`SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON D.C. 20549

                                    FORM 20-F

     [_]  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, 2006

                                       OR

     [_]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
          EXCHANGE ACT OF 1934

              FOR THE TRANSITION PERIOD FROM _________ TO _________

                                       OR

     [_]  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)

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...8,728,509
                            (as of December 31, 2006)`

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

                               Yes [_]     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 [_]     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 [_]

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 [_] Accelerated filer [_] Non-accelerated filer [X]

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

                           Item 17 [_]     Item 18 [X]

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 [_]     No [X]

This Report on Form 20-F is incorporated by reference into our Form F-3
Registration Statements File Nos. 333-127491, 333-117954, 333-115598 and
333-12074, and our Form S-8 Registration Statements File Nos. 333-111437 and
333-12844.`

`INTRODUCTION

     RADA Electronic Industries Ltd. develops, manufactures and sells automated
test equipment, avionics products and ground debriefing systems and provides
manufacturing services for military and commercial use, mainly in Israel, the
U.S. and Europe. We also provide test and repair services using our CATS(TM)
testers and test program sets through our Chinese subsidiary. In February 2005,
we purchased certain assets and assumed certain liabilities related to the
operations of Vectop Ltd., an Israeli company specializing in the design,
development, marketing and sale of electro-optic equipment and debriefing
systems. Such assets included the know-how, intellectual property and patents
that were used by, or connected to Vectop Ltd.'s business. Our products include
our Net Centric Digital Recorder and related recording devices, ground
information management systems, optronic products, based on technology that we
acquired from Vectop Ltd., inertial navigation products and advanced training
solutions.

     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 have been using CATS(TM), ACE(TM) and FACE(TM) as trade names. We have
acquired the rights to the Israeli trademark VDS(R) and to the U.S. trademark
application for the same trademark in connection with the assets we acquired
from Vectop Ltd. in February 2005. 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.

     In 2006, we received a letter from the NASDAQ Stock Market indicating that
our ordinary shares were subject to delisting from the NASDAQ Capital Market as
a result of our shares trading below a minimum bid price of $1.00 for thirty
consecutive trading days. In order to regain compliance with this requirement
our shareholders approved a one share for three shares reverse split on January
29, 2007 and the reverse stock split was effective as of February 14, 2007. As a
result of the reverse stock split, we are presently in compliance with the
Nasdaq Stock Market Rules. All share and per share amounts in this annual report
reflect the reverse stock split.

     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."


                                      -i-`

`TABLE OF CONTENTS
                                                                      PAGE NO.

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

ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS..........1
ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE........................1
ITEM 3.   KEY INFORMATION................................................1
          A.     Selected Financial Data.................................1
          B.     Capitalization and Indebtedness.........................2
          C.     Reasons for the Offer and Use of Proceeds...............2
          D.     Risk Factors............................................2
ITEM 4.   INFORMATION ON THE COMPANY....................................11
          A.     History and Development of the Company.................11
          B.     Business Overview......................................11
          C.     Organizational Structure...............................21
          D.     Property, Plants and Equipment.........................21
ITEM 4A.  UNRESOLVED STAFF COMMENTS.....................................21
ITEM 5.   OPERATING AND FINANCIAL REVIEW AND PROSPECTS..................21
          A.     Operating Results......................................21
          B.     Liquidity and Capital Resources........................28
          C.     Research and Development, Patents and Licenses.........31
          D.     Trend Information......................................31
          E.     Off-Balance Sheet Arrangements.........................32
          F.     Tabular Disclosure of Contractual Obligations..........32
ITEM 6.   DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES....................32
          A.     Directors and Senior Management........................32
          B.     Compensation...........................................34
          C.     Board Practices........................................35
          D.     Employees..............................................41
          E.     Share Ownership........................................43
ITEM 7.   MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.............45
          A.     Major Shareholders.....................................45
          B.     Related Party Transactions.............................46
          C.     Interests of Experts and Counsel.......................47
ITEM 8.   FINANCIAL INFORMATION.........................................47
          A.     Consolidated Statements and Other Financial
                 Information............................................47
          B.     Significant Changes....................................50
ITEM 9.   THE OFFER AND LISTING.........................................50
          A.     Offer and Listing Details..............................50
          B.     Plan of Distribution...................................51
          C.     Markets................................................51
          D.     Selling Shareholders...................................51
          E.     Dilution...............................................51
          F.     Expense of the Issue...................................51


                                      -ii-`

`ITEM 10.  ADDITIONAL INFORMATION........................................51
          A.     Share Capital..........................................51
          B.     Memorandum and Articles of Association.................51
          C.     Material Contracts.....................................54
          D.     Exchange Controls......................................54
          E.     Taxation...............................................54
          F.     Dividend and Paying Agents.............................62
          G.     Statement by Experts...................................62
          H.     Documents on Display...................................62
          I.     Subsidiary Information.................................63
ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS....63
ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES........64

PART II.................................................................64

ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES...............64
ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
          AND USE OF PROCEEDS...........................................64
ITEM 15.  CONTROLS AND PROCEDURES.......................................64
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........................65
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

PART III................................................................65

ITEM 17.  FINANCIAL STATEMENTS..........................................65
ITEM 18.  FINANCIAL STATEMENTS..........................................66
ITEM 19.  EXHIBITS......................................................66
S I G N A T U R E S.....................................................67


                                     -iii-`

`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, 2004, 2005 and 2006 and the consolidated balance sheet
data as of December 31, 2005 and 2006 from our audited consolidated financial
statements included in this annual report. We derived the consolidated
statements of operations data for the years ended December 31, 2002 and 2003,
and the consolidated balance sheet data as of December 31, 2002, 2003 and 2004
from our audited consolidated financial statements that are not included in this
annual report.

                                                              Year Ended December 31,
                                              --------------------------------------------------------
                                                2002        2003        2004        2005        2006
                                              --------    --------    --------    --------    --------
                                             (U.S. dollars in thousands, except share and per share data)

Revenues ..................................   $ 10,399    $ 12,315    $ 14,160    $ 13,421    $ 13,037
Cost of revenues ..........................      9,223       9,592      10,287      12,082      10,999
                                              --------    --------    --------    --------    --------
Gross profit ..............................      1,176       2,723       3,873       1,339       2,038
   Research and development expenses ......        122           -           -           -         181
   Marketing, selling, general and
      administrative expenses .............      3,809       2,698       2,854       3,094       3,110
Operating income (loss) ...................     (2,035)         25       1,019      (1,755)     (1,253)
Financial income (expenses), net ..........       (364)        708        (248)       (624)       (775)
Other income (expenses), net ..............       (290)         (2)         23          33          45
Minority interest in losses (gains) of
subsidiary ................................        206          27          28          17         (17)
Net income (loss) .........................   $ (2,483)   $    758    $    822    $ (2,329)   $ (2,000)
                                              ========    ========    ========    ========    ========
Basic net income (loss) per share* ........   $  (0.45)   $   0.12    $   0.12    $  (0.31)   $  (0.23)
                                              ========    ========    ========    ========    ========
Diluted net income (loss) per share* ......   $  (0.45)   $   0.12    $   0.09    $  (0.31)   $  (0.23)
                                              ========    ========    ========    ========    ========
Weighted average number of shares used
   to compute basic net income (loss) per
   share* .................................      5,518       6,170       6,458       7,504       8,723
                                              ========    ========    ========    ========    ========
Weighted average number of shares used
   to compute diluted net income (loss) per
   share* .................................      5,518       6,568       7,895       7,504       8,723
                                              ========    ========    ========    ========    ========

----------

     *All share and per share amounts reflect a one share for three shares
reverse stock split that was effective February 14, 2007.`

`As of December 31,
                                               ------------------------------------------------------
                                                 2002        2003        2004       2005       2006
                                               --------    --------    --------   --------   --------
                                                             (U.S. dollars in thousands)

BALANCE SHEET DATA:
Working capital (deficiency) ...............   $ (8,055)   $ (2,716)   $  2,265   $  3,575   $  3,514
Total assets ...............................     14,607      14,549      18,297     18,890     17,455
Short-term credits and current maturities of      5,697       1,123          14        877        559
long-term loans
Long-term debt, net of current maturities ..          -       1,220           -          -        142
Convertible note ...........................          -           -       2,346      2,560      2,858
Capital stock ..............................     58,893      59,247      64,184     67,016     67,355
Shareholders' equity .......................        485       2,878       7,232      7,735      6,074

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, 2006 we recorded a net loss of $2 million.
We have incurred losses in three out of the last five years and as of December
31, 2006 our accumulated deficit was $61 million. We may not be able to achieve
or sustain profitability in the future.

WE MAY NOT BE ABLE TO SERVICE OUR DEBT, INCLUDING $3 MILLION OF CONVERTIBLE
NOTES DUE ON JULY 12, 2007.

     Our ability to pay or to refinance our indebtedness, including $3 million
of convertible notes due July 12, 2007, will depend upon our future operating
performance. Our business may not generate sufficient cash flow from operations
and future borrowings may not be available to us in amounts sufficient to enable
us to pay our indebtedness or to fund our other liquidity needs. If we are
unable to meet our debt service obligations or fund our other liquidity needs,
we would attempt to restructure or refinance our indebtedness or seek additional
equity capital. It may be challenging for us to accomplish such actions on
satisfactory terms.

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 2006. We may need to raise additional funds
for a number of uses, including:

     o    Working capital and operating activities;


                                       2`

`o    Implementing marketing and sales activities for our products;

     o    Maintaining and expanding research and development programs;

     o    Hiring additional qualified personnel; and

     o    Supporting an increased level of operations.

     We may not be able to obtain additional funds on the most 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:

     o    Develop new products;

     o    Enhance our existing products;

     o    Remain current with evolving industry standards;

     o    Fulfill our contractual obligations;

     o    Take advantage of future opportunities;

     o    Respond to competitive pressures or unanticipated requirements; or

     o    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.

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

     As part of our growth strategy, we seek to acquire or invest in
complementary, including competitive, businesses, products and technologies. We
acquired certain assets and assumed certain liabilities related to the
operations of Vectop Ltd., or Vectop, in the first quarter of 2005, and are
seeking additional potential acquisition candidates. We currently have no
commitments or agreements with respect to any future acquisitions or investments
and we may not be able to consummate any acquisition or investment. Even if we
do acquire or invest in these businesses, products or technology, the process of
integrating acquired assets into our operations may result in unforeseen
operating difficulties and expenditures and may absorb significant management
attention that would otherwise be available for the ongoing development of our
business.

     In addition, we have limited experience in managing acquisitions and
growth. Therefore, the anticipated benefits of any acquisition may not be
realized. Furthermore, future acquisitions by us could result in potentially
dilutive issuances of our equity securities, the incurrence of debt and
contingent liabilities and impairment related to goodwill and other intangible
assets, any of which could materially adversely affect our operating results and
financial position. Acquisitions also involve other risks, including risks
inherent in entering markets in which we have no or limited prior experience and
the potential loss of key employees and the risk that we may experience
difficulty or delays in obtaining necessary permits.


                                       3`

`COMPETITION IN THE MARKET FOR AUTOMATED TEST EQUIPMENT AND AVIONICS EQUIPMENT IS
INTENSE AND WE MAY BE UNABLE TO ACHIEVE PROFITABILITY.

     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 automated
test equipment market are Zaban in Israel, and Aerospatiale Avionique and Avtron
abroad. Our principal competitors in the avionics market are Harris, Rockwell
Collins, Honeywell, Elbit Systems Ltd., or Elbit, Israel Aircraft Industries
Ltd., or IAI, R.S.L. Ltd., TEAC and Elisra Systems Ltd. We expect to continue to
face competition from these and other competitors. Most, if not all, 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.

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 MILITARY BUDGETS WORLDWIDE MAY CAUSE A REDUCTION IN OUR REVENUES,
WHICH WOULD ADVERSELY AFFECT OUR BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION.

     A significant portion of our revenues is derived from the sale of products
with military applications. These revenues, on a consolidated basis, totaled
approximately $11.6 million, or 89% of revenues in 2006, $11.8 million, or 88 %
of revenues in 2005, and $11.8 million, or 83% of revenues in 2004. The military
budgets of a number of countries may be reduced in the future. Declines in
military 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 military aviation 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.


                                       4`

`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 THEIR GOVERNMENT APPROVALS NECESSARY TO EXPORT THEIR PRODUCTS OR
DESIGNS TO US, OUR REVENUES MIGHT DECREASE AND WE MAY FAIL TO IMPLEMENT OUR
GROWTH STRATEGY.

     Under Israeli law, the export of certain 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.

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.

     A significant portion of our revenues is derived from a small number of
customers. Our major customers during the three years ended December 31, 2006
were as follows:

                                     Percentage of Revenues
                                   ----------------------------
                                   2004        2005        2006
                                   ----        ----        ----

Smiths Electronic Systems .          5%         21%         38%
The Boeing Company ........         10%          3%          -
Israeli Ministry of Defense         19%         12%          5%
Israel Aviation Industries           6%         14%         20%
Portuguese Air Force ......         17%          -           2%
U.S. Navy .................         11%          -           -
Lockheed Martin ...........          5%         12%          9%
Hindustan Aeronautics .....          -           5%          3%

     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.


                                       5`

`WE RELY ON THE AIRLINE INDUSTRY AND THE CONTINUED FINANCIAL CRISES IN THIS
INDUSTRY ADVERSELY AFFECTS OUR SALES.

     The airline industry is an important market for our automated test
equipment products and product support services. Our ability to achieve growth
and profitability in this market depends in great measure on the economic
condition of the commercial aviation industry. Since 2001, and especially
following the tragic events of September 11, 2001, the airline industry has
suffered from economic decline that caused the bankruptcy of several airlines
and imposed financial constraints on the entire industry. As a result of these
conditions, the sales of our automated test equipment products have materially
decreased. The continuance of the crisis in the commercial aviation industry
will adversely affect our business, financial condition and results of
operations.

RAPID TECHNOLOGICAL CHANGES MAY ADVERSELY AFFECT THE MARKET ACCEPTANCE OF OUR
PRODUCTS.

     The avionics 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.

WE MAY ENCOUNTER DIFFICULTIES WITH OUR INTERNATIONAL OPERATIONS AND SALES.

     While our principal executive offices are located in Israel, exports
accounted for 67% of our sales in 2006, 59% of our sales in 2005 and 65% of our
sales in 2004. This subjects us to many risks inherent in engaging in export
international business, including:

     o    Limitations and disruptions resulting from the imposition of
          government controls;

     o    Changes in regulatory requirements;

     o    Export license requirements;

     o    Economic or political instability;

     o    Trade restrictions;

     o    Changes in tariffs;

     o    Currency fluctuations;

     o    Longer receivable collection periods and greater difficulty in
          accounts receivable collection;

     o    Greater difficulty in safeguarding intellectual property;

     o    Difficulties in managing overseas subsidiaries and international
          operations; and

     o    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.


                                       6`

`WE ARE DEPENDENT ON OUR SENIOR MANAGEMENT AND KEY PERSONNEL, IN PARTICULAR
HERZLE BODINGER, OUR CHAIRMAN AND 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, Our chairman and chief executive officer. We do not
carry key person life insurance on our senior management or key personnel. Any
loss of the services of Herzle Bodinger, other members of senior management or
other key personnel could negatively and materially effect our business.

OUR PROPRIETARY TECHNOLOGY IS DIFFICULT TO PROTECT AND UNAUTHORIZED USE OF OUR
PROPRIETARY TECHNOLOGY BY THIRD PARTIES MAY IMPAIR OUR ABILITY TO COMPETE
EFFECTIVELY.

     Our success and ability to compete largely depends upon protecting our
proprietary technology. We rely on a combination of trade secrets, copyright law
and confidentiality, non-disclosure and assignment-of-inventions agreements to
protect our proprietary technology. Except for a patent that relates to our
ACE(TM) system, we do not have any patents.

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.

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.

COMPLIANCE WITH CHANGING REGULATION OF CORPORATE GOVERNANCE AND PUBLIC
DISCLOSURE MAY RESULT IN ADDITIONAL EXPENSES.

     As a result of certain corporate governance scandals and the legislative
and litigation environment resulting from those scandals, the costs of being a
public company in general have increased in recent years. The Sarbanes-Oxley Act
of 2002 requires changes in some of our corporate governance and securities
disclosure or compliance practices. We expect that the on-going implementation
of these regulations will further increase our legal compliance costs and will
make some activities more time consuming. We are presently evaluating and
monitoring regulatory developments and cannot estimate the magnitude of
additional costs we may incur as a result of such developments. Implementing
Section 404 of the Sarbanes-Oxley Act of 2002, which governs internal controls
and procedures for financial reporting, will require expenditure of significant
management time and financial resources to comply with the applicable
requirements. This and other proposed legislation may increase the fees of our
professional advisors and our insurance premiums.

                                       7`

`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:

     o    Quarterly variations in our operating results;

     o    Operating results that vary from the expectations of securities
          analysts and investors;

     o    Changes in expectations as to our future financial performance,
          including financial estimates by securities analysts and investors;

     o    Announcements of technological innovations or new products by us or
          our competitors;

     o    Announcements by us or our competitors of significant contracts,
          acquisitions, strategic partnerships, joint ventures or capital
          commitments;

     o    Changes in the status of our intellectual property rights;

     o    Announcements by third parties of significant claims or proceedings
          against us;

     o    Additions or departures of key personnel;

     o    Future sales of our ordinary shares;

     o    Delisting of our shares from the NASDAQ Capital Market; and

     o    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 shareholders sell substantial amounts of our 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 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 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.


                                       8`

`RISKS RELATING TO OUR LOCATION IN ISRAEL

CONDUCTING BUSINESS IN ISRAEL ENTAILS SPECIAL RISKS.

     We are incorporated under the laws of, and our principal executive offices
and manufacturing and research and development facilities are located in, the
State of Israel. As a result, the political, economic and military conditions
affecting Israel directly influence us. Any major hostilities involving Israel,
a full or partial mobilization of the reserve forces of the Israeli army, the
interruption or curtailment of trade between Israel and its present trading
partners, or a significant downturn in the economic or financial condition of
Israel could have a material adverse effect on our business, financial condition
and results of operations.

     Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. Although Israel has entered into
various agreements with Egypt, Jordan and the Palestinian Authority, 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
2006. In July 2006, an armed conflict began between Israel and Hezbollah forces
in Lebanon, which involved rocket attacks on populated areas in the northern
parts of Israel. On August 14, 2006, a cease-fire between Hezbollah and Israel
took effect. This situation has had an adverse effect on Israel's economy,
primarily in the geographical areas directly harmed by this conflict. Any future
armed conflict, political instability or violence in the region may have a
negative effect on our business condition, harm our results of operations and
adversely affect our share price. No predictions can be made as to whether or
when a final resolution of the area's problems will be achieved or the nature
thereof and to what extent the situation will impact Israel's economic
development or our operations.

     Furthermore, there are a number of countries, primarily in the Middle East,
as well as Malaysia and Indonesia, that restrict business with Israel or Israeli
companies, and we are precluded from marketing our products to these countries.
Restrictive laws or policies directed towards Israel or Israeli businesses may
have an adverse impact on our operations, our financial results or the expansion
of our business.

     Many of our executive officers and 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.

THE ECONOMIC CONDITIONS IN ISRAEL HAVE NOT BEEN STABLE IN RECENT YEARS.

     In recent years Israel has been going through a period of recession in
economic activity, resulting in low growth rates and growing unemployment.
Although economic activity in Israel has improved recently, our operations could
be adversely affected if the economic conditions in Israel begin to deteriorate
once again.

WE MAY BE ADVERSELY AFFECTED IF THE RATE OF INFLATION IN ISRAEL EXCEEDS THE RATE
OF DEVALUATION OF THE NIS AGAINST THE U.S. DOLLAR.

