.

Dividends
that we pay in NIS, including the amount of any Israeli taxes withheld
therefrom, will be included in your income in a U.S. dollar amount calculated
by reference to the exchange rate in effect on the day such dividends are
received. A U.S. Holder who receives payment in NIS and converts NIS into U.S.
dollars at an exchange rate other than the rate in effect on such day may have
a foreign currency exchange gain or loss that would be treated as ordinary
income or loss. U.S. Holders should consult their own tax advisors concerning
the U.S. tax consequences of acquiring, holding and disposing of NIS.

Subject
to complex limitations, any Israeli withholding tax imposed on such dividends
will be a foreign income tax eligible for credit against a U.S. Holders U.S.
federal income tax liability (or, alternatively, for deduction against income
in determining such tax liability). The limitations set out in the Code include
computational rules under which foreign tax credits allowable with respect to
specific classes of income cannot exceed the U.S. federal income taxes otherwise
payable with respect to each such class of income. Dividends generally will be
treated as foreign-source passive category income or, in the case of certain
U.S. Holders, general category income for United States foreign tax credit
purposes. Further, there are special rules for computing the foreign tax credit
limitation of a taxpayer who receives dividends subject to a reduced tax, see
discussion below. A U.S. Holder will be denied a foreign tax credit with
respect to Israeli income tax withheld from dividends received on the ordinary
shares to the extent such U.S. Holder has not held the ordinary shares for at
least 16 days of the 31-day period beginning on the date which is 15 days
before the ex-dividend date or to the extent such U.S. Holder is under an
obligation to make related payments with respect to substantially similar or
related property. Any days during which a U.S. Holder has substantially
diminished its risk of loss on the ordinary shares are not counted toward
meeting the 16-day holding period required by the statute. The rules relating
to the determination of the foreign tax credit are complex, and you should
consult with your personal tax advisors to determine whether and to what extent
you would be entitled to this credit.

58

---

---



Subject
to certain limitations, qualified dividend income received by a noncorporate
U.S. Holder in tax years beginning on or before December 31, 2010 will be
subject to tax at a reduced maximum tax rate of 15 percent. Distributions
taxable as dividends paid on the ordinary shares should qualify for the 15
percent rate provided that either: (i) we are entitled to benefits under the
income tax treaty between the United States and Israel (the Treaty) or (ii)
the ordinary shares are readily tradable on an established securities market in
the United States and certain other requirements are met. We believe that we
are entitled to benefits under the Treaty and that the ordinary shares
currently are readily tradable on an established securities market in the
United States. However, no assurance can be given that the ordinary shares will
remain readily tradable. The rate reduction does not apply unless certain
holding period requirements are satisfied. With respect to the ordinary shares,
the U.S. Holder must have held such shares for at least 61 days during the
121-day period beginning 60 days before the ex-dividend date. The rate
reduction also does not apply to dividends received from passive foreign
investment companies, see discussion below, or in respect of certain hedged
positions or in certain other situations. The legislation enacting the reduced
tax rate contains special rules for computing the foreign tax credit limitation
of a taxpayer who receives dividends subject to the reduced tax rate. U.S. Holders
of ordinary shares should consult their own tax advisors regarding the effect
of these rules in their particular circumstances.

Disposition of Ordinary Shares

If
you sell or otherwise dispose of ordinary shares, you will recognize gain or
loss for U.S. federal income tax purposes in an amount equal to the difference
between the amounts realized on the sale or other disposition and your adjusted
tax basis in the ordinary shares. Subject to the discussion below under the
heading Passive Foreign Investment Companies, such gain or loss generally
will be capital gain or loss and will be long-term capital gain or loss if you
have held the ordinary shares for more than one year at the time of the sale or
other disposition. In general, any gain that you recognize on the sale or other
disposition of ordinary shares will be U.S.-source for purposes of the foreign
tax credit limitation; losses will generally be allocated against U.S. source
income. Deduction of capital losses is subject to certain limitations under the
Code.

In
the case of a cash basis U.S. Holder who receives NIS in connection with the
sale or disposition of ordinary shares, the amount realized will be based on
the U.S. dollar value of the NIS received with respect to the ordinary shares
as determined on the settlement date of such exchange. A U.S. Holder who
receives payment in NIS and converts NIS into United States dollars at a
conversion rate other than the rate in effect on the settlement date may have a
foreign currency exchange gain or loss that would be treated as ordinary income
or loss.

An
accrual basis U.S. Holder may elect the same treatment required of cash basis
taxpayers with respect to a sale or disposition of ordinary shares, provided
that the election is applied consistently from year to year. Such election may
not be changed without the consent of the Internal Revenue Service (the IRS).
In the event that an accrual basis U.S. Holder does not elect to be treated as
a cash basis taxpayer (pursuant to the Treasury regulations applicable to
foreign currency transactions), such U.S. Holder may have a foreign currency
gain or loss for U.S. federal income tax purposes because of differences
between the U.S. dollar value of the currency received prevailing on the trade
date and the settlement date. Any such currency gain or loss would be treated
as ordinary income or loss and would be in addition to gain or loss, if any,
recognized by such U.S. Holder on the sale or disposition of such ordinary
shares.

Passive Foreign Investment Companies

For
U.S. federal income tax purposes, we will be considered a passive foreign
investment company (PFIC) for any taxable year in which either (i) 75% or
more of our gross income is passive income, or (ii) at least 50% of the average
value of all of our assets for the taxable year produce or are held for the
production of passive income. For this purpose, passive income includes
dividends, interest, royalties, rents, annuities and the excess of gains over
losses from the disposition of assets which produce passive income. If we were
determined to be a PFIC for U.S. federal income tax purposes, highly complex
rules would apply to U.S. Holders owning ordinary shares. Accordingly, you are
urged to consult your tax advisors regarding the application of such rules.

Based on our current and projected income,
assets and activities, we believe that we are not currently a PFIC nor do we
expect to become a PFIC in the foreseeable future. However, because the determination
of whether we are a PFIC is based upon the composition of our income and assets
from time to time, there can be no assurances that we will not become a PFIC
for any future taxable year.

59

---

---



If
we are treated as a PFIC for any taxable year, dividends would not qualify for
the reduced maximum tax rate, discussed above, and, unless you elect either to
treat your investment in ordinary shares as an investment in a qualified
electing fund (a QEF election) or to mark-to-market your ordinary shares,
as described below:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | you would be
 required to allocate income recognized upon receiving certain dividends or
 gain recognized upon the disposition of ordinary shares ratably over the
 holding period for such ordinary shares,                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | · | the amount allocated
 to each year during which we are considered a PFIC and subsequent years,
 other than the year of the dividend payment or disposition, would be subject
 to tax at the highest individual or corporate tax rate, as the case may be,
 in effect for that year and an interest charge would be imposed with respect
 to the resulting tax liability allocated to each such year,
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | · | the amount
 allocated to the current taxable year and any taxable year before we became a
 PFIC would be taxable as ordinary income in the current year, and                                                                                                                                                                                                                                        
| |   |                                                                                                                                                                                                                                                                                                                                                                                                     
| | · | you would be
 required to make an annual return on IRS Form 8621 regarding distributions
 received with respect to ordinary shares and any gain realized on your
 ordinary shares.                                                                                                                                                                                                                  

If
you make either a timely QEF election or a timely mark-to-market election in
respect of your ordinary shares, you would not be subject to the rules
described above. If you make a timely QEF election, you would be required to
include in your income for each taxable year your pro rata share of our ordinary
earnings as ordinary income and your pro rata share of our net capital gain as
long-term capital gain, whether or not such amounts are actually distributed to
you. You would not be eligible to make
a QEF election unless we comply with certain applicable information reporting
requirements.

Alternatively,
if the ordinary shares are considered marketable stock and if you elect to
mark-to-market your ordinary shares, you will generally include in income any
excess of the fair market value of the ordinary shares at the close of each tax
year over your adjusted basis in the ordinary shares. If the fair market value
of the ordinary shares had depreciated below your adjusted basis at the close
of the tax year, you may generally deduct the excess of the adjusted basis of
the ordinary shares over its fair market value at that time. However, such
deductions generally would be limited to the net mark-to-market gains, if any,
that you included in income with respect to such ordinary shares in prior years.
Income recognized and deductions allowed under the mark-to-market provisions,
as well as any gain or loss on the disposition of ordinary shares with respect
to which the mark-to-market election is made, is treated as ordinary income or
loss (except that loss on a disposition of ordinary shares is treated as
capital loss to the extent the loss exceeds the net mark-to-market gains, if
any, that you included in income with respect to such ordinary shares in prior
years). Gain or loss from the disposition of ordinary shares (as to which a
mark-to-market election was made) in a year in which we are no longer a PFIC,
will be capital gain or loss.

Backup Withholding and Information Reporting

Payments
in respect of ordinary shares may be subject to information reporting to the
U.S. Internal Revenue Service and to U.S. backup withholding tax at a rate
equal to the fourth lowest income tax rate applicable to individuals (which,
under current law, is 28%). Backup withholding will not apply, however, if you
(i) are a corporation or come within certain exempt categories, and demonstrate
the fact when so required, or (ii) furnish a correct taxpayer identification
number and make any other required certification.

Backup
withholding is not an additional tax. Amounts withheld under the backup
withholding rules may be credited against a U.S. Holders U.S. tax liability,
and a U.S. Holder may obtain a refund of any excess amounts withheld under the
backup withholding rules by filing the appropriate claim for refund with the
IRS.

U.S. Gift and Estate Tax

An
individual U.S. Holder of ordinary shares will be subject to U.S. gift and
estate taxes with respect to ordinary shares in the same manner and to the same
extent as with respect to other types of personal property.

F.      Dividend
and Paying Agents

Not
applicable.

60

---

---



G.      Statement
by Experts

Not
applicable.

H.      Documents
on Display

We
are subject to the reporting requirements of the United States Securities
Exchange Act of 1934, as amended, as applicable to foreign private issuers as
defined in Rule 3b-4 under the Exchange Act, and in accordance therewith, we
file annual and interim reports and other information with the Securities and
Exchange Commission.

As
a foreign private issuer, we are exempt from certain provisions of the Exchange
Act. Accordingly, our proxy solicitations are not subject to the disclosure and
procedural requirements of Regulation 14A under the Exchange Act, transactions
in our equity securities by our officers and directors are exempt from
reporting and the short-swing profit recovery provisions contained in Section
16 of the Exchange Act. In addition, we are not required under the Exchange Act
to file periodic reports and financial statements as frequently or as promptly
as United States companies whose securities are registered under the Exchange
Act. However, we distribute annually to our shareholders an annual report
containing financial statements that have been examined and reported on, with
an opinion expressed by, an independent public accounting firm, and we intend
to file reports with the Securities and Exchange Commission on Form 6-K
containing unaudited financial information for the first three quarters of each
fiscal year.

This annual report and the exhibits thereto
and any other document we file pursuant to the Exchange Act may be
inspected without charge and copied at prescribed rates at the following
Securities and Exchange Commission public reference rooms: 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549; and on the Securities and Exchange
Commission Internet site (http://www.sec.gov) and on our website www.rada.com.
You may obtain information on the operation of the Securities and Exchange
Commissions public reference room in Washington, D.C. by calling the
Securities and Exchange Commission at 1-800-SEC-0330. The Exchange Act file
number for our Securities and Exchange Commission filings is 0-30198.

The
documents concerning our company which are referred to in this annual report
may also be inspected at our offices located at 7 Giborei Israel Street,
Netanya 42504, Israel.

I.      Subsidiary
Information

Not
applicable.

|         |                                                           
|-------- | ----------------------------------------------------------
|ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

Interest Rate Risk

We
currently do not invest in, or otherwise hold, for trading or other purposes,
any financial instruments subject to market risk. We pay interest on our credit
facilities, convertible notes and long-term and short-term loans based on
Libor, for dollar-denominated loans, and Israeli prime or adjustment
differences to the Israeli consumer price index, for some of our
NIS-denominated loans. As a result, changes in the general level of interest
rates directly affect the amount of interest payable by us under these
facilities. However, we expect our exposure to market risk from changes in
interest rates to be minimal and not material. Therefore, no quantitative
tabular disclosures are required.

