Edgar Filing: RADA ELECTRONIC INDUSTRIES LTD

SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 20-F

[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
12 (g) OF THE SECURITIES EXCHANGE ACT OF 1934
or
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
or
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____

Commission file number: 0-15375

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

Israel
(Jurisdiction of
Incorporation or Organization)

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

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

None

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

Ordinary Shares, NIS 0.005 Par Value
(Title of Class)

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

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

Ordinary Shares, par value NIS 0.005 per share...............18,542,383

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

Yes X No __

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

Item 17 __ Item 18 X

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

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..............3
D. Risk Factors...........................................3
ITEM 4. INFORMATION ON THE COMPANY......................................14
A. History and Development of the Company................14
B. Business Overview.....................................14
C. Organizational Structure..............................25
D. Property, Plants and Equipment........................25
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................26
A. Operating Results.....................................26
B. Liquidity and Capital Resources.......................33
C. Research and Development, Patents and Licenses........36
D. Trend Information.....................................37
E. Off-Balance Sheet Arrangements........................37
F. Tabular Disclosure of Contractual Obligations.........37
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................38
A. Directors and Senior Management.......................38
B. Compensation..........................................42
C. Board Practices.......................................42
D. Employees.............................................48
E. Share Ownership.......................................49
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS...............52
A. Major Shareholders....................................52
B. Related Party Transactions............................53
C. Interests of Experts and Counsel......................54
ITEM 8. FINANCIAL INFORMATION...........................................54
A. Consolidated Statements and Other Financial
Information..........................................54
B. Significant Changes...................................57
ITEM 9. THE OFFER AND LISTING...........................................57
A. Offer and Listing Details.............................57
B. Plan of Distribution..................................58
C. Markets...............................................59
D. Selling Shareholders..................................59
E. Dilution..............................................59
F. Expense of the Issue..................................59
ITEM 10. ADDITIONAL INFORMATION..........................................59
A. Share Capital.........................................59
B. Memorandum and Articles of Association................59
C. Material Contracts....................................62

D. Exchange Controls.....................................62
E. Taxation..............................................62
F. Dividend and Paying Agents............................71
G. Statement by Experts..................................71
H. Documents on Display..................................71
I. Subsidiary Information................................72
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS......72
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES..........73

PART II.....................................................................73

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.................73
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS
AND USE OF PROCEEDS...........................................73
ITEM 15. CONTROLS AND PROCEDURES.........................................73
ITEM 16. RESERVED........................................................74
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT................................74
ITEM 16B. CODE OF ETHICS..................................................74
ITEM 16C. PRINCIPAL ACCOUNTING FEES AND SERVICES..........................74
ITEM 16D. EXEMPTIONS FROM THE LISTING REQUIREMENTS AND STANDARDS FOR
AUDIT COMMITTEE...............................................75
ITEM 16E. PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATES AND
PURCHASERS....................................................75

PART III....................................................................75

ITEM 17. FINANCIAL STATEMENTS............................................75
ITEM 18. FINANCIAL STATEMENTS............................................75
ITEM 19. EXHIBITS........................................................76
S I G N A T U R E S.........................................................78

This Annual Report on Form 20-F contains various "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
within the Private Securities Litigation Reform Act of 1995, as amended. Such
forward-looking statements reflect our current view with respect to future
events and financial results. Forward-looking statements usually include the
verbs "anticipates," "believes," "estimates," "expects," "intends," "plans,"
"projects," "understands" and other verbs suggesting uncertainty. 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. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof. We undertake no obligation to publicly release any
revisions to these forward-looking statements to reflect events or circumstances
after the date hereof or to reflect the occurrence of unanticipated events.

Unless specifically indicated otherwise, all numbers of ordinary shares
and per share data in this annual report reflect a two and one half share for
one share reverse stock split of our ordinary shares effected on April 4, 2001.

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, 2001, 2002 and 2003 and the consolidated balance
sheet data as of December 31, 2002 and 2003 from our audited consolidated
financial statements and notes included in this annual report. We derived the
consolidated statements of operations data for the years ended December 31, 1999
and 2000, and the consolidated balance sheet data as of December 31, 1999, 2000
and 2001 from our audited consolidated financial statements that are not
included in this annual report.

Year Ended December 31,
-------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(U.S. dollars in thousands, except per share data)

INCOME STATEMENT DATA:
Revenues.............................. $10,373 $3,816 $8,342 $10,399 $12,315
Cost of revenues...................... 12,707 5,307 7,416 9,223 9,592
------ ----- ----- ----- -----

Year Ended December 31,
-------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(U.S. dollars in thousands, except per share data)

Gross profit (loss)................... (2,334) (1,491) 926 1,176 2,723
Research and development
expenses........................... 428 730 534 122 -
Marketing, selling, general and
administrative expenses............ 4,316 3,612 3,617 3,809 2,698
Operating income (loss) from
continuing operations.............. (7,078) (5,833) (3,225) (2,035) 25
Financial income (expenses), net...... (1,141) (861) (210) (364) 708
Other income (expenses), net.......... 505 563 (30) (290) (2)
Operating income (loss)............... (7,714) (6,131) (3,465) (2,689) 731
Equity in loss of affiliated company.. (101) - - - -
Minority interest in losses of
subsidiary............................ 292 32 96 206 27
Income (loss) from continuing
operations......................... (7,523) (6,099) (3,369) (2,483) 758
Gain from disposal of discontinued
segment (net of tax)............... 306 - - - -
Net income (loss)..................... $(7,217) $(6,099) $(3,369) $(2,483) $758
======= ======= ======= ======= ====
Basic net income (loss) per share
from continuing operations......... $(0.77) $(0.46) $(0.24) $(0.15) $0.04
====== ====== ====== ====== =====
Diluted net income (loss) per
share from continuing operations $(0.77) $(0.46) $(0.24) $(0.15) $0.04
====== ====== ====== ====== =====
Basic income per share from
discontinued operations............. $ 0.03 $ - $ - $ - $ -
====== === === === ===
Diluted net income per share from
discontinued operations............. $ 0.03 $ - $ - $ - $ -
====== === === === ===

Basic net earnings (loss) per share... $(0.74) $(0.46) $(0.24) $(0.15) $0.04
====== ====== ====== ====== =====
Diluted net earnings (loss) per share. $(0.74) $(0.46) $(0.24) $(0.15) $0.04
====== ====== ====== ====== =====
Weighted average number of shares
used to compute basic net
income(loss) per share................ 9,722 13,305 13,817 16,555 18,511
===== ====== ====== ====== ======
Weighted average number of shares
used to compute diluted net income
(loss) per share...................... 9,722 13,305 13,817 16,555 19,704
===== ====== ====== ====== ======

As of December 31,
---------------------------------------------------------
1999 2000 2001 2002 2003
---- ---- ---- ---- ----
(U.S. dollars in thousands)

BALANCE SHEET DATA:
Working capital deficiency........... $(8,419) $(8,668) $(9,446) $(8,055) $(2,716)
Total assets......................... 19,918 18,874 16,332 14,607 14,549
Short-term credits and current maturities
of long-term debt.................. 5,378 5,624 5,920 5,697 1,123
Long-term debt, net of current maturities 811 8 - - 1,220
Shareholders' equity................. 4,329 4,069 700 485 2,878

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 maintain profitable
operations in the future.

We reported a net profit of $758,000 for the fiscal year ended December
31, 2003. As of December 31, 2003 our accumulated deficit was $57.7 million. No
assurance can be given that we will be able to maintain our current level of
revenues and profitability in the future.

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

Our working capital requirements and the cash flow provided by 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 2003. In June 2003 we
reached a settlement agreement with Bank Hapoalim B.M. and Bank Leumi Le-Israel
B.M. that significantly improved our financial position. We may need to raise
additional funds for a number of uses, including:

o working capital and operating activities;

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 acceptable terms or at
all. If we cannot raise needed funds on acceptable 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 SmallCap Market.

If adequate funds are not available to us, our business, results of
operations and financial condition will be materially and adversely affected.
Any equity or debt financings, if available at all, 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 cannot assure you that our shareholders or our banks will continue to provide
sufficient funds to finance our operations.

During the four years ended December 31, 2003, we relied predominately
on our principal shareholders and to a lesser degree 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. In June 2003 we also reached an
agreement with Bank Hapoalim B.M. and Bank Leumi Le Israel B.M. to restructure
$3,451,000 of our debt to them. Pursuant to the agreement, we paid the Banks
$1,100,000 on account of our debt to them and they forgave $1,100,000 in debt
and agreed to accept warrants to purchase 3,781,995 of our ordinary shares,
exercisable at par value per share, to purchase ordinary shares in lieu of
$1,251,000 of debt. We cannot assure you that our shareholders or Banks will
continue to provide us with funds when requested, and that such funds, if any,
will be sufficient to finance our operations. The failure of our principal
shareholders or other investors to provide us with the necessary financing may
result in a significant scaling back or elimination of some aspects of our
operations.

Our growth strategy is based on our forming close business relationships and
cooperation with major aerospace corporations; should these relationships not
materialize into significant agreements or existing contracts fail to be
profitably implemented, we may not be able to implement our growth strategy.

In line with our growth strategy, we have entered into memoranda of
understanding and other co-operation agreements with Smiths Electronic Systems
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.

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 J.C. AIR, Inc., Aerospatiale Avionique and
Avtron. Our principal competitors in the avionics market are Harris, Rockwell
Collins, Honeywell, Elbit Systems Ltd., Israeli Aircraft Industries, R.S.L. Ltd.
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-Shean 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-Shean 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-Shean 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 $9.6 million, or 78% of revenues in 2003, $6.9 million, or
66% of revenues, in 2002 and $3.1 million, or 37% of revenues, in 2001. The
military budgets of a number of countries may be reduced in the future. Declines
in government 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.

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 to us their products
or designs, 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
cannot assure you that we will 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
cannot assure you that we will 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, 2003
were as follows:

Percentage of Revenues
--------------------------
2001 2002 2003
---- ---- ----
Smiths Electronic Systems................. 6% 34% 22%
The Boeing Company........................ 16% 19% 14%
Israeli Ministry of Defense............... 12% 3% 11%
Israel Aviation Industries................ 2% 6% 12%
Portuguese Air Force...................... - 4% 19%
Tarom Romanian Air Transport.............. 17% 1% -

We anticipate that a significant portion of our future revenues will
continue to be derived from sales to a small number of customers. Further, in
accordance with our growth strategy, we are attempting to expand the number of
our customers while building long-term relationships with them. 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 cannot assure you
that we will 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.

We rely on the airline industry and the continued financial crises in this
industry adversely affect 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 cannot assure you that we will be successful in developing and
marketing enhancements to our products that will respond to technological
change, evolving industry standards or customer requirements; that we will not
experience difficulties that could delay or prevent the successful development,
introduction and sale of such enhancements; or that such enhancements will
adequately meet the requirements of the market and 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, 74% of our
sales in 2003, 86% of our sales in 2002 and 76% of our sales in 2001 were
export. This subjects us to many risks inherent in 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 cannot assure you that we will be able to sustain or increase
revenues from international operations or that we will not encounter significant
difficulties in connection with the sale of our products in international
markets or that one or more of these factors will not have a material adverse
effect on our future revenues and, as a result, 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, there can be no assurance that we will be able to do
so or that such transactions, if entered into, will 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. There can be no assurance such fluctuations in the
future will not have a material adverse effect on revenues from international
sales, and consequently, on our business, operating results and financial
condition.

We are dependent on our senior management and key personnel, in particular
Herzle Bodinger, our president and chairman of the board, whose loss would
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 president. 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 affect 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
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.

We may not be able to receive title to the land and buildings of our Chinese
subsidiary and may be required to initiate litigation in order to enforce our
rights to receive title to such properties.

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, which may prevent the disposition of these assets should CACS desire
to do so. Although Tianzu is legally obligated to complete such transfer of
title to the land and the buildings, we can not guarantee that such transfer
will be completed, or that we will not be required to initiate litigation in
order to enforce our rights to receive title to the land and buildings.

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 de-listing of our shares from the Nasdaq SmallCap 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.

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

Our shares have traded on the Nasdaq Stock Market since 1985 and on
Nasdaq SmallCap Market since June 10, 2002. During periods of 2002 and 2003, we
were not in compliance with Nasdaq's continued listing requirements as our
shareholders' equity fell below the Nasdaq minimum requirement of $2.5 million.
As a result of our agreement with our Banks, we achieved compliance, and in
November 2003, a Nasdaq Listing Qualification Panel issued a decision to
continue the listing of our shares on the Nasdaq SmallCap Market. However, the
panel required us to timely file reports with the SEC and Nasdaq evidencing that
our shareholders' equity as of December 31, 2003 and June 30, 2004 exceeds $2.5
million. While we met this requirement as of December 31, 2003, we cannot assure
you that our shareholders' equity will continue to be greater than $2.5 million
or that we will be able to satisfy the other listing maintenance requirements.
Furthermore, even if our current listing is maintained, in the event we incur
losses in the future, we would be required to raise additional capital in order
to maintain our listing on the Nasdaq SmallCap Market. Should we fail to raise
the necessary capital in order to satisfy such requirements, our ordinary shares
may be delisted from the Nasdaq SmallCap Market and transferred to the OTC
Bulletin Board.

We do not intend to pay dividends.

We have never declared or paid any cash dividends on our ordinary
shares. We currently intend to retain future earnings, if any, to finance
operations and expand our business and, therefore, do not expect to pay any
dividends in the foreseeable future.

Risks Relating to Our Location in Israel

Conducting business in Israel entails special risks.

We are incorporated under the laws of, and our executive offices,
manufacturing plant and research and development facilities are located in, the
State of Israel. Although most of our sales are made to customers outside
Israel, we are nonetheless directly affected by the political, economic and
military conditions affecting 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, or a significant downturn in
the economic or financial condition of Israel.

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. 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. There is no indication as to how long the current hostilities will
last or whether there will be any further escalation. Any further escalation in
these hostilities or 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.
Furthermore, there are a number of countries that restrict business with Israel
or Israeli companies. Restrictive laws or policies of those countries directed
towards Israel or Israeli businesses may have an adverse impact on our
operations, our financial results or the expansion of our business.

Our results of operations may be negatively affected by the obligation of our
personnel to perform military service.

Many of our executive officers and employees in Israel are obligated to
perform up to 36 days, depending on rank and position, of military reserve duty
annually 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. Our
operations could be adversely affected if the economic conditions in Israel
continue to deteriorate. In addition, due to significant economic measures
proposed by the Israeli Government, there have been several general strikes and
work stoppages in 2003 and 2004, affecting banks, airports and ports. These
strikes have had an adverse effect on the Israeli economy and on business,
including our ability to deliver products to our customers. Following the
passage by the Israeli Parliament of laws to implement the economic measures,
the Israeli trade unions have threatened further strikes or work-stoppages, and
these may have a material adverse effect on the Israeli economy and on us.

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 2003 approximately 25% of our expenses were in U.S. dollars or
U.S. dollar-linked NIS, in 2002 approximately 39% of our expenses were in
U.S. dollars or U.S. dollar-linked NIS and in 2001 approximately 45% 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 1998,
2001 and 2002 the rate of devaluation of the NIS against the dollar exceeded the
rate of inflation in Israel, which benefited us. In 1999 and 2000 the rate of
inflation exceeded the rate of devaluation of the NIS against the U.S. dollar.
In 2003 the rate of inflation was negative and the NIS was revaluated vis-a-vis
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
cannot assure you that we will not be materially 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.

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, all of whom reside outside the United States, may be
difficult to obtain within the United States. Furthermore, since substantially
all of our assets, all 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 difficult an acquisition of
us, 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.

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

A. HISTORY AND DEVELOPMENT OF THE COMPANY

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

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

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

B. BUSINESS OVERVIEW

Our Core Business

During 2002, we redefined our core business to being "solution-based"
rather than product-based. Our recent business successes led us to the
conclusion that our added value is in providing complete solutions that include
our products as part of a package rather than simply selling specific products.
In 2003 we further expanded our product range and have added additional
functions which extended our product capabilities. As a result, we are now in a
position to provide integrated solutions based on a number of our products to
form a complete system.

Our core business currently includes the following activities:

o Integrated training solutions;

o Advanced fleet maintenance management solutions;

o Integrated weapons management systems;

o Data acquisition and management systems;

o UAV avionics;

o Automatic testing solutions; and

o Manufacturing services.

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

Integrated Training Solutions

Our training solutions are based on a complete and integrated system
that includes an airborne component, installed onboard the aircraft, and a
ground component, installed in a squadron's ground facility. Recent technology
that we have developed, mainly for the Israeli Air Force, allows us to adapt the
system to any kind of aircraft, regardless of its onboard avionics systems. Our
solution also allows the integration of our airborne system with either an
analog or digital video recorder and to provide a squadron information
management network (SIM Net) as a ground component.