     In 2006, approximately 31% of our expenses were in U.S. dollars or U.S.
dollar-linked NIS, in 2005 approximately 38% of our expenses were in U.S.
dollars or U.S. dollar-linked NIS and in 2004 approximately 34% of our expenses
were in U.S. dollars or U.S. dollar-linked NIS. In each of these years,
virtually all our remaining expenses were in unlinked NIS. Our expenses that are
denominated in U.S. dollars or paid in Israeli currency linked to the U.S.
dollar-NIS exchange rate are influenced by the extent to which any inflation in
Israel is not offset (or is offset on a lagging basis) by the devaluation of the
NIS in relation to the U.S. dollar. In 2004 and 2005, the rate of inflation was
1.2% and 2.4%, respectively and in 2006 the rate deflation was 0.1% and the NIS
was reevaluated against the dollar. These changes, as well as the recent
world-wide devaluation of the U.S. dollar, have affected our operations,
financial condition and results of operations by decreasing the NIS equivalents
of our U.S. denominated revenues and increasing the U.S. dollar equivalents of
our NIS denominated expenses. We may be adversely affected in the future if the
rate of inflation in Israel exceeds the devaluation of the NIS against the U.S.
dollar or if the timing of this devaluation lags behind increases in inflation
in Israel.


                                       9`

`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 United States, 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.

PROVISIONS OF ISRAELI LAW MAY DELAY, PREVENT OR MAKE THE ACQUISITION OF OUR
COMPANY DIFFICULT, WHICH COULD PREVENT A CHANGE OF CONTROL AND THEREFORE DEPRESS
THE PRICE OF OUR SHARES.

     Provisions of Israeli corporate and tax law may have the effect of
delaying, preventing or making more difficult a merger with, or other
acquisition of, us. This could cause our ordinary shares to trade at prices
below the price for which third parties might be willing to pay to gain control
of us. Third parties who are otherwise willing to pay a premium over prevailing
market prices to gain control of us may be unable or unwilling to do so because
of these provisions of Israeli law.

YOUR RIGHTS AND RESPONSIBILITIES AS A SHAREHOLDER WILL BE GOVERNED BY ISRAELI
LAW AND DIFFER IN SOME RESPECTS FROM THE RIGHTS AND RESPONSIBILITIES OF
SHAREHOLDERS UNDER U.S. LAW.

     We are incorporated under Israeli law. The rights and responsibilities of
holders of our ordinary shares are governed by our memorandum of association,
our articles of association and by Israeli law. These rights and
responsibilities differ in some respects from the rights and responsibilities of
shareholders in typical U.S. corporations. In particular, a shareholder of an
Israeli company has a duty to act in good faith toward the company and other
shareholders and to refrain from abusing his power in the company, including,
among other things, in voting at the general meeting of shareholders on certain
matters. Israeli law provides that these duties are applicable in 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 shareholder vote
or to appoint or prevent the appointment of a director or executive officer in
the company has a duty of fairness toward the company. However, Israeli law does
not define the substance of this duty of fairness. Because Israeli corporate law
has undergone extensive revision in recent years, there is little case law
available to assist in understanding the implications of these provisions that
govern shareholder behavior.

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,
including the composition of our board of directors, director nomination
procedure, compensation of officers and quorum at shareholders meetings. In
addition, we may follow Israeli law instead of the NASDAQ Marketplace Rules that
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 our company, certain
transactions other than a public offering involving issuances of a 19.9% or more
interest in our company and certain acquisitions of the stock or assets of
another company.


                                       10`

`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 automated test equipment, avionics
products and ground debriefing systems and provide manufacturing services for
military and commercial use, mainly in Israel, the U.S. and Europe. We also
provide test and repair services using our CATS(TM) testers and test program
sets through our Chinese subsidiary. Our U.S.-based subsidiaries have been
inactive since January 1, 2002.

     In April 1985, we completed an 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, 2004, 2005 and
2006 were approximately $349,000, $411,000 and $236,000, respectively. These
expenditures were principally for machinery equipment and office furniture and
equipment.

B.   BUSINESS OVERVIEW

INDUSTRY OVERVIEW

     Our activity is focused on the market for defense electronics products.
This market has been growing in recent years and is currently a large part of
the defense business. Two contradictory forces control the defense electronics
market. On the one hand, new military aircraft are equipped with significantly
more avionics systems than they used to carry ten to twenty years ago. In
addition, the increasing usage of advanced avionics in modern aircraft,
including upgrades of existing technology and growing number of unmanned aerial
vehicles, or UAVs, has provided significant growth to the market. On the other
hand, the significant reduction in the price of electronic systems is shrinking
the dollar value of the market.

     Advanced defense electronics systems are, typically, derivatives or
enhancements of consumer electronic systems. Most of the defense electronics
systems are built for commercial components and even sub-systems, a fact that
reduces the overall price and, at the same time, generates complex obsolescence
issues.

     Customers for defense electronics products in the aerospace field are
either governments or major integrators. Doing business with these customers is
complex, has a long sales cycle and requires long term commitments for future
support of delivered hardware. Production batches of these products are, usually
small, especially in the retrofit market.

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

     New products in the defense electronic market are usually developed
utilizing internal research and development funds of customers and are tailored
to specific customers' 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.


                                       11`

`PRODUCTS AND SERVICES

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

     o    Net-Centric Digital Recorder and related recording devices;

     o    Ground information management systems that support our recording
          products and provide advanced data management capabilities;

     o    Optronic products based on technology we acquired as part of the
          Vectop transaction; and

     o    Inertial navigation products based on ring laser gyros, or RLG, fiber
          optic gyros, or FOG, and micro-electro mechanical sensors, or MEMS.

     In addition, we continue to sell and support our traditional products
including:

     o    Advanced training solutions;

     o    Integrated trainer aircraft avionics packages;

     o    Flight data recorders and supporting ground analysis;

     o    Unmanned aerial vehicle avionics; and

     o    Automatic testing solutions.

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

NET CENTRIC DIGITAL RECORDER - NCDR

     Recent developments in digital video recording systems and the significant
reduction in size and cost of solid state memories have turned solid state
digital video recording systems into the de-facto standard solution for airborne
applications. These systems have begun penetrating the aviation industry in new
aircraft such as the F-16I, as well as in the retrofit market. Identifying this
trend, we developed the Net Centric Digital Recorder, or NCDR with the view of
capturing sales from: (i) new aircraft that will be delivered with digital
recorders; (ii) the retrofit market for airborne video tape recorders; and (iii)
the integration of various additional applications into the NCDR, making it an
airborne server.

     The NCDR, together with our ground debriefing system, provides advanced
debriefing at an affordable price. We have identified a growing need for digital
video replacement of aging analog airborne video tape recorders, or VTR.
Approximately 15,000 VTRs are installed on board fighter aircraft today and we
have initiated a world-wide marketing effort to promote the replacement of these
aging VTRs with our new NCDR. This marketing activity has been successful in
several programs around the world, especially in our strategic markets. We were
awarded the U.S. Navy T-45 advanced trainer digital recorder and processor
program and we are making final deliveries of our NCDR to the Chilean Air Force
for its F-16 fleet. In 2006, we were chosen by Lockheed Martin to provide the
NCDR for all LM F-16 aircraft. We won a similar NCDR program for an Indian Navy
aircraft. The NCDR is fully qualified and is continuously being demonstrated to
various potential customers. We currently market the NCDR jointly with Smiths,
utilizing Smiths' broader access to the market, especially in the U.S.


                                       12`

`Additional applications are being developed and integrated into the NCDR in
order to provide an integrated airborne data server. These applications include
embedding data transfer capability to the system enabling the NCDR not only to
record during flight but also to provide data to the aircraft before flight, and
the integration of ground collision warning based on digital terrain data stored
in the NCDR memory.

GROUND INFORMATION MANAGEMENT SYSTEMS

     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(R) environment. The
solution, provides a state-of-the-art debriefing environment, fully capitalizing
on all available digital and video information in a highly synchronized
presentation. Further capitalizing on current day technology, individual
stations have a networking capability, providing data sharing, as well as
cross-unit and inter-air force debriefing.

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

     As part of the Peace Marble, or PM-V Program, with Lockheed Martin
Aerospace, we developed the next generation of our ground information management
system by advancing it to the digital video era. This modification 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.

     As of December 31, 2006, we have delivered 22 systems to the PM-V Program
as well as two additional debriefing systems to Lockheed Martin Aerospace for
use in integration and flight-testing. We are in the final stages of a
completing a digital debriefing system for the new F-16s purchased by the
Chilean Air Force. As an extension of the development work completed as part of
the PM-V Program, we are supplying the Chilean Air Force with a digital video
recorder for each of their F-16 aircraft as well as an advanced digital video
ground debriefing station. This station will be linked to a F-5 ground
debriefing station we previously delivered to the Chilean Air Force, creating a
common network debriefing solution for both front-line aircraft.

     In addition, each NCDR system includes some derivative of our ground data
management system to enable playback of recorded data.

OPTRONIC PRODUCTS FOR AIRBORNE AND GROUND VEHICLES

     The acquisition of the Vectop's assets in February 2005 provided us with a
new product line. Airborne cameras are an integral part of any training and
airborne debriefing system on board military platforms. Our customers include
major Israeli integrators (such as IAF, IAI and Elbit), as well as foreign
customers.

     This product line includes:

     o    EYE WITNESS. An airborne heads-up display, or HUD, and a camera, that
          is sold to customers in different configurations. We believe that a
          significant part of the future revenues related to the assets
          purchased from Vectop will be derived from the Eye Witness. We are
          currently competing in an IAF bid with this product.

     o    NIGHT WITNESS. A night vision camera that can be installed on any pair
          of night vision goggles to enable the recording of the pilot's view
          through the night vision goggles. Its unique capability has been
          integrated in several fighter aircraft and helicopter programs.

     o    ARMOR SENTRY. A video camera developed for ground armored vehicles and
          tanks. This system is being delivered to the Israeli ground forces for
          installation in the new "Merkava" battle tank and is generating
          interest in foreign markets. We recently won a bid for a continuation
          program for the "Merkava" and began making deliveries in the fourth
          quarter of 2006.

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


                                       13`

`INERTIAL AND GLOBAL POSITIONING SYSTEMS BASED NAVIGATION SOLUTIONS

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

     During 2005, we initiated a research and development program to integrate
the FOG and MEMS sensors into our navigation systems Navigation systems based on
these sensors are significantly more cost effective. We believe that the market
for low cost navigation systems includes significantly more potential
installations including ground based and marine based systems.

     Today, we offer our customers our existing RLG navigation system, or RNS,
as part of our avionics packages and as a stand-alone system and we also offer a
MEMS based solution. We plan to offer a new FOG based navigation system by mid
2007.

ADVANCED TRAINING SOLUTIONS

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

INTEGRATED TRAINER AIRCRAFT AVIONICS PACKAGE

     Following our selection by the IAF to provide our ACE(TM) integrated
trainer aircraft avionics package for their advanced trainer, the A-4 Skyhawk,
we were awarded a follow-on program aimed at total replacement of the aging
avionics package of the A-4 aircraft with a new, upgraded package. The new
avionics package 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 upgraded system includes an inertial navigation system, or INS, GPS,
HUD, camera, central weapon delivery and navigation processor based on an
enhanced flight monitoring unit, which is the core of the ACE(TM) system and a
control and display unit. The upgraded A-4 program was completed during 2005. We
expect to negotiate the terms of an additional upgrade package to the IAF A-4
aircraft during the first half of 2007.We believe that this program places us
among the few companies worldwide that performed a complete aircraft avionics
system upgrade. As a result of the A-4 system development, we have proposed
similar, cost effective, trainer aircraft avionics packages to other customers.
The A-4 avionics package provides, at a very affordable price, a complete and
modern avionics suite tailored for trainer aircraft. We have launched marketing
efforts to promote this package to different customers.

FLIGHT DATA RECORDERS AND SUPPORTING GROUND ANALYSIS

     GENERAL

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


                                       14`

`FATIGUE ANALYSIS AND AUTONOMOUS AIR COMBAT EVALUATION SYSTEM - FACE(TM)

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

     The FACE(TM) system is capable of communicating in real time with a voice
and data recorder, which is a crash survival unit known as a "black box"
manufactured by Smiths, for the purpose of recording flight safety related data.
We are currently upgrading the FACE(TM) systems we supplied to the Royal
Netherlands Air Force for its F-16 aircraft between the years 1996 and 1999.
During 2004 we supplied FACE(TM) systems for the F-16 fleet of the Portuguese
Air Force and for U.S. Navy aircraft, and during 2006 we supplied FACE(TM)
systems to the USAF as part of an FMS upgrade for F-16 aircraft of the Jordanian
Air Force. We believe that we will be able to continue to secure additional
FACE(TM) contracts in the future.

     DATA ACQUISITION SYSTEM - DAS

     The DAS is an advanced avionics data acquisition system designed to
acquire, process and record data from various aircraft systems. We developed and
jointly marketed with Smith the DAS for the new IAF F-16I aircraft. DAS consists
of two sub-systems, a data acquisition unit, or DAU, and an enhanced crash
survival memory unit, or ECSMU. The DAU interfaces 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 for the CSFDR system, which is currently installed on most F-16
aircraft worldwide. DAS has been offered as a substitute in various projects
that require a flight data recorder with advanced capabilities and growth
potential.

     The DAS is designed to meet all commercial aviation requirements for "black
box" recorders, thus expanding its market potential. During 2004, we started
supplying production DAS units to the IAF and entered into contracts to supply
DAS units to the Polish Air Force and the Korean Air Force starting in 2005.
Additional DAS contracts, for the USAF and others, are expected during 2008

     PERFORMS (PROCESSING, EVALUATING, AND REPORTING OF FORCE MANAGEMENT DATA
     SOFTWARE)

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

     The analysis includes fatigue monitoring, engine usage monitoring and other
applications that may be added, as required by different users. The recorded
data is downloaded to the station and stored in a commercial off the shelf
database with an interface for "plug-in" applications, allowing those
applications to access the data, manipulate and analyze it and provide a variety
of maintenance management tools. The program is managed by Lockheed Martin
Aerospace and is supplied to F-16 users in evolving software "builds" delivered
every 12 months starting in April 2003. Updated and upgraded PERFORMS software
packages were delivered during 2004 and 2005, 2006 and are scheduled for
delivery in 2007. Various air force customers currently use the software, and we
expect to receive requests to support the installation and operation of the
software from these users.


                                       15`

`UNMANNED AERIAL VEHICLES AVIONICS

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

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

     We initiated efforts to penetrate this market during 2001. Since then we
have entered into a contract with IAI to develop and provide an Input Output
Controller, or IOC, a unit that is part of our data acquisition systems product
line, for IAI's next generation UAV. We are continuing our efforts to widen our
participation in this important program as well as in other programs. The
development of this product was completed, and it is currently in production,
including various derivatives that were added to a complete package that
incorporates 10 units per aircraft. In addition, we have won and are delivering
other types of units for the same UAV model which includes up to 23 units per
aircraft. This numbers will provide us with significant sales volume when the
UAV program serial production picks up.

     During 2004, we developed and delivered a miniature avionics module (MAM)
to IAI. This unit is aimed at the miniature UAV market and provides complete
avionics capabilities in a single miniaturized unit. This unit was recently
selected for a miniature UAV sold by IAI to a foreign customer and we expect to
be under contract for delivery of serial units during 2007

AUTOMATIC TESTING SOLUTIONS

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

COMMERCIAL AVIATION TEST STATIONS - CATS(TM)

     The Commercial Aviation Test Stations, or CATS(TM), is a family of
multi-purpose, computerized automatic test equipment that meets the specific
needs of airlines and third party maintenance companies. The CATS(TM) stations
test and repair a variety of electronic units in existing commercial aircraft,
incorporating tools for testing, troubleshooting, and performing diagnostic
procedures. CATS(TM) stations replace or augment test stations from aircraft
manufacturers or avionics OEM suppliers, while automating multiple manual test
procedures.

MANUFACTURING SERVICES

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

TEST AND REPAIR STATIONS

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


                                       16`

`SALES AND MARKETING

     STRATEGY

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

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

     o    Expanding our product offerings of our four product lines, by adding
          new applications to our existing products.

     o    Expanding our customer base by including our products in solutions and
          integrated systems.

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

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

     STRATEGIC RELATIONSHIPS

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

     LOCKHEED MARTIN AEROSPACE. Our sales of avionics products focus mainly on
the F-16 aircraft manufactured by Lockheed Martin Aerospace, the most popular
fighter aircraft in the Western world today. In February 1999, we signed a
memorandum of understanding with Lockheed Martin pursuant to which we agreed to
provide certain avionics systems for the F-16 aircraft under the PM-V Program.
In September 1999, the U.S. and the State of Israel signed a letter of
acceptance pursuant to which the U.S. agreed to provide the IAF with 50 F-16I
aircraft and an option for an additional 52 aircraft, which was exercised in
June 2001 for a total of 102 F-16I aircraft. In cooperation with Smiths, we are
developing and supplying the data acquisition system that includes the advanced
data acquisition unit and an enhanced crash survivable memory unit, which will
be manufactured in our Beit She'an facility. In addition, in March 2001 we
signed an agreement with the Aircraft Structural Integrity Program Group of
Lockheed Martin pursuant to which we are assisting in the development of a
fatigue analysis system based on a PC computer for analyzing structural fatigue
of the F-16 aircraft. As the main subcontractor, our principal task is to
develop the software for the fatigue analysis system. The fatigue analysis
system will utilize data collected from the data acquisition unit and our
FACE(TM) system, as well as other systems used by air forces operating F-16
aircraft. In 2006 we were chosen by Lockheed Martin to supply the baseline NCDR
for all F-16 FMS sales and upgrades.

     SMITHS AEROSPACE ELECTRONIC SYSTEMS. In February 1999, we entered into an
agreement with Smiths that outlined joint marketing activities for our FACE(TM)
system and Smiths' voice and data recorder for F-16 A/B aircraft. Smiths is a
worldwide leader in avionics systems for fighter and commercial aircraft. The
two systems successfully passed flight tests conducted on the Royal Netherlands
Air Force's F-16 aircraft by Lockheed Martin and the Royal Netherlands Air
Force. The FACE(TM) system and the voice and data recorder complement each other
and are intended to serve as a data acquisition system that replace outdated
data recording systems, mechanical strain recorders and flight load recorders.

     In October 2003, we signed a teaming agreement with Smiths. 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 Smiths to purchase production services from us in the future.

     During 2004, we expanded our cooperation with Smiths to include our newly
developed Net Centric Digital Recorder and have jointly offered this product to
potential customers. In late 2006, we entered into a contract in the US for the
adaptation and production of the NCDR for various platforms, including the US
NAVY T-45 and for Foreign Military Sales of F-16.


                                       17`

`In addition to the cooperation with Smiths in connection with the PM-V
Program, we are currently supplying the Royal Netherlands Air Force with an
integration package for our FACE(TM) System and Smiths' black box for its F-16
MLU fleet. A similar package is also being supplied to the Portuguese Air Force
and the Royal Jordanian Air Force.

     ISRAEL AIRCRAFT INDUSTRIES. IAI was our second largest customer in 2006,
accounting for approximately 20% of our total revenues. We are actively
supplying avionics and test equipment to four different divisions of IAI. We
have identified the Israeli government-owned aerospace industries as potential
customers and cooperation entities. In particular the Lahav and Malat divisions
of IAI, major aircraft integrators, require our services as an avionics and test
equipment providers.

     MARKETING

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

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

     FIXED PRICE CONTRACTS

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

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



                                       18`

`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 2005 and
2006:

                                    2005     2006
                                    ----     ----

    Smiths Electronic Systems .      21%      38%
    The Boeing Company ........       3%       -
    Israeli Ministry of Defense      12%       5%
    Israel Aviation Industries       14%      20%
    Portuguese Air Force ......       -        2%
    U.S. Navy .................       -        -
    Lockheed Martin ...........      12%       9%
    Hindustan Aeronautics .....       5%       3%

     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:

                                             2004     2005     2006
                                             ----     ----     ----

Israel .................................      35%      41%      33%
North America ..........................      33%      38%      36%
Europe .................................      21%       5%       6%
Other (mainly India and Central America)      10%      16%      25%

COMPETITION

     The markets for our products are highly competitive. Our principal
competitors in the avionics market are Harris, Rockwell Collins, Honeywell,
Elbit Systems Ltd., IAI, R.S.L. Ltd., TEAC and Elisra Systems Ltd. We expect to
continue to face competition from these and other competitors. Most of our
competitors are larger, have greater resources including financial,
technological, marketing and distribution capabilities, and enjoy greater market
recognition than we do. These competitors may be able to achieve greater
economies of scale and may be less vulnerable to price 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.