A
devaluation of the NIS in relation to the U.S. dollar has the effect of
reducing the U.S. dollar amount of any of our expenses or liabilities which are
payable in NIS (unless such expenses or payables are linked to the U.S.
dollar). As of December 31, 2008, we had liabilities payable in NIS which are
not linked to the U.S. dollar in the amount of $5.5 million and cash and
receivables in the amount of $2.2 million denominated in NIS. Accordingly, an
increase of 1% of the NIS against the dollar would increase our financing
expenses by approximately $32,000. A devaluation of 1% of the NIS against the
dollar would decrease our financing expenses by the same amount. Neither a ten
percent increase nor decrease in current exchange rates would have a material
affect on our consolidated financial statements. However, the amount of
liabilities payable and/or cash and receivables in NIS is likely to change from
time to time.

61

---

---



Because
exchange rates between the NIS and the U.S. dollar fluctuate continuously
(albeit with a historically declining trend in the value of the NIS), exchange
rate fluctuations and especially larger periodic devaluations will have an
impact on our profitability and period-to-period comparisons of our results.
The effects of foreign currency re-measurements are reported in our
consolidated financial statements in continuing operations.

|         |                                                       
|-------- | ------------------------------------------------------
|ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

Not
applicable.

62

---

---



PART
II

|         |                                                 
|-------- | ------------------------------------------------
|ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND
 DELINQUENCIES

None.

|         |                                                                              
|-------- | -----------------------------------------------------------------------------
|ITEM 14. | MATERIAL MODIFICATIONS TO THE
 RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

None.

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

Disclosure
Controls and Procedures

We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in its Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commissions rules and forms, and that such information
is accumulated and communicated to our chief executive officer and chief
financial officer to allow timely decisions regarding required disclosure. Our management, including our chief
executive officer and chief financial officer, conducted an evaluation of our
disclosure controls and procedures, as defined under 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.

Managements
Annual Report on Internal Control over Financial Reporting

Managements Annual Reporton Internal Control over
Financial Reporting

Our
management is responsible for establishing and maintaining adequate internal
control over our financial reporting.
Internal control over financial reporting is defined in Rule 13a-15(f)
or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the companys principal executive and
principal financial officers and effected by the companys board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:

| |   |                                                                                                                                                                                                                                                                                                                                                
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | pertain to the maintenance of records that in
 reasonable detail accurately and fairly reflect the transaction and
 dispositions of the assets of the company;                                                                                                                                                                                 
| |   |                                                                                                                                                                                                                                                                                                                                                
| | · | provide reasonable assurance that transactions are
 recorded as necessary to permit preparation of financial statements in
 accordance with generally accepted accounting principles, and that receipts
 and expenditures of the company are being made only in accordance with
 authorizations of management and directors of the company; and
| |   |                                                                                                                                                                                                                                                                                                                                                
| | · | provide reasonable assurance regarding prevention or
 timely detection of unauthorized acquisition, use of disposition of the
 companys assets that could have a material effect on the financial
 statements.                                                                                                                                

Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.
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.

Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2008. In
making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control-Integrated Framework.
Based on that assessment, our management concluded that as of December
31, 2008, our internal control over financial reporting is effective.

63

---

---



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

Changes
in Internal Control over Financial Reporting

There
was no change in our internal control over financial reporting that occurred
during the period covered by this annual report that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.

|          |                        
|--------- | -----------------------
|ITEM 15T. | CONTROLS AND PROCEDURES

Not
applicable.

|         |          
|-------- | ---------
|ITEM 16. | RESERVED.

|          |                                 
|--------- | --------------------------------
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT

Our
board of directors has determined that that Mr. Eli Akavia, one of our outside
directors, qualifies as an independent director as this term is defined by the
rules of the Securities and Exchange Committee and NASDAQ, and meets the
definition of an audit committee financial expert, as defined by rules of the
Securities and Exchange Commission. For
a brief listing of Mr. Akavias relevant experience, see Item 6.A. Directors,
Senior Management and Employees -- Directors and Senior Management.

|          |               
|--------- | --------------
|ITEM 16B. | CODE OF ETHICS

We
have adopted a code of ethics that applies to our chief executive officer and
all senior financial officers of our company, including the chief financial
officer, chief accounting officer or controller, or persons performing similar
functions. Written copies are available
upon request. If we make any
substantive amendment to the code of ethics or grant any waivers, including any
implicit waiver, from a provision of the codes of ethics, we will disclose the
nature of such amendment or waiver on our website.

|          |                                        
|--------- | ---------------------------------------
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND
 SERVICES

Fees
Paid to Independent registered Public accounting firm

The
following table sets forth, for each of the years indicated, the fees paid to
our principal independent registered public accounting firm. All of such fees were pre-approved by our
Audit Committee.

|                   |  |                        |        |      |   |        | 
|------------------ |  | ---------------------- | ------ | ---- | - | ------ | 
|                   |  | Year Ended December 31 |       
|                   |  |                        |       
|                   |  | 2007                   |        | 2008 |  
|                   |  |                        |        |      |  
|                   |  |                        |        |      |   |        | 
|Services Rendered: |  |                        |        |      |   |        | 
|Audit              |  | $                      | 70,000 |      | $ | 84,000 | 
|                   |  |                        |        |      |   |        | 
|Total              |  | $                      | 70,000 |      | $ | 84,000 | 
|                   |  |                        |        |      |   |        | 

Audit fees consist of services that would normally be
provided in connection with statutory and regulatory filings or engagements,
including services that generally only the independent registered public
accounting firm can reasonably provide, such as services preformed in
connection with documents filed with the SEC.

Pre-Approval
Policies and Procedures

Our
Audit Committee has adopted a policy and procedures for the pre-approval of audit and
non-audit services rendered by our independent registered accounting firm, Kost
Forer Gabbay & Kasierer, a Member of
Ernst & Young Global. Pre-approval of an audit or non-audit
service may be given as a general pre-approval, as part of the audit
committees approval of the scope of the engagement of our independent auditor,
or on an individual basis. The policy
prohibits retention of the independent public accountants to perform the
prohibited non-audit functions defined in Section 201 of the Sarbanes-Oxley Act
or the rules of the Securities and Exchange Committee, and also requires the
Audit Committee to consider whether proposed services are compatible with the
independence of the public accountants.

64

---

---



|          |                                                                            
|--------- | ---------------------------------------------------------------------------
|ITEM 16D. | EXEMPTIONS FROM THE LISTING
 REQUIREMENTS AND STANDARDS FOR AUDIT COMMITTEE

Not
applicable.

|          |                                                                       
|--------- | ----------------------------------------------------------------------
|ITEM 16E. | PURCHASE OF EQUITY SECURITIES BY
 THE ISSUER AND AFFILIATED PURCHASERS

Issuer
Purchase of Equity Securities

Neither
we, nor any affiliated purchaser of our company, has purchased any of our
securities during 2008.

|          |                                               
|--------- | ----------------------------------------------
|ITEM 16F. | CHANGES IN REGISTRANTS CERTIFYING
 ACCOUNTANT

Not
applicable

|          |                     
|--------- | --------------------
|ITEM 16G. | CORPORATE GOVERNANCE

Under
NASDAQ Marketplace Rule 4350, or Rule 4350, foreign private issuers, such as
our company, are permitted to follow certain home country corporate governance
practices instead of certain provisions of Rule 4350. A foreign private issuer that elects to follow a home country
practice instead of any of such provisions of Rule 4350 must submit to NASDAQ,
in advance, a written statement from an independent counsel in such issuers
home country certifying that the issuers practices are not prohibited by the
home countrys laws.

In
May and August 2005, we provided NASDAQ with a notice of non-compliance with
Rule 4350. We informed NASDAQ that we
do not comply with the following requirements of Rule 4350, and instead follow
Israeli law and practice in respect of such requirements:

| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the requirement to maintain a majority of
 independent directors, as defined under the NASDAQ Marketplace Rules. Instead, under Israeli law and practice,
 we are required to appoint at least two outside directors, within the meaning
 of the Israeli Companies Law, to our board of directors. In addition, in
 accordance with the rules of the Securities and Exchange Commission and
 NASDAQ, we have the mandated three independent directors, as defined by the
 rules of the Securities and Exchange Commission and NASDAQ, on our audit
 committee. See above in this Item 6C.
 Directors, Senior Management and Employees - Board Practices - Independent
 and Outside Directors.
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | · | the requirement that our independent directors have
 regularly scheduled meetings at which only independent directors are
 present. Under Israeli law
 independent directors are not required to hold executive sessions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

65

---

---



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | · | the requirement regarding the nominations process
 for directors. Instead, we follow
 Israeli law and practice in accordance with which our board of directors
 recommends directors for election by
 our shareholders. See above in this
 Item 6C. Directors, Senior Management and Employees - Board Practices -
 Election of Directors.                                                                                                                                                                                                                                                                                                                                                              
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | · | the requirement regarding the compensation of
 officers. Instead, we follow Israeli
 law and practice. Under the Israeli Companies Law, all arrangements as to
 compensation of office holders who are not directors require
 the approval of the board of directors if the transaction
 is not an extraordinary transaction, unless a companys articles of
 association provide otherwise, and if such transaction is an
 extraordinary transaction, it requires the approval of the audit
 committee and the board of directors, in that order. The
 compensation of office holders who are directors must be approved by our
 Audit Committee, Board of Directors and shareholders, in that order.

66

---

---



PART
III

|         |                     
|-------- | --------------------
|ITEM 17. | FINANCIAL STATEMENTS

Not
applicable.

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

|                                                         |      
|-------------------------------------------------------- | -----
|Consolidated
 Financial Statements                       |      
|                                                        
|Index To Financial Statements                            | F - 1
|                                                        
|Report of Independent Registered Public Accounting
 Firm | F - 2
|                                                        
|Consolidated Balance Sheets                              | F - 3
|                                                        
|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

EXHIBITS

Index to
Exhibits

|        |  |                                                                                                                                                                                                    
|------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  | Description                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                    
|1.1     |  | Memorandum of Association of the Registrant*                                                                                                                                                       
|1.2     |  | Articles of Association of the Registrant*                                                                                                                                                         
|2.1     |  | Specimen of Share Certificate*                                                                                                                                                                     
|4.1     |  | 1999 Employee Stock Option Plan, as amended*                                                                                                                                                       
|4.2     |  | 2003 Employee Stock Option Plan, as amended**                                                                                                                                                      
|4.3     |  | Memorandum of Agreement
 dated June 23, 2003 between the Registrant and Bank Hapoalim B.M. and
 Bank Leumi Le-Israel B.M.**                                                                        
|4.4     |  | Loan Agreement dated July 1, 2008 between the
 Registrant and Faith Content Development Ltd.                                                                                                       
|4.5     |  | Joint Venture Agreement dated July 2, 2008 between
 the Registrant and Faith Content Development Ltd.                                                                                              
|4.6     |  | License Agreement dated July 2, 20-08 between the
 Registrant and Faith Content Development Ltd.                                                                                                   
|8       |  | List of Subsidiaries of the Registrant                                                                                                                                                             
|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

---

* 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,
2002 and incorporated herein by reference


67

---

---

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2008

U.S. DOLLARS IN THOUSANDS

INDEX

|                                                           | Page      
|---------------------------------------------------------- | ----------
|                                                           |           
|                                                           |           
|Report of Independent Registered Public Accounting Firm    | F-2       
|                                                           |           
|Consolidated Balance Sheets                                | F-3 - F-4 
|                                                           |           
|Consolidated Statements of Operations                      | F-5       
|                                                           |           
|Consolidated 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

---

---

| | 
| | 
| | 
| | 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors of

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY

We have audited the accompanying
consolidated balance sheets of Rada Electronic Industries Ltd. (the Company) and subsidiary
as of December 31, 2008 and 2007 and the related consolidated statements of operations, changes in
shareholders equity and cash flows for each of the three years in the period ended December 31,
2008. 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 audits 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 financial
statements referred to above present fairly, in all material respects, the consolidated financial
position of the Company and subsidiary as of December 31, 2008 and 2007, and the consolidated results
of their operations and their cash flows for each of the three years in the period ended December 31,
2008, in conformity with U.S. generally accepted accounting principles.