Autonomous Air Combat Evaluation System - ACE(TM)

ACE is an avionics system used for debriefing air combat missions and is
based on data recordings from digital and analog communication channels on the
aircraft on top of the aircraft's video recorder. The system converts the data
into digital form and installs it on the video channels of the aircraft. On the
ground, the data is utilized by our ground debriefing station to generate 3-D
graphic displays that portray all the aircraft's maneuvers during operational
and training missions. The graphic display is fully synchronized with the
heads-up displays recorded on each participant's video recorder. The Israeli Air
Force (F-16, A/B) and two other air forces (F-5) currently utilize the ACE
system.

The ability to provide debriefing of air combat maneuvers may also be
implemented as an additional application to our FACE system. The Royal
Netherlands Air Force is utilizing this capability of the FACE system to debrief
its aircrews.

Our latest enhancement of the ACE concept resulted in a contract with
the Israeli Ministry of Defense and the Israeli Air Force in the first quarter
of 2002. Under the contract we upgrade all of the existing A-4 aircraft of the
Israeli Air Force in order to provide these aircraft with our advanced ACE
debriefing capabilities. The absence of inertial navigation data onboard the A-4
aircraft led us to integrate a stand alone internal navigation system, or INS,
and a global positioning system, or GPS, on board the aircraft. We believe this
will open the market for non MIL-STD 1553 Max Bus equipped aircraft to utilize
the ACE. In 2003, we initiated a marketing campaign to promote these new
capabilities of the ACE. We believe that this A-4 program places us in a unique
position that will result in all the advanced Israeli Air Force trainers being
equipped with our debriefing solutions.

Ground Debriefing Station

Since 1999 we have offered operational ground debriefing stations that
complement our airborne systems. The operational ground debriefing station is
installed on a PC and operates in a Windows NT/2000 environment. The operational
ground debriefing station, which was designed by our employees (Israeli Air
Force F-16 and F-15 pilots in reserve service), is user-friendly with a graphic
display that is fully synchronized with the heads-up displays recorded on each
participant's video recorder. For users that operate more than one ground
debriefing station, our product provides a connection between other
ground-debriefing stations, through a LAN or WAN, to allow data sharing and
mutual debriefing. The Israeli Air Force and two other air forces have purchased
ground debriefing systems for their F-16 A/B and A-4 fleets.

Digital Video Based Training Systems

Recent development in digital video recording systems and the
significant reduction in size and cost of solid state memory hardware in recent
years make solid state digital video recording systems a superior solution for
airborne applications. These systems are beginning to penetrate the aviation
industry both in new aircraft such as the F-16I and in the retrofit market. We
have identified this trend and developed our advanced digital video-based
debriefing capabilities for the Peace Marble V Program, or PM-V Program relating
to the new F-16's of the Israeli Air Force, or IAF. This new solution provides
significantly improved debriefing capabilities as well as extensive networking
features for the ground infrastructure. In March 2004, we delivered the first
digital ground debriefing stations to the IAF, and they are currently being used
with the IAF's new F-16I aircraft.

Following the PM-V Program, we delivered two additional systems to
Lockheed Martin Aerospace for use in integration and flight testing in the
fourth quarter of 2002. We also signed a contract to develop and deliver a
complete digital video based debriefing system for the new F-16's purchased by
the Chilean Air Force. As a result of the development work that was accomplished
in connection with the Peace Marble V Program, we are supplying the Chilean Air
Force with a digital video recorder for each F-16 aircraft that they purchase as
well as an advanced digital video ground debriefing station. This station will
be connected to our previously delivered F-5 ground debriefing station creating
a common network debriefing solution for both front-line aircraft.

Advance Fleet Maintenance Management Solutions

Our fleet maintenance management solutions are based on our existing
programs and products developed and supplied during the past two years. These
programs include both airborne equipment that collect and store the relevant
data (such as FACE or DAS) and ground support software packages (such as
PERFORMS) that provide the infrastructure for efficient data logging and
analysis to support fleet maintenance management.

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

The FACE system is an avionics system designed to acquire, process and
record data from various aircraft systems and from strain gauges (sensors)
affixed to an aircraft's structure. This data is used to streamline and manage
the ongoing maintenance of an aircraft and its

systems. The FACE system communicates with a squadron's ground support logistic
station, enabling downloading of data from an aircraft, managing ongoing
maintenance, creating and modifying the set-up configuration files and
determining which data will be recorded, as well as providing for other
applications.

The FACE system is capable of communicating with, and transferring in
real time, safety data it has recorded to a voice and data recorder, which is a
crash survival unit known as a "black box" manufactured by Smiths Electronic
Systems. We are currently upgrading the FACE systems that we supplied to the
Royal Netherlands Air Force F-16 for its aircraft during the years 1996 to 1999
and are supplying FACE systems for the F-16 aircraft used by the Belgian Air
Force and the Portuguese Air Force.

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 and Smiths
Electronic Systems jointly developed and marketed the DAS for the new F-16I
aircraft of the Israeli Air Force. DAS consists of two sub-systems, a data
acquisition unit, or DAU, and an advanced crash survival memory unit, or ACSMU.
The DAU is connected to numerous data systems and data channels in the aircraft
and acquires, processes and records data, mostly for maintenance purposes. The
ACSMU is a "black box" capable of recording digital data and digitized audio
transferred through the DAU. DAS is a form fit replacement to 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. During 2003, we received three
different orders for DAS units.

PERFORMS

Since mid-2001 we have been involved, as a primary sub-contractor to
Lockheed Martin Aerospace, in the development of a new software package aimed at
replacing 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. The new product, known as 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
airborne flight data recorders manufactured by us and Smiths Aerospace, and the
DAS system, manufactured by Smiths and us.

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 that enables "plug-in" applications to access the data,
manipulate and analyze it and provide many maintenance management applications.
The program is managed by Lockheed Martin Aerospace and is supplied to users in
repeated software "builds" delivered every 12 months begInING in April 2003.
Under the agreement, we were granted a non-exclusive license to use the
developed software in support of our FACE and DAS products to supply the
application to its flight data recorders customers.

Integrated Weapons Management Systems

In the early 1980s we started to develop, manufacture and sell an
armament interface unit which controls the various weapon stations of an
aircraft based on commands from the main on-board computer. The armament
interface unit was designed for use by Israeli Aircraft Industries for its
worldwide upgrade programs. Later versions of the system can be installed in
attack helicopters as well as in fighter aircraft. We are now in the process of
supplying a derivative of the system to Israel Aircraft Industries for an F-5
upgrade program in Spain and are currently proposing the system for many other
applications in both Israel and foreign customers.

In the avionics area we develop, manufacture and sell armament
interface units which control the various weapon stations of an aircraft based
on commands from the main on-board computer. The armament interface unit was
designed for use by Israeli Aircraft Industries for its upgrade programs
worldwide. This avionics system may be installed in attack helicopters as well
as in fighter aircraft. Future sales of armament interface units are dependent
upon the success of the Israeli Aircraft Industries upgrade programs

We also provide complete armament testing solutions for aircraft using
our and others' weapons management systems. The test unit is used to verify the
serviceability of the armament management system during periodic maintenance or
before sophisticated weapons are installed.

Data Acquisition and Management Systems

As a result of our developments efforts for the PM-V Program, we have
added a new family of Solid State Recorders to our family of products. This
family of products provide scalable versions of sophisticated, fast and very
effective recorders, suitable for severe environmental conditions, that can
provide solutions to numerous data collection, storage and management needs.

The capabilities of these products include a large amount of data
storage, very fast read and write capability and utilization of solid state
memory to enable it to function onboard military aircraft.

Unmanned Air Vehicle Avionics

We have identified the Unmanned Air Vehicle, or UAV, avionics market as
having significant potential. We began our marketing activities in this market
in 2002. These activities resulted in two products aimed at the UAV market that
are now under development.

Currently we operate in the UAV avionics market as subcontractors,
mainly for Israel Aircraft Industries. We believe that our continued activities
in this market will enable us to increase our involvement in the production
process and to offer additional products and additional functions which will
extend our product capabilities.

Automatic Testing Solutions

We have attempted to position ourselves, domestically as well as
internationally, as a company that provides turnkey services for all
test-solutions purposes for both commercial and military aviation. We offer our
off-the-shelf automated test equipment, or ATE, platforms, test

solutions and software environments that enable the implementation and
development of test programs and test solutions. As such, we build the hardware
and develop, produce and update the software relative to these solutions. We
offer these for sale or lease and offer post-sale support programs.

We are currently seeing increased interest in the automated testing
solutions, especially from FAA certified maintenance facilities. This trend is a
direct result of the slow recovery of the commercial aviation business and of
the increasing need in maintenance services due to expiration of warranties on
aircraft purchased approximately 5 years ago.

CATS(R)

Commercial Aviation Test Stations, or CATS(R), is our off-the-shelf
modular ATE platform. It offers a family of multi-purpose, computerized
Automatic Test Equipment that meet the specific needs of avionics manufacturers,
airlines and third party maintenance companies to test and repair the electronic
units of commercial aircraft. CATS(R) includes tools for testing,
troubleshooting, and performing diagnostic procedures on a variety of units in
existing commercial aircraft, replacing or augmenting testing stations of
airplane manufacturers or OEM's and automating manual test procedures.

The CATS(R) system design is based on a modular and open architecture
that enables scalable test solutions while maintaining a standardized system.
This design provides the flexibility that allows for system configuration
tailoring to any maintenance requirement and thus, significantly reducing its
cost.

We have developed a library of over 200 Test Program Sets, or TPSs, that
include the test programs and test unit adapters for testing a large variety of
line replaceable units that range from Boeing 747 aircraft classic analog units
to sophisticated digital units for the Boeing 777 aircraft. Each TPS is
specifically designed to test a particular airborne electronic unit. Our TPSs
can be duplicated at a relatively low cost for use in similar applications by
different customers. We offer the CATS(R) with its test environment in order to
enable our customers to develop their own new test programs. In this way we hope
to enhance our TPS library.

Mini-CATS(R)

The Mini-CATS(R) is another of our off-the-shelf modular ATE platforms.
It is a state-of-the-art PC-based, general purpose and low-cost ATE. Like the
CATS(R), it is used to test and repair airborne electronic units. But the
Mini-CATS(R) is suitable for low to medium complexity units, with a declared
goal of providing maintenance at a very low cost.

The Mini-CATS(R) provides potential customers with an independent test
solution that may be purchased as a stand-alone unit or as part of a package
with a full-size CATS(R). Existing customers may use the Mini-CATS(R) as an easy
add-on to an existing full-size CATS(R), adding both new capabilities as well as
test capacity by freeing up use of the full-size CATS(R) and testing simpler
units or high volume units. Both systems share the same user-interface, thus
decreasing training and maintenance costs.

The Mini-CATS(R) includes tools for testing and troubleshooting a
variety of units of various manufacturers. The system includes inherent
user-friendly software for generating new test program sets and updating
existing test program sets. The Mini-CATS(R) enables scalable and modular
customization adjusting to customers needs. Our first test solution development
on the Mini-CATS(R) was for Smiths Electronic Systems Group's Control and
Display Unit mounted on the Boeing 737NG aircraft.

We have developed and customized a comprehensive agile test environment,
based on Microsoft Windows NT(R) and the National Instruments TestStand(TM).
This agile environment (e-CATS(R)) may be applied to any type of ATE and test
solution and has specific technical advantages by providing full connectivity
for the ATE to any external data-base/service, advanced TPS development tools
and obsolescence management of measurement and stimulus equipment on the ATE. To
date, we have not sold any Mini-CATS(R) and cannot guarantee that any future
sales will be made.

Manufacturing Services

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

Test and Repair Stations

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

Sales and Marketing

Sales and Marketing Strategy

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

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

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

o Expanding our customer base by including our products in
solutions and integrated systems. This approach was successful
both in Chile where, in 2002, we were awarded a contract to

provide a complete debriefing solution for the F-16 aircraft
purchased by the Chilean Air Force, and with the IAF, to whom we
supply complete weapon delivery and navigation system for the A-4
aircraft.

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

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

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

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

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

Smiths Aerospace Electronic Systems. In February 1999, we entered into
an agreement with Smiths Aerospace Electronic Systems that outlines joint
marketing activities for our FACE system and Smiths Aerospace Electronic
Systems' voice and data recorder for F-16 A/B aircraft. Smiths Aerospace
Electronic Systems 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 system and the voice and data recorder
complement each other and are intended to replace outdated data recording
systems, mechanical strain recorders and flight load recorders. No sales under
this agreement have been made to date.

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

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

Smiths Aerospace Electronic Systems was our principal customer in 2003
and we expect that it will continue to be one of our principal customers in
2004. In addition to the PM-V cooperation with Smiths, we are currently
supplying the Royal Netherlands Air Force with an integration package for our
FACE system and Smiths' VADR for the its F-16 MLU fleet. A similar package is
also being supplied to the Portuguese Air Force.

Israel Aircraft Industries. IAI was our fourth largest customer in 2003,
accounting for more than 12% of our total annual revenues. We are actively
supplying avionics and test equipment to four different divisions of IAI. We
have identified the Israeli government-owned aerospace industries as a potential
customers and cooperation entities. In particular the Lahav and Malat divisions
of IAI, major aircraft integrators, require our services as avionics and test
equipment providers.

Rafael Armament Development Authority Ltd. Rafael was one of our largest
Israeli customers in 2003. Our sales to Rafael during 2003 provided mainly test
equipment and build to print services. The addition of the Solid State Recording
family of products to the products we supply to Rafael adds our own developed
products to these sales. We expect that the SSR will lead Rafael to be one of
our significant customers.

Marketing

Our Chairman and President, Herzle Bodinger, our CEO, Adar Azancot, and
our V.P Business Development, Zvi Alon, lead our marketing efforts. We currently
employ two other persons in marketing our core business products and plan to
employ an additional person. Our engineering department supports our marketing
staff with respect to product pricing and technical demonstrations. In addition,
we have sales consultants, agents and representatives in Europe, South America,
China and India who receive commissions for sales effected through them.

The Israeli Ministry of Defense has historically supported and continues
to support our marketing efforts through its Export and Defense Assistance
division, or SIBAT, through various projects for the Israeli Defense Forces and
its related divisions. The Israeli Ministry of Industry and Commerce supports
our marketing efforts via its Industrial Cooperation Authority through

the exploitation of "offset commitments" by Lockheed Martin Aerospace and The
Boeing Company to the State of Israel. Such future assistance is not guaranteed.

Principal Customers

Generally, we complete a few transactions each year, each in an amount
comprising approximately 10% of our revenues for such year. As a result, each
year a significant portion of our revenues is derived from a small number of
customers. The following table sets forth our principal customers for the years
2002 and 2003:

2002 2003
---- ----
Smiths Electronic Systems...................... 34% 22%
The Boeing Company............................. 19% 14%
Israeli Ministry of Defense.................... 3% 11%
Israel Aviation Industries..................... 6% 12%
Portuguese Air Force........................... 4% 19%

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

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

Competition

The markets for our products are highly competitive, and we may not be
able to compete effectively in those markets. Our principal competitors in the
avionics market are Harris, Rockwell Collins, Honeywell, Elbit Systems Ltd.,
Israeli Aircraft Industries, R.S.L. Ltd. and Elisra Systems Ltd. Our principal
competitors in the automated test equipment market are J.C. AIR, Inc.,
Aerospatiale Avionique, Avtron, Enertec and Tzaban. We expect to continue to
face competition from these and other competitors. Most of our competitors are
far larger, have substantially greater resources including financial,
technological, marketing and distribution capabilities, and enjoy greater market
recognition than we do. These competitors may be able to achieve greater
economies of scale and may be less vulnerable to price competition than us. We
may not be able to offer our products as part of integrated systems to the same
extent as our competitors or successfully develop or introduce new products that
are more cost effective or offer better performance than those of our
competitors. Failure to do so could adversely affect our business, financial
condition and results of operations.

Export Policy

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

Fixed Price Contracts

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

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

Proprietary Information

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

The Israeli Government usually retains certain rights to technologies
and inventions resulting from our performance as a prime contractor or
subcontractor under Israeli Government contracts and may generally disclose such
information to third parties, including other defense contractors. When the
Israeli Government funds research and development, it may acquire rights to
proprietary data and title to inventions; we may retain a non-exclusive,
royalty-free license for 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 is being revised to comply
with ISO 9001:2000. This process is expected to be concluded in June 2003.

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

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 2003, 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

Facilities

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

significantly, we would be able to increase the number of workers or shifts at
the plant, or use more subcontractors.

Our executive offices and research and development facilities are
located in a 9,000 square foot office facility in Netanya, Israel. The lease for
this facility expires in January 2005. We are currently negotiating the renewal
of this lease until April 2006, with an option to renew it again, until April
2008.