                                       19`

`EXPORT POLICY

     Exports of military related products are subject to the military export
policy of the State of Israel. Current Israeli Government policy encourages
export to approved customers of military products similar to those manufactured
by us, provided that such export does not run counter to Israeli policy or
national security considerations. We must obtain a permit to initiate a sales
proposal and ultimately an export license for the transaction is required. We
may not obtain export permits or 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
permits or licenses for sale of our products.

PROPRIETARY INFORMATION

     We hold a patent for our ACE(TM) system in both Israel and the United
States, No. 5467274. In addition, in connection with the assets we acquired from
Vectop Ltd. in February 2005, we have acquired the rights to the following
patents and patent applications: Israeli patents No. 121042, No. 116131, No.
124816 and No. 1088253, U.S. patents No. 6,061,182, No. 5,742,434, No. 6,301,052
and No. 5,699,440, European patents (France England and Italy) No. 0777142 and
No. 1088253, Indian patent application No. IN/PCT/200/00611 and Japanese patent
application No. 329384/94.. Nevertheless, we generally do not consider patent
protection significant to our current operations and rely upon a combination of
security devices, copyrights, trademarks, trade secret laws and contractual
restrictions to protect our rights in our products. Our policy is to require
employees and consultants to execute confidentiality agreements upon the
commencement of their relationships with us. These measures may not be adequate
to protect our technology from third-party infringement, and our competitors
might independently develop technologies that are substantially equivalent or
superior to ours. Additionally, our products may be sold in foreign countries
that provide less protection for intellectual property rights than that provided
under U.S. or Israeli laws.

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

MANUFACTURING AND SUPPLY

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

     We stress quality control in our product realization process. Commencing
with customer requirements and expectations via raw material inspection through
completion, specifications are repeatedly checked. We maintain a quality
assurance team that participates in every stage of the design and manufacture of
our products. Our quality management standards are certified by the Standards
Institute of Israel, or SII, pursuant to ISO 9001 for hardware design and
production and ISO 9000.3 for software, both since 1995. SII performs quality
system audits twice a year and various customers perform audits four to six
times a year. In April 2001, SII certified our environmental management system
pursuant to ISO 14001. Our quality management system was revised to comply with
ISO 9001:2000 in June 2003. During 2005 we were certified according to AS-9100,
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 period of one to two years following delivery of a product to the
customer. We also provide maintenance services to customers who sign maintenance
contracts.


                                       20`

`SOURCE AND AVAILABILITY OF RAW MATERIALS

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

C.   ORGANIZATIONAL STRUCTURE

     We had one active subsidiary in 2006, Beijing Huarui Aircraft Components
Maintenance and Services Co., an 80% owned subsidiary 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, warehouse space and a portion of our
development facilities, is situated on land leased from the Israel Land
Authority for a period of 49 years until 2034. The plant has sufficient capacity
to meet our current requirements. If volume was to increase significantly, we
believe that we will be able to increase the number of workers or shifts at the
plant, or use more subcontractors.

     Our executive offices and research and development facilities are located
in a 12,500 square foot office facility in Netanya, Israel. The lease for this
facility expires in January 2008.

     Our Chinese subsidiary, CACS, conducts its business in an approximately
16,000 square foot facility in Beijing that includes offices and test and repair
facilities. The land for this facility was leased by Beijing Tianzu Forestry
Company or Tianzu, the minority shareholder in CACS, from the Chinese government
for 30 years. Under a joint venture agreement, and in consideration for its
equity investment in CACS, Tianzu granted CACS usage rights in the land,
constructed the buildings and granted CACS the ownership of these buildings.
However, the transfer of the title to the land and the buildings has not been
completed. 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. In
January 2007, we met with Tianzu and discussed a potential resolution whereby
Tianzu will withdraw from the joint venture, waiving their interest in the joint
venture, while obtaining title to the land and building.

     The aggregate annual rent for our offices in Israel was approximately
$177,000 in 2006.

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.


                                       21`

`OVERVIEW

     We develop, manufacture and sell automated test equipment, avionics
products and ground debriefing systems and provide manufacturing services for
military and commercial use, mainly in Israel, the U.S. and Europe. We also
provide test and repair services using our CATS(TM) testers and test program
sets 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 and our subsidiary 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.

     On February 14, 2007, we effected a one share for three shares 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 automated
test equipment and avionics products and from long-term fixed price contracts
for ATE, avionics and ground debriefing systems. 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.


                                       22`

`Revenues from services are recognized when the service is performed.
Revenue 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 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.

     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.

     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 software. We assess the recoverability of these intangible
assets at each balance sheet date 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. The use of
different assumptions with respect to the expected cash flows from our assets
and other economic variables may lead to different conclusions regarding the
recoverability of our assets' carrying values and to the potential need to
record an impairment loss for our intangible assets. 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
using a straight line basis over the expected useful life of five years. For the
year ended December 31, 2006, we recorded $19,000 of impairment charges on
specific TPS's from which we do not anticipate to derive future revenues.

     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 the carrying value of the asset exceeds its fair value. For the year
ended December 31, 2006, no impairment was 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, expected life of the option by the employee
and estimated forfeiture rates, in accordance with SAB 107. Changes in our
assumptions with respect to these components may change the compensation award
costs and amounts expensed in each period and consequently the results of our
operations. For the year ended December 31, 2006 we incurred share-based
compensation expense of $ 221,000. As of December 31, 2006, there was $ 270 of
total unrecognized compensation cost related to non-vested share-based
compensation arrangements granted under the Company's stock option plans, which
are expected to be recognized over a weighted-average period of one year.


                                       23`

`Prior to the adoption of SFAS 123(R), the Company applied SFAS 123, amended
by SFAS 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure," which allowed companies to apply the existing accounting rules
under APB 25, "Accounting for Stock Issued to Employees," and related
Interpretations. In general, as the exercise price of options granted under
these plans was equal to the market price of the underlying common stock on the
grant date, no stock-based employee compensation cost was recognized in the net
loss attributed to common stockholders for periods prior to the adoption of SFAS
123(R).

     PROVISION FOR LITIGATION. We have an outstanding balance of loans due to us
from our former chief executive officer and a former officer. Both officers
claim that they are not obliged to repay the loans. We are engaged in legal
actions with our former officers concerning, among other things, the repayment
of the loans. According to our legal consultants, we have a strong case with
regard to our claims for repayment of the outstanding loans. 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.

     FAIR VALUE OF WARRANTS. In July 2004, we consummated a private placement,
whereby we issued 600,000 shares, an aggregate of $3 million principal amount of
convertible notes and warrants (including additional investment rights) to
purchase an aggregate of 679,167 ordinary shares to investors for a total
consideration of $5.7 million, net of issuance expenses. The consideration was
allocated based on the respective fair values of the ordinary shares, notes,
warrants and additional investment rights. The fair value of the warrants and
the additional investment rights was based on a valuation prepared by an
independent, valuation expert using the Black-Scholes pricing model. The
valuation result was judged to be reasonable by our management based on
comparisons to benchmarks in similar circumstances.

SIGNIFICANT EXPENSES

     Cost of Revenues. Cost of revenues consist primarily of manufacturing
costs, depreciation of fixed assets, project development costs, impairment
losses on long-lived assets, 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.

     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 expenses and currency remeasurement
losses. Financial income consists of interest on cash and cash equivalent
balances and currency remeasurement gains.

RECENT ACCOUNTING PRONOUNCEMENTS

     In September 2006, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 157, "Fair Value Measurements". This Standard defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007 and interim periods within those fiscal years.
We believe this Standard will not have a material effect on our consolidated
financial statements.


                                       24`

`In June 2006, the FASB issued Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes" ("FIN 48"), an interpretation of SFAS 109,
"Accounting for Income Taxes". FIN 48 prescribes a comprehensive model for how
companies should recognize, measure, present and disclose in their financial
statements uncertain tax positions taken or expected to be taken on a tax
return. Under FIN 48, tax positions shall initially be recognized in the
financial statements when it is more-likely-than-not the position will be
sustained upon examination by the tax authorities. Such tax positions shall
initially and subsequently be measured as the largest amount of tax benefit that
is greater than 50% likely of being realized upon ultimate settlement with the
tax authority assuming full knowledge of the position and all relevant facts.
FIN 48 also revises disclosure requirements to include an annual tabular roll
forward of unrecognized tax benefits. The provisions of this interpretation are
required to be adopted for fiscal periods beginning after December 15, 2006. We
will be required to apply the provisions of FIN 48 to all tax positions upon
initial adoption with any cumulative effect adjustments to be recognized as an
adjustment to retained earnings. Based on our initial evaluation as of December
31, 2006, we do not believe that FIN 48 will have a material impact on its
financial statements.

     In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities," ("SFAS No. 159"), which permits
companies to choose to measure certain financial instruments and other items at
fair value that are not currently required to be measured at fair value. SFAS
No. 159 is effective for fiscal years beginning after November 15, 2007. We will
adopt SFAS No. 159 no later than January 1, 2008. We have not yet determined the
effect that the adoption of SFAS No. 159 will have on our consolidated financial
statements.

YEAR ENDED DECEMBER 31, 2006 COMPARED WITH YEAR ENDED DECEMBER 31, 2005

     Revenues. Our revenues decreased 3% to $13.0 million in 2006 from $13.4
million in 2005. We expect that in 2007 our revenues will be primarily generated
from sales of our new products.

     Cost of Revenues. Cost of revenues decreased 9% to $11 million in 2006 from
$12.1 million in 2005. The decrease is mainly due to the decreased revenues from
development programs which have lower profit margins. In 2007, we expect that
our cost of revenues as a percentage of revenues will continue to decrease.

     GROSS PROFIT. Our gross profit increased 54% to approximately $2.0 million
in 2006 from $1.3 million in 2005. Our profit margin increased to 16% in 2006
from 10% in 2005. The improved margins reflects the mix between the traditional
and new products that we sell and the lower margin of certain long-term fixed
price contracts whereby new products are being developed for our customers.

     RESEARCH AND DEVELOPMENT EXPENSES. In 2006 we incurred $181,000 of research
and development expenses. In 2005 we did not incur any research and development
expenses as we made a strategic decision not to engage in internal research, and
development activities, but entered into development projects through customers
orders. In 2007, we expect that we will continue to enter into new development
projects and develop products through customer orders, but will also initiate
internally funded research.

     MARKETING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing,
selling, general and administrative expenses were approximately $3.1 million in
both 2006 and in 2005. While we continue to implement our costs savings
measures, we also continued to support our sales efforts in our current and new
markets. We expect that marketing and selling expenses will remain at the same
level in 2007.

     FINANCIAL INCOME (EXPENSES), NET. Our financial expenses, net, were
$775,000 in 2006 compared to $624,000 in 2005. Our increased financial expenses
in 2006 were attributable primarily to the interest payable and amortization
expense on the deemed discount on the $3 million of convertible notes issued in
2004 and to higher interest rates.

YEAR ENDED DECEMBER 31, 2005 COMPARED WITH YEAR ENDED DECEMBER 31, 2004

     Revenues. Our revenues decreased 5% to $13.4 million in 2005 from $14.1
million in 2004. The decrease in our revenues is primarily attributable to our
being engaged in a higher proportion of development programs and a decrease in
sales of off-the-shelf products. We expect that in 2006 our revenues will be
primarily generated from sales of our new products and from the products
acquired in our purchase of certain assets of Vectop.


                                       25`

`Cost of Revenues. Cost of revenues increased 17% to $12.1 million in 2005
from $10.3 million in 2004. The increase is mainly due to the increased expenses
attributable to development programs, which have lower profit margins. In
addition, 17% of such increase is due to a write-down of inventories.

     GROSS PROFIT. Our gross profit decreased 66% to approximately $1.3 million
in 2005 from $3.9 million in 2004. Our profit margin decreased to 8% in 2005
from 27% in 2004. The decrease in gross margin is due to the mix between the
traditional products that we sell and the lower margin of certain long-term
fixed price contracts whereby new products are being developed for our
customers.

     RESEARCH AND DEVELOPMENT EXPENSES. In 2005 and 2004 we did not incur any
research and development expenses. We made a strategic decision not to engage in
internal research, and development activities, but entered into development
projects through customers orders.

     MARKETING, SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Marketing,
selling, general and administrative expenses were approximately $3.1 million in
2005 and $2.9 million in 2004. While we continue to implement our costs savings
measures, we also continued to support our sales efforts in our current and new
markets.

     FINANCIAL INCOME (EXPENSES), NET. Our financial expenses, net, were
$624,000 in 2005 compared to $248,000 in 2004. Our increased financial expenses
in 2005 were attributable primarily to the interest payable on the $3 million of
convertible notes issued in 2004 and to higher interest rates. Foreign currency
exchange differences and amortization expenses on convertible notes and deferred
charges also contributed to the increase of our financial expenses.

CONDITIONS IN ISRAEL

     We are incorporated under the laws of, and our principal executive offices
and manufacturing and research and development facilities are located in, the
State of Israel. Accordingly, we are directly affected by political, economic
and military conditions in Israel. Specifically, we could be adversely affected
by any major hostilities involving Israel, a full or partial mobilization of the
reserve forces of the Israeli army, the interruption or curtailment of trade
between Israel and its present trading partners, and a significant downturn in
the economic or financial condition of Israel.

POLITICAL CONDITIONS

     Since the establishment of the State of Israel in 1948, a number of armed
conflicts have taken place between Israel and its Arab neighbors, and a state of
hostility, varying from time to time in intensity and degree, has led to
security and economic problems for Israel. In 1979 Israel signed a peace
agreement with Egypt under which full diplomatic relations were established. In
October 1994 a peace treaty was signed between Israel and Jordan which provides,
among other things, for the commencement of full diplomatic relations between
the two countries. To date, there are no peace treaties between Israel and Syria
or Lebanon.

     Since 1993, several agreements have been signed between Israel and the
Palestinian representatives concerning conditions in the West Bank and Gaza and
outlining several interim Palestinian self-government arrangements. The
implementation of these agreements have been subject to difficulties and delays.

     Since September 2000, there has been a marked increase in violence, civil
unrest and hostility, including armed clashes, between the State of Israel and
the Palestinians, and acts of terror have been committed inside Israel and
against Israeli targets in the West Bank and Gaza. These developments have
adversely affected the regional peace process, placed the Israeli economy under
significant stress, and have negatively influenced Israel's relationship with
several Arab countries. In August 2005, Israel evacuated all Israeli settlements
in the Gaza Strip and four settlements in the West Bank. In July 2006, an armed
conflict began between Israel and Hezbollah forces in Lebanon, which involved
rocket attacks on populated areas in the northern parts of Israel. On August 14,
2006, a cease-fire between Hezbollah and Israel took effect. This situation has
had an adverse effect on Israel's economy, primarily in the geographical areas
directly harmed by this conflict. Any future armed conflict, political
instability or violence in the region may have a negative effect on our business
condition, harm our results of operations and adversely affect our share price.
No predictions can be made as to whether or when a final resolution of the
area's problems will be achieved or the nature thereof and to what extent the
situation will impact Israel's economic development or our operations.


                                       26`

`Furthermore, there are a number of countries, primarily in the Middle East,
as well as Malaysia and Indonesia, that restrict business with Israel or Israeli
companies, and we are precluded from marketing our products to these countries.
Restrictive laws or policies directed towards Israel or Israeli businesses may
have an adverse impact on our operations, our financial results or the expansion
of our business.

     Many of our executive officers and 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. To date, no executive officer or
key employee has been recruited for military service for any significant time
period. Any further deterioration of the hostilities between Israel and the
Palestinian Authority into a full-scale conflict might require more significant
military reserve service by some of our employees, which may have a material
adverse effect on our business.

ECONOMIC CONDITIONS

     In recent years Israel has been going through a period of recession in
economic activity, resulting in low growth rates and growing unemployment.
Although economic activity in Israel has improved recently, our operations could
be adversely affected if the economic conditions in Israel begin to deteriorate
again.

TRADE RELATIONS

     Israel is a member of the United Nations, the International Monetary Fund,
the International Bank for Reconstruction and Development and the International
Finance Corporation. Israel is a member of the World Trade Organization and is a
signatory to the General Agreement on Tariffs and Trade. In addition, Israel has
been granted preferences under the Generalized System of Preferences from the
United States, Australia, Canada and Japan. These preferences allow Israel to
export the products covered by such programs either duty-free or at reduced
tariffs.

     Israel and the EEC, known now as the "European Union," concluded a Free
Trade Agreement in July 1975 that confers some advantages with respect to
Israeli exports to most European countries and obligates Israel to lower its
tariffs with respect to imports from these countries over a number of years. In
1985, Israel and the United States entered into an agreement to establish a Free
Trade Area. The Free Trade Area has eliminated all tariff and some non-tariff
barriers on most trade between the two countries. On January 1, 1993, an
agreement between Israel and the European Free Trade Association, known as the
"EFTA," established a free-trade zone between Israel and the EFTA nations. In
November 1995, Israel entered into a new agreement with the European Union,
which includes a redefinition of rules of origin and other improvements, such as
allowing Israel to become a member of the Research and Technology programs of
the European Union. In recent years, Israel has established commercial and trade
relations with a number of other nations, including Russia, China, India, Turkey
and other nations in Eastern Europe and Asia.

     Israel receives significant amounts as economic assistance from the United
States. In the last several years Israel has received from the U.S.
approximately $3 billion per year. We cannot assure you that U.S. economic
assistance will continue, or that the amounts received will not be reduced. If
U.S. economic assistance is eliminated or reduced significantly, the Israeli
economy could suffer material adverse consequences which may have material
adverse impact on our financial condition and results of operations.


                                       27`

`CORPORATE TAX RATE

     Israeli companies are generally subject to income tax at the corporate tax
rate. The applicable rate for 2006 of 31%, will be reduced to 29% in 2007, and
will be further reduced to 27% in 2008, 26% in 2009 and 25% in 2010 and
thereafter.

     As of December 31, 2006, our carried forward net operating loss for Israeli
tax purposes was approximately $46 million, including a carry forward capital
loss amounting to approximately $3 million.

IMPACT OF CURRENCY FLUCTUATION AND OF INFLATION

     For many years prior to 1986, the Israeli economy was characterized by high
rates of inflation and devaluation of the Israeli currency against the dollar
and other currencies. However, since the institution of the Israeli Economic
Program in 1985, inflation, while continuing, has been significantly reduced and
the rate of devaluation has substantially diminished. Because governmental
policies in Israel linked exchange rates to a weighted basket of foreign
currencies of Israel's major trading partners, the exchange rate between the NIS
and the dollar remained relatively stable during reported periods.

     The following table sets forth, for the periods indicated, information with
respect to the rate of inflation in Israel, the rate of devaluation of the NIS
against the U.S. dollar, and the rate of inflation in Israel adjusted for such
devaluation:

                                                              Israeli inflation
         Year ended     Israeli inflation  Israeli devaluation  adjusted for
         December 31,         rate %             rate %         devaluation %
            ----            ---------          ---------          ---------

            2002               6.8                7.3                0.7
            2003              (1.9)              (7.6)               6.1
            2004               1.2               (1.6)               2.8
            2005               2.4                6.8               (4.1)
            2006              (0.1)              (8.2)               8.8

     Since most of our sales are quoted in dollars and in other foreign
currencies, and a significant portion of our expenses are incurred in NIS, our
results are adversely affected by a change in the rate of inflation in Israel
when such change is not offset (or is offset on a lagging basis) by a
corresponding devaluation of the NIS against the dollar and other foreign
currencies. We do not use any hedging instruments in order to protect ourselves
from currency fluctuation and of inflation risks.

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. and Bank Leumi Le-Israel B.M., our 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.

     As a result of continuing losses during the period 1999 through 2002 that
amounted to $58.5 million, we were forced to incur significant debt and issue
equity securities. During the four years ended December 31, 2003, we relied
predominantly on Mr. Howard P.L Yeung and our other principal shareholders, and
to a lesser extent on new investors to provide us with working capital. During
this period, they provided us with $13.1 million in equity capital, convertible
debt and loans.

     On April 23, 2002, we entered into a loan agreement with Mr. Yeung,
according to which he provided us with a $550,000 loan facility. The purpose of
the facility was to provide us with short term working capital and in 2002 we
utilized $350,000 of the facility.