|                 |                                 
|---------------- | --------------------------------
|                 | /s/ Kost Forer Gabbay & Kasierer
|Tel-Aviv, Israel | KOST FORER GABBAY & KASIERER    
|March 30, 2009   | A Member of Ernst & Young Global

F - 2

---

---

|                                                  
|--------------------------------------------------
|RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY
|                                                  
|CONSOLIDATED BALANCE SHEETS                       
|                                                  
|U.S. dollars in thousands                         

|                                                                                                                            |  |  |  |    |  |   | December 31, | 
|--------------------------------------------------------------------------------------------------------------------------- |  |  |  | -- |  | - | ------------ | 
|
|
|
|                                                                                                                            |  |  |  |    |  |   |              | 
|ASSETS                                                                                                                      |  |  |  |    |  |   |              | 
|                                                                                                                            |  |  |  |    |  |   |              | 
|CURRENT ASSETS:                                                                                                             |  |  |  |    |  |   |              | 
|Cash and cash equivalents                                                                                                   |  |  |  |    |  | $ | 964          | 
|Restricted cash                                                                                                             |  |  |  |    |  |   | 793          | 
|Trade receivables (net of allowance for doubtful accounts of $ 60 and $
    62 at December 31, 2008 and 2007, respectively) |  |  |  |    |  |   | 3,434        | 
|Other accounts receivable and prepaid expenses                                                                              |  |  |  |    |  |   | 597          | 
|Costs and estimated earnings in excess of billings on uncompleted
    contracts                                             |  |  |  | 3a |  |   | 2,210        | 
|Inventories                                                                                                                 |  |  |  | 4  |  |   | 4,409        | 
|                                                                                                                            |  |  |  |    |  |  
|                                                                                                                            |  |  | 
|Total current assets                                                                                                        |  |  |  |    |  |   | 12,407       | 
|                                                                                                                            |  |  |  |    |  |  
|                                                                                                                            |  |  | 
|LONG-TERM RECEIVABLES AND DEPOSITS:                                                                                         |  |  |  |    |  |   |              | 
|Long-term receivables                                                                                                       |  |  |  | 5  |  |   | 803          | 
|Leasing deposits                                                                                                            |  |  |  |    |  |   | 56           | 
|                                                                                                                            |  |  |  |    |  |  
|                                                                                                                            |  |  | 
|Total long-term receivables and deposits                                                                                    |  |  |  |    |  |   | 859          | 
|                                                                                                                            |  |  |  |    |  |  
|                                                                                                                            |  |  | 
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                                          |  |  |  | 6  |  |   | 3,699        | 
|                                                                                                                            |  |  |  |    |  |  
|                                                                                                                            |  |  | 
|OTHER ASSETS:                                                                                                               |  |  |  | 7  |  |   |              | 
|Intangible assets, net                                                                                                      |  |  |  |    |  |   | 972          | 
|Goodwill                                                                                                                    |  |  |  |    |  |   | 557          | 
|                                                                                                                            |  |  |  |    |  |  
|                                                                                                                            |  |  | 
|                                                                                                                            |  |  |  |    |  |   |              | 
|Total other assets                                                                                                          |  |  |  |    |  |   | 1,529        | 
|                                                                                                                            |  |  |  |    |  |  
|                                                                                                                            |  |  | 
|                                                                                                                            |  |  |  |    |  |   |              | 
|Total assets                                                                                                                |  |  |  |    |  | $ | 18,494       | 
|                                                                                                                            |  |  |  |    |  |  
|                                                                                                                            |  |  | 

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

F - 3

---

---

|                                                          
|----------------------------------------------------------
|RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY        
|                                                          
|CONSOLIDATED BALANCE SHEETS                               
|                                                          
|U.S. dollars in thousands, except share and per share data
|                                                          

|                                                                                                                                                                                                                                  |  |  |  |     |  |   | December 31, |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | --- |  | - | ------------ | -
|
|
|
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                                                                                              |  |  |  |     |  |   |              |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|CURRENT LIABILITIES:                                                                                                                                                                                                              |  |  |  |     |  |   |              |  
|Short-term bank credit and current maturities of long-term loans                                                                                                                                                                  |  |  |  | 8   |  | $ | 162          |  
|Trade payables                                                                                                                                                                                                                    |  |  |  |     |  |   | 2,760        |  
|Other accounts payable and accrued expenses                                                                                                                                                                                       |  |  |  | 9   |  |   | 3,860        |  
|Billings in excess of costs and estimated earnings on uncompleted
    contracts                                                                                                                                                   |  |  |  | 3b  |  |   | 43           |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |  
|                                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|Total current liabilities                                                                                                                                                                                                         |  |  |  |     |  |   | 6,825        |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |  
|                                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|LONG-TERM LIABILITIES:                                                                                                                                                                                                            |  |  |  |     |  |   |              |  
|Long-term loan                                                                                                                                                                                                                    |  |  |  | 8b  |  |   | 33           |  
|Loans from shareholders, net                                                                                                                                                                                                      |  |  |  | 8b  |  |   | 1,546        |  
|Convertible note from a shareholder, net                                                                                                                                                                                          |  |  |  | 11c |  |   | 1,980        |  
|Accrued severance pay and other long term liability                                                                                                                                                                               |  |  |  |     |  |   | 558          |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |  
|                                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|Total long-term liabilities                                                                                                                                                                                                       |  |  |  |     |  |   | 4,117        |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |  
|                                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|COMMITMENTS AND CONTINGENT LIABILITIES                                                                                                                                                                                            |  |  |  | 10  |  |   |              |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|MINORITY INTEREST                                                                                                                                                                                                                 |  |  |  |     |  |   | 556          |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |  
|                                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|SHAREHOLDERS EQUITY:                                                                                                                                                                                                             |  |  |  | 11  |  |   |              |  
|Share capital -                                                                                                                                                                                                                   |  |  |  |     |  |   |              |  
|Ordinary shares of NIS 0.015 par value - Authorized: 16,333,333 shares
    at December 31, 2008 and 2007; Issued and outstanding: 8,858,553 and
    8,705,788 shares at December 31, 2008 and December 31, 2007,
    respectively |  |  |  |     |  |   | 119          |  
|Additional paid-in capital                                                                                                                                                                                                        |  |  |  |     |  |   | 69,495       |  
|Accumulated other comprehensive income                                                                                                                                                                                            |  |  |  |     |  |   | 317          |  
|Accumulated deficit                                                                                                                                                                                                               |  |  |  |     |  |   | (62,935      | )
|                                                                                                                                                                                                                                  |  |  |  |     |  |  
|                                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|Total shareholders equity                                                                                                                                                                                                        |  |  |  |     |  |   | 6,996        |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |  
|                                                                                                                                                                                                                                  |  |  | 
|                                                                                                                                                                                                                                  |  |  |  |     |  |   |              |  
|Total liabilities and shareholders equity                                                                                                                                                                                        |  |  |  |     |  | $ | 18,494       |  
|                                                                                                                                                                                                                                  |  |  |  |     |  |  
|                                                                                                                                                                                                                                  |  |  | 

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

F - 4

---

---

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

|                                                                                                         |  |  |  |    |  |   | Year ended December 31, |  
|-------------------------------------------------------------------------------------------------------- |  |  |  | -- |  | - | ----------------------- | -
|
|
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|Revenues:                                                                                                |  |  |  | 15 |  |   |                         |  
|Products                                                                                                 |  |  |  |    |  | $ | 15,543                  |  
|Services                                                                                                 |  |  |  |    |  |   | 2,338                   |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |    |  |   | 17,881                  |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|Cost of revenues:                                                                                        |  |  |  |    |  |   |                         |  
|Products                                                                                                 |  |  |  |    |  |   | 12,472                  |  
|Services                                                                                                 |  |  |  |    |  |   | 1,214                   |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |    |  |   | 13,686                  |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|Gross profit                                                                                             |  |  |  |    |  |   | 4,195                   |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|Operating costs and expenses:                                                                            |  |  |  |    |  |   |                         |  
|Research and development                                                                                 |  |  |  |    |  |   | 686                     |  
|Marketing and selling                                                                                    |  |  |  |    |  |   | 1,496                   |  
|General and administrative                                                                               |  |  |  |    |  |   | 1,903                   |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|Total operating costs and expenses                                                                       |  |  |  |    |  |   | 4,085                   |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|Operating profit (loss)                                                                                  |  |  |  |    |  |   | 110                     |  
|Financial expenses, net                                                                                  |  |  |  | 13 |  |   | 668                     |  
|Other income, net                                                                                        |  |  |  |    |  |   |                        |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |    |  |   | (558                    | )
|Minority interest in earnings of subsidiary                                                              |  |  |  |    |  |   | (18                     | )
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|Net loss                                                                                                 |  |  |  |    |  | $ | (576                    | )
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|Net loss per share:                                                                                      |  |  |  |    |  |   |                         |  
|Basic and diluted net loss per share                                                                     |  |  |  |    |  | $ | (0.07                   | )
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   
|                                                                                                         |  |  |  |    |  |   |                         |  
|Weighted average number of Ordinary shares used for
      computing basic and diluted net loss per share |  |  |  |    |  |   | 8,855,205               |  
|                                                                                                         |  |  |  |    |  |   |                         |  
|                                                                                                         |  |  |  |   

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

F - 5

---

---

|                                                          
|----------------------------------------------------------
|RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY        
|                                                          
|CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
|                                                          
|U.S. dollars in thousands, except share data              
|                                                          

|                                                           |  |  |  |           |  |   |      |  |   |        |  |   |     |  |   |         |   |   |        |  
|---------------------------------------------------------- |  |  |  | --------- |  | - | ---- |  | - | ------ |  | - | --- |  | - | ------- | - | - | ------ | -
|
|
|                                                           |  |  |  |           |  |   |      |  |   |        |  |   |     |  |   |         |   |   |        |  
|Balance at January 1, 2006                                 |  |  |  | 8,691,955 |  | $ | 116  |  | $ | 66,900 |  | $ |    |  | $ | (59,281 | ) | $ | 7,735  |  
|                                                           |  |  |  |           |  |  
|                                                           |  |  |  |           |  |   |      |  |   |        |  |   |     |  |   |         |   |   |        |  
|Exercise of options                                        |  |  |  | 13,833    |  |   | *)  |  |   | 28     |  |   |    |  |   |        |   |   | 28     |  
|Share-based compensation 
         for employees           |  |  |  |          |  |   |     |  |   | 221    |  |   |    |  |   |        |   |   | 221    |  
|Issuance expenses related to 
        stamp tax provision  |  |  |  |          |  |   |     |  |   | 90     |  |   |    |  |   |        |   |   | 90     |  
|Net loss                                                   |  |  |  |          |  |   |     |  |   |       |  |   |    |  |   | (2,000  | ) |   | (2,000 | )
|                                                           |  |  |  |           |  |   |      |  |   |        |  |  
|                                                           |  |  |  |           |  |  
|                                                           |  |  |  |           |  |   |      |  |   |        |  |   |     |  |   |         |   |   |        |  
|Balance at December 31, 2006                               |  |  |  | 8,705,788 |  |   | 116  |  |   | 67,239 |  |   |    |  |   | (61,281 | ) |   | 6,074  |  
|                                                           |  |  |  |           |  |  
|                                                           |  |  |  |           |  |   |      |  |   |        |  |   |     |  |   |         |   |   |        |  
|Share-based compensation 
         for employees           |  |  |  |          |  |   |     |  |   | 175    |  |   |    |  |   |        |   |   | 175    |  
|Issuance of warrants                                       |  |  |  |          |  |   |     |  |   | 986    |  |   |    |  |   |        |   |   | 986    |  
|Beneficial conversion feature 
        on convertible note |  |  |  |          |  |   |     |  |   | 568    |  |   |    |  |   |        |   |   | 568    |  
|Net loss                                                   |  |  |  |          |  |   |     |  |   |       |  |   |    |  |   | (1,078  | ) |   | (1,078 | )
|                                                           |  |  |  |           |  |   |      |  |   |        |  |  
|                                                           |  |  |  |           |  |  
|                                                           |  |  |  |           |  |   |      |  |   |        |  |   |     |  |   |         |   |   |        |  
|Balance at December 31, 2007                               |  |  |  | 8,705,788 |  |   | 116  |  |   | 68,968 |  |   |    |  |   | (62,359 | ) |   | 6,725  |  
|                                                           |  |  |  |           |  |  
|                                                           |  |  |  |           |  |   |      |  |   |        |  |   |     |  |   |         |   |   |        |  
|Share-based compensation 
         for employees           |  |  |  |          |  |   |     |  |   | 131    |  |   |    |  |   |        |   |   | 131    |  
|Conversion of loan into shares                             |  |  |  | 152,765   |  |   | 3    |  |   | 396    |  |   |    |  |   |        |   |   | 399    |  
|Foreign currency translation 
        adjustment, net      |  |  |  |          |  |   |     |  |   |       |  |   | 317 |  |   |        |   |   | 317    |  
|Net loss                                                   |  |  |  |          |  |   |     |  |   |       |  |   |     |  |   | (576    | ) |   | (576   | )
|                                                           |  |  |  |           |  |   |      |  |   |        |  |  
|                                                           |  |  |  |           |  |  
|                                                           |  |  |  |           |  |   |      |  |   |        |  |   |     |  |   |         |   |   |        |  
|Balance at December 31, 2008                               |  |  |  | 8,858,553 |  | $ | 119  |  | $ | 69,495 |  | $ | 317 |  | $ | (62,935 | ) | $ | 6,996  |  
|                                                           |  |  |  |           |  |   |      |  |   |        |  |  

|   |                                     
|-- | ------------------------------------
|*) | Represents an amount lower than $ 1.