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

The aggregate annual rent for our offices in Israel and China was
approximately $133,000 in 2003.

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

A. OPERATING RESULTS

The following discussion and analysis should be read in conjunction with
our consolidated audited financial statements and the notes thereto, included
elsewhere in this annual report.

Overview

We develop, manufacture and sell automated test equipment and avionics
products for military and commercial use mainly in Israel, Europe and the United
States. Until December 31, 2001 we also sold aircraft spare parts through our
subsidiary, Jetborne International, but this business was discontinued following
the sale of our holdings in Jetborne. We also provide test and repair services
using our CATS(R) testers and test program sets through our Chinese subsidiary,
CACS. In addition, we provide manufacturing services to third parties engaged
mainly in the avionics market.

In March 2002, we sold, effective December 31, 2001, our 75% equity
interest in Jetborne to ILI Aviation Ltd., a private company registered under
the laws of the Marshall Islands. ILI undertook to cause Jetborne to repay us
all outstanding inter-company loan balances plus interest and additional
royalties whereby the repayment will be made in accordance with a schedule based
on a percentage of actual sales of Jetborne's inventory on hand on the effective
date of the agreement. All payments due to us under the agreement must be paid
no later than

the tenth anniversary of the agreement. Based on our assessment of the
collectibility of this debt we recorded an allowance for the full balance due to
us under the agreement.

Critical Accounting Policies

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 and address such matters as revenue recognition. 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.

The significant accounting policies listed in Note 2 of our consolidated
financial statements that we believe are the most critical to aid in fully
understanding and evaluating our financial condition and results of our
operations under generally accepted accounting principles are discussed below.

Intangible Assets. Costs of producing our TPS software library, which is
integrated with our test station, incurred subsequent to achieving technological
feasibility, were capitalized according to FASB No. 86 "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed" and are amortized
over the estimated useful life of the product. We assess the recoverability of
these intangible assets at each balance sheet date by determining whether
unamortized capitalized costs do not exceed the net realizable value of the
software. Net realizable value is the estimated future gross revenues from a
product reduced by the estimated future costs of disposing of that product,
including costs of performing maintenance and customer support required to
satisfy our obligations set forth at the time of sale. The use of different
assumptions with respect to the expected cash flows from our assets and other
economic variables, primarily the discount rate, 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.

Impairment of Long-Lived Assets. We are required to assess the
impairment of long-lived assets on an annual basis, and potentially more
frequently when events or changes in circumstances indicate that the carrying
value may not be recoverable in accordance with Statement of Financial
Accounting Standards, ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." 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 fair
value to the carrying amount of the asset, an impairment charge is recorded. We
measure fair value based on the projected future undiscounted cash flows
expected to be generated by the respective asset. Under different assumptions
with respect to the recoverability of our long-lived assets, our determination
may be different, which may negatively affect our financial position and results
of operations. As of December 31, 2003, no impairment was required.

Share-Based Compensation. We account for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles Board ("APB")
opinion No. 25, "Accounting

for Stock Issues to Employees," and related interpretations. Under APB 25,
compensation cost is measured as the excess, if any, of the closing market price
of our stock at the date of grant over the exercise price of the option granted.
We recognize compensation cost for stock options, if any, ratably over the
vesting period. We account for warrants issued to non-employees in accordance
with the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation".
We use the Black- Scholes option pricing model to value warrants granted to
non-employees.

Revenue Recognition. Our revenues are derived primarily from sales of
automated test equipment and avionics products. Revenues from sales of automated
test equipment and avionics products are recognized upon delivery of merchandise
or performance of services. Revenues from sales of other products are generally
recognized upon shipment of the product. Revenues from services are recognized
upon performance of the services. Revenues from long-term fixed price contracts
are recognized by the percentage-of-completion method. We apply this method when
the total of the costs of the contract can reasonably be estimated. Revenues
ascribed to each period represent costs incurred during the period, with the
addition of estimated earnings accrued, based on the extent of progress towards
completion during the period. The percentage-of-completion is determined for
each contract at the rate that costs incurred to date bear to the total
estimated cost to be incurred over the duration of each contract. With regard to
contracts on which a loss is anticipated, a provision is made for the entire
amount of the estimated loss. Contracts are considered to be 100% complete when
the customer accepts the project and when the project is delivered, or when the
project complies with performance specifications, depending upon the specific
situation. Revenues from test and repair services are recognized upon
performance of the maintenance services.

Revenues from certain arrangements may include multiple elements within
a single contract. Our accounting policy complies with the revenue determination
requirements set forth in EITF 00-21, relating to the separation of multiple
deliverables into individual accounting units with determinable fair values. Our
arrangements are accounted for as one unit of accounting.

Loans to Employees and Provision for Litigation. We have an outstanding
balance of loans due to us from our former CEO and a former officer. Both
officers claim that they are not obliged to repay the loans. There are pending
legal actions between us and each of the 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.

Fair Value of Warrants. In September 2003, we finalized an agreement
with Bank Hapoalim B.M. and Bank Leumi Le Israel B.M., or our Banks, to
restructure $3,451,000 of our debt to them. Pursuant to the agreement, we paid
the Banks $1,100,000 on account of our debt to them and they forgave $1,100,000
in debt and agreed to accept warrants to purchase 3,781,995 of our ordinary
shares, exercisable at par value per share, to purchase ordinary shares in lieu
of $1,251,000 of debt. This transaction was recorded in accordance with FASB No.
15, "Accounting by Debtors and Creditors for Troubled Debt Restructurings." The
warrants issued to the Banks were recorded at fair value using the Black and
Scholes pricing model, since we do

not believe that the market price of an ordinary share on Nasdaq on the date of
consummation reflects fair value. The fair value of the warrants was based on
the value of an ordinary share at the consummation date of the transaction,
based on a valuation of the warrants prepared by an external valuation
expert. The difference between the consideration paid to the Banks and the
carrying amount of the debt was recognized as a gain on restructuring of debt,
net of issuance expenses.

Significant Expenses

Cost of Revenues. Cost of revenues consists primarily of manufacturing
costs, depreciation of fixed assets, software development costs, impairment
losses on long-lived assets and amortization of capitalized software.

Research and Development Expenses. Research and development expenses
consist primarily of salaries of employees and subcontractors engaged in
on-going research and development activities and other related expenses.
Research and development expenses are expensed as incurred.

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, 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 and currency remeasurement losses. Financial income consists
of interest on cash and cash equivalent balances, currency remeasurement gains
and gain on restructuring of debt.

Other Expenses, Net. Other expenses, net relate primarily to items of
income or expenses outside our ordinary course of business.

Year Ended December 31, 2003 Compared With Year Ended December 31, 2002

Revenues. Our revenues increased 18% to $12.3 million in 2003 from $10.4
million in 2002. The increase in our revenues is primarily attributable to the
increase of revenues from the sale of GDS and DAS to Smiths Aerospace Electronic
Systems for the PM-V Program and sale of FACE systems to the Portuguese Air
Force. We expect that this growth rate will continue in 2004 and that the growth
will be generated primarily from sales of our traditional products.

Cost of Revenues. Cost of revenues increased 4% to $9.6 million in 2003
from $9.2 million in 2002 mainly due to increased revenues and impairment losses
recognized on some of our long-lived assets. In 2004 we expect that our cost of
revenue will increase due to the increase in revenue but will not increase
materially as a percentage of revenues.

Gross Profit. Our gross profit increased 132% to approximately $2.7
million in 2003 from $1.2 million in 2002. Our profit margin increased to 22% in
2003 from 11% in 2002. The improved margins reflects our reaching a sales level
that provides for better utilization of our

fixed overhead costs. Our margins should improve further with better
utilization of our manufacturing facilities.

Research and Development Expenses. In 2003 we did not incur any research
and development expenses as compared to 2002 when we expended $122,000 for
research and development. We made a strategic decision not to engage in internal
research and development activities but, rather, enter into development projects
through customers' orders. In 2004 we expect that we will develop new products
through customer orders and will not use internal funded research.

Marketing, Selling, General and Administrative Expenses. Marketing,
selling, general and administrative expenses decreased 13% to $2.7 million in
2003 from $3.1 million in 2002 mainly due to cost saving measures taken by us to
reduce our overhead. We expect that our total marketing, selling, general and
administrative expenses will increase slightly in 2004. Although we are
continuing our costs savings measures, increasing ales efforts in our current
and new markets will increase our marketing and selling expenses .

Financial Income (Expenses), Net. Our financial income, net was $708,000
in 2003 and our financial expenses, net was $364,000 in 2002. Our financial
income in 2003 was primarily attributable to an approximate $1 million gain on
our restructuring of debt with the Banks.

Year Ended December 31, 2002 Compared With Year Ended December 31, 2001

Revenues. Our revenues increased 25.3% to $10.4 million in 2002 from
$8.3 million in 2001. The increase in our revenues is primarily attributable to
the increase of revenues from the sale of GDS and DAS to Smiths Aerospace
Electronic Systems for the Peace Marble V Program and an increase in "build to
print" manufacturing activities. Revenues from sale of aircraft parts were
reduced to zero due to our sale of Jetborne in 2001.

Cost of Revenues. Cost of revenues increased 24% to $9.2 million in 2002
from $7.4 million in 2001 mainly due to increased revenues and impairment losses
recognized on some of our long-lived assets. Cost of revenues from sale of
aircraft parts were reduced to zero due to our sale of Jetborne in 2001.

Gross Profit. Our gross profit increased 27% to $1.2 million in 2002
from $0.9 million in 2001. Although our profit margin remained approximately the
same (11%) in both our results in 2002 were achieved despite changes arising
from the impairment of long-lived assets.

Research and Development Expenses. Research and development costs
decreased 77% to $122,000 in 2002 from $534,000 in 2001, mainly due to our
strategic decision to not engage in internal research and development activities
but, rather, enter into development projects with our customers.

Marketing, Selling, General and Administrative Expenses. Marketing,
selling, general and administrative expenses decreased 14% to $3.1 million in
2002 from $3.6 million in 2001 due to cost saving measures taken by us to reduce
our overhead.

Other Expenses, Net. Other expenses of approximately $290,000 in 2002 is
related to the allowance recorded in connection with an amount owed to us by
Jetborne, our former subsidiary.

Operating Loss from Continuing Operations. As a result of the foregoing,
our operating loss decreased 37% to $2 million in 2002 from $3.2 million in
2001.

Financing Expenses, Net. Net financing expenses increased 73% to
$364,000 in 2002 from $210,000 in 2001, primarily due to an increase in interest
expense due to cash shortages during the year that were financed through loans
and short term credit facilities bearing higher interest rates.

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.

In addition, some of our executive officers and employees in Israel are
obligated to perform up to 36 days, depending on rank and position, of military
reserve duty annually 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. Our
operations could be adversely affected if the economic conditions in Israel
continue to deteriorate. In addition, due to significant economic measures
proposed by the Israeli Government, there have been several general strikes and
work stoppages in 2003 and 2004, affecting all banks, airports and ports. These
strikes have had an adverse effect on the Israeli economy and on business,
including our ability to deliver products to our customers. Following the
passing by the Israeli Parliament of laws to implement the economic measures,
the Israeli trade unions have threatened further strikes or work-stoppages, and
these may have a material adverse effect on the Israeli economy and on us.

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.

Corporate Tax Rate

Israeli companies are generally subject to income tax at the corporate
tax rate of 36% of taxable income. However, an investment program at our
facility in Beit-Shean has been granted "approved enterprise" status under the
Law for Encouragement of Capital Investments, 1959, and consequently we are
eligible for some tax benefits. The portion of our income derived from the
approved enterprise program will be tax-exempt for a period of two years
commencing in the first year in which it generates taxable income and will be
subject, for the following period of five to eight years, to a reduced corporate
tax of 15%-20% (the rate will depend upon the percentage of non-Israeli holders
of our ordinary shares). However, these benefits will not be

available to us with respect to any income derived from our non-Israeli
subsidiaries. The above mentioned benefit program will expire in 2004.

As of December 31, 2003, our net operating loss carry-forwards for
Israeli tax purposes were approximately $43 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 Israeli inflation
Year ended Israeli Consumer Israeli inflation devaluation adjusted for
December 31, Price index rate % rate % devaluation %
------------ ----------- ------ ----------- -------------

1999 100 1.3 (0.2) 1.5
2000 100 0 (2.7) 2.8
2001 101.4 1.4 9.3 (7.8)
2002 108.2 6.8 7.3 0.7
2003 106.14 (1.9) (7.6) (6.1)

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., 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 substantive debt and
issue equity securities. During the four years ended December 31, 2003, we
relied predominantly on Howard 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.

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 1,938,775 of our ordinary
shares at a price of $0.49 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 4,302,041 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 $2.00 per share, and during the
subsequent 24 month period, at an exercise price which will be equal to the
higher of: (i) $2.00 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
$1,350,000 of loans granted by Mr. Yeung, into 2,755,102 of our ordinary shares
at a price of $0.49 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 8,265,306 ordinary shares. Such warrants will be
outstanding for five years and will be exercisable during the first 36 months at
an exercise price of $2.00 per share, and during the subsequent 24 month period,
at an exercise price which shall be equal to the higher of: (i) $2.00 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 the
agreement, or 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 3,781,995 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. These warrants may not be exercised for a period of
21 months unless transferred pursuant to the call or put options described
below. These warrants expire on March 24, 2006. The Banks have 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. Howard P. L. Yeung has 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 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, pending upon
the average close price of the shares during the last 90 business days prior to
such exercise. We have also agreed to grant the Banks warrants to purchase an
additional 1,100,000 ordinary shares at an exercise price of $2.00 per share,
exercisable for 5 years, commencing as of September 24, 2003.

As of December 31, 2003, we had a short-term loan of approximately
$1,411,000 from Bank Leumi bearing interest at a rate of Libor plus 4%.
Subsequent to our balance sheet date, Bank Leumi agreed to extend the payment
terms of this loan and, as a result, approximately $ 1.2 million of the loan was
reclassified as long-term debt. We also had a credit facility with Bank Leumi.,
which provides for borrowings of up to NIS 1,314,000 (approximately $300,000) as
of December 31, 2003) bearing interest of prime plus 3%, of which NIS 867,000
($198,000) was drawn as of December 31, 2003. As of December 31, 2003, we also
had a credit facility with Bank Hapoalim of NIS 4,326,000 (approximately
$988,000), bearing interest of Prime plus 1%, under which NIS 3,213,000
(approximately $734,000) was outstanding as of December 31, 2003. The borrowings
from the Banks 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, our debt to the Israeli Tax Authority is secured by a
first priority fixed charge on our fixed assets in Beit-Shean facility.

We had capital expenditures of $49,000 in 2003 and $85,000 in 2002. We
currently do not have any significant capital spending or purchase commitments.
The decrease in capital expenditures in 2003 is primarily attributable to the
decision to lease computers, other equipment and vehicles, rather than purchase
them, and to decreased in house construction of machinery and equipment for our
own use.

Net cash generated from operating activities was $1,021,000 in 2003.
This was attributable primarily to our net income of $758,000.

Net cash used in operating activities was $425,000 in 2002. This was
attributable primarily to our net loss of $2.5 million, an increase in trade
receivables of approximately $1 million, a decrease in deferred revenues of
approximately $0.6 million, which was offset in part by depreciation and
amortization of $2.4 million, a decrease in inventories of approximately
$500,000 and a decrease in costs and estimated earnings in excess of billings on
uncompleted contracts, net of approximately $0.5 million.

Net cash used in investing activities was approximately $50,000 in 2003
and $41,000 in 2002.

Net cash used in financing activities was $1,074,000 in 2003 due to the
repayment of short term bank credit net. Net cash provided by financing
activities was $962,000 in 2002 mainly due to the net proceeds of $835,000 from
issuance of our shares in a private placement.

At December 31, 2003, we had a working capital deficiency of $2.7
million and cash and cash equivalents of $467,000 as compared to a working
capital deficiency of $8 million and cash and cash equivalents of $570,000 at
December 31, 2002.

We have been dependent in recent years on receiving financial support
from our principal shareholders. We cannot assure that they will continue to
provide us with funds when requested, and that such funds, if any, will be
sufficient to finance our operations. The failure of our principal shareholders
or other new investors to provide us with the necessary financing may result in
a significant scale back or elimination of some aspects of our operations. Based
on the anticipated continued financial support from our shareholders and
existing and anticipated shipments in 2004, we anticipate that our capital
resources will be adequate to satisfy our working capital and capital
expenditure requirements until December 31, 2004. We may need to raise
additional funds thereafter.