                                       28`

`At an extraordinary meeting of shareholders held on June 9, 2002, our
shareholders approved the terms of a purchase agreement between us and certain
investors, pursuant to which such investors purchased 646,258 of our ordinary
shares at a price of $1.47 per share, which was equal to 70% of the average
closing price of the ordinary shares for the ten (10) trading days prior to June
9, 2002. In addition, pursuant to the approval of our shareholders, we issued to
such investors warrants to purchase 1,434,014 of our ordinary shares. Such
warrants have a term of five years and are exercisable during the first 36
months after issuance at an exercise price of $6.00 per share, and during the
subsequent 24 month period, at an exercise price which will be equal to the
higher of: (i) $6.00 per share or (ii) 50% of the average closing price during
the ten (10) trading days prior to an exercise date. The warrants contain
certain anti-dilution provisions that could reduce the exercise price of the
warrants in the event that we issue securities at a price below the exercise
prices of the warrants our shareholders also approved the conversion of the
$450,000 of loans granted by Mr. Yeung, into 918,367 of our ordinary shares at a
price of $1.47 per share, which was equal to 70% of the average closing price of
our ordinary shares for the ten trading days prior to the date of shareholder
approval. As part of the transaction, we issued to Mr. Yeung on June 30, 2002
warrants to purchase 2,755,102 ordinary shares. Such warrants will be
outstanding for five years and will be exercisable during the first 36 months at
an exercise price of $6.00 per share, and during the subsequent 24 month period,
at an exercise price which shall be equal to the higher of: (i) $6.00 per share
or (ii) 50% of the average closing price of our ordinary shares during the ten
(10) trading days prior to the exercise date. Under the terms of the purchase
agreements, we also agreed to provide the investors and Mr. Yeung with certain
registration rights.

     On June 22, 2003, we signed a memorandum of agreement with our Banks, which
agreement was approved by our shareholders at an extraordinary general meeting
of shareholders that was held on July 22, 2003. Pursuant to an agreement that
was finalized on September 24, 2003, we restructured $3,451,000 of our
outstanding debt to the Banks. We repaid $1,100,000 on account of our debt to
the Banks, and the Banks forgave $1,100,000 of debt and received warrants to
purchase 1,260,665 of our ordinary shares, at an exercise price that is equal to
the nominal (par) value of our shares, in lieu of $1,251,000 of our debt. The
Banks also granted us an additional short-term line of credit of $500,000 to
finance our cash flow requirements during 2003. As part of the agreement our
controlling shareholder, Mr. Yeung, agreed to grant the Banks a put option
allowing the Banks to require him to purchase the warrants granted to the Banks,
for the consideration of $1,251,000, exercisable within a period of 45 days
commencing on March 24, 2005 and the Banks granted Mr. Yeung a call option
allowing him to require the Banks, during a period of 18 months, commencing as
of September 24, 2003, and in the event that the Banks will not exercise their
put option, during additional 90 days period commencing as of May 9, 2005, to
sell him such warrants at a price that is not lower than $1,251,000 and not
higher then $1,770,165, depending on the average closing price of our ordinary
shares during the last 90 business days prior to such exercise. In May 2005, Mr.
Yeung exercised his call option to purchase the warrants from the Banks and in
October 2005, exercised these warrants. Upon such exercise, we issued Mr. Yeung
1,260,665 ordinary shares. We also agreed to grant the Banks warrants to
purchase an additional 366,667 ordinary shares at an exercise price of $6.00 per
share, exercisable for five years, commencing as of September 24, 2003.

     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 an aggregate of $3.0 million
principal amount of convertible notes. The convertible notes will mature on July
12, 2007, bear interest at a rate of six month LIBOR plus 2.5% and are
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.

     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. As part of this transaction the
investors exercised 303,022 additional investment rights that were issued to
them in the July 12, 2004 transaction, for the purchase of 303,022 ordinary
shares. As a result, we received proceeds of approximately $3,000,000.


                                       29`

`As of December 31, 2006, we owed our Banks $288,000 under long-term loans.
$175,000 under a short-term loan and $238,000 under credit facilities.. In
addition, our Banks provided $1.4 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 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 damage). 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.

     In addition, on September 1, 2006, we entered into a loan agreement with
Mr. Yeung, according to which he provided a $650,000 short-term loan to our
company. The purpose of the loan was to provide us with short term working
capital. The loan was repaid on November 30, 2006.

     We had capital expenditures of $236,000 in 2006 and $411,000 in 2005. 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,
                                                           ----------------------
                                                             2005          2006
                                                           --------      --------
                                                          (US dollars in thousands)

Net cash provided by (used in) operating activities ......   (5,126)          717
Net cash provided by (used in) investing activities ......     (750)           71
Net cash provided by (used in) financing  activities .....    2,762          (148)
Net decrease (increase) in cash and cash equivalents .....   (3,114)          640
Cash and cash equivalents at beginning of the year .......    3,464           350
Cash and cash equivalents at end of the year .............      350           990

     Net cash generated from operating activities was $717,000 in 2006. This was
primarily attributable to our loss of $2.0 million and an increase in
inventories of $526,000 offset by a net decrease in costs and estimated earnings
in excess of billings of $622,000, a $126,000 increase in accounts payables,
accrued expenses, depreciation and amortization of $1.4 million and share-based
compensation expenses of $221,000. Net cash used in operating activities was
$5.1 million in 2005. This was primarily attributable to our loss of $2.3
million, an increase in trade receivables of $2.7 million, a net increase in
costs and estimated earnings in excess of billings of $685,000 and a $568,000
decrease in deferred revenues, offset by a $200,000 decrease in inventories and
depreciation and amortization of $1.4 million.

     Net cash provided from investing activities was approximately $71,000 in
2006 and $750,000 was used in 2005. In 2006, $313,000 was released from
restricted cash and we invested $236,000 in property.. In 2005, we purchased the
net assets of Vectop for $351,000 and invested $411,000 in property and
equipment.

     Net cash used in financing activities was $148,000 in 2006. This amount was
principally in respect of our repayment of $ 525,000 of current maturities of
long-term loans offset by $288,000 in proceeds from a long term loan. Net cash
provided by financing activities was $2.8 million in 2005. This amount was
principally in respect of net proceeds of $2.8 million from the issuance of
shares and warrants and from the exercise of warrants.

     As a result of the foregoing, at December 31, 2006, we had working capital
of $3.5 million and cash and cash equivalents of $990,000 as compared to working
capital of $3.6 million and cash and cash equivalents of $350,000 at December
31, 2005.

     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
2007 will be sufficient to meet our cash requirements in 2007. However, we
cannot assure that that such funds will be sufficient to finance our operations.
In such event, we expect our shareholders, other investors or the Banks will
continue to provide us with funds.


                                       30`

`As of March, XX, 2007 there were 5,493,282 warrants outstanding to purchase
5,493,282 of our ordinary shares. Of such warrants, 4,555,782 warrants have an
exercise price of $6.00 per share, 625,000 warrants have an exercise price of
$6.30 per share and 312,500 warrants have an exercise price of $7.50 per share.
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 2006 we incurred $181,000 of any research and development expenses. In
the years ended December 31, 2004 and 2005, we didn't incur research and
development costs. In 2007, we expect that we will continue to enter into new
development projects and develop products through customer orders, and we will
continue to initiate internally funded research and to invest in existing
projects.

     As of December 31, 2006, we employed 30 engineers in research and
development, which 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, 2006, our total obligation for
royalties payments, net of royalties paid or accrued is approximately $861,000.

     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, 2006.

D.   TREND INFORMATION

     In 2005 and 2006 our revenues remained relatively constant. We expect that
in 2007 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.

     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:

     o    Net Centric Digital Recorder (NCDR);

     o    Ground debriefing stations;

     o    Optronics; cameras for HUD and armored vehicles;

     o    Testing solutions

     o    Manufacturing services.


                                       31`

`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, 2006 and the effect we expect them to
have on our liquidity and cash flow in future periods.

     Contractual Obligations                                    Payments due by Period
---------------------------------      --------------------------------------------------------------------------
                                                       Less than 1                                     More than
                                         Total            year          1-3 Years       3-5 Years       5 years
                                       ----------      ----------      ----------      ----------      ----------

Long-term debt obligations ......      $3,321,000      $3,179,000      $  142,000               -               -
Operating lease obligations .....      $1,306,000      $  721,000      $  585,000               -               -
                                       ----------      ----------      ----------      ----------      ----------
Total ...........................      $4,627,000      $3,900,000      $  727,000               -               -

     In addition, 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, 2006 our
severance pay liability was $2,026,000. .

     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 (1) ....   64        Chairman of the board and president, and chief executive officer
Elan Sigal .............   40        Chief financial officer
Zvi Alon ...............   53        Vice president, business development and marketing
Dov Sella ..............   52        Vice president and chief operating officer
Adrian Berg ............   59        Director
Roy Kui Chuen Chan .....   60        Director
Ben Zion Gruber ........   48        Director
Michael  Letchinger ....   51        Director
Nurit Mor ..............   63        Outside director
Eli Akavia .............   58        Outside director


                                       32`

`Messrs. Bodinger and Letchinger will serve as directors until our 2007
annual general meeting of shareholders. Mr. Berg will serve as a director until
our 2008 annual general meeting of shareholders. Messrs. Chan and Gruber will
serve as directors until our 2009 annual general meeting of shareholders.

     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-years
period.

     HERZLE BODINGER joined us in May 1997 as the president of our U.S.
subsidiary, Rada Electronic Industries Inc., in charge of international
marketing activities and was appointed our president and chief executive officer
in June 1998. General (Res.) Bodinger has served as chairman of the board since
July 1998. 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.

     ELAN SIGAL re-joined us in January 2004 as chief financial officer. From
May 2000 to December 2003, Mr. Sigal worked as a management consultant in the
London office of McKinsey & Co., a leading global management consulting firm.
Prior to that, Mr. Sigal worked with us from July 1997 to April 2000, initially
as a system engineer developing one of our leading products, and later as a
marketing manager. For nine years Mr. Sigal served as a fighter pilot in the
Israeli Air Force. Mr. Sigal holds a B.A. degree in Economics from Tel Aviv
University.

     ZVI ALON joined us in January 2000 and served as our vice president and
chief operating officer until March 30, 2003 when he was appointed vice
president of business development and Marketing. From 1980 to 1999 (except for a
period from 1987 until 1989), 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 an
M.Sc. degree in Computer Science, both from Tel Aviv University.

     DOV SELLA joined us in January 2003 and was appointed chief operating
officer on March 30, 2003. 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 roles at Elbit
were director of programs, director of avionics engineering and director of
business development. Between 1997 and 2000, Mr. Sella served UltraGuide Ltd., a
medical devices start-up, as executive vice president and vice president of
business development and vice president of research and development. 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 in
Computer Engineering from the Technion Israel Institute of Technology (cum
laude). He served as a fighter aircraft navigator in the Israeli Air Force.

     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.

     ROY KUI CHUEN CHAN has served as a director since November 1997. Mr. Chan
is a designees 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.


                                       33`

`BEN ZION GRUBER was elected as a director designee of the shareholders
(excluding Howard Yeung) that participated in our last private placement. Mr.
Gruber is 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 LETCHINGER was 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 MOR has served as our outside director 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
various positions with the management of the Bank of Israel, including director
of public complaints and customer relations. Ms. Mor holds a B.A. degree in
Economics and Statistics and an MA in Business Administration from the Hebrew
University, Jerusalem, and an M.A degree in Labor Studies form the Tel Aviv
University.

     ELI AKAVIA has served as our Outside Director 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, currently a member firm of Ernst & Young
International, As of June 2004 Mr. Akavia serves as a director in Eden Springs
Ltd., and since December 2003 Mr. Akavia acts as a director in On Track
Innovation Ltd. both public Israeli companies. In addition, Mr. Akavia serves as
a director in Wintegra Inc. a Delaware corporation. 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.

     Adar Azancot ceased to serve as our Chief Executive Officer effective as of
August 31, 2006.

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, 2006.

                                                        Salaries, fees,   Pension, retirement
                                                       commissions and        and similar
                                                           bonuses             benefits
                                                          ----------          ----------

All directors and executive officers
 as a group, consisting then of 11 persons .....          $  683,100          $  273,100

     During the year ended December 31, 2006, we paid each of our outside
directors a per meeting attendance fee of NIS 1,000 ($237) plus an annual fee of
NIS 18,000 ($4,260).


                                       34`

`As of December 31, 2006, our directors and executive officers as a group,
consisting of eleven persons, held options to purchase an aggregate of 658,001
ordinary shares, at exercise prices ranging from $2.07 to $4.02 per share,
vesting over three years. These options were issued under our 2003 Stock Option
Plan and expire in 2013. In 2006 200,001 options at exercise price of $2.40 were
granted under 2003 plan.

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. 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. Bodinger and Letchinger are Class B directors and will hold office
until the Annual General Meeting of Shareholders to be held in 2007. Mr. Berg is
a Class C director and will hold office until the Annual General Meeting of
Shareholders to be held in 2008. Messrs. Chan and Gruber are Class A directors
and will hold office until the Annual General Meeting of Shareholders to be held
in 2009.

     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, excluding service as an outside director of a
company that is offering its shares to the public for the first time.


                                       35`

`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 outside directors elected 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.

     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.
In general, outside directors serve for a three-year term, which may be renewed
for only one additional three-year term. 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.

     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.

     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.

     Our board of directors has determined that Ms. Nurit 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 independent 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."


                                       36`

`COMMITTEES OF THE BOARD OF DIRECTORS

     AUDIT COMMITTEE. 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 respective
"independence" requirements of 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.

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

     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,
or any person filling any of these positions in a company even if he or she
holds a different title, and also includes any other manager directly
subordinate to the general manager. An office holder's fiduciary duties consist
of a duty of care and a duty of loyalty. An office holder must 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 business feasibility of an action brought for his
or her approval or performed by him or her by virtue of his or her position; and
(ii) all other important information pertaining to these actions. The duty of
loyalty requires that an office holder act in good faith and for the benefit of
the company, including the duty to (i) avoid any conflict of interest between
the office holder's position in the company and any other position he holds or
his personal affairs; (ii) avoid any competition with the company's business;
(iii) avoid exploiting any business opportunity of the company in order to
obtain benefit for the office holder or any other person; and (iv) disclose to
the company any information or documents relating to the company's affairs which
the office holder received by virtue of his or her position as an office holder.


                                       37`

`The Israeli Companies Law regulates the approval procedures for transaction
between a company and its controlling shareholders or transaction in which
office holders or the controlling shareholders or their relatives have a
personal interest. For the purpose of these requirements a controlling
shareholder is defined as a shareholder that holds either solely or in concert
with others at least 25% of the issued share capital of the company unless
another shareholder holds more than 50% of the issued share capital. The
holdings of two or more shareholders, each having a personal interest in the
approval of the same transaction are aggregated for this purpose.

     Under the Israeli Companies Law, transactions of a company with an office
holder and transactions of a company with another entity in which an office
holder has a personal interest and which are not extraordinary transactions,
must be approved by the board of directors or as otherwise provided for in a
company's articles of association. An extraordinary transaction 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. Extraordinary transactions with an office holder that is not a
director and transactions that involve the grant of an exemption, insurance,
indemnification or an undertaking to indemnify an office holder that is not a
director must be approved by the audit committee and the board of directors.
Extraordinary transactions with a director and transactions involving the
conclusion of a contract by a company with a director as to the terms of his
office, including the grant of an exemption, insurance, indemnification or an
undertaking to indemnify, or the conclusion of a contract by a company with a
director as to the terms of his employment in other positions, must be approved
by the audit committee, board of directors and shareholders. If the office
holder is a controlling shareholder or a relative of a controlling shareholder,
any extraordinary transaction, compensation, exemption, indemnification and
insurance of the office holder must be approved by our audit committee, board of
directors and shareholders, supported by the vote of at least one-third of the
shares of the non-controlling shareholders voting on the matter, or provided
that the total number of shares held by non-controlling shareholders that voted
against the proposal did not exceed one percent of all of the voting rights in
the company.

     The Israeli Companies Law requires that an office holder and a controlling
shareholder disclose promptly, and no later than by the first board meeting at
which such transaction is considered, any personal interest that he or she may
have and all related material information and documents, in connection with any
existing or proposed transaction of the company. Personal interest includes any
personal interest of the person's relative, or any corporation in which the
person or any relative of such person is an interested party. The disclosure
requirement does not apply where the office holder or controlling shareholder's
personal interest is created only by the personal interest of a relative in a
transaction that is not an extraordinary transaction.

     A director who has a personal interest in a matter, which is considered at
a meeting of the board of directors or the audit committee, may not be present
during the discussions of the board of directors or audit committee and may not
vote on this matter, unless the transaction under consideration 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 or the audit committee have a personal
interest, then the approval of the general meeting of shareholders is also
required.


                                       38`

`Under the Companies Regulations (Relief from Related Party Transactions),
5760-2000, promulgated under the Israeli Companies Law, and amended in January
2002, certain transactions between a company and its controlling shareholder(s)
do not require shareholder approval. In addition, under such regulations,
directors' compensation and employment arrangements do not require the approval
of the shareholders if both the audit committee and the board of directors agree
that such arrangements only benefit the company or if the directors'
compensation does not exceed the maximum amount of compensation for outside
directors determined by applicable regulations. Under very limited
circumstances, employment and compensation arrangements for an office holder
that is a controlling shareholder of the company or his relative do not require
the approval of shareholders. The foregoing relief 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 grant of such
relief, 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. If such objection is duly and timely
submitted, then the transaction or compensation arrangement will require
shareholders' approval as detailed above.

     Board of directors and shareholder approval is also required in the event a
company issues its securities in a private placement of securities that will
cause a person to become a controlling shareholder, or in the event 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, and that issuance will (i) increase the
relative holdings of a shareholder that holds 5% or more of the company's
outstanding share capital, or (ii) cause any person to become a holder of more
than 5% of the company's outstanding share capital.

     Notwithstanding all of the above, if any of the enumerated transactions
requiring special approvals is adverse to the company's interest, such approval
would not be effective.

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:

     o    a breach of the office holder's duty of care to the company or to
          another person;

     o    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

     o    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:

     o    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;

     o    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


                                       39`

`o    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.

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

     o    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.

     o    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:

     o    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;

     o    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.

     o    any act or omission done with the intent to unlawfully yield a
          personal benefit; or

     o    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 a per claim and aggregate coverage limit of $5.0
million. However, at an annual general meeting of our shareholders held on June,
2005, our shareholders approved an increase of the aggregate coverage limit to
$10.0 million provided that the annual premium will not exceed $150,000.

NASDAQ MARKETPLACE RULES AND HOME COUNTRY PRACTICES

     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.


                                       40`

`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:

     o    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.

     o    the requirement that our independent directors will have regularly
          scheduled meetings at which only independent directors are present.
          Under Israeli law independent directors are not required to hold
          executive sessions.

     o    the requirement regarding the directors nominations process. Instead,
          we follow Israeli law and practice in accordance with which our
          directors are recommended by our board of directors for election by
          our shareholders. See above in this Item 6C. "Directors, Senior
          Management and Employees - Board Practices - Election of Directors."

     o    the requirement regarding 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.

D.   EMPLOYEES

     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.

     On December 31, 2005, we employed 109 persons, of whom 38 were employed in
research, development and engineering, 56 persons in manufacturing and
logistics, 5 persons in sales and marketing, and 10 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.

     On December 31, 2004, we employed 106 persons, of whom 41 were employed in
research, development and engineering, 51 persons in manufacturing and
logistics, 4 persons in sales and marketing, and 10 persons in administration
and management and finance. All of our employees are located in Israel. In
addition, CACS (our 80% owned subsidiary) employed 18 persons in China.


                                       41`

`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.