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

F - 6

---

---

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

|                                                                                                        |  |  |   | Year ended December 31, |  
|------------------------------------------------------------------------------------------------------- |  |  | - | ----------------------- | -
|
|
|                                                                                                        |  |  |   |                         |  
|                                                                                                        |  |  |   |                         |  
|Cash flows from operating activities:                                                                   |  |  |   |                         |  
|                                                                                                        |  |  |   |                         |  
|Net loss                                                                                                |  |  | $ | (576                    | )
|Adjustments required to reconcile net loss to net cash provided by
     (used in) operating activities: |  |  |   |                         |  
|Depreciation and amortization                                                                           |  |  |   | 1,154                   |  
|Amortization expense on convertible note                                                                |  |  |   | 358                     |  
|Amortization expense on loans                                                                           |  |  |   | 114                     |  
|Loss due to extinguishment of a loan                                                                    |  |  |   | 100                     |  
|Minority interest in earnings of subsidiary and others                                                  |  |  |   | 97                      |  
|Share-based compensation for employees                                                                  |  |  |   | 131                     |  
|Severance pay, net                                                                                      |  |  |   | 35                      |  
|Decrease (increase) in trade receivables, net                                                           |  |  |   | 1,502                   |  
|Increase in other accounts receivable and prepaid expenses                                              |  |  |   | (250                    | )
|Decrease (increase) in costs and estimated earnings in excess of
       billings, net                   |  |  |   | (1,554                  | )
|Decrease (increase) in inventories                                                                      |  |  |   | (2,214                  | )
|Decrease (increase) in trade payables                                                                   |  |  |   | 950                     |  
|Increase (decrease) in other accounts payable and accrued expenses                                      |  |  |   | (163                    | )
|                                                                                                        |  |  |   |                         |  
|                                                                                                        |  |  |  
|                                                                                                        |  |  |   |                         |  
|Net cash provided by (used in) operating activities                                                     |  |  |   | (316                    | )
|                                                                                                        |  |  |   |                         |  
|                                                                                                        |  |  |  
|                                                                                                        |  |  |   |                         |  
|Cash flows from investing activities:                                                                   |  |  |   |                         |  
|Cash paid in conjunction with the acquisition of certain assets and
     liabilities of Vectop.         |  |  |   | (235                    | )
|Change in restricted cash                                                                               |  |  |   | (195                    | )
|Purchase of property, plant and equipment                                                               |  |  |   | (498                    | )
|Decrease (increase) in leasing deposits                                                                 |  |  |   | 1                       |  
|                                                                                                        |  |  |   |                         |  
|                                                                                                        |  |  |  
|                                                                                                        |  |  |   |                         |  
|Net cash provided by (used in) investing activities                                                     |  |  |   | (927                    | )
|                                                                                                        |  |  |   |                         |  
|                                                                                                        |  |  |  
|                                                                                                        |  |  |   |                         |  
|Cash flows from financing activities:                                                                   |  |  |   |                         |  
|Proceeds from long term loan from a shareholder                                                         |  |  |   | 1,500                   |  
|Proceeds from long term receivables                                                                     |  |  |   | 158                     |  
|Proceeds from issuance of loan and warrants                                                             |  |  |   |                        |  
|Proceeds from issuance of convertible loan and warrants                                                 |  |  |   |                        |  
|Proceeds from long-term loans from banks, net                                                           |  |  |   | 165                     |  
|Proceeds from bridge loan                                                                               |  |  |   |                        |  
|Repayment of bridge loan                                                                                |  |  |   |                        |  
|Repayments of current maturities of long-term loans                                                     |  |  |   | (157                    | )
|Repayments of long-term convertible note                                                                |  |  |   |                        |  
|Short-term bank credit, net                                                                             |  |  |   | (333                    | )
|Exercise of options                                                                                     |  |  |   |                        |  
|                                                                                                        |  |  |   |                         |  
|                                                                                                        |  |  |  
|                                                                                                        |  |  |   |                         |  
|Net cash provided by (used in) financing activities                                                     |  |  |   | 1,333                   |  
|                                                                                                        |  |  |   |                         |  
|                                                                                                        |  |  |  
|                                                                                                        |  |  |   |                         |  
|Effect of exchange rate changes on cash and cash equivalents                                            |  |  |   | 39                      |  
|Increase (decrease) in cash and cash equivalents                                                        |  |  |   | 129                     |  
|Cash and cash equivalents at the beginning of the year                                                  |  |  |   | 835                     |  
|                                                                                                        |  |  |   |                         |  
|                                                                                                        |  |  |  
|                                                                                                        |  |  |   |                         |  
|Cash and cash equivalents at the end of the year                                                        |  |  | $ | 964                     |  
|                                                                                                        |  |  |   |                         |  

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

F - 7

---

---

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

|                                                          |  |  |   | Year ended December 31, | 
|--------------------------------------------------------- |  |  | - | ----------------------- | 
|
|
|                                                          |  |  |   |                         | 
|                                                          |  |  |   |                         | 
|(b)     Supplemental disclosures of cash flow activities: |  |  |   |                         | 
|                                                          |  |  |   |                         | 
|Net cash paid during the year for:                        |  |  |   |                         | 
|                                                          |  |  |   |                         | 
|Income taxes                                              |  |  | $ | 22                      | 
|                                                          |  |  |   |                         | 
|                                                          |  |  |   |                         | 
|Interest                                                  |  |  | $ | 216                     | 
|                                                          |  |  |   |                         | 
|(c)       Non-cash transactions:                          |  |  |   |                         | 
|                                                          |  |  |   |                         | 
|Transfer of inventory to equipment                        |  |  | $ | 429                     | 
|                                                          |  |  |   |                         | 
|                                                          |  |  |   |                         | 
|Goodwill in respect of Vectop (royalties payable)         |  |  | $ | 93                      | 
|                                                          |  |  |   |                         | 
|Purchase of fixed assets                                  |  |  | $ | 486                     | 
|                                                          |  |  |   |                         | 
|Conversion of loan into shares                            |  |  | $ | 399                     | 
|                                                          |  |  |   |                         | 
|Issuance expenses related to stamp tax provision          |  |  | $ |                        | 
|                                                          |  |  |   |                         | 

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

F - 8

---

---

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

|NOTE 1:-GENERAL
|---------------
|               

| | a. | Rada Electronic Industries Ltd. an Israeli corporation (the Company), is involved in the
military and commercial aerospace industries. The Company is engaged in the development, manufacture and sale of defense electronics (solid-state recorders, computers, inertial navigation systems
and alike) and their supporting ground systems (automated testers, data debriefing stations). The
Company also provides test and repair services using our CATS testers and test program sets
for commercial aviation electronic systems through the Chinese subsidiary.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | b. | As reflected in the consolidated financial statements as of December 31, 2008, the Company has an accumulated
deficit of $ 62,935. Based on continued financial support from the Companys shareholders
and existing and anticipated orders in 2009, management believes that the anticipated cash flows
from operations, as well as financial support from the Companys controlling shareholders, will
enable the Company to finance its operations at least through December 31, 2009.                                                                               
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | c. | The Company operates a test and repair shop using its Automated Test Equipment (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.                                                                                                                                                                                                                        
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES
|---------------------------------------
|                                       

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

| | b. | Financial statements in U.S. dollars:
| | -- | -------------------------------------
| |    |                                      

| | Most of the revenues of the Company are generated in U.S. dollars (dollar). In addition,
a substantial portion of the costs of the Company is incurred in dollars. The Companys management
believes that the dollar is the currency of the primary economic environment in which the Company
operates. Thus, its functional and reporting currency 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, in the period in which the currency exchange rate changes.

F - 9

---

---

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

|NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-----------------------------------------------
|                                               

| | The financial statements of the Companys foreign subsidiary, whose functional currency is not
the U.S. dollar, have been translated into dollars. All balance sheet amounts have been translated
using the exchange rates in effect at balance sheet date. Statement of operation amounts have been
translated using the average exchange rate prevailing during the year. Such translation adjustments
are reported as a component of accumulated other comprehensive income (loss) in shareholders
equity.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | 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. | Reclassifications:
| | -- | ------------------
| |    |                   

| | Certain amounts in prior years financial statements have been reclassified to conform to the
current years presentation.
| | --------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                           

| | e. | Cash and cash equivalents:
| | -- | --------------------------
| |    |                           

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

| | f. | Restricted cash:
| | -- | ----------------
| |    |                 

| | Restricted cash is invested in a short-term bank deposit (less than three months), which is mainly
used as security for the Companys guarantees to customers. The deposit is in U.S. dollars and
bears a variable interest up to 1%.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                      

| | g. | 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. See
also 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.                                         
| |                                                                                                                                                                                                                         

| | h. | Property, plant and equipment:
| | -- | ------------------------------
| |    |                               

| | Property plant 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:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 10

---

---

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

|NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-----------------------------------------------
|                                               

| |                                |  |  | %             |  | 
| | ------------------------------ |  |  | ------------- |  | 
|
|
| | Factory and other buildings    |  |  | 4             |  | 
| | Machinery and equipment        |  |  | 7, 10, 15, 33 |  | 
| | Office furniture and equipment |  |  | 6 - 15        |  | 

| |                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------
| | Leasehold improvements are depreciated 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.
| |                                                                                                                                                          

| | i. | Intangible assets:
| | -- | ------------------
| |    |                   

| | Capitalized software costs are amortized by the greater of the amount computed using: (i) the 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.                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | At each balance sheet date, the unamortized capitalized costs of the software products are compared
to the net realizable value of the product. If the unamortized capitalized costs of a computer software
product exceed the net realizable value of the product, such excess is written off. The net realizable
value is calculated as the estimated future gross revenues from the product reduced by the estimated
future costs of completing and disposing of that product, including the costs of performing maintenance
and customer support required to satisfy the Companys responsibility set forth at the time
of the sale.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | A customer relationships asset (intangible asset) has been recorded as a result of the acquisition
of Vectop and is amortized over the expected useful life of five years.                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | As for impairment charges included in these financial statements, see Note 7.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| | j. | 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 the 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 of December 31, 2008, no impairment losses have been identified.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 11

---

---

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

|NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-----------------------------------------------
|                                               

| | k. | Goodwill
| | -- | --------
| |    |         

| | Goodwill represents excess of the costs over the net assets of businesses acquired. Under SFAS No.
142, Goodwill and Other Intangible Assets (SFAS No. 142), goodwill acquired
in a business combination should not be amortized. SFAS No. 142 requires goodwill to be tested for
impairment at least annually or between annual tests in certain circumstances, and written down when
impaired, In 2008 and 2007, the Company recorded goodwill in respect of additional consideration
payable in connection with the acquisition of Vectop relating to royalties due based on actual revenues
derived from Vectop projects. The Company operates in one segment, and this segment comprises its
only reporting unit, as required under SFAS 142.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase screens
for impairment while the second phase (if necessary) measures impairment. In the first phase of impairment
testing, goodwill attributable to the reporting unit is tested for impairment by comparing the fair
value of the reporting unit with its carrying value. The Company determines its fair value according
to the Companys market capitalization and the goodwill was tested for impairment by comparing
the fair market value with its carrying amount. As of December 31, 2008 and 2007, no impairment losses
have been identified. As a result, step two was not required.                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | l. | 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | Research and development costs incurred in the process of developing product masters 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.                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                            

| | m. | 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.                                 
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 contains
a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance
with SFAS No. 109. The first step is to evaluate the tax position taken or expected to be taken in
a tax return by determining if the weight of available evidence indicates that it is more likely
than not that, on an evaluation of the technical merits, the tax position will be sustained on audit,
including resolution of any related appeals or litigation processes.