As of March 31, 2004 there were 18,074,032 warrants outstanding to
purchase 18,074,032 of our ordinary shares. Of such warrants, 3,781,995 warrants
have an exercise price of (par value) per share, 13,667,347 warrants have an
exercise price of $2.00 per share and 624,690 warrants have exercise prices
ranging from $2.17 to $6.25 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 the years ended December 31, 2001, 2002 and 2003, our research and
development costs (including capitalized costs in 2001) were $637,000, $122,000
and $0, respectively.

In 2003 we did not incur any research and development expenses. Since
2002 we have not capitalized any costs of development and in 2003 we made a
strategic decision not to engage in internal research and development
activities, but rather to develop products through customer orders. For example,
in 2002 we engaged in the development of our GDS product and co-development of
DAS, both as sub-contractors for Smiths Aerospace in connection with the PM-V
Program. We intend to continue this approach for the foreseeable future.

As of December 31, 2003, we employed 27 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 receive 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. The amount of royalties to be paid may not
exceed the dollar value of the total grants received. As of December 31, 2003,
our total obligation for royalties payments, net of royalties paid or accrued,
is approximately $630,000.

We are committed to pay royalties to the Israel - United States
Binational Industrial Research and Development Foundation at the rate of 2.5% 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 $1.9 million as of December 31, 2003.

D. TREND INFORMATION

Based on our strategic plan, we have succeeded in reducing our losses
over the last few years and achieved profitability for the year ending December
31, 2003. 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.

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 testing solutions;

o ground debriefing stations and avionics products for the F-16
aircraft of Lockheed Martin Aerospace;

o fighter and trainer up-grades based on our A-4 up-grade for the
IAF; and

o manufacturing services.

If we are unsuccessful in our sales efforts, it is unlikely that we
will be able to achieve profitability 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, 2003 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 More than 5
Total 1 year 1-3 Years 3-5 Years years
---------- --------- ---------- --------- -----------

Long-term debt obligations....... $1,400,000 $180,000 $1,220,000 - -
Capital (finance) lease
obligations.................. - - - - -
Operating lease obligations...... $717,000 $505,000 $191,000 $21,000 -
Purchase obligations............. $84,000 $84,000 - - -
Other long-term liabilities
reflected on the company's balance
sheet under U.S. GAAP ........... - - - - -

Total............................ $2,201,000 $769,000 $1,411,000 $21,000 -

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, 2003 our
severance pay liability was $2,048,000.

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

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 six directors.

Our executive officers are responsible for our day-to-day management.
The executive officers have individual responsibilities established by our chief
executive officer and by the board of directors. Executive officers are
appointed by and serve at the discretion of the board of directors, subject to
any applicable employment agreements.

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

Name Age Position
---------------------------- --- -----------------------------------
Herzle Bodinger (1)......... 61 Chairman of the board and president
Adar Azancot................ 39 Chief executive officer
Zvi Alon.................... 50 Vice president, business development and
marketing
Dov Sella................... 49 Vice president and Chief operating officer
Elan Sigal.................. 37 Chief financial officer
Adrian Berg (2)............. 56 Director
Asaf Agmon (5).............. 56 Director
Roy Kui Chuen Chan (3)...... 57 Director
Hava Snir (4)............... 61 Outside director
Ben Zion Gruber (2)......... 45 Director
Zvi Tropp (4)............... 63 Outside director

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

(1) Mr. Bodinger will serve as a director until our 2004 annual general
meeting of shareholders.

(2) Messrs. Berg and Gruber will serve as directors until our 2005 annual
general meeting of shareholders.

(3) Mr. Chan will serve as a director until our 2006 annual general
meeting of shareholders.

(4) Ms. Snir and Mr. Tropp will serve as outside directors pursuant to the
provisions of the Israeli Companies Law for three-year terms until our
2006 annual general meeting of shareholders. Thereafter, their terms
of service may not be renewed.

(5) Mr. Agmon will serve as a director until our 2004 annual general
meeting of shareholders.

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.

Adar Azancot joined us in July 1997 as marketing manager in charge of
marketing activities aimed at the Israel Defense Forces and was appointed vice
president-business development in March 1999. Mr. Azancot was appointed chief
executive officer in July 2001. Mr. Azancot served for 14 years as a fighter
pilot in the Israeli Air Force while holding various command positions. Mr.
Azancot holds an LL.B. degree in Law 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
Forces 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.

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.

Adrian Berg has served as a director since November 1997. Mr. Berg is
one of two designees 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.

Asaf Agmon served as non-employee independent director from May 1999
until December 2002. On December 2, 2003 he was nominated as a director by our
Board and will serve as a director until our 2004 annual general meeting. Mr.
Agmon has served as chief executive officer of Solgood Trading Ltd., an Israeli
company, since 1998. Brigadier General (Res.) Agmon served in the Israeli Air
Force from 1967 until 1998 as a fighter pilot while holding various command
positions. During the last three years of his service, Mr. Agmon served as the
Israeli Military and Defense Attache to Japan and South Korea. Mr. Agmon holds a
B.A. degree in Economics and Business Administration from Tel Aviv University
and an M.A. degree in International Affairs from Haifa University. Mr. Agmon is
also a graduate of the RAF Staff College in the U.K.and of the National Defense
Institute of Israel.

Ben Zion Gruber was elected as a designee of the shareholders
(other than 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.

Roy Kui Chuen Chan has served as a director since November 1997. Mr.
Chan is one of two 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.

Hava Snir has served as an outside director since December 2000.
Ms. Snir has been an attorney for over 25 years and has been self-employed since
January 1999. From June 1989 until July 1998, Ms. Snir was a prosecutor with the
Taxation and Economics Office of the Tel Aviv District Attorney, specializing in
securities laws and white-collar crimes. Ms. Snir received her qualification as
a lawyer and has been a member of the Israel Bar since 1971. She is a member of
the Taxes Committee and the Sub-Committee for V.A.T. and Customs Duty of the
Israel Bar Association and serves as chairman of the V.A.T. and Property Tax
Appeal Committee of the Israeli Ministry of Finance and as a member of the
Ethics Committee of the Israeli Ministry of Health. Ms. Snir holds a B.A. degree
in Law from the Hebrew University of Jerusalem and spent a year at Harvard
University where she took law courses.

Zvi Tropp has served as an outside director since December 2000. From
November 2000 until April 2003, Mr. Tropp served as the chief executive officer
of Enavis Networks Ltd, a wholly owned subsidiary of ECI Telecom Ltd. Since
April 2003 Mr. Tropp has served as senior consultant with Zenovar Consultants
Ltd. Zenovar an Israeli company providing consultancy services with respect to
business organization, marketing and real estate. Mr. Tropp was vice
president-finance and business development of Baltimore Spice Israel Ltd., an
Israeli food additives manufacturer, from January 1994 until May 1998. Prior
thereto, Mr. Tropp served in various positions in the private sector. Prior to
joining the private sector, Mr. Tropp was a government employee for 20 years and
held various positions with the Israeli Ministries of Defense and Agriculture,
the last of which was as chief economic adviser to the Ministry of Defense. Mr.
Tropp has lectured in Economics and Defense Economics at the Hebrew University,
Tel Aviv University and Bar Ilan University. Mr. Tropp serves as a member of the
board of directors of Ofek Trust Fund Ltd., an Israeli affiliate of Bank Leumi
Le-Israel B.M., whose shares trade on the Tel Aviv Stock Exchange, and of
several Israeli private companies. Mr. Tropp holds a B.Sc. degree in Agriculture
and an M.Sc. degree in Agricultural Economics, both from the Hebrew University.

Guy Shelly served as our chief financial officer since June 1, 2002
until January 2004 and his employment with our company was terminated effective
April 15, 2004.

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, 2003.

Salaries, fees,
commissions and Pension, retirement
bonuses and similar benefits
--------------- --------------------
All directors and executive officers
as a group, consisting of eight persons $685,986 $191,780

During the year ended December 31, 2003, we paid each of our outside
directors a per meeting attendance fee of NIS 1,000 ($228) plus an annual fee of
NIS 18,000 ($4,110).

As of December 31, 2003, our directors and executive officers as a
group, consisting of eleven persons, held options to purchase an aggregate of
1,570,000 ordinary shares, at exercise prices ranging from $0.69 to $6.25 per
share, vesting over three years. These options expire between 2009 and 2013. Of
such options 144,000 options were issued under our 1999 employee stock option
plan and 1,426,000 options were issued under our 2003 employee stock option
plan. These options have ten year terms.

Additionally, as of December 31, 2003, our directors and officers as a
group held warrants to purchase an aggregate of 177,041 ordinary shares, at
exercise prices ranging from $2.00 to $2.75 per share. These warrants were
purchased as part of the private placements of our shares (prior to the director
nomination to office) in 2001 and 2002 of which 75,000 warrants expire on June
30, 2004 and 102,041 warrants expire on June 30, 2007.

C. BOARD PRACTICES

Election of Directors

Pursuant to our articles of association, the board of directors is
divided into three classes. Generally, at each annual meeting of shareholders
one class of 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.

Alternate Directors

Our articles of association provide that any director may appoint, by
written notice to us, another person to serve as an alternate director, subject
to the approval of the board of directors. Pursuant to the Israeli Companies
Law, any person, who is not already acting as director or alternate director in
a company may act as an alternate director at such company, provided, however,
that the same person may not act as an alternate for several directors. An
alternate

director may be appointed for one meeting or for another specified period or
until notice is given of the cancellation of the appointment. From April 2002
until the end of June 2002, Mr. Neil Myerson was appointed as an alternate
director to replace Mr. Berg. To our knowledge, no director currently intends to
appoint any other person as an alternate director, except if the director is
unable to attend a meeting of the board of directors.

Outside and Independent Directors

The Israeli Companies Law requires Israeli companies with shares that
have been offered to the public in or outside of Israel to appoint at least two
outside directors. No person may be appointed as an outside director if the
person or the person's relative, partner, employer or any entity under the
person's control has or had, on or within the two years preceding the date of
the person's appointment to serve as outside director, any affiliation with the
company or any entity controlling, controlled by or under common control with
the company. The term affiliation includes:

o an employment relationship;

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

o control; and

o service as an officer holder.

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 an outside director or may otherwise interfere with the
person's ability to serve as an outside director. If, at the time outside
directors are to be appointed, all current members of the board of directors are
of the same gender, then at least one outside director must be of the other
gender.

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 are present at the meeting. 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. 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 Companies Law and is otherwise prohibited from
receiving any other compensation, directly or indirectly, in connection with
such service.

In addition, the Nasdaq Stock Market requires us to have at least two
independent directors on our board of directors and to establish an audit
committee. Ms. Snir and Mr. Tropp qualify both as independent directors under
the Nasdaq Stock Market requirements and as outside directors under the Israeli
Companies Law requirements. Mr. Agmon serves as our third independent director.
Mr. Agmon qualifies as an independent director under the Nasdaq Stock Market
requirements.

Approval of Related Party Transactions Under Israeli Law

The Companies Law codifies the fiduciary duties that "office holders,"
including directors and executive officers, owe to a company. An office holder's
fiduciary duties consist of a duty of care and a duty of loyalty. The duty of
care requires an office holder to act at a level of care that a reasonable
office holder in the same position would employ under the same circumstances.
The duty of loyalty includes avoiding any conflict of interest between the
office holder's position in the company and his personal affairs, avoiding any
competition with the company, avoiding exploiting any business opportunity of
the company in order to receive personal gain for the office holder or others,
and disclosing to the company any information or documents relating to the
company's affairs which the office holder has received due to his position as an
office holder. Each person listed as a director or executive officer in the
table under " -- Directors and Senior Management" above is an office holder.
Under the Companies Law, all arrangements as to compensation of office holders
who are not directors require approval of our board of directors, and the
compensation of office holders who are directors must be approved by our audit
committee, board of directors and shareholders.

The Companies Law requires that an office holder promptly disclose any
personal interest that he or she may have and all related material information
known to him or her, in connection with any existing or proposed transaction by
us. In addition, if the transaction is an extraordinary transaction, that is, a
transaction other than in the ordinary course of business, other than on market
terms, or likely to have a material impact on the company's profitability,
assets or liabilities, the office holder must also disclose any personal
interest held by the office holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any of the foregoing, or by
any corporation in which the office holder or a relative is a 5% or greater
shareholder, director or general manager or in which he or she has the right to
appoint at least one director or the general manager. Some transactions, actions
and arrangements involving an office holder (or a third party in which an office
holder has an interest) must be approved by the board of directors or as
otherwise provided for in a company's articles of association, as not being
adverse to the company's interest. In some cases, such a transaction must be
approved by the audit committee and by the board of directors itself (with
further shareholder approval required in the case of extraordinary
transactions). An office holder 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 board of directors or audit committee discussions and
may not vote on this matter, unless the majority of the members of the board or
the audit committee have a personal interest, as the case may be.

The Companies Law also provides that some transactions between a public
company and a controlling shareholder, or transactions in which a controlling
shareholder of the company has a personal interest but which are between a
public company and another entity, require the approval of the board of
directors and of the shareholders. Moreover, an extraordinary

transaction with a controlling shareholder or the terms of compensation of a
controlling shareholder must be approved by the audit committee, the board of
directors and shareholders. The shareholder approval for an extraordinary
transaction must include at least one-third of the shareholders who have no
personal interest in the transaction and are present at the meeting. The
transaction can be approved by shareholders without this one-third approval, if
the total shareholdings of those shareholders who have no personal interest and
voted against the transaction do not represent more than one percent of the
voting rights in the company.

However, under the Companies Regulations (Relief From Related Party
Transactions), 5760-2000, promulgated under the Companies Law and amended in
January 2002, certain transactions between a company and its controlling
shareholder(s) do not require shareholder approval.

In addition, pursuant to the recent amendment to these 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 are for the benefit of the company. If the director or
the office holder is a controlling shareholder of the company, then the
employment and compensation arrangements of such director or office holder do
not require the approval of the shareholders provided that certain criteria are
met.

The above exemptions 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 seven (7) days
from the date of the filing of a report regarding the adoption of such
resolution by the company pursuant to the requirements of the Israeli Securities
Law. If such objection is duly and timely submitted, then the compensation
arrangement of the directors will require shareholders' approval as detailed
above.

The Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 25% shareholder of the company. This
rule does not apply if there is already another 25% shareholder of the company.
Similarly, the Companies Law provides that an acquisition of shares in a public
company must be made by means of a tender offer if as a result of the
acquisition the purchaser would become a 45% shareholder of the company, unless
there is a 50% shareholder of the company. These rules do not apply if the
purchase of the shares is made through a private placement. Regulations under
the Companies Law provide that the Companies Law's tender offer rules do not
apply to a company whose shares are publicly traded outside of Israel, if
pursuant to the applicable foreign securities laws and stock exchange rules
there is a restriction on the acquisition of any level of control of the
company, or if the acquisition of any level of control of the company requires
the purchaser to make a tender offer to the public shareholders.

Indemnification of Directors and Officers

The Companies Law provides that an Israeli company cannot exculpate an
office holder from liability with respect to a breach of his duty of loyalty,
but may exculpate in advance an office holder from his liability to the company,
in whole or in part, with respect to a breach of his duty of care. Our articles
of association provide that, subject to any restrictions imposed by

corporate law, we may enter into a contract for the insurance of the liability
of any of our office holders with respect to:

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

o breach of his duty of loyalty to us, provided that the office
holder acted in good faith and had reasonable cause to assume
that his act would not prejudice our interests; or

o a financial liability imposed upon him in favor of another person
in respect of an act performed by him in his capacity as an
office holder.

In addition, we may indemnify an office holder against:

o a financial liability imposed on him in favor of another person
by any judgment, including a settlement or an arbitrator's award
approved by a court in respect of an act performed in his
capacity as an office holder; and

o reasonable litigation expenses, including attorneys' fees,
expended by such office holder or charged to him by a court, in
proceedings we institute against him or instituted on our behalf
or by another person, or in a criminal charge from which he was
acquitted, all in respect of an act performed in his capacity as
an office holder.

These provisions are specifically limited in their scope by the
Companies Law, which provides that a company may not indemnify an office holder,
nor enter into an insurance contract which would provide coverage for any
monetary liability incurred as a result of certain improper actions.

Pursuant to the Companies Law, indemnification of, and procurement of
insurance coverage for, our office holders must be approved by our audit
committee and our board of directors and, in specified circumstances, by our
shareholders.

We have indemnified our office holders to the fullest extent permitted
by law. We currently maintain a directors and officers liability insurance
policy with a per claim and aggregate coverage limit of $5.0 million.