                                       42`

`E.   SHARE OWNERSHIP

BENEFICIAL OWNERSHIP OF EXECUTIVE OFFICERS AND DIRECTORS

     The following table sets forth certain information as of March 26, 2007
regarding the beneficial ownership by each of our directors and executive
officers:




                                                  Number of Ordinary Shares  Percentage of
 NAME                                               Beneficially Owned (1)    Ownership(2)
 --------                                                 ----------          ----------

 Herzle Bodinger (3)............................             100,000                 1.1%
 Elan Sigal (3)(4)  ............................              55,555                   *
 Zvi Alon (3)(5)  ..............................              55,555                   *
 Dov Sella (3)(5)  .............................              55,555                   *
 Adrian Berg (6)(7)  ...........................              85,533                 1.0%
 Roy Kui Chuen Chan (8)(9)  ....................              58,867                   *
 Ben Zion Gruber (3)(10) .......................              84,694                 1.0%
 Michael Letchinger (11) .......................                   -                   -
 Nurit Mor (3) .................................                   -                   -
 Eli Akavia (3) ................................                   -                   -
 All directors and executive officers as a group
     (10) persons)(12) .........................             495,759                 5.7%

-----------
*    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 8,728,509 ordinary shares issued and
     outstanding as of March 26, 2007.

(3)  The business addresses of Messrs. Bodinger, Azancot, Sigal, Alon, Sella,
     Gruber, Akavia and Ms. Mor 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. 22,222 options at an exercise
     price of $2.40 per share and 33,333 options at an exercise price of $3.87
     per share . The options expire in September 2013.

(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 22,222 options at an exercise price of $2.40
     per share. The options expire in September 2013.

(6)  The business address of Mr. Berg is Alexander & Co., 17 St. Ann's Square,
     Manchester M2 7 PW, U.K.

(7)  Includes 84,000 ordinary shares subject to currently exercisable options
     granted under our stock option plan at an exercise price of $4.02 per
     share. The options expire in September 2013.

(8)  The business address of Mr. Chuen Chan is Gearhart Holdings (H.K.) Limited,
     2202 Kodak House II, 39 Healthy Street, E. North Point, Hong Kong.

(9)  Includes 57,333 ordinary shares subject to currently exercisable options
     granted under our stock option plan at an exercise price of $4.02 per
     share. The options expire in September 2013.


                                       43`

`(10) Includes 68,027 ordinary shares issuable upon currently exercisable
     warrants at an exercise price of $6.00 per share that were issue in
     connection with the private placement of our shares in June 2002, and
     16,667 ordinary shares subject to currently exercisable options granted
     under our stock option plans, at an exercise price of $4.02 per share. Such
     options expire in September 2013.

(11) The business address of Mr. Letchinger is 2709 Rittenhouse Street,
     Washington DC, 20015, USA.

(12) Includes 68,027 ordinary shares issuable upon the exercise of currently
     exercisable warrants, at an exercise price of $6 per share that were issued
     in connection with a private placement of our shares in June 2002. Such
     warrants expire on June 30, 2007.

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.

     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 26, 2007, options to purchase 81,633 ordinary shares had been
granted to 30 employees at an average exercise price of $6.51 per share. All of
such options are currently exercisable.


                                       44`

`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.

     As of March 26, 2007 options to purchase 1,191,000 ordinary shares had been
granted. Of such options, 51,168 options have been exercised and 80,666 have
been cancelled or forfeited. 1,059,166 options are outstanding. Options to
purchase 705,722 ordinary shares 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,
and holds currently exercisable warrants to purchase an additional 2,755,102 of
our ordinary shares. Accordingly, Mr. Howard Yeung may be deemed to control our
company.

     The following table sets forth certain information as of March 26, 2007,
regarding the beneficial ownership by all shareholders known to us to own
beneficially 5% or more of our ordinary shares:

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

Howard P.L. Yeung (3)(4)(5) .........           6,802,620                59.2%
Kenneth Yeung (3)(6) ................             450,029                 5.2%
Iroquuois Capital LLP (7)(8) ........             496,016                 5.4%
Smithfield  Fiduciary LLC (9)(10) ...             570,397                 6.2%

(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.

(2)  The percentages shown are based on 8,728,509 ordinary shares outstanding as
     of March 26, 2007.

(3)  Of the 6,802,620 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 2,755,102 ordinary shares issuable upon the exercise of currently
     exercisable warrants issued to Mr. Howard P.L. Yeung.

(5)  The address of Mr. Howard P.L. Yeung is 2202 Kodak House II, 39 Healthy
     Street, North Point, Hong Kong.


                                       45`

`(6)  The address of Mr. Kenneth Yeung is 2202 Kodak House II, 39 Healthy Street,
     North Point, Hong Kong.

(7)  Includes 72,917 ordinary shares issuable upon currently exercisable
     warrants at an exercise price of $7.50 per share and 111,111 ordinary
     shares issuable upon currently exercisable convertible notes that were
     issued in connection with the private placement of our shares in July 2004.
     In addition, 210,086 ordinary shares issuable upon currently exercisable
     warrants at an exercise price of $6.30 per share that was issued in
     connection with the private placement of our shares in April 2005.

(8)  The address of Iroquois Capital LLP is 641 Lexington Ave., 26th Floor, New
     York, New York, 10022.

(9)  Includes 133,333 ordinary shares issuable upon currently exercisable
     warrants at an exercise price of $7.50 per share and 203,175 ordinary
     shares issuable upon currently exercisable convertible notes that were
     issued in connection with the private placement of our shares in July 2004.
     In addition, 157,514 ordinary shares issuable upon currently exercisable
     warrants at an exercise price of $6.30 per share that was issued in
     connection with the private placement of our shares in April 2005.

(10) The address of Smithfield Fiduciary LLC is c/o Highbridge Capital
     Management LLC, 9 West 57th Street, 27th Floor, New York, New York 10019.

SIGNIFICANT CHANGES IN THE OWNERSHIP OF MAJOR SHAREHOLDERS

     On January 27, 2005, Bank Leumi le-Israel B.M, filed a Schedule 13G with
the Securities and Exchange Commission reflecting ownership of 976,399, or
13.7%, of our ordinary shares. In an amendment to the Schedule 13G filed with
the Securities and Exchange Commission on June 6, 2005, Bank Leumi le-Israel B.M
reported ownership of 220,000, or 2.9%, of our ordinary shares.

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 our transfer agent,
as of March 28, 2007, there were 309 holders of record of our ordinary shares,
of which 283 record holders holding approximately 28% 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 June 22, 2003 we signed a memorandum of agreement with Bank Hapoalim
B.M. and Bank Leumi Le-Israel B.M., or the Banks, which agreement was approved
by our shareholders at an extraordinary general meeting of shareholders that was
held on July 22, 2003. Pursuant to the agreement that was finalized on September
24, 2003, we restructured $3,451,000 of our outstanding debt to the Banks. We
repaid $1,100,000 on account of our debt the Banks, and the Banks forgave
$1,100,000 of debt and received warrants to purchase 1,260,665 of our ordinary
shares, at an exercise price that is equal to the nominal (par) value of our
shares, in lieu of $1,251,000 of our debt. The Banks also agreed to grant us an
additional short-term line of credit of $500,000 to finance our cash flow
requirements during 2003. As part of the agreement, our controlling shareholder,
Mr. Yeung, agreed to grant the Banks a put option allowing the Banks to require
him to purchase the above warrants for the consideration of $1,251,000,
exercisable within a period of 45 days commencing on March 24, 2005 and the
Banks granted Mr. Yeung a call option allowing him to require the Banks, during
a period of 18 months, commencing as of September 24, 2003, and in the event
that the Banks do not exercise their put option, during an additional 90 day
period commencing as of May 9, 2005, to sell him such warrants at a price that
is not lower than $1,251,000 and not higher then $1,770,165, depending upon the
average close price of our ordinary shares during the 90 business days prior to
such exercise. We also granted the Banks warrants to purchase an additional
366,667 ordinary shares at an exercise price of $6.00 per share, exercisable for
five years, commencing as of September 24, 2003.


                                       46`

`In May 2005, Mr. Yeung exercised his call option to purchase the warrants
from the Banks and in October 2005 exercised these warrants. Upon such exercise,
we issued 1,260,665 ordinary shares, to Mr. Yeung.

C.   INTERESTS OF EXPERTS AND COUNSEL

     Not applicable.

ITEM 8. FINANCIAL INFORMATION

A.   CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

LEGAL PROCEEDINGS

     ALL PROCEEDINGS DESCRIBED HEREUNDER, IN WHICH WE OR OUR OFFICE HOLDERS ARE
INVOLVED, AGAINST MR. H. NISSENSON, OUR FORMER PRESIDENT, OR MR. E. DUBRONSKY, A
FORMER BOARD MEMBER, ARE THE SUBJECT OF MEDIATION PROCESS WHICH IS CURRENTLY
ONGOING. AS A RESULT, ALL SUCH PROCEEDINGS, EXCEPT THOSE IN THE REGIONAL LABOR
COURT IN TEL-AVIV, HAVE BEEN STAYED, PENDING THE OUTCOME OF THE MEDIATION
PROCESS.

     In December 1998, Mr. Haim Nissenson, our former president and chief
executive officer, filed a complaint against us and Mr. Herzle Bodinger, 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 (approximately $440,000) for salary, vacation and severance
payments and other benefits that he is allegedly entitled to pursuant to his
retirement agreement with us. In addition, Mr. Nissenson is seeking a permanent
injunction and a declarative relief, stating that a personal loan that was
provided to him by us had been forgiven. Mr. Nissenson is also asserting that
Mr. Bodinger caused the breach of the retirement agreement. In response, we
filed a statement of defense claiming, among other things, that (i) the
retirement agreement is not valid since it was not approved pursuant to the
requirements of the applicable law; (ii) Mr. Nissenson was responsible for our
company's precarious financial condition at the time he resigned and for the
concealment of these facts from our board of directors and our investors; (iii)
during the board of directors meeting in which such agreement was discussed and
approved, Mr. Nissenson misrepresented our financial and economic condition and
the nature and origins of his debt to us; and (iv) by breaching his fiduciary
duties Mr. Nissenson caused us damages in amounts that exceed the amount of the
complaint, which damages should be offset from any amounts awarded in favor of
Mr. Nissenson, if any. In addition, we asserted that in a certificate dated
March 23, 1992, Mr. Nissenson assigned to us all his rights to receive
employment related benefits other than salaries, including severance and
vacation payments for the period up to the certificate date. The hearing of this
claim was combined with the hearing of our claim for repayment of the loan
granted to Mr. Nissenson, as detailed below. The hearing of testimony in this
matter was recently concluded. Our management believes that this claim will not
have a material adverse effect on our financial condition or results of
operations. In addition, the income tax authorities have demanded that we
commence payment of the salary tax due in respect of the retirement arrangements
of Mr. Nissenson which are the subject matter of this litigation. An agreement
was reached with the tax authority whereby the tax liability will be discharged
over several years and that in the event that Mr. Nissenson's claim is
dismissed, the tax payment will be recovered.

     In September 1999, we filed a suit in the District Court of Tel-Aviv
against Messrs. Haim Nissenson and Eles Dubronsky (Civil File 2514/99 RADA
ELECTRONIC INDUSTRIES LTD. V. H. NISSENSON AND OTHERS) seeking damages in the
amount of $1.4 million. In the complaint, we alleged that Messrs. Nissenson and
Dubronsky: (i) represented to our board of directors inaccurate and incomplete
information, and (ii) failed to disclose, during the course of our board's
deliberations to acquire Jetborne International, Ltd., their personal interest
in Jetborne International and Mr. Nissenson's involvement in a previous attempt
to gain control of Jetborne International several years earlier. We alleged that
our board of directors approved the acquisition based on such inaccurate and
incomplete information and that the acquisition caused severe losses. We further
alleged that in their conduct Messrs. Nissenson and Dubronsky breached their
fiduciary duty owed to us and to our shareholders while acting as an executive
and members of our board of directors. Our motion to attach the funds deposited
by Mr. Nissenson in his pension funds was denied by the Court in May 2000. The
suit is still in its preliminary stages.


                                       47`

`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, they entered into an agreement with us, whereby they
were entitled to remuneration in the event that they found an investor for our
company. The claim was dismissed by the Court and it was held, inter alia, that
the witnesses for the plaintiffs were not credible. The plaintiffs appealed to
the Supreme Court and the matter is now pending. We believe that there will be
no material exposure or adverse effect on our financial condition as a result of
this appeal.

     In August 2000, we filed a claim against Mr. Haim 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 (approximately
$440,000) for the repayment of the loan granted by us 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 and the court has recently
completed hearing the testimony of our witnesses.

     In January 2001, we filed a suit against our former controller, Mr.
Mordechai Perera in the Regional Court for Labor Disputes in Tel Aviv (Case No.
1672/01 RADA ELECTRONIC INDUSTRIES LTD. V. PERERA) in the amount of
approximately $260,000 for the repayment of a loan provided to him. While Mr.
Perera did not deny that he received such amount, he argued that it was promised
to him on account of his compensation and was registered as a loan in the books
of our company for tax purposes. He further claimed that Mr. Nissenson orally
promised him that such loan would be forgiven. In March 2001, Mr. Perera filed a
counter claim in the amount of approximately $520,000 for various payments to
which he was allegedly entitled in connection with his employment and
termination thereof by us, including bonus, severance payments, vacation
redemption and overtime payments. In December 2006 a judgment was delivered by
the Court, whereby Perera's counter-claim was dismissed entirely and our claim
was allowed in part, as the Court held that we have waived half of Perera's
debt. We have recently appealed to the National Labor Court and the matter is
pending there.

     In February 2001, we filed a suit against Mr. Dubronsky, in the District
Court of Tel Aviv (Civil Case 1158/01 RADA ELECTRONIC INDUSTRIES LTD. V. E.
DUBRONSKY) seeking approximately $250,000. We maintain that Mr. Dubronsky is
personally responsible for drafting and executing Mr. Nissenson's retirement
agreement and that in such capacity he breached his fiduciary duties to our
company and should the Labor Court decide that the retirement agreement is valid
and enforceable against us, Mr. Dubronsky has to indemnify us for all the
damages caused to us as a result of such Court decision. The District Court has
issued a stay of the proceedings pending resolution of the Labor Court
proceedings detailed above.

     In May 2001, Mr. Haim Nissenson filed a suit against us in the District
Court of Tel Aviv (Civil Case 1715/01 H. NISSENSON V. RADA ELECTRONIC INDUSTRIES
LTD.) for damages allegedly suffered by him as a result the cancellation of an
attachment imposed by us on his pension funds in connection with the previously
mentioned Jetborne International litigation. The claim is for NIS 1.0 million
(approximately $220,000). In response, we filed a statement of defense denying
all of Mr. Nissenson's allegations.

     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 June 2001, we filed a counter claim (within the framework of the said
civil case 1715/01) against Mr. Haim Nissenson, his wife and another former
director for damages caused us as a result of transfers of funds to third
parties that were made in breach of fiduciary duties owed to us by Mr. Nissenson
and the other former director. In addition, we are seeking a declaratory
judgment stating that Mrs. Nissenson is liable to us for the repayment of the
loan provided to Mr. Nissenson, jointly with Mr. Nissenson. We are also seeking
a declaration that the transfer of the title to Mr. Nissenson's house and
another apartment to his wife without consideration in the beginning of 1997 are
void and were made to avoid the repayment of outstanding loans to us.

     In August 2004, Mr. Nissenson filed a suit against us, and our office
holders, Messers. Bodinger, Azancot, Agmon, Tropp, Sigal and Ms. Snir and
against our former chief financial officer, Mr. Ronen Stein, in the Magistrate
Court of Tel Aviv (CIVIL CASE 56365/04 NISSENSON V. RADA ELECTRONIC INDUSTRIES
LTD. AND OTHERS), seeking damages in the amount of NIS 1.0 million
(approximately $220,000) and alleging that the description of the claim filed
against him and another former director in connection with the acquisition of
our formerly owned subsidiary Jetborne International, Ltd. included in our
annual reports on Form 20-F and certain press releases contains defamatory
allegations with respect to Mr. Nissenson. We believe that we and our officers
have valid defenses against these claims. According to Israeli law, the usual
award in defamatory claims is low and does not exceed NIS 500,000 (approximately
$110,000).

     In June 2005, Mr. Nissenson filed a suit in the District Court of Tel Aviv
against our chairman, Mr. Bodinger (Civil Case No. 1845/05 H. NISSENSON V. H.
BODINGER) seeking damages in an amount of NIS 2.6 million (approximately
$565,000 ). In the complaint, which was filed with the court one day before the
expiration of the statute of limitations , Mr. Nissenson alleged that Mr.
Bodinger committed fraud against him and negligent misrepresentation towards
him, as a result of which he was compelled at the time (June 1998), to retire
from his position as the chief executive officer of our company. Mr. Nissenson
further alleged that Mr. Bodinger represented to our board of directors that
Boeing Corporation would not invest in our company unless Mr. Nissenson retired
from his position as the chief executive officer. It is further alleged that as
a result, Mr. Nissenson retired from his position, losing income equal to the
claimed amount of NIS 2.6 million. In response, we filed a statement of defense,
claiming among other things, that no representation whatsoever was made by Mr.
Bodinger to the board of directors and that Mr. Nissenson was fully aware, at
all times, of all the relevant information regarding the possibility of the
investment by Boeing Corporation. We further asserted that the allegation raised
by Mr. Nissenson in this claim is inconsistent with his allegation in his claim
against us in the Regional Court for Labor Dispute (Case No. 3/4074/98) and that
there is no sufficient legal basis for his claim. Our management believes that
this claim (in respect of which Mr. Bodinger is entitled to indemnity from us),
does not carry any material exposure or adverse effect on our financial
condition.

     In May 2006, Mr. Nissenson filed a suit in the Magistrates Court of
Tel-Aviv against our Board Members, Mr. R. K. C. Chan and Mr. A.H. Berg (C.C.
29334/06 NISSENSON VS. CHAN AND BERG) seeking damages in the amount of NIS. 0.5
Million (approx. $110,000). In essence, this claim is identical to Mr.
Nissenson' claim against us and against our officer holders (C.C. 56365/04 in
the Magistrates Court of Tel-Aviv) which is described above. A response has not
as yet been submitted on behalf of the defendants, since the issue of the
competency of the Court has to be decided first.

     In 2006, we filed a suit before an Arbitrator seeking to recover $444,574
from Parado Technologies Ltd., formerly known as Vectop Ltd. ("Vectop"). On the
same day Vectop counterclaimed against us seeking an order that we transfer an
amount of $181,492 to a trust account and to provide Vectop an accounting of
sales made during 2006. These claims are related to an agreement made with
Vectop in 2005 whereby we purchased certain of Vectop's assets. Under the
Agreement, Vectop is entitled to receive payments contingent upon sales made by
us of Vectop's products. According to the Agreement, the first $200,000 due to
Vectop should have been transferred to a trust account for the purpose of
indemnifying us for possible future damages. In our claim, we assert that we are
entitled to compensation because of misrepresentations made by Vectop during the
negotiations, in connection with five of the products sold to us by Vectop. We
also allege that Vectop breached the agreement by not providing on time
financial statements reconciled to US GAAP. We also asserted that we have a
right of set-off against payments due to Vectop under the Agreement. Vectop
alleges that we are obliged to transfer to the trust account the part of the
immediate payment from the sales of the year 2005 and that we can only be
indemnified from this trust account under a final award of the Arbitrator. We
believe that there is a possibility that the Arbitrator will order the transfer
of the said amount to the trust account until a final award is delivered. As for
the outcome of the arbitration, the matter is still in its early stages and we
are therefore unable to assess the possibility that Vectop's claim will be
allowed.


                                       49`

`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
----------          ----------          ----------

2002 .....          $     5.40          $     1.65
2003 .....                6.69                1.65
2004 .....               10.32                3.42
2005 .....                5.64                3.18
2006 .....                3.9                 1.95

     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:

2005                       High            Low
----                    ----------     ----------

First Quarter ......    $     5.64     $     4.38
Second Quarter .....          5.22           3.87
Third Quarter ......          4.56           3.75
Fourth Quarter .....          3.99           3.18

2006                       High            Low
----                    ----------     ----------

First Quarter ......    $      3.9     $     2.79
Second Quarter .....          2.85           1.95
Third Quarter ......          3.03           2.16
Fourth Quarter .....          2.67           1.98


                                       50`

`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:

2006                                       High                 Low
----                                    ----------          ----------

October ......................          $     2.67          $     2.34
November .....................                2.43                2.1
December .....................                2.19                1.98

2007
----

January ......................          $     3.00          $     1.95
February .....................                2.55                1.98
March (through March 28, 2007)                2.94                2.01

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 Capital Market. On December 13, 2005, we changed
our symbol to "RADI." , which symbol was changed for a 22 business day period to
RADID after our reverse split on February 14, 2007. 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


                                       51`

`PURPOSES AND OBJECTS OF THE COMPANY

     We are registered with the Israeli Companies Registry and have been
assigned company number 52-003532-3. 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.