F - 12

---

---

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

NOTE 2:-       SIGNIFICANT ACCOUNTING POLICIES (Cont.)

| | The second step is to measure the tax benefit as the largest amount that is more than 50% likely to
be realized upon ultimate settlement. The adoption of FIN 48 did not result in a change in the Companys
accumulated deficit. The Company did not record any provision in connection with FIN 48 as of December
31, 2007 and 2008.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                       

| | n. | Severance pay:
| | -- | --------------
| |    |               

| | The Companys agreements with most of its employees are in accordance with section 14 of the Severance
Pay Law -1963, under which the Companys contributions for severance pay shall be instead of
severance compensation. Upon release of the policy to the employee, no additional liability exists
between the parties regarding the matter of severance pay and no additional payments shall be made
by the Company to the employee.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Companys liability for severance pay for the employees that are not under section 14, is
calculated pursuant to Israels Severance Pay Law, based on the most recent salary of the employees
as of the balance sheet date less monthly deposits for insurance policies and/or pension funds. Employees
are entitled to one months salary for each year of employment or a portion thereof.                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The carrying value of deposited funds includes profits (losses) accumulated up to the balance sheet
date. The deposited funds may be withdrawn only upon the fulfillment of the obligations pursuant
to Israeli severance pay law or labor agreements.                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | Severance expense recorded in the statement of operations is net of interest and other income accumulated
in the deposits. Severance expense for the years ended December 31, 2008, 2007 and 2006 amounted
to $ 28, $ 21 and $ 43, respectively.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                 

| | o. | Fair value of financial instruments:
| | -- | ------------------------------------
| |    |                                     

| | The carrying amount of cash and cash equivalents, restricted cash, trade receivables, other accounts
receivable, short-term bank credit, current maturities of long term loans, trade payables and other
accounts payable approximate their fair value due to the short-term maturity of these instruments.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | The fair value of the convertible notes and long-term loans are estimated by discounting the future
cash flows using current interest rates for loans of similar terms and maturities. The carrying amount
of the convertible notes and long-term loans approximates their fair value.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Effective January 1, 2008, the Company adopted SFAS 157, Fair Value Measurements and,
effective October 10, 2008, adopted FSP No. SFAS 157-3, Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active, except as it applies to the
nonfinancial assets and nonfinancial liabilities subject to FSP 157-2. SFAS 157 clarifies that fair
value is an exit price, representing the amount that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants. As such, fair value is
a market-based measurement that should be determined based on assumptions that market participants
would use in pricing an asset or a liability. As a basis for considering such assumptions, SFAS 157
establishes a three-tier value hierarchy, which prioritizes the inputs used in the valuation methodologies
in measuring fair value:
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | Level 1- Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities
in active markets. Level 2- Include
other inputs that are directly or indirectly observable in the marketplace. Level 3-Unobservable
inputs which are supported by little or no market activity.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

F - 13

---

---

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

|NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-----------------------------------------------
|                                               

| | The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize
the use of unobservable inputs when measuring fair value.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                 

| | p. | Concentrations of credit risk:
| | -- | ------------------------------
| |    |                               

| | Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, restricted cash, trade receivables and long-term receivables.                                                                                                                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Companys cash and cash equivalents and restricted cash 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, low, 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 collectability 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
$ 845 as of December 31, 2008. These loans are partly unsecured and if not paid, the Company will
incur a loss equal to the amount of the loan, net of a provision recorded against the loan. (See
also note 10 for status of litigation).                                                                                                                                                                                    
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | The Company has no off-balance sheet credit risks.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | q. | Comprehensive income (loss):
| | -- | ----------------------------
| |    |                             

| | The Company accounts for comprehensive income (loss) in accordance with SFAS No. 130, Reporting
Comprehensive Income. This statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose financial statements. Comprehensive
income (loss) generally represents all changes in shareholders equity during the period except
those resulting from investments by, or distributions to, stockholders. The other comprehensive income
(loss) relates to gain and loss on foreign currency translation adjustments.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | r. | Warranty:
| | -- | ---------
| |    |          

| | In connection with the sale of its products, the Company provides product warranties for periods between
one year to one year and a half. Based on past experience and engineering estimates, the liability
from these warranties is immaterial as of December 31, 2007 and 2008.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                  

| | s. | Share-based compensation:
| | -- | -------------------------
| |    |                          

| | At December 31, 2008, the Company has two stock-based employee compensation plans, which are described
in Note 11b.
| | -------------------------------------------------------------------------------------------------------------------

F - 14

---

---

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

|NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-----------------------------------------------
|                                               

| | Effective January 1, 2006, the Company adopted FASB Statement No. 123 (revised 2004), Share-Based
Payment (SFAS 123(R)) , and related Securities and Exchange Commission rules included
in Staff Accounting Bulletin No. 107, on a modified prospective basis. Under this method, compensation
cost recognized in 2006 includes costs related to 1) all share-based payments granted prior
to but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in
accordance with the original provisions of SFAS 123 and 2) all share-based payments granted
subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). The value of the portion of the award that is ultimately expected to vest
is recognized as an expense over the requisite service periods in the Companys consolidated
statements of operations. Results for prior periods have not been restated.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton
option-pricing model with the following weighted average assumptions:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                         |  |  |  | Year ended December 31, |  
| | ----------------------- |  |  |  | ----------------------- | -
|
|
| |                         |  |  |  |                         |  
| |                         |  |  |  |                         |  
| | Expected term           |  |  |  | 3 years                 |  
| | Dividend yield          |  |  |  | 0                       | %
| | Expected volatility     |  |  |  | 53                      | %
| | Risk-free interest rate |  |  |  | 2.7                     | %

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The risk-free interest rate assumption is based on the yield from U.S. Treasury zero-coupon bonds with
an equivalent term as of the Companys employee stock options. The dividend yield assumption
is based on the Companys historical and expectation of future dividend payouts and may be subject
to changes in the future. The expected term of the options represents the period of time that the
options are expected to be outstanding and is based on the simplified method, as allowed under Staff
Accounting Bulleting 110, which is the mid point between the vesting date and the end of the contractual
of the option. The Company used its historical stock price movement over the most recent periods
ended on the date of grant equal to the expected option term for calculating volatility in accordance
with SFAS 123 (R). Estimated forfeitures are based on actual historical pre-vesting forfeitures.
The expected term in 2008 was determined to be three years due to the modification of the options
(see also Note 11b).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | t. | 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 to customers
and provides manufacturing, development and product support services.                                                                                                                                                                                                                                                                                                                                                                                              
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | Product revenues:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | The Company recognizes revenue from sales of products 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.

F - 15

---

---

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

|NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-----------------------------------------------
|                                               

| | Revenues from long-term fixed price contracts which provide a substantial level of development efforts
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, 2008 and 2007, the provision for estimated losses
identified is $ 106 and $ 26 respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | Revenues under long-term fixed-price contracts that involve both development and production are recorded
using the cost-to-cost method (development phase) and units-of-delivery method (production phase)
as applicable to each phase of the contract, as the basis to measure progress toward completion.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 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 separate units of accounting when it is possible to determine objective
and reliable evidence of fair value of the undelivered elements in order to separate the fees among
the elements. Revenue is recognized when the element is delivered and all other criteria for revenue
recognition are met.                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | The Company accounts for software sales (TPSs) in accordance with Statement of Position No. 97-2, Software
Revenue Recognition (SOP No. 97-2), as amended. Revenue from software arrangements
is recognized when persuasive evidence of an arrangement exists, delivery of the product has occurred,
the fee is fixed or determinable, and collectability is probable. Arrangements with payment terms
extending beyond customary payment terms are considered not to be fixed or determinable. If
the fee is considered not to be fixed or determinable, revenue is deferred and recognized when payment
becomes due from the customer or are actually collected when collectability is not probable, providing
that all other revenue recognition criteria have been met.                                                         

F - 16

---

---

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

|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 from customers, but not yet recognized as revenues.                                                                                                 
| |                                                                                                                                                                                                         

| | u. | Basic and diluted net loss per share:
| | -- | -------------------------------------
| |    |                                      

| | Basic net loss per share is computed based on the weighted average number of Ordinary shares outstanding
during each year. Diluted net loss per share is computed based on the weighted average number of
Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered
outstanding during the year in accordance with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For the years ended December 31, 2008, 2007 and 2006, all outstanding
options, convertible notes and warrants have been excluded from the computation of diluted net loss
per share, since their effect is anti-dilutive.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| | v. | Recently issued Accounting Standards:
| | -- | -------------------------------------
| |    |                                      

| | In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (SFAS 141R).
SFAS 141R establishes principles and requirements for how an acquirer recognizes and measures
in its financial statements the identifiable assets acquired, the liabilities assumed, any non controlling
interest in the acquire and the goodwill acquired. SFAS 141R also establishes disclosure requirements
to enable the evaluation of the nature and financial effects of the business combination. SFAS 141R
is effective for fiscal years beginning after December 15, 2008. Earlier adoption is prohibited.
The Company does not expect the adoption of SFAS 141R will have material impact on its consolidated
results of operations and financial condition.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards
that require that the ownership interests in subsidiaries held by parties other than the parent be
clearly identified, labeled, and presented in the consolidated statement of financial position within
equity, but separate from the parents equity; the amount of consolidated net income attributable
to the parent and to the noncontrolling interest be clearly identified and presented on the face
of the consolidated statement of income; and changes in a parents ownership interest while
the parent retains its controlling financial interest in its subsidiary be accounted for consistently.
SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning
on or after December 15, 2008. The Company does not expect the adoption of SFAS No. 160 will
have significant impact on its consolidated financial statement.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 17