Employment Agreements

On May 1, 1997, we entered into an employment agreement with Mr. Herzle
Bodinger who assumed the position of the general director of our International
Division. Mr. Bodinger was appointed our chief executive officer and president
in June 1998. Nonetheless, his terms of employment have not changed. The
agreement provides for a base salary and a package of benefits including options
and warrants and contains certain non-competition and confidentiality
provisions. The agreement does not provide for any benefits upon termination of
employment, except for benefits to which Mr. Bodinger is entitled under Israeli
law. Such benefits include

severance payments equal to one month salary per each year of employment with
us. Under the agreement, the term of Mr. Bodinger's employment will continue
until such time as it is terminated by us, subject to providing Mr. Bodinger
with a six-month prior notice. Mr. Bodinger may terminate the agreement on a
one-month prior notice. As of October 24, 2001, Mr. Bodinger relinquished the
chief executive officer position to Adar Azancot retaining the positions of
president and chairman of our Board of Directors. We are currently negotiating a
new employment agreement with Mr. Bodinger. As part of these negotiations, Mr.
Bodinger has agreed, effective as of September 2003, to reduce his monthly
salary. During 2003, Mr. Bodinger agreed to a further reduction in his salary as
of February 1, 2004.

On July 9, 2001, we entered into an employment agreement with Mr. Adar
Azancot, our chief executive officer. The agreement provides for the same base
salary and a package of customary benefits Mr. Azancot had as vice president of
marketing and business development and contains certain non-competition and
confidentiality provisions. In September 2002 our board of directors resolved to
increase Mr. Azancot's base salary. In addition to severance payments equal to
one month salary per each year of employment with us as provided under Israeli
law, Mr. Azancot was also entitled to a one time payment equal to six times his
last gross salary in the event his employment is terminated by us. In 2003, Mr.
Azancot waived this right.

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, approving related-party transactions as required by
Israeli law, and such other duties as may be directed by our board of directors.

Our Audit Committee consist of three board members who satisfy the
"independence" requirements of the SEC, Nasdaq and Israeli Law for audit
committee members. Our audit committee is currently composed of Ms. Hava Snir
and Messrs. Zvi Tropp and Asaf Agmon, each of whom satisfies these requirements.
The audit committee meets at least once each quarter.

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.

The Audit Committee reviewed our audited financial statements for the
year ended December 31, 2003 and members of the committee met with both
management and our external auditors to discuss those financial statements.
Management and the external auditors have represented to the Audit Committee
that the financial statements were prepared in accordance

with the generally accepted accounting principles. Members of the Audit
Committee have received from and discussed with the external auditors their
written disclosure and letter regarding their independence from our company as
required by Independence Standards Board Standard No. 1. Members of the Audit
Committee also discussed with the external auditors any matters required to be
discussed by Statement on Auditing Standards No. 61. Based upon these reviews
and discussions, the Audit Committee has recommended to the Board of Directors
that the audited financial statements be included in our Annual Report on Form
20-F for the year ended December 31, 2003.

Other Committees

Our Board of Directors has also established a Compensation Committee
composed of Mr. Zvi Trop and Mr. Adrian Berg. The Compensation Committee is
authorized to determine all compensations issues, especially to administer the
Company's option plans and to make recommendations to the Board of Directors in
connection with option grants to employees and directors of the Company and the
terms thereof. The Committee will also make recommendation to the board in
connection with the terms of employment of the CEO and the president of the
Company.

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.
A person who does not satisfy the Companies Law's independence requirements may
not be appointed as an internal auditor. 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 Companies Law.

D. EMPLOYEES

On December 31, 2003, we employed 99 persons, of whom 27 were employed
in research, development and engineering, 54 persons in manufacturing and
logistics, 4 persons in sales and marketing, and 11 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.

On December 31, 2002, we employed 104 persons, of whom 27 were employed
in research, development and engineering, 69 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 16 persons in China.

On December 31, 2001, we employed 94 persons, of whom 20 were employed
in research, development and engineering, 65 persons in manufacturing and
logistics, 3 persons in sales and marketing, and 6 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.

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

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

E. SHARE OWNERSHIP

Beneficial Ownership of Executive Officers and Directors

The following table sets forth certain information as of March 31, 2004
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)................ 125,000 *
Adrian Berg (5).................... 109,600 *
Asaf Agmon (3)..................... 33,333 *
Roy Kui Chuen Chan (6)............. 76,267 *
Ben Zion Gruber (3)(7)............. 197,874 1.1%
Hava Snir (3)...................... -- --
Zvi Tropp (3) ..................... -- --

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

* 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 18,542,383 ordinary shares issued
and outstanding as of March 31, 2004.

(3) The business addresses of Messrs. Bodinger, Alon, Sela, Shelly, Sigal,
Azancot, Agmon, Gruber, Tropp and Ms. Snir 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 stock option plan, 48,000 options at an exercise price
of $3.75 per share, 48,000 options at an exercise price of $5.00 per
share, 48,000 options at an exercise price of $6.25 per share and 33,333
options at an exercise price of $0.69 per share. 144,000 options expire
in June 2010 and 33,333 options in September 2013.

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

(6) 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.

(7) Includes 177,041 ordinary shares issuable upon currently exercisable
warrants at an exercise price of $2.00 per share that were issue in
connection with the private placement of our shares in June 2002.

In 2003 we granted warrants to purchase 854,000 ordinary shares to
Messrs. Bodinger, Berg, Chan, Agmon and Gruber. Such grants were approved by our
shareholders at an Extraordinary Shareholders Meeting that took place on March
9, 2004.

Stock Option Plans

1994 Stock Option Plan

Our 1994 Stock Option Plan, or the 1994 Plan, provides for the issuance
of stock options to purchase an aggregate of 40,400 of our ordinary shares.
Options under the 1994 Plan may be issued to outside directors, consultants,
officers and other key employees of our company and its subsidiaries who, in the
judgment of the board of directors or, if appointed in the future, a committee
which will administer the 1994 Plan, are in a position to contribute
significantly to our success. 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 1994 Plan, of the form of option.

Options granted under the 1994 Plan may be for a maximum term of ten
years from the date of grant. The 1994 Plan itself will expire on November 23,
2004 (unless terminated earlier by an action of the board of directors) and no
options can be granted after such date. 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 1994 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 1994 Plan also contains provisions protecting optionees against
dilution of the value of their options in the case of stock splits, stock
dividends or other changes in our capital structure, in the event of any
proposed reorganization or merger involving our company or in the event of any
spin-off or distribution of assets to our shareholders.

As of March 31, 2004, options to purchase 40,400 ordinary shares had
been granted to 9 employees at an average exercise price of $4.347 per share.
All of such options to are currently exercisable. To date, no options have been
exercised.

1996 Stock Option Plan

Our 1996 Stock Option Plan, or the 1996 Plan, authorizes the issuance of
options to key employees and consultants, including officers and directors of
our company and its subsidiaries, to purchase an aggregate of 5,600 ordinary
shares, who, in the judgment of the board of directors or, if appointed in the
future, a committee which will administer the 1996 Plan, are in position to
contribute significantly to our success. The terms of the 1996 Plan are
substantially the same as those of the 1994 Plan. As of March 31, 2004, options
to purchase 5,600 ordinary shares had been granted to 3 employees and directors
at an average exercise price of $3.68 per share. All of such options are
currently exercisable. No options have been exercised to date.

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 1,040,000 of our ordinary shares.
Options under the 1999 Plan may be issued to key employees and consultants,
including officers and directors of our company and its subsidiaries who, in the
judgment of the board of directors or, if appointed in the future, a committee
which will administer the 1999 Plan, are in a position to contribute
significantly to our success. The terms of the 1999 Plan are substantially the
same as those of the 1994 Plan. As of March 31, 2004, options to purchase
289,200 ordinary shares had been granted to 15 employees at an average exercise
price of $4.42 per share. Of such options, options to purchase 289,200 ordinary
shares are currently exercisable.

2003 Stock Option Plan

Our 2003 Stock Option Plan, or the 2003 Plan, provides for the issuance
of stock options to purchase an aggregate of 2,000,000 of our ordinary shares.
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 1994 Plan. As of March 31, 2004 options
to purchase 998,000 ordinary shares had been granted. Of such options, options
to purchase 357,666 ordinary shares are currently exercisable and 31,667 options
have been exercised.

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

A. MAJOR SHAREHOLDERS

The following table sets forth certain information as of March 31, 2004,
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)........ 20,672,973 67.1%
Kenneth Yeung (3)(7).................. 1,350,086 7.3%
Most Worth Investments Limited (8).... 1,100,000 5.9%
-------------

(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 18,542,383 ordinary shares
outstanding as of March 31, 2004.

(3) Of the 20,672,973 ordinary shares, 1,350,086 shares are held directly 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 8,501,218 ordinary shares issuable upon the exercise of
currently exercisable warrants issued to Mr. Howard P.L. Yeung.

(5) Includes 3,781,991 ordinary shares issuable to Mr. Howard P.L. Yeung in
the event he acquires warrants from Bank Leumi le-Israel B.M. and Bank
Hapoalim BM. by exercising a call option granted to him by such banks
pursuant to an option agreement dated September 24, 2003.

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

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

(8) The address of Most Worth Investments Ltd., a company incorporated in
Hong Kong, is c/o 9/F King Fook Building, 30-32 Des Voeux Road, Central,
Hong Kong. Most Worth Investments is a wholly owned subsidiary of King
Fook Holdings Limited, whose shares are traded on the Hong Kong Stock
Exchange. Accordingly, King Fook Holdings may be deemed to be the
beneficial owner of the ordinary shares held by Most Worth Investments.

As of April 6, 2004, there were 325 holders of record of our ordinary
shares. Based on a review of the information provided to us by our transfer
agent, 290 record holders holding approximately 67.5% of our ordinary shares had
registered addresses in the United States. We believe that there were
approximately 1,214 beneficial holders of our ordinary shares on April 7, 2004.

B. RELATED PARTY TRANSACTIONS

On June 9, 2002, our shareholders approved the conversion of $1,350,000
of the principal amount of loans granted by Mr. Howard P.L. Yeung, one of our
controlling shareholders into 2,755,102 of our ordinary shares at a price of
$0.49 per share, which is equal to 70% of the average closing price of our
ordinary shares for the ten (10) trading days prior to June 9, 2002. In
addition, we agreed to issue to Mr. Yeung warrants to purchase 8,265,306
ordinary shares. Such warrants will be outstanding for five years and will be
exercisable during the first 36 months at an exercise price of $2.00 per share,
and during the subsequent 24 month period, at an exercise price which shall be
equal to the higher of: (i) $2.00 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.

We also agreed to provide Mr. Yeung with the right to cause us to file a
registration statement with the U.S. Securities Exchange Commission commencing
one year after the

issuance date, to register the resale of the ordinary shares issued and the
ordinary shares issuable upon exercise of the warrants.

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, or 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 3,781,995
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. These warrants may not
be exercised for a period of 21 months unless transferred pursuant to the call
or put options described below. These warrants expire on March 24, 2006. The
Banks have 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. Howard P. L. Yeung, has 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 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, pending upon the average close price of the
shares during the last 90 business days prior to such exercise. We have also
agreed to grant the Banks warrants to purchase an additional 1,100,000 ordinary
shares at an exercise price of $2.00 per share, exercisable for 5 years,
commencing as of September 24, 2003.

C. INTERESTS OF EXPERTS AND COUNSEL

Not applicable.

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

A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

Legal Proceedings

In December 1998, Haim Nissenson, our former president and chief
executive officer, filed a complaint against us and Herzle Bodinger, the
incumbent president, in the Regional Court for Labor Disputes of Tel Aviv (Case
No. 3/4074/98 H. Nissenson v. RADA ELECTRONIC INDUSTRIES Ltd. and others),
seeking approximately NIS 2.0 million (approximately $500,000) 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. We
defended the claim vigorously asserting, among others, that (i) the retirement
agreement is not valid since it was not approved pursuant to the requirements of
the applicable law; (ii) Mr. Nissenson is responsible for our present financial

condition 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 gave misrepresentations
regarding 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 accordance to a certificate dated March 23, 1992,
Mr. Nissenson has assigned all his rights to receive employment related benefits
other than salaries but including severance and vacation payments up to the
above 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 and a preliminary hearing took place in 2003. Although the claim is in its
preliminary stages, management believes it will not have a material adverse
effect on our financial condition or results of operations.

In March 1999, Mr. Nissenson filed a complaint in the District Court of
Tel Aviv against Mr. Bodinger, our president, (Civil Case 1345/99 H. Nissenson
v. H. Bodinger), alleging Mr. Bodinger published defamatory comments about Mr.
Nissenson. The complaint seeks damages in the amount of NIS 1.2 million
(approximately $275,000). Mr. Bodinger denied the allegations, alleging, among
others, that the statements made by him in these publications were truthful and
bona fide. In October 2000, Mr. G. Nissenson, the son of our former chief
executive officer, filed a complaint in the District Court of Tel-Aviv against
our chief executive officer, Mr. H. Bodinger (Civil Case 2733/99 G. Nissenson v.
H. Bodinger), alleging that Mr. Bodinger has made defamatory comments regarding
the plaintiff during a board meeting. The complaint seeks damages in the amount
of NIS 1.1 million (approximately $250,000).

In September 1999, we filed a suit in the District Court of Tel-Aviv
against Messrs. Nissenson and Eles Dubronsky, a former member of our board of
directors, (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 the inaccurate and incomplete information and
that the acquisition caused us 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 currently in its
preliminary stages.

In August 2000, we filed a claim against Mr. Nissenson in the Regional
Court for Labor Disputes in Tel Aviv (Case No. 7049/00 RADA Electronic
Industries Ltd. v. Nissenson.) in the amount of NIS 2.0 million (approximately
$460,000) 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 preliminary hearing of the
cases took place in 2003. In the hearing the Court ordered the parties to file
an agreed list of factual controversies and

agreements in order to enhance the efficiency of the process and eliminate
unnecessary evidential matters.

In November 2000, Mr. Nissenson filed a suit against us, Mr. Bodinger
and Mr. Ronen Stein, our chief financial officer at the time, in the District
Court of Tel Aviv (Civil Case 2882/00 Nissenson v. RADA Electronic Industries
Ltd. and others), seeking damages in the amount of NIS 1.0 million
(approximately $230,000) and alleging that the description of the claim filed
against him and another former director in connection with the acquisition of
our subsidiary Jetborne International, Ltd. included in our Annual Report on
Form 20-F for the year ended December 31, 1999 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
$115,000).

In May 2001, Mr. 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 $230,000). We are defending the suit vigorously and denied all of
Mr. Nissenson's allegations. In June 2001, we filed a counter claim against Mr.
Nissenson, his wife and another former director for damages caused to us as a
result of transfers of funds to third parties who were made due to breaches by
Mr. Nissenson and the other former director of their fiduciary duties toward us.
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 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 $300,000 for the repayment of a loan provided to him by us. While
Mr. Perera does not deny that he received such amount, he claims that it was
promised to him on account of his compensation and was registered as a loan in
the books of the company for tax purposes. He further claims that he was orally
promised by Mr. Nissenson that such loan would later be forgiven. In March 2001,
Mr. Perera filed a counter claim in the amount of approximately $575,000 for
various payments to which he is allegedly entitled in connection with his
employment and termination thereof by us, including bonus, severance payments,
vacation redemption and overtime payments.

In February 2001, we filed a suit against Mr. Eles Dubronsky, a former
member of our board of directors, in the District Court of Tel Aviv (Civil Case
1158/01 RADA Electronic Industries Ltd. v. E. Dubronsky) in the amount of
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 toward us 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. 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 600,000 of our ordinary shares 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.

We are involved in legal proceedings from time to time. 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

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 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 has 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:

Year High * Low *
---- ------- -------
1999........................... $4.7655 $2.3437
2000........................... 10.4687 1.7967
2001........................... 2.577 1.48
2002........................... 1.8 0.54
2003........................... 2.37 0.41

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 National Market:

2002 High Low
---- ----- -----
First Quarter.................. $1.8 $1.55
Second Quarter................. 1.63 0.6
Third Quarter.................. 0.72 0.6
Fourth Quarter................. 0.64 0.54

2003
----
First Quarter.................. $0.68 $0.57
Second Quarter................. 1.04 0.41
Third Quarter.................. 0.76 0.59
Fourth Quarter................. 2.37 0.53

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
National Market:

2003 High Low
---- ----- -----
October........................ $1.52 $0.53
November....................... 2.12 1.16
December....................... 2.37 1.41

2004
----
January........................ $2.08 $1.68
February....................... 1.85 1.55
March.......................... 1.93 1.31

B. PLAN OF DISTRIBUTION

Not applicable.

C. MARKETS

Our ordinary shares have traded on the Nasdaq National Market under the
symbol RADIF since our initial public offering in 1985 until June 10, 2002 when
the listing of our ordinary shares was transferred to the Nasdaq SmallCap
Market.

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

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, 1999-5759, or the
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 Companies Law, 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 Israel 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 45,000,000 ordinary shares of a
nominal value of NIS 0.005 each. All outstanding ordinary shares are validly
issued, fully paid and non-assessable. 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." 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
thereon. 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 thereon.