     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.


                                       52`

`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."

     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.


                                       53`

`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."

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 repatriable
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.


                                       54`

`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
2006 was 31%. The rate was reduced to 29% in 2007, and will be further reduced
to 27% in 2008, 26% in 2009 and 25% in 2010 and thereafter.

LAW FOR THE ENCOURAGEMENT OF INDUSTRY (TAXES), 1969

     Under the Encouragement of Industry (Taxes) Law 5729-1969, or the Industry
Encouragement Law, Industrial Companies are entitled to certain corporate tax
benefits, including, among others:

o    Deduction, under certain conditions, of purchases of know-how and patents
     over an eight-year period for tax purposes;

o    Right to elect, under specified conditions, to file a consolidated tax
     return with additional related Israeli industrial companies;

o    Accelerated depreciation rates on equipment and buildings; and

o    Deductions over a three-year period of expenses involved with the issuance
     and listing of shares on the Tel Aviv stock exchange or, following January
     1, 2003, on a recognized stock market outside of Israel.

     Eligibility for benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. Under the
Industry Encouragement Law, an "Industrial Company" is defined as a company
resident in Israel, at least 90% of the income of which, in any tax year,
determined in Israeli currency, exclusive of income from government loans,
capital gains, interest and dividends, is derived from an "Industrial
Enterprise" owned by it. An "Industrial Enterprise" is defined as an enterprise
owned by an Industrial Company, whose major activity in a given tax year is
industrial production activity.

     We believe that we currently qualify as an Industrial Company within the
definition of the Industry Encouragement Law. No assurance can be given that we
will continue to qualify as an Industrial Company or that the benefits described
above will be available in the future.

LAW FOR THE ENCOURAGEMENT OF INDUSTRIAL RESEARCH AND DEVELOPMENT, 5744-1984

     The Government of Israel encourages research and development projects
through the Office of Chief Scientist of the Israeli Ministry of Industry, Trade
and Labor, or the Office of the Chief Scientist, pursuant to the Law for the
Encouragement of Industrial Research and Development, 5744-1984, and the
regulations promulgated thereunder, commonly referred to as the Research Law.
Grants received under such programs are repaid through a mandatory royalty based
on revenues from products incorporating know-how developed with the grants. This
government support is conditioned upon the ability of the participant to comply
with certain applicable requirements and conditions specified in the Office of
the Chief Scientist's programs and with the provisions of the Research Law.

     Under the Research Law, research and development programs which meet
specified criteria and are approved by a research committee of the Office of the
Chief Scientist are eligible for grants of up to 50% of certain of the project's
approved expenditure, as determined by the research committee.

     In exchange, the recipient of such grants is required to pay the Office of
the Chief Scientist royalties from the revenues derived from products
incorporating technology developed within the framework of the approved research
and development program or derived from such program (including ancillary
services in connection with such program), usually up to 100% of the U.S.
dollar-linked value of the total grants received in respect of such program,
plus LIBOR interest.


                                       55`

`The terms of the Israeli Government participation generally requires that
the products developed with such grants be manufactured in Israel. However,
under regulations promulgated under the Research Law, upon the approval of the
Chief Scientist, some of the manufacturing volume may be performed outside
Israel, provided that the grant recipient pays royalties at an increased rate.
The Research Law also allows for the approval of grants in cases in which the
applicant declares that part or all of the manufacturing will be performed
outside of Israel or by foreign residents and the research committee is
convinced that this is essential for the execution of the program. The Research
Law also provides that know-how developed under an approved research and
development program may not be transferred to third parties in Israel without
the prior approval of the research committee. The Research Law further provides
that the know-how developed under an approved research and development program
may not be transferred to any third parties outside Israel. No approval is
required for the sale or export of any products resulting from such research and
development.

     However, 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 and
requires the new interested party to undertake to the Office of the Chief
Scientist to comply with the Research Law. 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 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.

     The funds available for grants from the Office of the Chief Scientist were
reduced in 1998, however the Israeli authorities have indicated in the past that
the government may increase grants from the Office of the Chief Scientist in the
future.


                                       56`

`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.

TAXATION UNDER INFLATIONARY CONDITIONS

     The Income Tax Law (Inflationary Adjustments), 5745-1985, generally
referred to as the Inflationary Adjustments Law, represents an attempt to
overcome the problems presented to a traditional tax system by an economy
undergoing rapid inflation. The Inflationary Adjustments Law is highly complex.
Its features, which are material to us, can be summarized as follows:

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

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

CAPITAL GAINS TAX ON SALES OF OUR ORDINARY SHARES

     Under the Income Tax Ordinance [New Version], 5721-1961, commonly referred
to as the Tax Ordinance, the general rule is that Israeli resident individuals
are subject to a 20% tax rate on the real capital gains derived on or after
January 1, 2003. Substantial individual shareholders (who are defined as
shareholders of 10% or more of the shares of the company on the date of the sale
of the shares or any date during the 12 months before the sale of the shares)
are subject to a 25% tax rate on the real capital gains derived on or after
January 1, 2003 from the sale of shares. Notwithstanding, capital gains of an
Israeli resident individual from the sale of non-index linked debentures,
commercial securities, State loans and/or loans, is subject to a 15% tax rate on
the real capital gains derived on or after January 1, 2003 from the sale of such
securities, while substantial individual holders of such non-index linked
securities are subject to a 20% tax rate on the real capital gains derived on or
after January 1, 2003 from the sale of such securities.

     For the tax years 2006-2009, Israeli resident companies who were not
subject to the provisions of Article 6 of the Inflationary Adjustments Law
(which deals with the purchase and sale of securities publicly traded on a
recognized stock exchange during periods of inflation) prior to August 10, 2005,
are subject to 25% tax rate on real capital gains derived on or after January 1,
2003 from the sale of securities publicly traded on a recognized stock exchange.
Notwithstanding the above, Israeli resident companies which were subject to the
provisions of Article 6 of the Inflationary Adjustments Law prior to August 10,
2005, are subject to the regular corporate tax rate on real capital gains
derived from the sale of securities publicly traded on a recognized stock
exchange.

     Under income tax regulations foreign residents, who sell shares of an
Israeli company publicly traded on a recognized stock exchange outside of
Israel, will be exempt from tax subject to the satisfaction of all following
conditions:

o    The capital gain is not attributable to a permanent establishment in Israel

o    The shares were purchased after the first initial public offering on the
     recognized stock exchange outside of Israel


                                       57`

`Pursuant to the convention between the governments of the United States of
America and Israel with respect to taxes on income, as amended, referred to as
the Treaty, the sale, exchange or disposition of ordinary shares by a person who
qualifies as a resident of the United States within the meaning of the Treaty
and who is entitled to claim the benefits afforded to such person by the Treaty
generally will not be subject to the Israeli capital gains tax unless such U.S.
resident holds, directly or indirectly, shares representing 10% or more of our
voting power during any part of the 12-month period preceding such sale,
exchange or disposition, subject to particular conditions. A sale, exchange or
disposition of ordinary shares by such a U.S. resident who holds, directly or
indirectly, shares representing 10% or more of our voting power at any time
during such preceding 12-month period would be subject to such Israeli tax, to
the extent applicable; however, under such U.S. resident 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 the limitations under
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

     Foreign residents are subject to income tax on income accrued or derived
from sources in Israel. Such sources of income include passive income such as
dividends, royalties and interest, as well as non-passive income from services
rendered in Israel. On distributions of dividends after January 1 2006 other
than bonus shares or stock dividends, income tax at the rate of 20% will be
withheld on dividends distributed to Israeli individual shareholders or to a
foreign resident.

     The foregoing tax rates are withheld at source, unless a different rate is
provided by a treaty between Israel and the shareholder's country of residence.
(For instance under the provisions of the treaty between Israel and the United
States 12.5% tax rate is imposed on dividends not generated by an approved
enterprise if the foreign resident is a U.S. corporation that holds 10% of a
company's voting power, and 15% on dividends generated by an approved
enterprise. In addition under the Treaty, the maximum tax on dividends paid to a
holder of ordinary shares who is a U.S. resident within the meaning of the
Treaty will be 25%).

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.


                                       58`

`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.

     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 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.


                                       59`

`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.

     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 amount 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.


                                       60`

`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.

     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:

o    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,

o    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,

o    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

o    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.


                                       61`

`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.

     Any U.S. Holder who holds 10% or more in vote or value of our ordinary
shares will be subject to certain additional United States information reporting
requirements.

     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.

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.


                                       62`

`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 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, 2006, we had liabilities payable in NIS which are not linked
to the U.S. dollar in the amount of $2.8 million and cash and receivables in the
amount of $2.5 million denominated in NIS. Accordingly, an increase of 1% of the
NIS against the dollar would increase our financing expenses by approximately
$1,000. 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.

     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.


                                       63`

`ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     Not applicable.

                                     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

     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.

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. The code of ethics is publicly available on our website at
www.rada.com. 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.


                                       64`

`ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     FEES PAID TO INDEPENDENT PUBLIC ACCOUNTANTS

     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
                              ------------------------------
Services Rendered                2005                2006
--------------------          ----------          ----------

Audit (1) ..........          $   77,500          $   74,000
Audit-related (2) ..          $    7,500                   -
                              ----------          ----------
Total ..............          $   85,000          $   74,000

(1)  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.

(2)  Audit related fees consist of fees for assurance and related services by
     the independent registered public accounting firm that are reasonably
     related to the performance of the audit or review of the registrant
     financial statements.

     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.

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 has purchased any of our securities
during 2006.

                                    PART III

ITEM 17. FINANCIAL STATEMENTS

     Not applicable.


                                       65`

`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

ITEM 19. 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*

 4.3          1999 Employee Stock Option Plan, as amended*

 4.4          2003 Employee Stock Option Plan, as amended**

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

   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.


                                       66`

`RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY

                        CONSOLIDATED FINANCIAL STATEMENTS

                             AS OF DECEMBER 31, 2006

                            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-36

                                     F - 1`

`REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

                             TO THE SHAREHOLDERS OF

               RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY

     We have audited the accompanying consolidated balance sheets of Rada
Electronic Industries Ltd. ("the Company") and its subsidiary as of December 31,
2006 and 2005 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, 2006. 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 consolidated financial statements referred to above
present fairly in all material respects, the consolidated financial position of
the Company and its subsidiary as of December 31, 2006 and 2005, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2006, in conformity with U.S. generally accepted
accounting principles.

     As discussed in Note 2p to the consolidated financial statements, in 2006
the Company adopted Statement Financial Accounting Standards Board No. 123
(revised 2004), "Share-Based Payment".

                                                /S/Kost Forer Gabbay and Kasierer
Tel-Aviv, Israel                                  KOST FORER GABBAY & KASIERER
March 29, 2007                                  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,
                                                                   --------------------
                                                             NOTE   2006         2005
                                                             ----  -------      -------

    ASSETS

CURRENT ASSETS:
  Cash and cash equivalents                                        $   990      $   350
  Restricted cash                                                      704        1,017
  Trade receivables (net of allowance for
    doubtful accounts of $ 34 and $ 6 at December
    31, 2006 and 2005, respectively)                                 4,296        4,920
  Other accounts receivable and prepaid expenses                       200          156
  Costs and estimated earnings in excess of billings
    on uncompleted contracts                                    3      668        1,396
  Inventories                                                   4    2,468        1,942
                                                                   -------      -------

TOTAL current assets                                                 9,326        9,781
                                                                   -------      -------

LONG-TERM RECEIVABLES AND DEPOSITS:
  Long-term receivables                                         5      983          983
  Leasing deposits                                                      78           72
  Severance pay fund                                                 1,624        1,614
                                                                   -------      -------

TOTAL long-term receivables and deposits                             2,685        2,669
                                                                   -------      -------

PROPERTY, PLANT AND EQUIPMENT, NET                              6    3,359        3,931
                                                                   -------      -------

OTHER ASSETS:
  Intangible assets, net                                        7    1,906        2,469
  Goodwill                                                      7      166            -
  Deferred charges, net                                                 13           40
                                                                   -------      -------

TOTAL other assets                                                   2,085        2,509
                                                                   -------      -------

TOTAL assets                                                       $17,455      $18,890
                                                                   =======      =======

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,
                                                                            -----------------------
                                                                       NOTE   2006           2005
                                                                       ---- --------       --------

    LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
  Short-term bank credit                                                 8a $    238       $    177
  Current maturities of long-term loans                                  8b      321            700
  Convertible note                                                       11    2,858              -
  Trade payables                                                               1,611          1,671
  Other accounts payable and accrued expenses                             9    3,419          3,217
  Deferred revenues                                                               84             50
  Billings in excess of costs and estimated earnings
    on uncompleted contracts                                              3      285            391
                                                                            --------       --------

TOTAL current liabilities                                                      8,816          6,206
                                                                            --------       --------

LONG-TERM LIABILITIES:
  Long-term loans                                                        8b      142              -
  Convertible note                                                       11        -          2,560
  Accrued severance pay                                                        2,026          2,009
                                                                            --------       --------

TOTAL long-term liabilities                                                    2,168          4,569
                                                                            --------       --------

COMMITMENTS AND CONTINGENT LIABILITIES                                   10

MINORITY INTERESTS                                                               397            380
                                                                            --------       --------

SHAREHOLDERS' EQUITY:                                                    11
  Share capital -
    Ordinary shares of NIS 0.015 par value - Authorized:
    16,333,333 and 15,833,333 shares at December 31, 2006
    and 2005, respectively; Issued and outstanding: 8,728,509
    and 8,714,676 shares at December 31, 2006  and 2005,
    respectively                                                                 116            116
  Additional paid-in capital                                                  67,239         66,900
  Accumulated deficit                                                        (61,281)       (59,281)
                                                                            --------       --------

TOTAL shareholders' equity                                                     6,074          7,735
                                                                            --------       --------

TOTAL liabilities and shareholders' equity                                  $ 17,455       $ 18,890
                                                                            ========       ========

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 PER SHARE DATA


                                                                          YEAR ENDED DECEMBER 31,
                                                                    --------------------------------------
                                                           NOTE       2006          2005            2004
                                                           ----     --------       --------       --------

Revenues:                                                   15
  Products                                                          $ 10,984       $ 11,303       $ 11,123
  Services                                                             2,053          2,118          3,037
                                                                    --------       --------       --------

                                                                      13,037         13,421         14,160
                                                                    --------       --------       --------
Cost of revenues:
  Products                                                             9,517         10,601          8,669
  Services                                                             1,482          1,481          1,618
                                                                    --------       --------       --------

                                                                      10,999         12,082         10,287
                                                                    --------       --------       --------

Gross profit                                                           2,038          1,339          3,873
                                                                    --------       --------       --------

Operating costs and expenses:
  Research and development                                               181              -              -
  Marketing and selling                                                1,316          1,155            738
  General and administrative                                           1,794          1,939          2,116
                                                                    --------       --------       --------

TOTAL operating costs and expenses                                     3,291          3,094          2,854
                                                                    --------       --------       --------

Operating income (loss)                                               (1,253)        (1,755)         1,019
Financial expenses, net                                     13          (775)          (624)          (248)
Other income, net                                                         45             33             23
                                                                    --------       --------       --------

                                                                      (1,983)        (2,346)           794
Minority interests in losses (earnings) of subsidiary                    (17)            17             28
                                                                    --------       --------       --------

Net income (loss)                                                   $ (2,000)      $ (2,329)      $    822
                                                                    ========       ========       ========

Net earnings (loss) per share:                              16
  Basic net earnings (loss) per share                               $  (0.23)      $  (0.31)      $   0.12
                                                                    ========       ========       ========

  Diluted net earnings (loss) per share                             $  (0.23)      $  (0.31)      $   0.09
                                                                    ========       ========       ========

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


                                                     NUMBER OF                     ADDITIONAL                      TOTAL
                                                     ORDINARY         SHARE         PAID-IN      ACCUMULATED    SHAREHOLDERS'
                                                      SHARES         CAPITAL        CAPITAL        DEFICIT         EQUITY
                                                     ---------      ---------      ---------      ---------       ---------

Balance at January 1, 2004                           6,170,238      $     108      $  60,544      $ (57,774)      $   2,878

  Issuance of Ordinary shares and warrants,
    net *)                                             621,438              2          3,300              -           3,302
  Beneficial conversion feature
     on convertible note                                     -              -            180              -             180
  Exercise of options                                   24,445         ***) -             50              -              50
  Net income                                                 -              -              -            822             822
                                                     ---------      ---------      ---------      ---------       ---------

Balance at December 31, 2004                         6,816,121            110         64,074        (56,952)          7,232

  Issuance  of  Ordinary  shares and  warrants,
    net *)                                             321,978              1          1,005              -           1,006
  Exercise of warrants, net **)                      1,563,688              5          1,794              -           1,799
  Exercise of options                                   12,889         ***) -             27              -              27
  Net loss                                                   -              -              -         (2,329)         (2,329)
                                                     ---------      ---------      ---------      ---------       ---------

Balance at December 31, 2005                         8,714,676            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                         8,728,509            116         67,239        (61,281)          6,074
                                                     =========      =========      =========      =========       =========

*)   Net of issuance expenses of approximately $ 85 and $ 95 for the years ended
     December 31, 2005 and 2004, respectively.

**)  Net of issuance expenses of approximately $ 148.

***) 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,
                                                                          -----------------------------------
                                                                           2006          2005          2004
                                                                          -------       -------       -------

CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income (loss)                                                       $(2,000)      $(2,329)      $   822
  Adjustments required to reconcile net income (loss) to net cash
    provided by (used in) operating activities:
    Depreciation and amortization                                           1,398         1,347         1,066
    Amortization expense on convertible note                                  298           214           106
    Minority interests in earnings (losses) of subsidiary                      17           (17)          (28)
    Share-based compensation for employees                                    221             -             -
    Accrued interest and translation differences on long-term
      receivables                                                               -             -             2
    Capital loss on property, plant and equipment                               -             -            16
    Severance pay, net                                                          7           (30)         (112)
    Decrease (increase) in trade receivables, net                             624        (2,676)        1,853
    Decrease (increase) in other accounts receivable and prepaid
      expenses                                                                (44)           81            42
    Decrease (increase) in costs and estimated earnings in excess of
      billings, net                                                           622          (685)       (1,980)
    Decrease (increase) in inventories                                       (526)          200          (951)
    Increase (decrease) in trade payables                                     (60)         (219)          440
    Increase (decrease) in other accounts payable and accrued
      expenses                                                                126          (444)          295
    Increase (decrease) in deferred revenues                                   34          (568)         (574)
                                                                          -------       -------       -------

Net cash provided by (used in) operating activities                           717        (5,126)          997
                                                                          -------       -------       -------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash paid in conjunction with the acquisition of certain assets
    and liabilities of Vectop, net (a)                                          -          (351)            -
  Deduction of long-term restricted cash                                      313             -             -
  Investment in restricted cash                                                 -           (15)       (1,002)
  Purchase of property, plant and equipment                                  (236)         (411)         (349)
  Increase (decrease) in leasing deposits                                      (6)           22           (23)
  Loans repaid by employees                                                     -             5             -
                                                                          -------       -------       -------

Net cash provided by (used in) investing activities                            71          (750)       (1,374)
                                                                          -------       -------       -------

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from issuance of Ordinary shares and warrants, net                   -         1,006         3,302
  Proceeds from issuance of convertible note, net                               -             -         2,351
  Proceeds from short-term loans                                                -           700             -
  Proceeds from long-term loans                                               288             -             -
  Proceeds from bridge loan                                                   650             -             -
  Repayment of bridge loan                                                   (650)            -             -
  Repayments of current maturities of long-term loans                        (525)         (933)       (1,359)
  Short-term bank credit, net                                                  61           163          (970)
  Exercise of warrants, net                                                     -         1,799             -
  Exercise of options                                                          28            27            50
                                                                          -------       -------       -------

Net cash provided by (used in) financing activities                          (148)        2,762         3,374
                                                                          -------       -------       -------

Increase (decrease) in cash and cash equivalents                              640        (3,114)        2,997
Cash and cash equivalents at the beginning of the year                        350         3,464           467
                                                                          -------       -------       -------

Cash and cash equivalents at the end of the year                          $   990       $   350       $ 3,464
                                                                          =======       =======       =======

NON-CASH TRANSACTIONS:
  Goodwill in respect of Vectop (royalties payable)                           166       $     -       $     -
                                                                          =======       =======       =======
  Issuance expenses related to stamp tax provision                             90       $     -       $     -
                                                                          =======       =======       =======

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,
                                                       2005
                                                      -------

(a)  CASH PAID IN CONJUNCTION WITH THE ACQUISITION
     OF CERTAIN ASSETS AND LIABILITIES OF VECTOP,
     NET (SEE ALSO NOTE 1D):

     Working capital, net                             $   844
     Equipment                                            (62)
     Intangible assets                                 (1,263)
     Deferred revenues                                    130
                                                      -------

                                                      $  (351)
                                                      =======

                                               YEAR ENDED DECEMBER 31,
                                               ------------------------
                                               2006      2005      2004
                                               ----      ----      ----

(b)  SUPPLEMENTAL DISCLOSURES OF CASH FLOW
     ACTIVITIES:

       Net cash paid during the year for:

         Income taxes                          $ 14      $  3      $  3
                                               ====      ====      ====

         Interest                              $307      $396      $290
                                               ====      ====      ====

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, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:- GENERAL

     a.   Rada Electronic Industries Ltd., an Israeli corporation ("the
          Company"), is engaged in the development, manufacture and sale of
          Automated Test Equipment ("ATE") products, avionics equipment and
          aviation data acquisition and debriefing systems.

     b.   As reflected in the consolidated financial statements, as of December
          31, 2006, the Company has an accumulated deficit of $ 61,281. Based on
          continued financial support from the Company's shareholders, existing
          and anticipated orders in 2007, management believes that the
          anticipated cash flows from operations, will enable the Company to
          finance its operations at least through December 31, 2007.