---

---

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

|NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES (Cont.)
|-----------------------------------------------
|                                               

| | In February 2008, the FASB issued FASB Staff Position (FSP) FAS No. 157-2, Effective
Date of FASB Statement No. 157 (FSP FAS 157-2), to delay the effective date of
FASB Statement 157 for one year for certain nonfinancial assets and nonfinancial liabilities, excluding
those that are recognized or disclosed in financial statements at fair value on a recurring basis
(that is, at least annually). For purposes of applying the FSP FAS 157-2, nonfinancial assets and
nonfinancial liabilities include all assets and liabilities other than those meeting the definition
of a financial asset or a financial liability in FASB Statement 159. FSP FAS 157-2 defers the effective
date of Statement 157 to fiscal years beginning after November 15, 2008, and interim periods within
those fiscal years for items within the scope of this FSP FAS 157-2. The Company does not expect
the adoption of FAS 157 with respect to certain nonfinancial assets and nonfinancial liabilities
that are under the scope of FSP FAS 157-2, to have a material impact on its financial position, results
of operations or cash flows.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In April 2008, the FASB issued FASB Staff Position (FSP) FAS 142-3, Determination of the
Useful Life of Intangible Assets. FSP FAS 142-3 amends the factors that should be considered
in developing renewal or extension assumptions used to determine the useful life of a recognized
intangible asset under FASB Statement No. 142, Goodwill and Other Intangible Assets.
FSP FAS 142-3 is effective for fiscal years beginning after December 15, 2008 and early
adoption is prohibited. The Company does not expect the adoption of FAS 142-3 will have material
impact on the Companys consolidated financial statement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In June 2008, the FASB issued EITF No. 07-5 Determining whether an Instrument (or Embedded Feature)
is indexed to an Entitys Own Stock (EITF 07-5). EITF 07-5 is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Early application is not permitted. Paragraph 11(a) of SFAS No. 133 specifies
that a contract that would otherwise meet the definition of a derivative but is both (a) indexed
to the Companys own stock and (b) classified in stockholders equity in the statement
of financial position would not be considered a derivative financial instrument. EITF 07-5 provides
a new two-step model to be applied in determining whether a financial instrument or an embedded feature
is indexed to an issuers own stock and thus able to qualify for the SFAS 133 paragraph 11(a)
scope exception. The Company believes adopting this statement will have no material impact on the
consolidated financial statements.                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

|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, | 
| | --------------------------------------- |  |  | - | ------------ | 
|
|
| |                                         |  |  |   |              | 
| |                                         |  |  |   |              | 
| | Costs incurred on uncompleted contracts |  |  | $ | 6,036        | 
| | Estimated earnings                      |  |  |   | 732          | 
| |                                         |  |  |  
| |                                         |  |  |   | 6,768        | 
| | Less - billings and progress payments   |  |  |   | 4,558        | 
| |                                         |  |  |  
| |                                         | 
| |                                         |  |  |   |              | 
| |                                         |  |  | $ | 2,210        | 
| |                                         |  |  |  

F - 18

---

---

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

|NOTE 3:-CONTRACTS IN PROGRESS (Cont.)
|-------------------------------------
|                                     

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

| |                                         |  |  |   | December 31, |  
| | --------------------------------------- |  |  | - | ------------ | -
|
|
| |                                         |  |  |   |              |  
| |                                         |  |  |   |              |  
| | Costs incurred on uncompleted contracts |  |  | $ | 835          |  
| | Estimated earnings (expenses)           |  |  |   | (118         | )
| |                                         |  |  |  
| |                                         |  |  |   | 717          |  
| | Less - billings and progress payments   |  |  |   | 760          |  
| |                                         |  |  |  
| |                                         | 
| |                                         |  |  |   |              |  
| |                                         |  |  | $ | (43          | )
| |                                         |  |  |  

|                    | 
|------------------- | 
|NOTE 4:-INVENTORIES
|                    | 

| |                              |  |  |   | December 31, | 
| | ---------------------------- |  |  | - | ------------ | 
|
|
| |                              |  |  |   |              | 
| |                              |  |  |   |              | 
| | Raw materials and components |  |  | $ | 1,894        | 
| | Work in progress             |  |  |   | 1,933        | 
| | Finished goods               |  |  |   | 582          | 
| |                              |  |  |  
| |                              | 
| |                              |  |  |   |              | 
| |                              |  |  | $ | 4,409        | 
| |                              |  |  |  

| |                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Write-offs of inventories for the years ended December 31, 2008, 2007 and 2006 amounted to $ 191, $ 134
and $ 29, respectively. The write-offs were due to slow-moving items and excess inventories
and were recorded as cost of revenues.

NOTE 5:-      LONG-TERM
RECEIVABLES

| |                                        |  |  |   | December 31, | 
| | -------------------------------------- |  |  | - | ------------ | 
|
|
| |                                        |  |  |   |              | 
| |                                        |  |  |   |              | 
| | Loan to former chief executive officer |  |  | $ | 705          | 
| | Loan to a former officer (*)           |  |  |   | 98           | 
| |                                        |  |  |  
| |                                        | 
| |                                        |  |  |   |              | 
| |                                        |  |  | $ | 803          | 
| |                                        |  |  |  

| |                   
| | ------------------
| | See also Note 10a.
| |                   

| | (*) | In March 2008, a counter claim of the former officer was dismissed. The Company claim was allowed almost
in full and his appeal was denied resulting in such employees repayment of the outstanding
loan amount. As a result, out of the $278 outstanding loan, $138 was paid and $140 will be paid in
48 installments commencing January 2009.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 19

---

---

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

|NOTE 6:-PROPERTY, PLANT AND EQUIPMENT
|-------------------------------------
|                                     

| |                                |  |  |   | December 31, | 
| | ------------------------------ |  |  | - | ------------ | 
|
|
| |                                |  |  |   |              | 
| |                                |  |  |   |              | 
| | Cost:                          |  |  |   |              | 
| | Factory building               |  |  | $ | 1,987        | 
| | Other buildings                |  |  |   | 1,222        | 
| | Machinery and equipment (*)    |  |  |   | 11,959       | 
| | Office furniture and equipment |  |  |   | 342          | 
| | Leasehold improvements         |  |  |   | 50           | 
| |                                |  |  |  
| |                                | 
| |                                |  |  |   |              | 
| |                                |  |  |   | 15,560       | 
| |                                |  |  |  
| | Accumulated depreciation:      |  |  |   |              | 
| | Factory building               |  |  |   | 1,419        | 
| | Other buildings                |  |  |   | 414          | 
| | Machinery and equipment (*)    |  |  |   | 9,789        | 
| | Office furniture and equipment |  |  |   | 215          | 
| | Leasehold improvements         |  |  |   | 24           | 
| |                                |  |  |  
| |                                | 
| |                                |  |  |   |              | 
| |                                |  |  |   | 11,861       | 
| |                                |  |  |  
| |                                | 
| |                                |  |  |   |              | 
| | Depreciated cost               |  |  | $ | 3,699        | 
| |                                |  |  |  

| |     |                                                                                                                                                                                                                                                                              
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (*) | Write-offs of machinery and equipment, (cost and accumulated depreciation), for the year ended
December 31, 2008 amounted to a gross amount of $ 3,063, net of depreciated cost of $0. The write-offs
in 2008 were due to fully depreciated assets that are no longer in use.
| |     |                                                                                                                                                                                                                                                                              

| | The Companys factory building in Beit-Shean, Israel is located on land leased from the
Israel Lands Administration until 2034.
| | --------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                 
| | Depreciation expense amounted to $ 712, $ 722 and $ 808 for the years ended December 31,
2008, 2007 and 2006, respectively.     
| |                                                                                                                                 
| | As for charges, see Note 10f.                                                                                                   
| |                                                                                                                                 

|NOTE 7:-INTANGIBLE ASSETS, NET AND GOODWILL
|-------------------------------------------
|                                           

| | On February 13, 2005, the Company purchased certain assets and assumed certain liabilities related
to the operations of Vectop Limited (Vectop) in order to increase its customer base.
The Company purchased Vectops net assets for $ 381 in cash and additional future royalties
based on revenues derived from Vectop projects five years from the date of the agreement. The net
assets purchased are considered to be a business, in accordance with EITF 98-3, Determining
Whether a Non-monetary Transaction Involves Receipt of Productive Assets or Business. The acquisition
was accounted for under the purchase method of accounting in accordance with FAS 141, Business
Combinations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 20

---

---

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

|NOTE 7:-INTANGIBLE ASSETS, NET AND GOODWILL (Cont.)
|---------------------------------------------------
|                                                   

| |                                        |  |  |  | December 31, 2008 |  |   | December 31, 2007 | 
| | -------------------------------------- |  |  |  | ----------------- |  | - | ----------------- | 
|
|
| |                                        |  |  |  |                   |  |   |                   | 
| |                                        |  |  |  | **(Years)**       |  |   |                   | 
| |                                        |  |  |  |                   |  |   |                   | 
| | Amortized
  intangible
  assets:       |  |  |  |                   |  |   |                   | 
| | Test Systems
  Programs Sets
  (TPS) |  |  |  | 5 - 10            |  | $ | 8,275             | 
| | Customer                               |  |  |  |                   |  |   |                   | 
| | relationships                          |  |  |  | 5                 |  |   | 1,263             | 
| |                                        |  |  |  |                   |  |   |                   | 
| |                                        |  |  |  |                   |  |  
| |                                        |  |  |  |                   |  |   |                   | 
| | Total                                  |  |  |  |                   |  | $ | 9,538             | 
| |                                        |  |  |  |                   |  |   |                   | 
| |                                        |  |  |  |                   |  |  

| |                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | *)         Includes impairment charges of $ 19.                                                                                                                                                            
| |                                                                                                                                                                                                            
| | Amortization expense was $ 442, $ 492 and $ 544 for the years ended December 31, 2008, 2007
and 2006, respectively. The expected amortization expense over the next four years is approximately
as follows:
| |                                                                                                                                                                                                            

| |      |  |  |   |     |  | 
| | ---- |  |  | - | --- |  | 
| | 2009 |  |  | $ | 442 |  | 
| | 2010 |  |  |   | 177 |  | 
| | 2011 |  |  |   | 177 |  | 
| | 2012 |  |  |   | 176 |  | 
| |      |  | 
| |     
| |      |  |  |   |     |  | 
| |      |  |  | $ | 972 |  | 
| |      |  | 

| |                                                                                                                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The weighted average useful life of the intangible assets is five years. No impairment of Test System
Programs Sets (TPSs) was recorded in 2008 and 2007. In 2006 an impairment of $ 19
was recorded since the Company does not anticipate future revenues on certain specific TPSs.
| |                                                                                                                                                                                                                                                                                       
| | In 2008 and 2007, the Company recorded $ 343 and $ 48, respectively, of goodwill in respect of
additional consideration payable in connection with the acquisition of Vectop relating to royalties
due based on actual revenues derived from Vectop projects.                         
| |                                                                                                                                                                                                                                                                                       

|NOTE 8:-SHORT-TERM BANK CREDIT AND LOANS
|----------------------------------------
|                                        

| | a. | Short-term bank credit:
| | -- | -----------------------
| |    |                        

| |                       |  |  |   | December 31, | 
| | --------------------- |  |  | - | ------------ | 
|
|
| |                       |  |  |   |              | 
| |                       |  |  |   |              | 
| | Bank credit in NIS *) |  |  | $ |             | 
| |                       |  |  |  

| |    |                                                                           
| | -- | --------------------------------------------------------------------------
| | *) | The interest rate at December 31, 2008 is 6.1% (December 31, 2007 - 8.6%).