Pursuant to our articles of association, our directors are elected at
our annual general meeting of shareholders by a vote of the holders of a
majority of the voting power represented and voting at such meeting. See "Item
6A. Directors, Senior Management and Employees - 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 "- 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 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 Extraordinary 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. Notice of at least twenty-one days prior to the date of the meeting is
required. An extraordinary meeting may be convened by the board of directors, as
it decides or upon a demand of any two directors or 25% of the directors,
whichever is lower, or of one or more shareholders holding in the aggregate at
least 5% of our issued capital and at least 1% of the voting rights in our
company. An extraordinary meeting must be held not more than thirty-five days
from the publication date of the announcement of the meeting.

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

Limitations on the Rights to Own Securities in Our Company

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

Provisions Restricting Change in Control of Our Company

The 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. Under the Companies Law, our articles of association are deemed to
include a requirement that such merger be approved by an extraordinary
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 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 summary of the current tax structure applicable to
companies in Israel, with special reference to its effect on us and our
shareholders. The following also contains a discussion of Israeli government
programs benefiting us. To the extent that the discussion is based on a new tax
legislation that has not been subject to judicial or administrative
interpretation, we cannot assure you that the tax authorities will accept the
views expressed in the discussion in question. The discussion is not intended,
and should not be taken, as legal or professional tax advice and is not
exhaustive of all possible tax considerations.

General Corporate Tax Rate

In general, Israeli companies are currently subject to Company Tax at
the rate of 36% of taxable income. However, the effective tax rate payable by a
company, which derives income from an "approved enterprise" (as further
discussed below), may be considerably less. Subject to relevant tax treaties,
dividends or interest received by an Israeli corporation from foreign
subsidiaries are generally subject to tax regardless of its status as an
approved enterprise.

Law for the Encouragement of Capital Investments, 1959

Certain of our facilities have been granted "approved enterprise" status
under the Law for the Encouragement of Capital Investments, 1959, as amended, or
the Investment Law. The Investment Law provides that a capital investment in
eligible facilities may, upon application to the Israel Investment Center, be
designated as an approved enterprise. Each certificate of approval for an
approved enterprise relates to a specific investment program delineated both by
its financial scope, including its capital sources and its physical
characteristics, e.g., the equipment to be purchased and utilized pursuant to
the program. The tax benefits derived from any such certificate of approval
relate only to taxable income attributable to the specific approved enterprise.

Taxable income of a company derived from an approved enterprise is
subject to Company Tax at the rate of 0% to 25% (rather than 36% as stated
above) for the benefit period: a period of seven years commencing with the year
in which the approved enterprise first generated taxable income (limited to
twelve years from commencement of the operations of the approved enterprise or
of production or fourteen years from the date of approval, whichever is earlier)
and, under certain circumstances, where foreign shareholdings in our company
exceed 25%, extending to a maximum of ten years from the commencement date. In
the event a company is operating under more than one approval or that its
capital investments are only partly approved, its effective Company Tax rate is
the result of a weighted combination of the various applicable rates.

In addition, a company owning an approved enterprise approved after
April 1, 1986 may elect (as we have) to forego certain Government grants
extended to approved enterprises in return for an "alternative package" of tax
benefits. Under the alternative package, a company's undistributed income
derived from an approved enterprise will be exempt from Company Tax for a period
of between two and ten years, depending on the geographic location of the
approved enterprise within Israel, and such company will be eligible for the
standard tax benefits under the Investment Law for the remainder of the benefit
period.

A company that has elected the alternative package and that subsequently
pays a dividend out of income derived from the approved enterprise(s) during the
tax exemption period will be subject to Company Tax in the year the dividend is
distributed in respect of the amount distributed at the rate that would have
been applicable had the company not elected the alternative package (generally
25%). The dividend recipient is taxed at the reduced rate applicable to
dividends from approved enterprises (15% as compared to 25%), if the dividend is
distributed during the tax exemption period or within a specified period
thereafter. This tax must

be withheld by the company at source, regardless of whether the dividend is
converted into foreign currency.

Subject to certain provisions concerning income subject to the
alternative package, all dividends are considered to be attributable to the
entire enterprise and the effective tax rate is the result of a weighted
combination of the various applicable tax rates.

The Investment Law also provides that an approved enterprise is entitled
to accelerated depreciation on its property and equipment that are included in
an approved investment program. We have not utilized this benefit.

Three expansion programs of our production facilities have been granted
"approved enterprise" status under the Law. The period of benefits for the first
program terminated in 1991 and the benefits under the second program terminated
in 1995. The period of benefits for the third program will terminate in 2004.

The above tax benefits are conditioned upon fulfillment of the
requirements stipulated by the Investment Law and the regulations promulgated
thereunder, as well as the criteria set forth in the certificates of approval.
In the event of our failure to comply with these conditions, the tax benefits
could be canceled, in whole or in part, and we would be required to refund the
amount of the canceled benefits, plus interest and certain inflation
adjustments.

Law for the Encouragement of Industry (Taxes), 1969

We believe that we currently qualify as an "industrial company" within
the meaning of the Law of the Encouragement of Industry (Taxes), 1969 (the
"Industry Encouragement Law"). According to the Industry Encouragement Law, an
"industrial company" is a company resident in Israel, at least 90% of the income
of which in any tax year, determined in Israeli currency (exclusive of income
from defense loans, capital gains, interest and dividends) is derived from an
"industrial enterprise" that it owns. An "industrial enterprise" is defined by
that law as an enterprise whose major activity in a given tax year is industrial
production activity.

The following preferred Company Tax benefits are available to industrial
companies such as ours:

o Deduction of purchases of know-how and patents over eight years
for tax purposes.

o Deduction of expenses incurred in connection with a public share
issuance over a three-year period.

o Accelerated depreciation rates on equipment and buildings.

o A right to file, under certain conditions, consolidated tax
returns with related Israeli industrial companies.

Eligibility for the benefits under the Industry Encouragement Law is not
subject to receipt of prior approval from any governmental authority. We cannot
assure you that we will

continue to qualify as an "industrial company" or that the benefits described
above will be available in the future.

Taxation under Inflationary Conditions

The Income Tax Law (Inflationary Adjustments), 1985, or the Adjustment
for Inflation Law represents an attempt to overcome the problems presented to a
traditional tax system by an economy undergoing rapid inflation. Generally, the
Adjustment for Inflation Law was designed to neutralize for Israeli tax purposes
the erosion of capital investments in businesses and to prevent unintended tax
benefits resulting from the deduction of inflationary financing expenses. The
Adjustment for Inflation Law applies a supplementary set of inflationary
adjustments to a normal taxable profit computed according to regular historical
cost principles.

The Adjustment for Inflation Law introduced a special adjustment for the
preservation of equity for the tax purpose based on changes in the Israeli
consumer price index, whereby corporate assets are classified broadly into fixed
(inflation resistant) assets and non-fixed assets. Where the shareholders'
equity, as defined in the Adjustment for Inflation Law, exceeds the depreciated
costs of fixed assets, a corporate tax deduction which takes into account the
effect of inflationary change 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 an inflation-linked basis with no ceiling). If the
depreciated costs of fixed assets exceeds shareholders' equity, then such excess
multiplied by the annual rate of inflation is added to taxable income.

In addition, subject to certain limitations, depreciation on fixed
assets and loss carry forwards are adjusted for inflation based on changes in
the Israeli consumer price index. The net effect of the Adjustment for Inflation
Law on us might be that our taxable income, as determined for Israeli Company
Tax purposes, will be different from our U.S. dollar income, as reflected in our
financial statements, due to the difference between the annual changes in the
consumer price index and in the NIS exchange rate with respect to the U.S.
dollar, causing changes in the actual tax rate.

Law for the Encouragement of Industrial Research and Development, 1984

Under the Law for the Encouragement of Industrial Research and
Development, 1984, or the Research Law, and the Instructions of the director
general of the Ministry of Industry and Trade, research and development programs
and the plans for the intermediate stage between research and development and
manufacturing and sales, approved by a governmental committee of the Office of
the Chief Scientist are eligible for grants of up to 50% of the project's
expenditure if they meet certain criteria. These grants are issued in return for
the payment of royalties from the sale of the product developed in accordance
with the program as follows: 3% of revenues during the first three years, 4% of
revenues during the following three years, and 5% of revenues in the seventh
year and thereafter, with the total royalties not to exceed 100% of the dollar
value of the Office of the Chief Scientist grant (or in some cases up to 300%).
Following the full payment of such royalties, there is no further liability for
payment.

The Israeli government requires that the manufacture of products
developed with government grants be performed in Israel, unless a special
approval has been granted. Separate Israeli government consent is required to
transfer to third parties technologies developed through

projects in which the government participates. Such restrictions do not apply to
exports from Israel of products developed with such technologies.

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 of Non-Residents

The State of Israel imposes income tax on non-residents of Israel on
income accrued or derived from sources in Israel or received in Israel by
non-residents. The sources of income include passive income such as dividends,
royalties and interest, as well as non-passive income from services rendered in
Israel. We are required to withhold income tax at the rate of 25%, or 15% for
dividends of income generated by an approved enterprise, on all distributions of
dividends other than bonus shares (stock dividends), unless a different rate is
provided in a treaty between Israel and the shareholder's country of residence.
Under the Convention between the Government of the United States of America and
the Government of Israel with Respect to Taxes on Income, or the Israeli-U.S.
Treaty, the maximum tax on dividends paid to a holder of ordinary shares who is
a U.S. resident (as defined in the treaty) is 25%.

Israel law imposes a capital gains tax on the sale of securities and
other capital assets. Under current law, however, sales of our ordinary shares
are exempt from Israeli capital gains tax for so long as the shares are quoted
on Nasdaq or listed on a stock exchange recognized by the Israeli Ministry of
Finance, provided that we continue to qualify as an "industrial company" or
"industrial holding company." See - "Tax Benefits under the Law for the
Encouragement of Industry (Taxes), 1969." Furthermore, under the Israeli-U.S.
Treaty, a holder of ordinary shares who is a U.S. resident will generally be
exempted from Israeli capital gain tax on the sale of ordinary shares unless
such holder owned, directly or indirectly, 10% or more of our voting power at
any time during the 12-month period before the sale.

A non-resident of Israel who receives interest, dividend or royalty
income derived from or accrued in Israel, from which tax was withheld at the
source, is generally exempted from the duty to file tax returns in Israel with
respect to such income, provided such income was not derived from a business
conducted in Israel by the taxpayer and the taxpayer has no other taxable
sources of income in Israel.

Israel presently has no estate or gift tax.

Reform of Income Taxes in Israel

On July 24, 2002, Amendment 132 to the Israeli Tax Ordinance (the
"Amendment") was approved by the Israeli parliament and came into effect on
January 1, 2003. The principal

objectives of the amendment were to broaden the categories of taxable income and
to reduce the tax rates imposed on employees' income.

The material consequences of the amendment applicable to our company
include, among other things, imposing a tax upon all income of Israeli
residents, individuals and corporations, regardless of the territorial source of
the income and certain modifications in the qualified taxation tracks of
employee stock options. In addition, a foreign tax credit was introduced,
allowing us to credit the income tax paid by our subsidiaries abroad against our
tax liabilities on dividends paid to us by such subsidiaries.

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, non-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.

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

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 for U.S. federal
income tax principles. You will be required to include this amount of dividends
in gross income as ordinary income (see "-New Tax Law Applicable to Dividends
and Long-Term Capital Gain," below). Distributions in excess of our earnings and
profits will be treated as a non-taxable return of capital to the extent of your
tax basis in the ordinary shares and any amount in excess of your tax basis,
will be treated as gain from the sale of ordinary shares. See "-Disposition of
Ordinary Shares" below for the discussion on the taxation of capital gains.
Dividends will not qualify for the dividends-received deduction generally
available to corporations under Section 243 of the Code.

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

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, subject to certain limitations set out in the Code (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 (see "-New Tax Law Applicable to Dividends and Long-Term Capital
Gain," below). Dividends generally will be treated as foreign-source passive
income or financial services income for United States foreign tax credit
purposes. Foreign income taxes exceeding the credit limitation for the year of
payment or accrual may be carried back for two taxable years and forward for
five taxable years in order to reduce U.S. federal income taxes, subject to the
credit limitation applicable in each of such years. Other restrictions on the
foreign tax credit include a prohibition on the use of the credit to reduce
liability for the U.S. individual and corporation alternative minimum taxes by
more than 90%. 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 30-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.

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.

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.

New Tax Law Applicable to Dividends and Long-Term Capital Gain

Under recently enacted amendments to the Code, dividends received by
noncorporate U.S. Holders from certain foreign corporations, and long-term
capital gain realized by noncorporate U.S. Holders, generally are subject to
U.S. federal income tax at a reduced maximum tax rate of 15 percent through
December 31, 2008. Dividends received with respect to ordinary shares should
qualify for the 15 percent rate. The rate reduction does not apply to dividends
received from PFICs, see discussion below, or in respect of certain short-term
or hedged positions in common stock 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 rate reduction. U.S. Holders of ordinary shares should consult their own
tax advisors regarding the implications of these rules in light of their
particular circumstances.

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, then, 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, dividends would not qualify for the reduced
maximum tax rate, discussed above, and

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 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 gain recognized upon the disposition of ordinary shares would be
taxable as ordinary income, 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.

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.

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.

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: 450 Fifth Street, N.W., Judiciary Plaza, Room 1024, 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 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 this facility. 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, 2003, we
had liabilities payable in NIS which are not linked to the U.S. dollar in the
amount of $2.5 million and cash and receivables in the amount of $700,000
denominated in NIS. Accordingly, an increase of 1% of the NIS against the dollar
would increase our financing expenses by approximately $18,000. A devaluation of
1% of the NIS against the dollar would decrease our financing expenses by the
same amount. 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.

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

During the year 2003, we carried out an evaluation, under the
supervision and with the participation of our management, including our chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of our company's disclosure controls and procedures
pursuant to Rule 13a-14 of the Securities Exchange Act of 1934. Based upon that
evaluation, our chief executive officer and chief financial officer concluded
that our company's disclosure controls and procedures are effective in timely
alerting them to material information relating to our company required to be
included in our company's periodic SEC filings.

There have been no significant changes in our internal controls or other
factors which could significantly affect internal controls subsequent to the
date we carried out the evaluation.

It should be noted that any system of controls, however well designed
and operated, can provide only reasonable, and not absolute, assurance that the
objectives of the system are met. In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future events.
Because of these and other inherent limitations of control systems,

there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.

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

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

Our board of directors has determined that Mr. Zvi Trop, one of our
outside directors, meets the definition of an audit committee financial expert,
as defined in Item 401 of Regulation S-K.

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.

ITEM 16C. PRINCIPAL ACCOUNTING 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 independent public accountants and the percentage of each of
the fees out of the total amount paid to the accountants.

Year Ended December 31,
-----------------------------------------------------
2002 2003
------------------------ ------------------------
Services Rendered Fees Percentages Fees Percentages
--------------------- ------- ----------- ------- -----------

Audit ............... $50,000 95% $50,000 100%
Audit-related ....... $2,500 5% - -
Tax ................. - - - -
Other................ - - - -
Total ............... $52,500 100% $50,000 100%

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 public
accountants, Kost Forer Gabbay & Kasierer a member firm 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 SEC, 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 AFFILIATES AND
PURCHASERS
---------------------------------------------------------------------

Issuer Purchase of Equity Securities

Neither we, nor any "affiliated purchaser" of our company, has purchased
any of our securities during 2003.

PART III

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

Not applicable.

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

Consolidated Financial Statements

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

Reports of Independent Auditors.....................................F-2

Consolidated Balance Sheets.........................................F-5

Consolidated Statements of Operations...............................F-6

Statements of Changes in Shareholders' Equity ......................F-7

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

Notes to Consolidated Financial Statements..........................F-10

ITEM 19. EXHIBITS
--------

Index to Exhibits

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

3.1* Memorandum of Association of the Registrant

3.2* Articles of Association of the Registrant

4.1* Specimen of Share Certificate

10.1* 1993 Employee Stock Option Plan, as amended

10.2* 1994 Employee Stock Option Plan, as amended

10.3* 1996 Employee Stock Option Plan, as amended

10.4* 1999 Employee Stock Option Plan, as amended

10.5*** 2003 Employee Stock Option Plan, as amended

10.6* Form of warrants to directors

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

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

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

21 List of Subsidiaries of the Registrant

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

23.2 Consent of Luboshitz Kasierer, a Member of Ernst &
Young Global, Certified Public Accountants (Israel)
with respect to our Registration Statements on Form F-3 and
S-8

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

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

32.1 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

32.2 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

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

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

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

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

RADA ELECTRONIC INDUSTRIES LTD. AND ITS SUBSIDIARY

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2003

IN U.S. DOLLARS

INDEX

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

Reports of Independent Auditors F-2 - F-4

Consolidated Balance Sheets F-5

Consolidated Statements of Operations F-6

Statements of Changes in Shareholders' Equity F-7

Consolidated Statements of Cash Flows F-8 - F-9

Notes to Consolidated Financial Statements F-10 - F-34

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

F-1

ERNST & YOUNG

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of

RADA ELECTRONIC INDUSTRIES LTD.