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

     d.   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. Vectop is an
          Israeli company specializing in the design, development, marketing and
          sale of electro-optic equipment and debriefing systems. Vectop's
          assets also include know-how, patents and intellectual property to
          produce off-the-shelf products such as cameras and video recorders,
          which are currently operational onboard aircraft and tanks in Israel
          and other countries. The Company purchased 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 up to $
          500. 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", and the results
          of Vectop operations have been included from the acquisition date
          (February 2005). The purchase price related to the acquisition of
          Vectop was allocated to the fair market value of tangible and
          intangible assets acquired and liabilities assumed at the date of
          acquisition, as detailed below.

          Cash and cash equivalents                           $   30
          Trade receivables                                      601
          Other current assets                                   347
          Equipment                                               62
          Customer relationships (five-year useful life)       1,263
                                                              ------

          TOTAL assets acquired                                2,303
                                                              ------

          Short-term bank credit and loans                       933
          Trade payables                                         810
          Other accounts payable and accrued expenses             49
          Deferred revenues                                      130
                                                              ------

          TOTAL liabilities assumed                            1,922
                                                              ------

          Net assets acquired                                 $  381
                                                              ======


                                     F - 9`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 1:- GENERAL (CONT.)

          Customer relationships were determined by Company's management using
          the discounted cash flows approach and is being amortized on a
          straight-line basis over the expected useful life of five years (see
          also Note 7).

          The following table presents unaudited pro forma results of operations
          and gives effect to the acquisition of Vectop as if the acquisition
          had been consummated at January 1, 2004. The unaudited pro forma
          results of operations are not necessarily indicative of what would
          have occurred had the acquisition been made as of the beginning of
          this period or the results that may occur in the future. Net income
          for the period presented includes amortization of intangible assets
          related to the acquisition of $ 253. The unaudited pro forma
          information is as follows:

                                                                          YEAR ENDED
                                                                         DECEMBER 31,
                                                                            2004
                                                                           -------
                                                                          UNAUDITED
                                                                           -------

          Revenues                                                          $17,187
                                                                            =======
          Net income from continuing operations                             $   910
                                                                            =======
          Basic net income per share from continuing operations             $  0.05
                                                                            =======
          Diluted net income per share from continuing operations           $  0.04
                                                                            =======
          Weighted average number of Ordinary shares in computation of
          basic net earnings per share                                        6,458
                                                                            =======
          Weighted average number of Ordinary shares in computation of
          diluted net earnings per share                                      7,895
                                                                            =======

     e.   As for major customers, see Note 15.

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 reported amounts in
          the financial statements and accompanying notes. Actual results could
          differ from those estimates.


                                     F - 10`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     b.   Financial statements in U.S. dollars:

          Most of the revenues of the Company and its subsidiary are generated
          in U.S. dollars ("dollar"). In addition, a substantial portion of the
          costs of the Company and its subsidiary is incurred in dollars. The
          Company's management believes that the dollar is the currency of the
          primary economic environment in which the Company and its subsidiary
          operate. Thus, their 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. The representative
          exchange rate at December 31, 2006 was U.S. $ 1.00 = NIS 4.225,
          December 31, 2005 was U.S. $ 1.00 = NIS 4.603 and December 31, 2004 -
          NIS 4.308.

     c.   Basis of consolidation:

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

     d.   Cash equivalents and restricted cash:

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

          Restricted cash is invested in a 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
          interest at an average rate of 4.6%.

     e.   Inventories:

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

          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.


                                     F - 11`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          Amounts related to long-term contracts as determined by the percentage
          of completion method of accounting are recorded as "Costs and
          estimated earnings in excess of billings."

     f.   Property, plant and equipment:

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

                                                   %
                                              -----------

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

          Leasehold improvements are 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.

     g.   Intangible assets:

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

          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 using the
          straight-line basis over the expected useful life of five years.

          As for impairment charges included in these financial statements, see
          Note 7.


                                     F - 12`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     h.   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, rather than
          being amortized as previous accounting standards required. In 2006,
          the Company recorded goodwill in respect of additional consideration
          payable in connection with the acquisition of Vectop. The Company
          determines fair value of goodwill using market capitalization and is
          tested for impairment by comparing the fair market value with its
          carrying amount. As of December 31, 2006, no impairment losses have
          been identified.

     i.   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,
          2006, no impairment losses have been identified.

     j.   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.


                                     F - 13`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     k.   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.

     l.   Severance pay:

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

          The value of the deposited funds is based on the cash surrendered
          value of these policies, and includes immaterial profits.

          Severance expense recorded in the statement of operations is net of
          interest and other income accumulated in the deposits. Severance
          expense for the years ended December 31, 2006, 2005 and 2004 amounted
          to $ 43, $ 57 and $ 76, respectively.

     m.   Fair value of financial instruments:

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

          The carrying amount of cash and cash equivalents, restricted cash,
          trade receivables, short-term bank credit and trade payables
          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 approximate their fair
          value.


                                     F - 14`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     n.   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, accordingly, minimal credit risk exists
          with respect to these investments.

          The Company's trade receivables are derived from sales to large and
          solid organizations located mainly in the United States, Europe and
          Israel. The Company performs ongoing credit evaluations of its
          customers and to date has not experienced any material losses. An
          allowance for doubtful accounts is determined with respect to these
          amounts that the Company has determined to be doubtful of collection.
          The allowance is computed for specific debts and the collectibility is
          determined based upon the Company's experience.

          The Company granted loans in prior years to its former CEO and a
          former officer amounting to approximately $ 983 as of December 31,
          2006 and 2005. These loans are partly unsecured and the Company is
          currently in litigation with these officers regarding such loans. If
          not paid, the Company will incur a loss equal to the amount of the
          loan, net of a provision recorded against the loan.

          The Company has no off-balance sheet credit risks.

     o.   Warranty:

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


                                     F - 15`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     p.   Share-based compensation:

          At December 31, 2006, the Company has three stock-based employee
          compensation plans, which are described in Note 11b. Prior to January
          1, 2006, the Company accounted for those plans under the recognition
          and measurement provisions of APB 25, "Accounting for Stock Issued to
          Employees", and related Interpretations, as permitted by FASB
          Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS
          123"). In general, as the exercise price of options granted under
          these plans was equal to the market price of the underlying common
          stock on the grant date, no stock-based employee compensation cost was
          recognized in the statements of operations for the years ended
          December 2005 and 2004.

          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 had unvested options granted to employees upon its
          adoption of SFAS 123(R) on January 1, 2006. The impact of the adoption
          of SFAS 123(R) on January 1, 2006 was an increase of approximately $
          75 thousand on the Company's net loss and $ 0.01 on the basic and
          diluted net loss per share for the year ended December 31, 2006.


                                     F - 16`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          The following table illustrates the effect on net income (loss) and
          net earnings (loss) per share, assuming that the Company had applied
          the fair value recognition provisions of SFAS 123 to options granted
          under the Company's stock options plans in all periods presented prior
          to the adoption of SFAS 123(R). For purposes of this pro forma
          disclosure, the value of the options is estimated using a
          Black-Scholes-Merton option-pricing model and amortized to expense
          over the options' vesting periods.

                                                                       YEAR ENDED DECEMBER 31,
                                                                       -----------------------
                                                                        2005             2004
                                                                       -------         -------

          Net income (loss), as reported                                $(2,329)        $   822
          Deduct - total stock-based employee compensation expense
          under fair value based methods                                   (136)            (73)
                                                                        -------         -------

          Pro forma net income (loss)                                   $(2,465)        $   749
                                                                        =======         =======

          Net earnings (loss) per share:

          Basic net earnings (loss) per share as reported               $ (0.31)        $  0.12
          Pro forma basic net earnings (loss) per share                 $ (0.33)        $  0.12
          Diluted net earnings (loss) per share as reported             $ (0.31)        $  0.09
          Pro forma diluted net earnings (loss) per share               $ (0.33)        $  0.09

          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,
                                       -------------------------
                                        2006     2005     2004
                                       -------  -------  -------

          Expected term                4 years  4 years  2 years
          Dividend yield                  0%       0%       0%
          Expected volatility            54%      66%      68%
          Risk-free interest rate        4.7%     4.4%     2.6%
          Estimated forfeitures          10%       -        -


                                     F - 17`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          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 substantial change 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 Company's historical
          information, with respect to employee options exercised. The Company
          used its historical volatility for calculating volatility in
          accordance with SFAS 123 (R). Estimated forfeitures are based on
          actual historical pre-vesting forfeitures.

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

          Revenues from certain long-term fixed price contracts are recognized
          in accordance with Statement of Position No. 81-1, "Accounting for
          Performance of Construction-Type and Certain Production-Type
          Contracts" ("SOP 81-1"), using contract accounting on a percentage of
          completion method in accordance with the "Input Method". The
          percentage of completion is determined based on the ratio of actual
          costs incurred to total costs estimated to be incurred over the
          duration of the contract. With regard to contracts for which a loss is
          anticipated, a provision is made for the entire amount of the
          estimated loss at the time such loss becomes evident. As of December
          31, 2006, the provision for estimated losses identified is $ 104.

          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.


                                     F - 18`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          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.

          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.


                                     F - 19`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (CONT.)

     r.   Basic and diluted net earnings (loss) per share:

          Basic net earnings (loss) per share are computed based on the weighted
          average number of Ordinary shares outstanding during each year.
          Diluted net earnings (loss) per share are computed based on the
          weighted average number of Ordinary shares outstanding during each
          year, plus dilutive potential Ordinary shares considered outstanding
          during the year in accordance with Statement of Financial Accounting
          Standards No. 128, "Earnings Per Share". Options and warrants to
          purchase 5,335,037 Ordinary shares have been excluded from the
          computation of diluted net earnings per share for the year ended
          December 31, 2004, since their effect is anti-dilutive. For the years
          ended December 31, 2006 and 2005, all outstanding options and warrants
          have been excluded from the computation of diluted net loss per share,
          since their effect is anti-dilutive.

     s.   Recently issued Accounting Standards:

          In September 2006, the Financial Accounting Standards Board ("FASB")
          issued SFAS No. 157, "Fair Value Measurements". This Standard defines
          fair value, establishes a framework for measuring fair value in
          generally accepted accounting principles and expands disclosures about
          fair value measurements. SFAS No. 157 is effective for financial
          statements issued for fiscal years beginning after November 15, 2007
          and interim periods within those fiscal years. Management believes
          this Standard will not have a material effect on its consolidated
          financial statements.

          In June 2006, the FASB issued Interpretation No. 48, "Accounting for
          Uncertainty in Income Taxes" ("FIN 48"), an interpretation of SFAS
          109, "Accounting for Income Taxes". FIN 48 prescribes a comprehensive
          model for how companies should recognize, measure, present and
          disclose in their financial statements uncertain tax positions taken
          or expected to be taken on a tax return. Under FIN 48, tax positions
          shall initially be recognized in the financial statements when it is
          more-likely-than-not the position will be sustained upon examination
          by the tax authorities. Such tax positions shall initially and
          subsequently be measured as the largest amount of tax benefit that is
          greater than 50% likely of being realized upon ultimate settlement
          with the tax authority assuming full knowledge of the position and all
          relevant facts. FIN 48 also revises disclosure requirements to include
          an annual tabular rollforward of unrecognized tax benefits. The
          provisions of this Interpretation are required to be adopted for
          fiscal periods beginning after December 15, 2006. The Company will be
          required to apply the provisions of FIN 48 to all tax positions upon
          initial adoption with any cumulative effect adjustments to be
          recognized as an adjustment to retained earnings. Based on Company's
          initial evaluation as of December 31, 2006, the Company does not
          believe that FIN 48 will have a material impact on its financial
          statements.

          In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
          for Financial Assets and Financial Liabilities," ("SFAS No. 159"),
          which permits companies to choose to measure certain financial
          instruments and other items at fair value that are not currently
          required to be measured at fair value. SFAS No. 159 is effective for
          fiscal years beginning after November 15, 2007. The Company will adopt
          SFAS No. 159 no later than January 1, 2008. The Company has not yet
          determined the effect that the adoption of SFAS No. 159 will have on
          its consolidated financial statements.


                                     F - 20`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

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,
                                                       ---------------------
                                                        2006          2005
                                                       -------       -------

          Costs incurred on uncompleted contracts      $ 6,758       $ 7,625
          Estimated earnings                             1,612           435
                                                       -------       -------

                                                         5,146         7,190
          Less - billings and progress payments          4,478         5,794
                                                       -------       -------

                                                       $   668       $ 1,396
                                                       =======       =======

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


          Costs incurred on uncompleted contracts      $ 3,706       $ 7,426
          Estimated earnings                             2,005         1,380
                                                       -------       -------

                                                         5,711         8,806
          Less - billings and progress payments          5,996         9,197
                                                       -------       -------

                                                       $  (285)      $  (391)
                                                       =======       =======

NOTE 4:- INVENTORIES

                                          DECEMBER 31,
                                       ------------------
                                        2006        2005
                                       ------      ------

     Raw materials and components      $1,852      $1,348
     Work in progress                     523         541
     Finished goods                        93          53
                                       ------      ------

                                       $2,468      $1,942
                                       ======      ======

     Write-offs of inventories for the years ended December 31, 2006, 2005 and
     2004 amounted to $ 29, $ 342 and $ 0, respectively. The write-offs in 2006
     and 2005 was due to slow-moving items and excess inventories and was
     presented as cost of revenues.


                                     F - 21`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 5:- LONG-TERM RECEIVABLES

                                                  DECEMBER 31,
                                                 --------------
                                                 2006      2005
                                                 ----      ----

     Loan to former chief executive officer      $705      $705
     Loan to a former officer                     278       278
                                                 ----      ----

                                                 $983      $983
                                                 ====      ====

     See also Note 10a.

NOTE 6:- PROPERTY, PLANT AND EQUIPMENT, NET

                                             DECEMBER 31,
                                         --------------------
                                          2006         2005
                                         -------      -------

     Cost:
      Factory building                   $ 1,940      $ 1,940
      Other building                       1,042        1,042
      Machinery and equipment             14,001       13,785
      Office furniture and equipment         541          521
      Leasehold improvements                  23           23
                                         -------      -------

                                          17,547       17,311
                                         -------      -------
     Accumulated depreciation:
      Factory building                     1,320        1,275
      Other building                         310          263
      Machinery and equipment             12,140       11,453
      Office furniture and equipment         396          368
      Leasehold improvements                  22           21
                                         -------      -------

                                          14,188       13,380
                                         -------      -------

     Depreciated cost                    $ 3,359      $ 3,931
                                         =======      =======

     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 $ 808, $ 825 and $ 778 for the years ended
     December 31, 2006, 2005 and 2004, respectively.

     As for charges, see Note 10e.


                                     F - 22`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 7:- INTANGIBLE ASSETS, NET AND GOODWILL

                                      DECEMBER 31, 2006                           DECEMBER 31, 2005
                          ------------------------------------------      ------------------------------
                                      GROSS                               GROSS
                          USEFUL     CARRYING    ACCUMULATED AMORTIZED   CARRYING  ACCUMULATED   AMORTIZED
                           LIFE       AMOUNT     AMORTIZATION BALANCE     AMOUNT   AMORTIZATION   BALANCE
                          ------      ------      ----------  ------      ------      ------      ------
                          (YEARS)
                          ------

     Amortized
       intangible
       assets:
     Test Systems
       Programs Sets
       ("TPS")            5 - 10      $8,275      $ *) 7,135  $1,140      $8,275      $6,841      $1,434
     Customer
       relationships        5          1,263             497     766       1,263         228       1,035
                                      ------      ----------  ------      ------      ------      ------

     Total                            $9,538      $    7,632  $1,906      $9,538      $7,069      $2,469
                                      ======      ==========  ======      ======      ======      ======

     *)   Includes impairment charges of $ 19.

     Amortization expense was $ 544, $ 503 and $ 275 for the years ended
     December 31, 2006, 2005 and 2004, respectively. The expected amortization
     expense over the next six years is approximately as follows:

     2007                                          $        500
     2008                                                   421
     2009                                                   421
     2010                                                   211
     2011 and thereafter                                    353
                                                   ------------

                                                   $      1,906
                                                   ============

     The weighted average useful life of the intangible assets is five years.
     Impairment of Test System Programs Sets ("TPSs") was $ 19, $ 0 and $ 0 for
     the years ended December 31, 2006, 2005 and 2004, respectively and included
     in cost of revenues. The impairment of $ 19 was recorded in 2006 since the
     Company does not anticipate future revenues on certain specific TPSs.

     In 2006, the Company recorded $ 166 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.


                                     F - 23`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 8:- SHORT-TERM BANK CREDIT AND LOANS

     a.   Short-term bank credit:

                                                  DECEMBER 31,
                                                 --------------
                                                 2006      2005
                                                 ----      ----
          Short-term:
            Bank credit in NIS (1)               $238      $166
            Bank credit in U.S. dollars (2)         -        11
                                                 ----      ----

                                                 $238      $177
                                                 ====      ====

          (1)  The interest rate at December 31, 2006 is 8.85% (December 31,
               2005 - 9.3%).

          (2)  The interest rate at December 31, 2005 is 13.6%.

          The revolving line of credit is due in December 2007 and will be
          renewed on an annual basis.

          As for collaterals, see Note 10e.

     b.   Long-term loans

                                           DECEMBER 31,
                                          --------------
                                          2006      2005
                                          ----      ----

          Loan in NIS (1)                 $288      $  -
          Loan in U.S. dollars (2)         175       700
                                          ----      ----

                                          $463      $700
                                          ====      ====

          Current maturities
            Loan in NIS (1)               $146      $  -
            Loan in U.S. dollars (2)       175       700
                                          ----      ----

                                          $321      $700
                                          ====      ====

          (1)  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,
               2006 is 8.6%.

          (2)  The principal of the loan is due in 15 monthly installments from
               January 2006 until April 2007 and the interest is payable monthly
               from March 2005. The interest rate at December 31, 2006 and 2005
               is 5.1%.

          The Company's line of credit (including loans) is $ 763, out of which
          $ 701 was utilized at December 31, 2006.