F - 21

---

---

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

|NOTE 8:-SHORT-TERM BANK CREDIT AND LOANS (Cont.)
|------------------------------------------------
|                                                

| | b. | Long-term loans:
| | -- | ----------------
| |    |                 

| |                                                |  |  |   | December 31, | 
| | ---------------------------------------------- |  |  | - | ------------ | 
|
|
| |                                                |  |  |   |              | 
| |                                                |  |  |   |              | 
| | Loan from bank in NIS (1)                      |  |  | $ | 33           | 
| | Loan in U.S. dollars from shareholder, net (3) |  |  |   | 76           | 
| | Loan in U.S. dollars from a shareholder (4)    |  |  |   | 1,470        | 
| |                                                |  |  |  
| |                                                | 
| |                                                |  |  |   |              | 
| |                                                |  |  | $ | 1,579        | 
| |                                                |  |  |  
| |                                                | 
| |                                                |  |  |   |              | 
| | Current maturities                             |  |  |   |              | 
| | Loan from bank in NIS (1)                      |  |  | $ | 132          | 
| | Loan in NIS (2)                                |  |  |   |             | 
| | Loan in U.S. dollars from a shareholder (4)    |  |  |   | 30           | 
| |                                                |  |  |  
| |                                                | 
| |                                                |  |  |   |              | 
| |                                                |  |  | $ | 162          | 
| |                                                |  |  |  

| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | In March 2008, the Company received a loan from the bank in the amount of approximately $ 260. The
principal of the loan is due in 24 monthly installments from March 2008 until March 2010. The interest
rate at December 31, 2008 is 6.1%.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (2) | The principal of the loan is due in 21 monthly installments from March 2007 until November 2008 and
the interest is payable monthly from February 2007. The interest rate at December 31, 2007 is 8.6%.
As of December 31, 2008, the loan was fully paid.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (3) | In July 2007, the Company received a loan from shareholders in the amount of $ 400. The loan bears
an annual interest rate of 8%. The remaining loan is due in one installment in June, 2010. In January
2008, the shareholders entered into an agreement with the Company whereby $ 300 of the loan was converted
into shares. The conversion of the loan was treated as an extinguishment of debt in accordance with
EITF 96-19 and EITF 06-6 and as a result a loss in the amount of $ 100 was recorded as financial
expenses. See also Note 11(c).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | (4) | In July 2008, the Company entered into a $1.5 million loan agreement with its controlling shareholder.
The loan was provided mainly in order to facilitate the development of the Companys inertial
navigation systems technology (INS Technology). The loan was drawn down in July ($1.0
million) and in December 2008 ($0.5 million). The loan bears interest of 3% + LIBOR payable at the
beginning of every quarter. Principal payments equal to $ 90 are payable in six equal installments
commencing July 1, 2009 and the remaining principal amount will be payable in eight equal installments,
commencing April 1, 2011. In addition, the controlling shareholder received a non-exclusive license
to sell the INS Technology for non-military/commercial purposes. The non-exclusive license granted
under this agreement will automatically convert into an exclusive license should the Company default
on any of its obligations under the loan agreement. The fair value of the non-exclusive license at
the transaction date is deemed deminimus.
| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| | The Companys line of credit from the bank (including guarantees and loans) is $ 2,772, from which
$ 2,652 was utilized at December 31, 2008. See also Note 10(g).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 22

---

---

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

NOTE 9:-       OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

| |                                                        |  |  |   | December 31, | 
| | ------------------------------------------------------ |  |  | - | ------------ | 
|
|
| |                                                        |  |  |   |              | 
| |                                                        |  |  |   |              | 
| | Payroll and related accruals                           |  |  | $ | 1,239        | 
| | Provision for legal proceedings                        |  |  |   | 650          | 
| | Accrued royalties                                      |  |  |   | 794          | 
| | Accrued commissions                                    |  |  |   | 254          | 
| | Contracts in progress - provision for estimated losses |  |  |   | 106          | 
| | Accrued expenses                                       |  |  |   | 660          | 
| | Deferred revenues                                      |  |  |   | 36           | 
| | Other                                                  |  |  |   | 121          | 
| |                                                        |  |  |  
| |                                                        | 
| |                                                        |  |  |   |              | 
| |                                                        |  |  | $ | 3,860        | 
| |                                                        |  |  |  
| |                                                        | 

NOTE 10:-     COMMITMENTS AND CONTINGENT
LIABILITIES

| | As of December 31, 2008, the Company was a party to various legal proceedings, including the following:
| | -------------------------------------------------------------------------------------------------------
| |                                                                                                        

| | 1. | In December 1998, Mr. Haim Nissenson, the Companys former president and chief executive officer,
filed a complaint against the Company and Mr. Herzle Bodinger, chairman of the Companys Board
of Directors and the Companys president, in the Regional Labor Court of Tel Aviv (Case No.
3/4074/98 H. Nissenson v. RADA Electronic Industries Ltd. and others), seeking approximately NIS 2.0 million for salary, vacation and severance payments and other benefits
that he was allegedly entitled to pursuant to his retirement agreement with the Company. In addition,
Mr. Nissenson has also sought a permanent injunction and declarative relief, stating that a personal
loan that was provided to him by the Company had been forgiven. In August 2000, the Company filed
a claim against Mr. Nissenson in the Regional Court for Labor Disputes in Tel Aviv (Case No. 7049/00 RADA Electronic Industries Ltd. v. Nissenson.) for the amount of NIS 2.0 million for the repayment of the loan the Company granted to Mr. Nissenson
that allegedly was forgiven by the Company in Mr. Nissensons retirement agreement, as mentioned
above.  The hearings of both Mr. Nissensons and the Companys claims in the Regional
Court for Labor Disputes were joined.
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| | Subsequent to balance sheet date, in February 2009, the Regional Labor Court determined that Mr., Nissenson
is required to repay the $ 485 of loans he received from the Company together with accrued interest
and linkage differences as provided by law. The Court also denied all of Mr. Nissensons claims
and allegations against Mr. Herzle Bodinger, the Companys current Chairman of the Board, as
well as substantially all of Mr. Nissensons claims against the Company, except for payment
of recuperation fees and vacation fees in the aggregate amount of NIS 109, together with accrued
interest and linkage differences, as provided by law. The Court found that the retirement agreement
between the Company and Mr. Nissenson is null and void since it was not legally approved, tainted
with misleading information provided by Mr. Nissenson and included provisions that were not properly
approved by the Companys Board of Directors.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

F - 23

---

---

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

NOTE 10:-     COMMITMENTS AND CONTINGENT

LIABILITIES (Cont.)

| | 2. | In April 2008, the Company reached a settlement in all other pending claims involving Messers Nissenson.
Dobronski, other current and former directors and officers and the Company. Pursuant to this settlement,
it was agreed that all the claims that were filed in the following cases 6152-08-07 (old number 2514/99),
6159-08-07 (old number 1751/01), 2600-03-08 (old number 1158/01), 1845/05 in the District Court of
Tel-Aviv, 56365/04 in the Magistrate Court of Tel-Aviv and 29334/06 in the Magistrate Court of Tel
Aviv were dismissed, while such agreement does not constitute a waiver by each party of any of its
claims or otherwise an admission of the parties claims. Pursuant to such agreement, the Company
does not insist in its claims that Mr. Nissenson and Mr., Dobronski did not disclose their personal
interest in Jetborne International, Ltd., a former subsidiary of the Company, as previously stated
in the Companys reports.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 3. | In 2000, a claim was filed by an Israeli firm against the Company, claiming that it served as a broker
in an agreement signed by the Company and a potential investor and is entitled to commissions (or
finders fee) in the amount of approximately $ 250. The claim was dismissed by the Court.
Plaintiffs appealed to the Supreme Court and their appeal was denied on February 4, 2009.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | 4. | In 2001, a former director filed a claim in Israel against the Company, claiming that he is entitled
to 200,000 options (after the reverse split) to purchase Ordinary shares of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| | In addition, in March 2007, the same former director commenced an action against the Company in New
York State Supreme Court alleging that the Company failed to provide him certain stock options
as described above. The former director also alleged in his complaint that he was entitled to
recover $1.8 million from the Company. The Company moved to dismiss this complaint on several grounds.
In December 2007, the court granted the Companys motion to dismiss the action in its entirety.
The former director attempted to appeal from the dismissal, but did not do so in a timely
fashion and his appeal was rejected. He subsequently made a motion to the appellate court in New
York seeking additional time to prosecute his appeal. That motion was denied. He has made a motion
to the appellate court asking the court to reconsider its denial of his request for additional time
to appeal. In March 2009, that motion was denied and his appeal from the order dismissing his claims
was dismissed.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | Management believes, based on the advice of its legal counsel, that the claims do not have any merit
and, accordingly, did not record any provision.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| | 5. | The Company is involved periodically in various legal claims in the ordinary course of business, including
claims by agents and others for commissions, royalties and others. The Company has provided an amount
which it believes is sufficient to cover 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 Israels Ministry of Industry, Trade
and Labor (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 whose research was supported
by grants received from 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 $ 424 as of December 31,
2008. The total amount of royalties charged to operations for the years ended December 31, 2008,
2007 and 2006 was approximately $ 13, $ 10 and $ 17, respectively.

F - 24

---

---

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

NOTE 10:-            COMMITMENTS AND CONTINGENT

LIABILITIES (Cont.)

| | 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 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 $ 2,066 as of December 31, 2008. The total
amount of royalties charged to operations for the years ended December 31, 2008, 2007 and 2006
was approximately $ 0, $ 7 and $ 14, respectively.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | d. | The Companys offices in Netanya are rented under a non-cancelable operating lease expiring January 31,
2010. In addition, the Companys motor vehicles are rented under operating leases.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| |    | Annual minimum future rental commitments under these leases, at exchange rates in effect on December 31,
2008, are approximately as follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |      |  |  |   |       |  | 
| | ---- |  |  | - | ----- |  | 
| | 2009 |  |  | $ | 751   |  | 
| | 2010 |  |  |   | 394   |  | 
| | 2011 |  |  |   | 149   |  | 
| |      |  | 
| |     
| |      |  |  |   |       |  | 
| |      |  |  | $ | 1,294 |  | 
| |      |  | 

| |                                                                                                             
| | ------------------------------------------------------------------------------------------------------------
| | Lease expense for the years ended December 31, 2008, 2007 and 2006 was $ 719, $ 619 and $ 656,
respectively.
| |                                                                                                             

| | e. | During 2008, the Company entered in to a lease agreement to purchase a machine in the amount of approximately
$ 224, which was accounted for as a capital lease under SFAS 13. The total amount of the lease liability
was $ 147 as of December 31, 2008.                                                                                                                                      
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| | f. | Floating charges have been recorded on all of the Companys assets and specific charges have been
recorded on certain assets in respect of the Companys liabilities to its banks and other creditors.                                                                                                                                                                                         
| |    |                                                                                                                                                                                                                                                                                                                                                                                                
| | g. | The Company provides bank guarantees to its customers and others in the ordinary course of business.
The guarantees which are provided to customers are to secure advances received at the commencement
of a project or to secure performance of operational milestones. The total amount of bank guarantees
provided to customers and others as of December 31, 2008 is approximately $ 2,488.
| |    |                                                                                                                                                                                                                                                                                                                                                                                                

|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 February 2007, the Company effected a 3 to 1 reverse stock split with respect to its Ordinary shares.
All shares, stock options, warrants and net loss per share amounts in these financial statements
have been restated for all prior periods to reflect the reverse stock split.

F - 25

---

---

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

|NOTE 11:-SHAREHOLDERS EQUITY (Cont.)
|-------------------------------------
|                                     

| | In January 2008, the Company repaid $ 300 of the $ 400 loan received in June 2007 in consideration
for 152,765 ordinary shares. (See also Note 8).
| | --------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                   

| | b. | Stock option plans:
| | -- | -------------------
| |    |                    

| | In 1999 and 2003, the Companys Board approved the adoption of Employee Stock Option Plans (the
Plans), which authorized the grant of options to purchase up to an aggregate of 346,667 and
1,166,667 Ordinary shares (in 2006 the Companys Board approved an increase in the 2003 plan
by an additional 500,000 options), 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. One third of the options granted under the Companys Plans
vest immediately on the grant date and the remaining two thirds vest ratably over two years. Compensation
expense is recognized by the straight-line method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | 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, 2008, 346,632 options
were available for grant under the Plans described above. Upon exercise of options by employees,
the Company satisfies the requirements by issuing newly issued shares.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | In May 2008, the Company granted under the 2003 Israeli Stock Option Plan to four of its directors
options to purchase a total of 261,000 ordinary shares for an exercise price of $ 2.14 per share
of which 258,000 were in exchange for 258,000 options that were granted to those directors in 2003
for an exercise price of $ 4.02 per share. Those options were fully vested and there was no remaining
compensation expense related to those options. The Company accounted for the exchange of options
under the provisions of SFAS 123(R) as a modification. A modification to the terms of an award should
be treated as an exchange of the original award for a new award with total compensation cost equal
to the grant-date fair value of the original award plus the incremental value measured at the modification
date. Under SFAS 123(R), the calculation of the incremental value is based on the excess of the fair
value of the new (modified) award based on current circumstances over the fair value of the original
option measured immediately before its terms are modified based on current circumstances. That is,
the original (pre-modification) option will be valued based on current assumptions, without regard
to the assumptions made on the grant date. As a result of the modification, the Company will record
incremental compensation cost of $ 191 to be recognized over the new service period beginning on
the modification date. In 2008 $ 48 was recognized due to this modification.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | The term of the new options is five years and they will vest as follows: 25% of the options granted
to each of our directors will vest on January 1, 2009, additional 40% shall vest in four equal installments
of 10% each on the last date of each calendar quarter commencing on March 31, 2009 and the balance
of 35% shall vest in two equal installments of 17.5% each on March 31, 2010 and June 30, 2010 respectively.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