We have audited the accompanying consolidated balance sheet of Rada
Electronic Industries Ltd. and its subsidiary (the "Company") as of December 31,
2003 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company as of December 31, 2003, and the results of their operations and
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States.

/s/ Kost Forer Gabbay & Kasierer
Tel-Aviv, Israel KOST FORER GABBAY & KASIERER
March 31, 2004 A Member of Ernst & Young Global

F-2

REPORT OF INDEPENDENT AUDITORS

To the Shareholders of
RADA ELECTRONIC INDUSTRIES LTD.
-------------------------------

We have audited the accompanying consolidated balance sheet of Rada
Electronic Industries Ltd. and its subsidiaries ("the Company") as of December
31, 2002 and the related consolidated statements of operations, changes in
shareholders' equity and cash flows for the year ended December 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The financial statements of Rada Electronic Industries Ltd. as of
December 31, 2001 and for the year ended December 31, 2001 were audited by other
auditors who have ceased operations as a foreign associated firm of the
Securities and Exchange Commission Practice Section of the American Institute of
Certified Public Accountants and whose report dated April 28, 2002, expressed an
unqualified opinion on those statements.

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

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

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

F-3

This is a copy of the previously issued Independent Public Accountants' report
of Arthur Andersen. The report has not been reissued by Arthur Andersen.

To the Shareholders of
RADA ELECTRONIC INDUSTRIES LTD.

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

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

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
the Company and its subsidiaries as of December 31, 2001 and 2000, and the
results of its operations and cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

Tel-Aviv, Israel Luboshitz Kasierer
April 28, 2002 Arthur Andersen

F-4

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

December 31,
--------------------------
Note 2003 2002
------- ----------- ------------

ASSETS

CURRENT ASSETS:
Cash and cash equivalents $ 467 $ 570
Trade receivables (net of allowance for doubtful accounts
of $ 214 at December 31, 2003 and 2002) 3,496 1,832
Other receivables and prepaid expenses 250 93
Costs and estimated earnings in excess of billings on
uncompleted contracts 3 176 -
Inventories 4 873 1,077
----------- ------------
Total current assets 5,262 3,572
----- ----------- ------------

LONG-TERM RECEIVABLES AND DEPOSITS:
Long-term receivables 5 990 893
Leasing deposits 71 70
Severance pay fund 1,511 1,334
----------- ------------
Total long-term receivables and deposits 2,572 2,297
----- ----------- ------------

PROPERTY AND EQUIPMENT, NET 6 4,728 5,611
----------- ------------
INTANGIBLE ASSETS, NET 7 1,987 3,127
----------- ------------
Total assets $ 14,549 $ 14,607
----- =========== ============

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES:
Short-term bank credit and loans 8 $ 1,123 $ 5,697
Trade payables 640 635
Other payables and accrued expenses 9 3,317 2,949
Deferred revenues 1,062 1,771
Billings in excess of costs and estimated earnings
on uncompleted contracts 3 1,836 575
----------- ------------

Total current liabilities 7,978 11,627
----- ----------- ------------

LONG-TERM LIABILITIES:
Long-term loans 8 1,220 -
Accrued severance pay 2,048 2,043
----------- ------------
Total long-term liabilities 3,268 2,043
----- ----------- ------------

CONTINGENCIES, COMMITMENTS AND CHARGES 10

MINORITY INTERESTS 425 452
----------- ------------
SHAREHOLDERS' EQUITY: 11
Share capital
Ordinary shares of NIS 0.005 par value - Authorized:
45,000,000 shares at December 31, 2003 and 2002;
Issued and outstanding: 18,510,716 shares at
December 31, 2003 and 2002 108 108
Additional paid-in capital 59,139 58,785
Warrants 1,405 124
Accumulated deficit (57,774) (58,532)
----------- ------------
Total shareholders' equity 2,878 485
----- ----------- ------------

Total liabilities and shareholders' equity $ 14,549 $ 14,607
----- =========== ============

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

F-5

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

Year ended December 31,
-----------------------------------------
Note 2003 2002 2001
-------- ----------- ----------- ------------

Revenues: 14,15
Products $ 8,977 $ 6,773 $ 5,883
Services 3,338 3,626 2,459
----------- ----------- ------------

12,315 10,399 8,342
----------- ----------- ------------
Cost of revenues: 14
Products 6,933 6,685 6,079
Services 2,659 2,538 1,337
----------- ----------- ------------

9,592 9,223 7,416
----------- ----------- ------------

Gross profit 2,723 1,176 926
----------- ----------- ------------

Operating expenses:
Research and development expenses - 122 534
Marketing, selling, general and
administrative expenses 2,698 3,089 3,617
----------- ----------- ------------

Total operating expenses 2,698 3,211 4,151
----------- ----------- ------------

Operating income (loss) 25 (2,035) (3,225)
Financial income (expenses), net 13a,14 708 (364) (210)
Other expenses, net 13b (2) (290) (30)
----------- ----------- ------------

731 (2,689) (3,465)
Minority interests in losses of subsidiary 27 206 96
----------- ----------- ------------

Net income (loss) $ 758 $ (2,483) $ (3,369)
=========== =========== ============

Earnings (loss) per share:

Basic net earnings (loss) per share 16 $ 0.04 $ (0.15) $ (0.24)
=========== =========== ============

Diluted net earnings (loss) per share 16 $ 0.04 $ (0.15) $ (0.24)
=========== =========== ============

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

F-6

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

Number of Additional Total
Ordinary Share paid-in Accumulated shareholders'
shares capital capital Warrants deficit equity
----------- ---------- ---------- ---------- ----------- -----------

Balance at January 1, 2001 13,816,839 $ 103 $56,646 $ - $(52,680) $ 4,069

Net loss - - - - (3,369) (3,369)
----------- ---------- ---------- ---------- ----------- -----------

Balance at December 31,
2001 13,816,839 103 56,646 (56,049) 700

Issuance of Ordinary
shares and warrants,
net *) 1,938,775 2 792 41 - 835
Conversion of loan into
Ordinary shares and
warrants 2,755,102 3 1,347 83 - 1,433
Net loss - - - - (2,483) (2,483)
----------- ---------- ---------- ---------- ----------- -----------

Balance at December 31,
2002 18,510,716 108 58,785 124 (58,532) 485

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

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

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

F-7

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

Year ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------- --------------

Cash flow from operating activities:
------------------------------------
Net income (loss) $ 758 $ (2,483) $ (3,369)
Adjustments required to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Loss (gain) on extinguishment of debt (1,013) 83 -
Depreciation and amortization 2,072 2,388 1,961
Provision of long-term receivable - 290 -
Loss on sale of a subsidiary - - 30
Stock compensation expense - fair value of warrants
issued to suppliers 14 - -
Minority interests in losses of subsidiary (27) (206) (96)
Accrued interest and translation differences on
long-term receivables (97) (40) 47
Decrease (increase) in trade receivables, net (1,664) (1,015) 21
Decrease (increase) in other receivables and
prepaid expenses (157) (26) 559
Decrease in inventories 204 539 7
Decrease in costs and estimated earnings in excess
of billings, net 1,085 460 181
Increase (decrease) in trade payables 5 (162) (159)
Increase (decrease) in other payables and accrued
expenses 722 63 (99)
Decrease in deferred revenues (709) (592) (45)
Accrued severance pay, net (172) 276 -
Others - - 61
----------- ----------- ------------

Net cash provided by (used in) operating activities 1,021 (425) (901)
----------- ----------- ------------

Cash flow from investing activities:
------------------------------------
Purchase of property and equipment (49) (85) (236)
Proceeds from sale of property and equipment - 94 -
Capitalization of software development costs - - (104)
Grant of loans to employees - - (9)
Repayment of loans granted to employees - 20 -
Sale of a subsidiary, net of cash (a) - - (14)
Payment of leasing deposits (1) (70) -
----------- ----------- ------------

Net cash used in investing activities (50) (41) (363)
----------- ----------- ------------

Cash flow from financing activities:
------------------------------------
Proceeds from issuance of shares, net - 835 -
Increase (decrease) in short-term bank credits and
loans, net (1,074) (223) 361
Proceeds from issuance of loan to a related party - 550 1,000
Repayment of loan to a related party - (200) (43)
----------- ----------- ------------

Net cash provided by (used in) financing activities (1,074) 962 1,318
----------- ----------- ------------

Increase (decrease) in cash and cash equivalents (103) 496 54
Cash and cash equivalents at the beginning of the year 570 74 20
----------- ----------- ------------

Cash and cash equivalents at the end of the year $ 467 $ 570 $ 74
=========== =========== ============

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

F-8

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

Year ended December 31,
-------------------------------------------
2003 2002 2001
------------- ------------- --------------

Non-cash transactions:
----------------------
Conversion of shareholder's loan into Ordinary
shares and warrants $ - $ 1,350 $ -
=========== =========== ============
Fair value of warrants issued in connection with $ 1,305 $ - $ -
settlement of debt
=========== =========== ============
Adjustment of accrual for issuance expenses $ 354 $ - $ -
=========== =========== ============

Supplemental disclosures of cash flow activities:
-------------------------------------------------
Net cash paid during the
year for:
Income taxes $ 5 $ 7 $ 13
=========== =========== ============
Interest $ 240 $ 326 $ 525
=========== =========== ============

(a) Sale of a subsidiary (Jetborne):
--------------------------------
Working capital (excluding cash and
cash equivalents) $ 69
Property and equipment 2
Long-term assets 238
Minority interest (3)
Loss on realization (30)
Long-term receivable (290)
------
$ (14)
======

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

F-9

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

NOTE 1:- GENERAL

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

b. As reflected in the consolidated financial statements, as of
December 31, 2003, the Company had an accumulated deficit of $
57,774 and a working capital deficiency of $ 2,716. During 2003,
the Company entered into a restructuring agreement with its banks
with respect to $ 3,451 of its debt and recorded a gain on
restructuring of approximately $ 1,000 (see Note 11c). Subsequent
to balance sheet date, one of its banks also agreed to extend the
payment terms of a short-term loan and, as a result,
approximately $ 1,200 of the loan was reclassified to long-term
debt. Management believes that the abovementioned agreement and
the anticipated cash flows from operations will enable the
Company to finance its operations at least through December 31,
2004.

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. The Company sold aircraft spare parts through Jetborne
International, Inc. ("Jetborne"), which was 75% owned by the
Company until December 31, 2001. Jetborne historically purchased
inventory in bulk, mainly at auctions, and sold the spare parts
over long periods of time through a computerized communication
system through which sales and purchases of airplanes spare parts
are effected. In March 2002, the Company sold its 75% equity
interest in Jetborne in consideration for one dollar and recorded
a loss of $30. Jetborne's results of operations for the year
ended December 31, 2001 are included in the consolidated
statement of operations (see Note 5).

e. As for major customers, see Note 15.

f. The Company changed the estimated useful life of the remaining
intangible assets associated with its Aircraft Test Systems
Programs Sets ("TPS"s) from five to ten years. The effect of
change in estimate on the net income and net earnings per share
for the year ended December 31, 2003, resulted in a decrease of
$136 and $0.01, respectively. The annual expected effect of this
change of estimate for the following years resulted in a decrease
of approximately $116 and $0.01 on net income and on net earnings
per share, respectively.

F-10

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES

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

a. Use of estimates:

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

b. Financial statements in U.S. dollars:

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

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

c. Basis of consolidation:

The consolidated financial statements include the accounts of the
Company and its majority-owned subsidiaries. Intercompany
transactions and balances including profit from intercompany
sales not yet realized outside the group, have been eliminated
upon consolidation.

d. Cash equivalents:

All highly liquid investments that are readily convertible to
cash and are not restricted with original maturity of three
months or less are considered cash equivalents.

e. Inventories:

Inventories are stated at the lower of cost or market value.
Inventory write-offs are provided to cover risks arising from
slow-moving items, excess inventories, and for market prices
lower than cost. As for write-offs included in these financial
statements, see Note 4.

F-11

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Cost is determined as follows:

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

Work in progress - represents the cost of manufacturing with the
addition of allocable indirect manufacturing costs. Costs of work
in progress is determined as follows: raw materials - as
mentioned above and manufacturing costs on an average basis.

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. Intangible assets:

Capitalized software costs are amortized by the greater of the
amount computed using the: (i) ratio that current gross revenues
from sales of the software to the total of current and
anticipated future gross revenues from sales of that software, or
(ii) the straight-line method over the estimated useful life of
the product. The Company assesses the recoverability of these
intangible assets on a regular basis by determining whether the
amortization of the asset over its remaining life can be
recovered through undiscounted future operating cash flows from
the specific software product sold. As for impairment charges
included in these financial statements, see Note 7.

g. Property and equipment:

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

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

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

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

F-12

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

h. Impairment of long-lived assets:

The Group'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 asset may
not be recoverable. Recoverability of an asset to be held and
used is measured by a comparison of the carrying amount of an
asset to the future undiscounted cash flows expected to be
generated by the asset. If such asset is considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the asset exceeds its fair
value. As for write-down charges included in these financial
statements, see Note 6.

i. Research and development costs:

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

Research and development costs incurred in the process of
developing product masters, product enhancements and the
Company's TPS software library, integrated with the Company's
test station, are generally charged to expenses as incurred.

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

j. Income taxes:

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

F-13

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

k. Severance pay:

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

Severance 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, 2003, 2002 and
2001 amounted to $132, $541 and $194, respectively.

l. Fair value of financial instruments:

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

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

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 long-term loans
approximates their fair value.

m. Concentrations of credit risk:

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

Cash and cash equivalents 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.

F-14

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company granted loans in prior years to its former CEO and a
former officer amounting to approximately $983 and $890 including
interest as of December 31, 2003 and 2002, respectively. These
loans are unsecured and the Company is currently in litigation
with its former CEO and a former officer regarding such loans. If
not paid, the Company will incur a loss equal to the amount of
the loans.

The Company has no off-balance sheet credit risks.

n. Warranty:

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

o. Share based compensation:

The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25 - "Accounting for
Stock Based Compensation" ("APB No. 25") and FASB Interpretation
No. 44 "Accounting for Certain Transactions Involving Stock
Compensation" ("FIN No. 44"). According to APB No. 25,
compensation expense is measured under the intrinsic value
method, whereby compensation expense is equal to the excess, if
any of the quoted market price of the share at the date of grant
of the award over the exercise price. The Company provides the
disclosures required by Statement of Financial Accounting
Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS
No. 123") and FAS No. 148 "Accounting for Stock-Based
Compensation - Transition and disclosure" ("SFAS 148").

The Company adopted the disclosure provisions of Financial
Accounting Standards Board Statement No. 148, "Accounting for
Stock-Based Compensation - transition and disclosure" ("SFAS No.
148"), which amended certain provisions of SFAS 123 to provide
alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for
stock-based employee compensation, effective as of the beginning
of the fiscal year. The Company continues to apply the provisions
of APB No. 25, in accounting for stock-based compensation.

Pro forma information regarding the Company's net income (loss)
and net earnings (loss) per share is required by SFAS No. 123 and
has been determined as if the Company had accounted for its
employee stock options under the fair value method prescribed by
SFAS No. 123.

The fair value for these options was estimated at the date of
grant, using the Black and Scholes Option Valuation Model, with
the following weighted-average assumptions for each of the three
years in the period ended December 31, 2003: (1) expected life of
option of two years; (2) dividend yield of 0%; (3) expected
volatility of 31% (24% - 2002, 36% - 2001); and (4) risk-free
interest rate of 1% (2% -2002, 5% - 2001). The compensation
expense is amortized over the vesting period of the options.

F-15

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

If deferred compensation had been determined under the above
mentioned fair value method, the effect on the Company's share
based compensation cost, net income (loss) and net earnings
(loss) per share would have been immaterial for all the reported
periods.

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

p. Revenue recognition:

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

Product revenues:

In December 2003, the SEC issued Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition" ("SAB No. 104") which
revises or rescinds certain sections of SAB No. 101 "Revenue
Recognition," in order to make this interpretive guidance
consistent with current authoritative accounting and auditing
guidance and SEC rules and regulations. The changes noted in SAB
No. 104 did not have a material effect on the Company's
consolidated results of operations, consolidated financial
position or consolidated cash flows.