                                     F - 24`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 9:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

                                                                    DECEMBER 31,
                                                                 ------------------
                                                                  2006        2005
                                                                 ------      ------

     Payroll and related accruals                                $  953      $  980
     Provision for legal proceedings                                561         576
     Accrued royalties                                              861         691
     Accrued commissions                                            294         338
     Contracts in progress - provision for estimated losses         104          68
     Accrued expenses                                               401         539
     Other                                                          245          25
                                                                 ------      ------

                                                                 $3,419      $3,217
                                                                 ======      ======

NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES

     a.   As of December 31, 2006, the Company was a party to various legal
          proceedings, including the following:

          1.   In June 1998, the Company's Board accepted the resignation of the
               Company's former CEO. In December 1998, the former CEO commenced
               legal proceedings against the Company in the Tel-Aviv Labor
               Court, claiming approximately $ 440 in respect of salary,
               severance pay, vacation pay and other fringe benefits. The former
               CEO also claimed that a personal loan that was provided to him by
               the Company had been forgiven and that the Company is to bear the
               tax in respect thereof. In May 2001, an additional claim of
               approximately $ 220 was filed by the former CEO against the
               Company in the Tel-Aviv District Court for damages allegedly
               caused to him as a result of attachment imposed on certain of his
               assets by the Company that was subsequently cancelled by the
               Court. In addition, in 2001, the Company filed a claim against a
               former director. In the event the former CEO's claim in the Labor
               Court is accepted by the Court, damages in the amount of $ 250
               should be covered by the former director. The Company filed
               additional lawsuits against the former CEO and a former director
               in the amount of $ 260 for funds that they allegedly transferred
               from the Company to a third party. In September 1999, the Company
               filed a lawsuit against the former CEO and the former director
               with the District Court of Tel-Aviv in the amount of $ 1,400 for
               damages caused to the Company in the purchase of a subsidiary and
               negligence of management. In August 2000, the Company filed an
               additional lawsuit against the former CEO in the amount of
               approximately $ 440 regarding the repayment of the loan provided
               to him. Management believes, based on the advice of its legal
               counsel, that the Company has a strong defense against all claims
               made against it.


                                     F - 25`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES

          2.   In 1999 and 2000, the former CEO and his son filed a number of
               complaints against the Company's president and are seeking
               damages for alleged slander by him in the amount of approximately
               $ 750. The claim by the former CEO was withdrawn and replaced by
               a new claim filed in 2004, for an amount of NIS 1 million ($ 235
               at December 31, 2006) while his son's claim was dismissed and an
               appeal to the Supreme Court was withdrawn. Management believes,
               based on the advice of its legal counsel, that the Company has a
               strong defense against the allegations and, accordingly, did not
               record any provision.

          3.   In 2001, a former employee and officer of the Company filed a
               claim against the Company with the Tel-Aviv Labor Court claiming
               approximately $ 520 in respect of severance pay, vacation pay and
               other fringe benefits. This claim was filed as a counter-claim to
               a claim filed by the Company in 2000, in the amount of $ 260 in
               respect of the repayment of a personal loan that was provided to
               the former employee. The Company's claim was allowed in part
               while the employers' claim was dismissed. The Company appealed to
               the National Labor Court.

          4.   In 2001, a former director filed a claim against the Company,
               claiming that he is entitled to 200,000 (after the reverse split)
               options to purchase Ordinary shares of the Company. Management
               believes, based on the advice of its legal counsel, that the
               claim does not have any merit and, accordingly, did not record
               any provision.

          5.   In 2000, a claim was filed by an Israeli firm against the
               Company, claiming that it served as a broker in an agreement
               signed between the Company and a potential investor and is
               entitled to commissions (or finder's fee) in the amount of $ 250.
               The claim was dismissed by the Court and Plaintiff appealed to
               the Supreme Court. Management believes, based on the advice of
               its legal counsel, that there is no merit to the appeal.

          6.   In 2005, the former CEO of the Company filed a claim against the
               Chairman of the Company (in respect of which the Chairman is
               entitled to indemnification) alleging that the Chairman has
               committed fraud and negligent misrepresentation of him. The
               former CEO claims that, as a result, he was compelled to retire
               from his position, resulting in a loss of a salary and benefits
               in the aggregate amount of approximately $ 565. Management
               believes, based on the advice of its legal counsel, that there is
               no merit to the claim and that the Company has a strong defense
               against the allegations and, accordingly, did not record any
               provision.

          7.   In 2006, the former CEO filed a claim against two of the Board
               members seeking damages in the amount of NIS 0.5 million ($ 118
               at December 31, 2006). In essence, this claim is identical to the
               claim against the Company and against its Chairman, which is
               described in 6 above. Defense has not as yet been submitted on
               behalf of the defendants, since the issue of the competency of
               the Court has to be decided first.


                                     F - 26`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

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

          8.   In 2006, the Company filed a suit before an arbitrator seeking to
               recover $ 445 from Parado Technologies Ltd., formerly known as
               Vectop Ltd. ("Vectop"). Consequently, Vectop counterclaim seeking
               an order that the Company will transfer an amount of $ 181 to a
               trust account and with respect to royalties due to Vectop for
               2005 and 2006.

               In accordance with the agreement with Vectop (see Note 1d),
               Vectop is entitled to receive payments contingent upon sales made
               by the Company of Vectop's products. According to the agreement,
               the first $ 200 due to Vectop should have been transferred to a
               trust account for the purpose of indemnifying the Company for
               possible future damages.

               In the claim against Vectop, the Company asserts that it is
               entitled to compensation because of misrepresentations made by
               Vectop during the negotiations, in connection with five of the
               products sold by Vectop. It is alleged that Vectop breached the
               agreement, by not providing timely financial statements
               reconciled to US GAAP. The Company asserts that it has a right of
               off-set against payments due to Vectop under the agreement.

               Vectop alleges that the Company is obliged to transfer to the
               trust account the part of the immediate payment of royalties due
               from the 2005 sales and that it can only be indemnified from this
               trust account under a final decision of the arbitrator. The
               Company believes that there is a possibility that the arbitrator
               will order the transfer of said amount to the trust account until
               a final award is made. As for the outcome of the arbitration,
               management believes, based on the advice of its legal counsel,
               that the matter is still in its early stages and it is therefore
               not possible to assess the risk involved in Vectop's claim.

          9.   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
               accrued 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.


                                     F - 27`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

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

     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 $ 685 as of
          December 31, 2006. The total amount of royalties charged to operations
          for the years ended December 31, 2006, 2005 and 2004 was approximately
          $ 17, $ 27 and $ 60, respectively.

     c.   Research and development projects undertaken by the Company were
          partially financed by the Binational Industrial Research and
          Development Fund ("BIRD") Foundation. The Company is committed to pay
          royalties to the BIRD Foundation at a rate of 5% of sales proceeds
          generating from projects for which the BIRD Foundation provided
          funding up to 150% of the sum financed by the BIRD Foundation. The
          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 $ 2,097 as of December 31, 2006. The
          total amount of royalties charged to operations for the years ended
          December 31, 2006, 2005 and 2004 was approximately $ 14, $ 12 and $
          20, respectively.

     d.   The Company's offices in Netanya are rented under a non-cancelable
          operating lease expiring January 31, 2008. 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, 2006, are approximately as follows:

          2007                                         $         721
          2008                                                   492
          2009                                                    94
                                                       -------------

                                                       $       1,307
                                                       =============

          Lease expense for the years ended December 31, 2006, 2005 and 2004 was
          $ 479 $ 471 and $ 508, respectively.

     e.   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.

     f.   The Company provides bank guarantees to its customers in the ordinary
          course of business. These guarantees are provided to customers 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 as of December 31, 2006 is
          approximately $ 1,354.


                                     F - 28`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

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 earnings (loss) per share amounts in these financial
          statements have been restated for all prior periods to reflect the
          reverse stock split.

          In April 2005, the Company completed a private placement to
          institutional investors. The Company issued 321,978 Ordinary shares
          for total proceeds of $ 1,091 ($ 1,006 net of issuance expenses) and
          warrants to purchase up to an aggregate of 625,000 Ordinary shares at
          an exercise price of $ 6.30 per share. At the same time, the investors
          exercised additional investment rights to purchase 303,022 of the
          Company's Ordinary shares at an exercise price of $ 6.30 per share,
          for total amount of $ 1,909 ($ 1,761 net of issuance expenses) (see
          also c. below).

          In July 2004, the Company issued 600,000 shares, an aggregate of $
          3,000 principal amount of convertible notes, additional investment
          rights to purchase up to an aggregate of 366,667 Ordinary shares at an
          exercise price of $ 6.30 per share, (with a term of two years
          commencing six months following the closing) and warrants to purchase
          up to an aggregate of 312,500 Ordinary shares at an exercise price of
          $ 7.50 per share (for a term of five years commencing six months
          following the closing) to investors in a private placement for a total
          consideration of $ 5,880 ($ 5,712 net of issuance expenses) (see also
          c. below).

          The consideration was allocated based on the relative fair values of
          the Ordinary shares, notes, additional investment rights and warrants
          in accordance with APB No. 14, "Accounting for Convertible Debt and
          Debt Issued with Stock Purchase Warrants". The convertible notes bear
          interest at a rate of six-month LIBOR plus 2.5%. The principal is due
          in July 2007 and the interest is payable in quarterly installments
          until July 2007. The notes are convertible to Ordinary shares at a
          conversion price of $ 6.30. In connection with the issuance of the
          notes, additional investment rights and warrants, $ 180 was recorded
          as a beneficial conversion feature in accordance with EITF 98-5,
          "Accounting for Convertible Securities with Beneficial Conversion
          Features or Contingently Adjustable Conversion Ratios".


                                     F - 29`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 11:- SHAREHOLDERS' EQUITY (CONT.)

          The total amount of the deemed discount on the notes as a result of
          the allocated proceeds attributable to the warrants, additional
          investment rights and the beneficial conversion feature amounting to $
          760, is amortized over the term of the notes using the interest
          method. At December 31, 2006, the unamortized balance on the deemed
          discount on the convertible notes was $ 142. The fair value of the
          warrants and additional investment rights was based on a valuation
          prepared using the Black-Scholes-Merton option-pricing model, assuming
          a risk free interest of 2.64% and 3.69%, respectively, a volatility
          factor of 0.67 and 0.68, respectively, dividend yield of 0% and
          contractual life of two years and five years, respectively. In
          addition, the valuation considered that the warrants and additional
          investment rights were restricted for the first six months, the
          warrants were not traded on the market at any time, and the underlying
          asset had a low marketability. The valuation result was judged to be
          reasonable by comparison to benchmarks in similar circumstances. The
          Company's management is responsible for the valuation.

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

     b.   Stock option plans:

          In 1996, 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 80,000, 346,667 and
          1,166,667 Ordinary shares (in 2006 the Company's Board approved
          increase of 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 10 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 third vests 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, 2006, 166,432
          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.


                                     F - 30`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 11:- SHAREHOLDERS' EQUITY (CONT.)

          Transactions related to the above Plans (including warrants to
          directors) during the year ended December 31, 2006 were as follows:

                                                        YEAR ENDED DECEMBER 31, 2006
                                           --------------------------------------------------
                                                                       WEIGHTED
                                                                       AVERAGE
                                                           WEIGHTED    REMAINING
                                                            AVERAGE   CONTRACTUAL   AGGREGATE
                                           AMOUNT OF       EXERCISE      TERM       INTRINSIC
                                            OPTIONS          PRICE    (IN YEARS)      VALUE
                                           ----------       --------   --------      --------

          Options outstanding at
            beginning of year                 705,300       $   3.79       5.29      $      -
          Granted                             400,000       $   2.40       6.07      $      -
          Exercised                           (13,833)      $   2.07       6.07      $      -
          Expired                             (11,467)      $   4.09          -      $      -
          Forfeited                           (22,533)      $   3.70       4.52      $      -
                                           ----------

          Options outstanding at end
            of year                         1,057,467       $   3.31       4.85      $      -
                                           ==========       ========   ========      ========

          Vested and expected to
            vest at December 31, 2006       1,025,864       $   3.34       4.82      $      -
                                           ==========       ========   ========      ========

          Exercisable options at end
            of year                           759,578       $   3.63       4.47      $      -
                                           ==========       ========   ========      ========

          No share-based employee compensation expense was recorded for the
          years ended December 31, 2005 and 2004 under APB 25. Share based
          compensation for the year ended December 31, 2006 was $ 221.

          The weighted-average grant-date fair value of options granted during
          the years ended December 31, 2006, 2005 and 2004 was $ 0.34, $ 0.55
          and $ 0.44, 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, 2006 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, 2006. Total intrinsic value of
          options exercised for the years ended December 31, 2006, 2005 and 2004
          was $ 13, $ 98 and $ 183, respectively. As of December 31, 2006, there
          was $ 270 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 one year.


                                     F - 31`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 11:- SHAREHOLDERS' EQUITY (CONT.)

          The options outstanding as of December 31, 2006 have been separated
          into ranges of exercise prices, as follows:

                                       OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                               ---------------------------------         ------------------
                                            WEIGHTED
                                             AVERAGE
                                            REMAINING    WEIGHTED                   WEIGHTED
                                  AT       CONTRACTUAL   AVERAGE           AT        AVERAGE
             RANGE OF         DECEMBER 31,   LIFE (IN    EXERCISE      DECEMBER 31, EXERCISE
          EXERCISE PRICE         2006         YEARS)      PRICE           2006       PRICE
          ---------------      ---------       ---        ------         ------      ------

          $  2.07 - 3.00         586,000      5.02        $ 2.30        319,334      $ 2.21
          $  3.87 - 6.00         436,667      5.21        $ 3.97        405,444      $ 4.00
          $  9.28 - 12.38         24,133      1.42        $10.16         24,133      $10.16
          $ 14.63 - 20.25         10,667      1.5         $16.88         10,667      $16.88
                               ---------                                -------

                               1,057,467                  $ 3.31        759,578      $ 3.63
                               =========                  ======        =======      ======

     c.   Warrants:

          As of December 31, 2006, warrants to purchase 5,493,282 Ordinary
          shares were outstanding.

          In April 2005, in connection with the issuance of Ordinary shares
          described in a. above, the Company granted the purchasers of the
          Ordinary shares, warrants to purchase up to an aggregate of 625,000
          Ordinary shares at $ 6.30 per share, which expire on the later of (i)
          24 months from the date of the grant, and (ii) 24 months from the date
          of the shareholder approval, ratifying the issuance of the Ordinary
          shares and the warrants under the Securities Purchase Agreement to the
          selling shareholders and authorizing the increase of the Company's
          authorized Ordinary shares from 15,000,000 Ordinary shares to no less
          than 15,833,333 Ordinary shares

          In July 2004, in connection with the issuance of Ordinary shares and
          convertible notes described in a. above, the Company granted the
          investors additional investment rights to purchase up to an aggregate
          of 366,667 Ordinary shares at an exercise price of $ 6.30 per share,
          (with a term of two years commencing six months following the closing)
          and warrants to purchase up to an aggregate of 312,500 Ordinary shares
          at an exercise price of $ 7.50 per share (for a term of five years
          commencing six months following the closing). In April 2005, 303,022
          additional investment rights were exercised.


                                     F - 32`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 12:- TAXES ON INCOME

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

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

     b.   Tax benefits under the Law for the Encouragement of Industry (Taxes),
          1969:

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

     c.   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: 2004 - 35%, 2005 - 34%, 2006 - 31%, 2007 - 29%,
          2008 - 27%, 2009 - 26%, 2010 and thereafter - 25%.

     d.   As of December 31, 2006, the net operating tax loss carryforward
          relating to the Company in Israel amounted to approximately $ 49,000,
          including a carryforward capital loss amounting to approximately $
          2,955. Carryforward losses in Israel may be carried forward
          indefinitely and may be offset against future taxable income.

          As of December 31, 2006, carryforward tax losses relating to the
          subsidiary (in China), amounted to approximately $ 239.

          As the Company believes that it is more likely than not that the tax
          assets in respect of these carryforward losses amounting to
          approximately $ 15,300 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 tax assets relating to net operating loss
          carryforward and other temporary differences due to the uncertainty of
          the realization of such tax assets.


                                     F - 33`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 12:- TAXES ON INCOME (CONT.)

     f.   Income (loss) before income taxes:

                              YEAR ENDED DECEMBER 31,
                        -----------------------------------
                         2006          2005          2004
                        -------       -------       -------

          Domestic      $(2,085)      $(2,254)      $   937
          Foreign            85           (75)         (115)
                        -------       -------       -------

                        $(2,000)      $(2,329)      $   822
                        =======       =======       =======

NOTE 13:- FINANCIAL EXPENSES, NET

                                                                YEAR ENDED DECEMBER 31,
                                                              -----------------------------
                                                               2006        2005        2004
                                                              -----       -----       -----

     Income:
        Foreign currency exchange differences                 $  96       $ 164       $ 234
        Interest on cash equivalents and restricted cash         56          20           4
                                                              -----       -----       -----

                                                                152         184         238
                                                              -----       -----       -----
     Expenses:
        Interest on convertible note                            231         181          64
        Amortization expenses on convertible note and
          deferred expenses                                     323         234         115
        Foreign currency exchange differences                   240         156          79
        Interest on loans and other credit balances              35          68          82
        Bank commissions                                         98         100         116
        Others                                                    -          69          30
                                                              -----       -----       -----

                                                                927         808         486
                                                              -----       -----       -----

                                                              $(775)      $(624)      $(248)
                                                              =====       =====       =====

NOTE 14:- RELATED PARTY TRANSACTIONS

     There are no related party balances as of December 31, 2006 and 2005, and
     no related party transactions for the years ended December 31, 2006, 2005
     and 2004.


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).


                                     F - 34`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

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

     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,
                             ---------------------------------
                              2006         2005         2004
                             -------      -------      -------

          North America      $ 4,666      $ 5,096      $ 4,715
          Europe                 792          586        3,022
          Israel               4,265        5,546        4,998
          Others               3,314        2,193        1,425
                             -------      -------      -------

          Total              $13,037      $13,421      $14,160
                             =======      =======      =======

     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,
                        --------------------
                        2006    2005    2004
                        ----    ----    ----
                                  %
                        --------------------

          Customer A      *)      12      19
          Customer B      20      14      *)
          Customer C      38      21      *)
          Customer D       -      *)      10
          Customer E      *)       -      11
          Customer F      *)      *)      17
          Customer G      *)      12      *)

          *)   Less than 10%.

     d.   Long-lived assets by geographic areas:

                         DECEMBER 31,
                      ------------------
                       2006        2005
                      ------      ------

          Israel      $4,518      $5,332
          China          926       1,108
                      ------      ------

                      $5,444      $6,440
                      ======      ======


                                     F - 35`

`RADA ELECTRONIC INDUSTRIES LTD.AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA

NOTE 16:- NET EARNINGS (LOSS) PER SHARE

     The following table sets forth the computation of basic and diluted net
     earnings (loss) per share:

                                                                                 YEAR ENDED DECEMBER 31,
                                                                  -------------------------------------------------
                                                                     2006                2005               2004
                                                                  ------------       ------------       ------------

     Numerator:

     Net income (loss)                                            $     (2,000)      $     (2,329)      $        822
                                                                  ============       ============       ============

     Denominator:

     Weighted average number of Ordinary shares outstanding
        during the year used to compute basic net earnings
        (loss) per share (in thousands)                                  8,723              7,504              6,458
     Incremental shares attributable to exercise of
        outstanding options and warrants (assuming proceeds
        would be used to purchase treasury stock) (in
        thousands)                                                           -                  -              1,437
                                                                  ------------       ------------       ------------

     Weighted average number of Ordinary shares outstanding
        during the year used to compute diluted net earnings
        (loss) per share (in thousands)                                  8,723              7,504              7,895
                                                                  ============       ============       ============

     Basic net earnings (loss) per share                          $      (0.23)      $      (0.31)      $       0.12
                                                                  ============       ============       ============

     Diluted net earnings (loss) per share                        $      (0.23)      $      (0.31)      $       0.09
                                                                  ============       ============       ============


                                     F - 36`

`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/ Herzle Bodinger
                                           -----------------------
                                           Herzle Bodinger
                                           President and Chief Executive Officer

Dated:  March 29, 2007


                                       67`