F - 26

---

---

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

|NOTE 11:-SHAREHOLDERS EQUITY (Cont.)
|-------------------------------------
|                                     

| | Transactions related to the above Plans (including warrants to directors) during the year ended December 31,
2008 were as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                   

| |                                                    |  |  |  | Year ended December 31, 2008 |  
| | -------------------------------------------------- |  |  |  | ---------------------------- | -
|
|
| |                                                    |  |  |  |                              |  
| |                                                    |  |  |  |                              |  
| | Options outstanding at
  beginning of year         |  |  |  | 1,108,933                    |  
| | Granted (*)                                        |  |  |  | 261,000                      |  
| | Cancelled (*)                                      |  |  |  | (258,000                     | )
| | Forfeited                                          |  |  |  | (234,667                     | )
| |                                                    |  |  |  |                             
| |                                                    |  |  |  |                              |  
| | Options outstanding at end
  of year               |  |  |  | 877,266                      |  
| |                                                    |  |  |  |                              |  
| |                                                    |  |  |  |                              |  
| | Vested and expected to vest
  at December 31, 2008 |  |  |  | 851,806                      |  
| |                                                    |  |  |  |                              |  
| |                                                    |  |  |  |                              |  
| | Exercisable options at end
  of year               |  |  |  | 609,322                      |  
| |                                                    |  |  |  |                              |  

| |                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------
| | (*)        See Note 11b                                                                                               
| |                                                                                                                       
| | Share based compensation for the years ended December 31, 2008, 2007 and 2006 was $ 131, $ 175 and $ 221 respectively.
| |                                                                                                                       

| | The weighted-average grant-date fair value of options granted during the years ended December 31, 2008,
2007 and 2006 was $ 0.81, $ 2.91 and $ 0.34, respectively. The aggregate intrinsic value in the table
above represents the total intrinsic value (the difference between the Companys closing stock
price on December 31, 2008 and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holders had all option holders exercised their options
on December 31, 2008. As of December 31, 2008 all options were out of the money. As of December 31,
2008 and 2007, there was $ 151 and $ 79 respectively of total unrecognized compensation cost related
to non-vested share-based compensation arrangements granted under the Companys stock option
plans. That cost is expected to be recognized over a weighted-average period of two years.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| | c. | Warrants:
| | -- | ---------
| |    |          

| | As of December 31, 2008, warrants to purchase 2,654,032 Ordinary shares were outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | On December 10, 2007, in connection with a convertible note in the amount of $ 3,000 issued to a shareholder,
the Company issued warrants to purchase up to an aggregate of 1,578,947 Ordinary shares at an exercise
price of $ 2.38 per share for a term of five years. The convertible notes bear an interest at a rate
of six-month LIBOR plus 3.5%. The principal is due in December 2010 and the interest is payable in
quarterly installments until December 2010. The notes are convertible to Ordinary shares at a conversion
price of $ 2.09 per share.

F - 27

---

---

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

|NOTE 11:-SHAREHOLDERS EQUITY (Cont.)
|-------------------------------------
|                                     

| | The consideration was allocated based on the relative fair values of the convertible loan and warrants
in accordance with APB No. 14. In connection with the issuance of the convertible note, $ 568
was recorded as a beneficial conversion feature in accordance with EITF 98-5. The total amount of
the deemed discount on the convertible note as a result of the allocated proceeds attributable to
the warrants and the beneficial conversion feature amounting to $ 1,410, was amortized over
the term of the note using the interest method. The fair value of the warrants was based on the Black-Scholes-Merton
option-pricing model, assuming a risk free interest of 3.49%, a volatility factor of 47%, dividend
yield of 0% and contractual life of five years.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | In July 2007, the Company received a loan in the amount of $ 400 from certain shareholders, See also
Note 8(b). These shareholders had warrants to purchase 762,585 Ordinary shares which expired on the
same date of the issuance of the loan. In connection with the issuance of the loan the warrants to
purchase 606,803 Ordinary shares were extended for a term of three years and repriced to an exercise
price of $ 1.88 per share. Warrants to purchase the remaining 155,782 Ordinary shares were extended
for an additional three years. The extended and re-priced warrants were accounted for as modification
accounting in accordance with FASB 123(R).                                                                                                       
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The consideration was allocated based on the relative fair values of the loan and warrants (extended
and repriced) in accordance with APB No. 14. The fair value of the warrants was based on the Black-Scholes-Merton
option-pricing model, assuming a risk free interest of 5%, a volatility factor of 43%, dividend yield
of 0% and contractual life of three years.                                                                                                                                                                                                                                                                                                                                                                                                     
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | The total amount of the deemed discount on the loan of $ 158, is amortized over the term of the
loan using the interest method. In January 2008, the shareholders entered in to an agreement with
the Company in order to convert $ 300 of the loan into shares. As of December 31, 2008 the net deemed
discount is $ 24. (See also Note 11a).                                                                                                                                                                                                                                                                                                                                                                                                                              
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | d. | According to registration rights agreements with various security holders listed under registration
statements filed in connection with private placements for issuance of shares, convertible notes
and warrants issued, should the Company fail to maintain and file the effectiveness of those registration
statements for the periods stated in the respective agreements, the Company risks having imposed
on it unlimited liquidated damages as defined in those agreements.
| | -- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| | In accordance with EITF 00-19, the warrants are classified as permanent equity. If at any time payment
of liquidated damages becomes probable, the Company will recognize a liability, and a charge to expense,
for the probable damages in accordance with SFAS No. 5, Accounting for Contingencies.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                        

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

F - 28

---

---

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

|NOTE 12:-TAXES ON INCOME (Cont.)
|--------------------------------
|                                

| | 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. | Tax rates applicable to income of companies in Israel:
| | -- | ------------------------------------------------------
| |    |                                                       

| | In June 2004, an amendment to the Income Tax Ordinance (No. 140 and Temporary Provision), 2004 was
passed by the Knesset (Israeli parliament) and on July 25, 2005, another law was passed,
the amendment to the Income Tax Ordinance (No. 147) 2005, according to which the corporate tax rate
is to be progressively reduced to the following tax rates: 2006 - 31%, 2007 - 29%, 2008 - 27%, 2009
- 26%, 2010 and thereafter - 25%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                                                                                                                                        

| | d. | As of December 31, 2008, the net operating tax loss carryforward relating to the Company in Israel
amounted to approximately $ 59,488, including a carryforward capital loss amounting to approximately
$ 3,623. Carryforward losses in Israel may be carried forward indefinitely and may be offset
against future taxable income.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                    

| | As the Company believes that it is more likely than not that the deferred tax assets in respect of
these carryforward losses amounting to approximately $ 14,872 will not be utilized, the Company
recorded a valuation allowance for the entire balance of the deferred tax asset relating to the carryforward
losses.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |                                                                                                                                                                                                                                                                                                                        

| | 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 deferred tax assets relating to net operating
loss carryforwards and other temporary differences due to the uncertainty of the realization of such
tax assets.
| | -- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                         
| | f. | Loss before income taxes:                                                                                                                                                                                                                                                                                               
| |    |                                                                                                                                                                                                                                                                                                                         

| |          |  |  |   | Year ended December 31, |  
| | -------- |  |  | - | ----------------------- | -
|
|
| |          |  |  |   |                         |  
| |          |  |  |   |                         |  
| | Domestic |  |  | $ | (647                    | )
| | Foreign  |  |  |   | 71                      |  
| |          |  |  |   |                         |  
| |          |  | 
| |          |  |  |   |                         |  
| |          |  |  | $ | (576                    | )
| |          |  |  |   |                         |  

F - 29

---

---

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

|NOTE 13:-FINANCIAL EXPENSES, NET
|--------------------------------
|                                

| |                                                                     |  |  |   | Year ended December 31, | 
| | ------------------------------------------------------------------- |  |  | - | ----------------------- | 
|
|
| |                                                                     |  |  |   |                         | 
| |                                                                     |  |  |   |                         | 
| | Income:                                                             |  |  |   |                         | 
| | Foreign currency exchange differences                               |  |  | $ | 190                     | 
| |                                                                     |  | 
| |                                                                     |  | 
| | Others                                                              |  |  |   | 66                      | 
| | Interest on cash equivalents and restricted cash                    |  |  |   | 63                      | 
| |                                                                     |  |  |   |                         | 
| |                                                                     |  | 
| |                                                                     |  |  |   |                         | 
| |                                                                     |  |  |   | 319                     | 
| |                                                                     |  |  |   |                         | 
| | Expenses:                                                           |  |  |   |                         | 
| | Interest on convertible note                                        |  |  |   | 222                     | 
| | Amortization expense on convertible note and
     deferred expenses |  |  |   | 473                     | 
| | Loss due to extinguishment of a loan                                |  |  |   | 100                     | 
| | Foreign currency exchange differences                               |  |  |   |                        | 
| | Interest on loans and other credit balances                         |  |  |   | 61                      | 
| | Bank commissions                                                    |  |  |   | 131                     | 
| |                                                                     |  |  |   |                         | 
| |                                                                     |  | 
| |                                                                     |  |  |   |                         | 
| |                                                                     |  |  |   | 987                     | 
| |                                                                     |  |  |   |                         | 
| |                                                                     |  | 
| |                                                                     |  |  |   |                         | 
| |                                                                     |  |  | $ | 668                     | 
| |                                                                     |  |  |   |                         | 

|                                    | 
|----------------------------------- | 
|NOTE 14:-RELATED PARTY TRANSACTIONS
|                                    | 

| | a. | For the year ended December 31, 2008, the Company incurred $ 308 in respect of interest on loans received
from its shareholders.                                 
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                  
| | b. | For the year ended December 31, 2007 the Company recognized revenues in the amount of $ 870 from a related party (a company controlled by the major
shareholder).
| |    |                                                                                                                                                                  

| | See also Notes 8(b), 11(a) and (c) for transactions with Companys shareholders.
| | --------------------------------------------------------------------------------
| |                                                                                 

|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 (see Note 1a).
| | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |    |                                                                                                                                                                                                                                                                                                                                                          
| | 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, | 
| | ------------------- |  |  | - | ----------------------- | 
|
|
| |                     |  |  |   |                         | 
| |                     |  |  |   |                         | 
| | Israel              |  |  | $ | 8,032                   | 
| | Asia (Mainly India) |  |  |   | 5,642                   | 
| | North America       |  |  |   | 3,819                   | 
| | Europe              |  |  |   | 144                     | 
| | Others              |  |  |   | 244                     | 
| |                     |  |  |   |                         | 
| |                     |  | 
| |                     |  |  |   |                         | 
| | Total               |  |  | $ | 17,881                  | 
| |                     |  |  |   |                         | 

F - 30

---

---

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

|NOTE 15:-MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION (Cont.)
|-----------------------------------------------------------
|                                                           

| | 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, | 
| | ---------- |  |  |  | ----------------------- | 
|
|
| |            |  |  |  |                         | 
| |            |  |  |  |                         | 
| |            |  |  |  |                        
| |            |  |  |  |                         | 
| | Customer A |  |  |  | 15                      | 
| | Customer B |  |  |  | 11                      | 
| | Customer C |  |  |  | 16                      | 
| | Customer D |  |  |  | *)                      | 
| | Customer E |  |  |  | 29                      | 

| |    |               
| | -- | --------------
| | *) | Less than 10%.
| |    |               

| | d. | Long-lived assets by geographic areas:
| | -- | --------------------------------------
| |    |                                       

| |        |  |  | December 31, |      
| | ------ |  |  | ------------ | -----
|
|
| |        |  |  |              |      
| |        |  |  |              |      
| | Israel |  |  | $            | 4,353
| | China  |  |  |              | 875  
| |        |  |  |             
| |        |  | 
| |        |  |  |              |      
| |        |  |  | $            | 5,228
| |        |  |  |             

F - 31

---

---

S I G N A T U R E S

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

| |  | RADA ELECTRONIC INDUSTRIES LTD.By: /s/ Zvi Alon
Zvi AlonChief Executive Officer
| |  | ---------------------------------------------------------------------------------------------

Dated: April 1, 2009



---

---