Revenues from sales of products and aircraft spare parts are
recognized in accordance with SAB 104, according to which revenue
is recognized when shipment has occurred, persuasive evidence of
an arrangement exists, the vendor's fee is fixed or determinable,
no further obligation remains and collectibility is probable.

Revenues from 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. 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, 2003, no such estimated losses were identified.
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 are recorded in results of operations
when they are reasonably determinable by management, on a
cumulative catch-up basis.

F-16

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 for a specific
anticipated contract are being deferred, subject to evaluation of
their probable recoverability, and only if the costs can be
directly associated with a specific anticipated contract. Such
deferred costs are recorded as unbilled contract costs.

In November 2002, Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 00-21, "Revenue Arrangements with Multiple
Deliverables". EITF Issue No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance
of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 applied to revenue
arrangements entered into in fiscal periods beginning after June
15, 2003. Additionally, companies will be permitted to apply the
consensus guidance in this issue to all existing arrangements as
the cumulative effect of a change in accounting principle in
accordance with APB Opinion No. 20, "Accounting Changes". EITF
Issue No. 00-21 also addresses how arrangement consideration
should be measured and allocated to the separate units of
accounting in the arrangement.

Revenues from certain arrangements may include multiple elements
within a single contract. The Company's accounting policy
complies with the revenue determination requirements set forth in
EITF 00-21, relating to the separation of multiple deliverables
into individual accounting units with determinable fair values.
The Company's arrangements are accounted for as one unit of
accounting.

Service revenues:

Revenues from services are recognized as the services are
performed.

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

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

F-17

NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES (Cont.)

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

Basic net earnings (loss) per share is computed based on the
weighted average number of ordinary shares outstanding during
each year. Diluted net income (loss) per share is computed based
on the weighted average number of Ordinary shares outstanding
during each year, plus dilutive potential Ordinary shares
considered outstanding during the year in accordance with
statement of Financial Accounting Standards No. 128, "Earnings
Per Share". Options and warrants to purchase 14,862,237,
13,718,037 and 2,359,894 Ordinary shares have been excluded from
the computation of diluted net loss per share for the years ended
December 31, 2003, 2002 and 2001, respectively, because their
effect is anti-dilutive for all periods presented.

r. Recently issued accounting pronouncements:

In January 2003, the Financial Accounting Standards Board (FASB)
issued Interpretation No. 46, "Consolidation of Variable Interest
Entities" (FIN 46). In December 2003, the FASB modified FIN 46 to
make certain technical corrections and address certain
implementation issues that had arisen. FIN 46 provided a new
framework for identifying variable interest entities (VIEs) and
determining when a company should include the assets,
liabilities, noncontrolling interests and results of activities
of a VIE in its consolidated financial statements.

In general, a VIE is a corporation, partnership,
limited-liability corporation, trust or any other legal structure
used to conduct activities or hold assets that either (1) has an
insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2)
has a group of equity owners that are unable to make significant
decisions about its activities, or (3) has a group of equity
owners that do not have the obligations to absorb losses or the
right to receive returns generated by its operations.

FIN 46 requires a VIE to be consolidated if a party with an
ownership, contractual or other financial interest in the VIE (a
variable interest holder) is obligated to absorb a majority of
the risk of loss from the VIE's activities, is entitled to
receive a majority of the VIE's residual returns (if no party
absorbs a majority for the VIE's losses) or both. A variable
interest holder that consolidates the VIE is called the primary
beneficiary. Upon consolidation, the primary beneficiary
generally must initially record all of the VIE's assets,
liabilities and noncontrolling interests at fair value and
subsequently account for the VIE as if it were consolidated based
on a majority voting interest. FIN 46 also requires disclosures
about VIEs that the variable interest holder is no required to
consolidate but in which it has a significant variable interest.
The Company will apply the provisions of FIN 46 as of March 31,
2004. As of December 31, 2003, the Company does not expect the
adoption of FIN 46 to have a material impact on its consolidated
financial statements.

F-18

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,
-------------------------------
2003 2002
-------------- --------------

Costs incurred on uncompleted contracts $ 862 $ -
Estimated earnings 324 -
-------------- --------------
1,186 -
Less - billings and progress payments 1,010 -
-------------- --------------
$ 176 $ -
============== ==============

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

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

Costs incurred on uncompleted contracts $ 3,711 $ 1,453
Estimated earnings 1,019 756
-------------- --------------
4,730 2,209
Less - billings and progress payments 6,566 2,784
-------------- --------------
$ 1,836 $ 575
============== ==============

NOTE 4:- INVENTORIES

December 31,
------------------------------
2003 2002
------------- -------------
Raw materials and components $ 668 $ 713
Work in progress 112 364
Finished goods 93 -
------------- -------------
$ 873 $1,077
============= =============

Write-down of inventories for the years ended December 31, 2003, 2002
and 2001 amounted to $0, $623 and $0 respectively. The write-off in
2002 was for excess and slow moving inventories and was included in
cost of revenues.

F-19

NOTE 5:- LONG-TERM RECEIVABLES

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

Loan to former chief executive officer (1) $ 705 $ 636
Loan to a former officer (1) 278 251
Loan to Jetborne (2) 290 290
Loans to employees 7 6
------------- -------------
1,280 1,183
Less - allowance for doubtful accounts (2) (290) (290)
------------- -------------
$ 990 $ 893
============= =============

(1) The loans to the former officers are in New Israeli Shekels
linked to the Israeli Consumer Price Index ("CPI") and bear
interest of 4% per annum. The loans were granted from 1989
through 1997. The Company is currently in litigation with
its former CEO and the former officer - see Note 10a.

(2) Loan to Jetborne - On December 31, 2001, the Company sold
its 75% ownership in Jetborne in consideration for one
dollar. Jetborne will repay the Company the outstanding
loan, including accrued interest within ten years from the
date of the agreement. In addition, Jetborne is committed to
pay the Company royalties as a percentage of the gross
revenues of Jetborne, which are derived from the inventory
held by Jetborne as of December 31, 2001. It was agreed that
any payments on account of the royalties will be deducted
from the outstanding loan. In any event, the loan should be
repaid no later than the tenth anniversary of the agreement.
The outstanding loan is presented at an estimated discounted
fair value of $290, net of a provision recorded for the
entire amount of the outstanding loan, due to doubt of
collectibility (see Note 13b).

F-20

NOTE 6:- PROPERTY AND EQUIPMENT, NET

December 31,
------------------------------
2003 2002
------------- -------------
Cost:
Factory building $ 1,940 $ 1,940
Other building 1,042 1,042
Machinery and equipment 13,044 12,996
Office furniture and equipment 459 458
Leasehold improvements 20 20
------------- -------------
16,505 16,456
------------- -------------
Accumulated depreciation:
Factory building 1,132 1,061
Other building 175 130
Machinery and equipment 10,145 9,365
Office furniture and equipment 305 278
Leasehold improvements 20 11
------------- -------------
11,777 10,845
------------- -------------
Depreciated cost $ 4,728 $ 5,611
============= =============

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

Depreciation expense was $932, $918 and $1,103 for the years ended
December 31, 2003, 2002 and 2001, respectively. Write-down of property
and equipment, which is not in use by the Company, was $0, $490 and
$200 for the years ended December 31, 2003, 2002 and 2001,
respectively. The write-downs were included in cost of revenues.

As for charges, see Note 10e.

NOTE 7:- INTANGIBLE ASSETS, NET

December 31,
-----------------------------
2003 2002
------------ -------------
Test Systems Programs Sets:
Cost $ 8,275 $ 8,275
Less - accumulated amortization 6,288 5,148
------------ -------------
Amortized cost $ 1,987 $ 3,127
============ =============

F-21

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

Amortization expense was $382, $730 and $607 for the years ended
December 31, 2003, 2002 and 2001, respectively. The expected
amortization expense in the next five years is approximately as
follows:

2004 $ 275
2005 275
2006 275
2007 275
2008 177
------
$1,277
======

Impairment of intangible assets was $758, $251 and $51 for the years
ended December 31, 2003, 2002 and 2001, respectively included in cost
of revenues. The impairment was recorded since the Company did not
anticipate future revenues on specific TPSs. The weighted average
useful life of the intangible assets is eight years.

NOTE 8:- LOANS AND SHORT-TERM BANK CREDIT

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

Short-term:
Current maturities of long-term loan in U.S.
dollars (1) $ 180 $ 3,965
Short-term bank loan in U.S. dollars (2) - 1,000
Short-term bank credits in NIS (3) 943 732
------------- -------------
$ 1,123 $ 5,697
============= =============
Long-term:
Loans in U.S. dollars (1) $ 1,220 $ -
============= =============
The loans mature as follows:
December 31,
----------------

2004 (current maturity)
2005 $ 180
2006 420
800
-------------
$ 1,400
=============

(1) The interest rate at December 31, 2003 is between
4.25%-5.13% (December 31, 2002 between 2.4% - 4.9%). The
weighted average interest rate as of December 31, 2003 is
4.25 % (December 31, 2002 - 4.6%).

(2) The interest rate at December 31, 2002 is 4.4%.

(3) The interest rate at December 31, 2003 is 8% (December 31,
2002 - 11.4%).

F-22

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

During 2003, the Company restructured a portion of its debt with its
banks (see Note 11c). In addition, subsequent to balance sheet date,
one of the banks agreed to extend the payment terms of a short-term
loan of $1,400 to 2006. As a result, $1,220 of the loan was
reclassified to long-term debt.

The total authorized credit line of the Company at December 31, 2003
is $1,285 (of which $943 was utilized).

As for collateral, see Note 10e.

NOTE 9:- OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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

Payroll and related accruals $ 860 $ 940
Provision for legal proceedings 748 594
Accrued royalties 644 662
Accrued commissions 491 -
Other 574 753
----------- ----------
$ 3,317 $ 2,949
============= ==========

NOTE 10:- CONTINGENCIES, COMMITMENTS AND CHARGES

a. As of December 31, 2003, the Company was a party to various legal
proceedings, including the following:

1. In June 1998, the Company's Board of Directors accepted the
resignation of the Company's former CEO. In December 1998,
the former CEO commenced legal proceedings against the
Company in the Tel Aviv Labor Court, claiming approximately
$ 500 in respect of salary, severance pay, vacation pay and
other fringe benefits. The former CEO also claimed that a
personal loan that was provided to him by the Company had
been forgiven. In May 2001, an additional claim of
approximately $ 230 was filed by the former CEO against the
Company in the Tel-Aviv District Court for damages allegedly
caused to him as a result of attachment imposed on certain
of his assets by the Company that was subsequently cancelled
by the Court. In addition, in 2001, the Company filed a
claim against a former director in event the former CEO's
claim in the Labor Court is accepted by the court, damages
in the amount of $ 250 should be covered by the former
director. The Company filed additional lawsuits against the
former CEO and a former director in the amount of $ 250 for
funds that they allegedly transferred from the Company to a
third party. In September 1999 and in 2001, the Company
filed lawsuit against the former CEO and the former director
with the District Court of Tel Aviv in the amount of $ 1,400
for damages caused to the Company in the purchase of a
subsidiary and negligence of management. In August 2000, the
Company filed an additional lawsuit against the former CEO
in the amount of approximately $ 460 regarding the repayment
of the loan provided to the former CEO. Legal counsel
believes that the Company has a valid defense against all
claims made against it.

F-23

NOTE 10:- CONTINGENCIES, COMMITMENTS AND CHARGES (Cont.)

2. In 1999 and 2000, the former CEO and his son filed a number
of complaints against the Company's president and are
seeking damages for alleged slander by the defendant in the
amount of approximately $750. In the opinion of Company's
legal counsel, the Company has a strong defense against the
allegations.

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

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

5. In 2002, a claim was filed against the Company, whereby an
individual claims that it served as an agent in an agreement
signed between the Company and a customer and is entitled to
commissions in the amount of $250. In the opinion of
Company's legal counsel, the Company has a strong defense
against the allegations.

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

b. The Company's research and development efforts have been
partially financed through royalty bearing programs sponsored by
the Office of the Chief Scientist of the Ministry of Industry and
Trade of Israel ("OCS"). In return for the OCS's participation,
the Company is committed to pay royalties at a rate ranging from
3 % to 5% of sales of the products supported by the OCS, up to
100% of the amount of such participation received linked to the
U.S. dollar. The obligation to pay these royalties is contingent
on actual sales of the products and in the absence of such sales,
no payment is required. The Company's total obligation for
royalties, net of royalties paid or accrued totaled approximately
$630 as of December 31, 2003.

The total amount of royalties charged to operations in the years
ended December 31, 2003, 2002 and 2001 was approximately $73, $98
and $153, respectively.

F-24

NOTE 10:- CONTINGENCIES, COMMITMENTS AND CHARGES (Cont.)

c. Research and development projects undertaken by the Company were
partially financed by the Binational Industrial Research and
Development Fund ("BIRD") Foundation. The Company is committed to
pay royalties to the BIRD Foundation at a rate of 2.5% of sales
proceeds generating from projects for which the BIRD Foundation
provided funding up to 150% of the sum financed by the BIRD
Foundation. The Company's total obligation for royalties, net of
royalties paid or accrued, totaled approximately $1,890 as of
December 31, 2003. 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 total amount of royalties charged to operations for the years
ended December 31, 2003, 2002 and 2001 was approximately $15, $13
and $13, respectively.

d. The Netanya offices of the Company are rented under a
non-cancelable operating lease expiring by January 31, 2005. In
addition, certain of the Company's vehicles and computers are
under operating leases. Annual minimum future rental payments
under these leases, at exchange rates in effect on December 31,
2003, are approximately as follows:

2004 $ 505
2005 192
2006 20
-----
$ 717
=====

Lease expense for the years ended December 31, 2003, 2002 and
2001 was $447, $277 and $195, 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 obtains bank guarantees on behalf of its customers
and suppliers in the ordinary course of business. The total
amount of bank guarantees as of December 31, 2003 is
approximately $3,458.

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

F-25

NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)

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

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

b. Stock option plans:

In 1994, 1996, 1999 and 2003 the Company's Board of Directors
approved the adoption of Employee Stock Option Plans (the
"Plans"), which authorized the grant of options to purchase up to
an aggregate of 200,000, 240,000, 1,040,000 and 2,000,000
Ordinary shares, respectively, to officers, directors,
consultants and key employees of the Company and its
subsidiaries. Options granted under the Plan expire within
maximum of ten years from adoption of the plan. The Plans will
expire in 2004, 2006, 2009 and 2013, respectively, unless sooner
terminated by action of the Board of Directors. Options granted
under the Company's Plans vest ratably over three years, one
third on each anniversary of the grant.

The exercise price of an option granted to an employee may not be
less than 60% of the fair market value of the 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, 2003, 2,110,800 options were available for grant
under the Plans described above.

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

F-26

NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)

Transactions related to the above plans (including warrants to
directors) during the years ended December 31, 2003, 2002 and
2001 were as follows:

Year ended December 31,
---------------------------------------------------------------
2003 2002 2001
-------------------- --------------------- --------------------
Weighted Weighted Weighted
Amount average Amount average Amount average
of exercise of exercise of exercise
options price options price options price
---------- --------- ---------- --------- ---------- ---------

Options
outstanding at
beginning of year 526,000 $ 4.89 1,638,000 $ 5.48 1,742,000 $ 5.40
Granted 998,000 0.84 - - - -
Forfeited or
cancelled (154,800) 6.34 (1,112,000) 5.76 (104,000) 4.78
---------- ---------- ----------
Options
outstanding at
end of year 1,369,200 $ 1.77 526,000 $ 4.89 1,638,000 $ 5.48
========== ========= ========== ========= ========== =========
Exercisable
options at end
of year 760,533 $ 2.56 411,600 $ 4.85 949,200 $ 4.71
========== ========= ========== ========= ========== =========

No options were granted in 2002 and 2001. The weighted average
fair value of options granted in 2003 was immaterial. No
compensation expense was recorded for the years ended December
31, 2002 and 2001, respectively.

The following table summarizes information about options
outstanding and exercisable at December 31, 2003:

Options outstanding Options exercisable
---------------------------------------- --------------------------
Weighted
average Weighted Weighted
Range of Amount at remaining average Amount at average
exercise December 31, contractual exercise December 31, exercise
price 2003 life price 2003 price
-------------- ------------ ----------- ------------- -------------- ----------
(years)
-----------

$ 0.69 - 1.00 843,000 9.52 $ 0.70 334,333 $ 0.72
$ 1.34 - 2.00 155,000 9.76 1.57 55,000 2.00
$ 3.09 - 4.13 219,600 5.55 3.41 219,600 3.41
$ 4.88 - 6.75 151,600 5.23 5.56 151,600 5.56
------------ ------------- -------------- ----------
1,369,200 $ 1.77 760,533 $ 2.56
============ ============= ============== ==========

F-27

NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)

c. Warrants:

As of December 31, 2003, warrants to purchase 18,074,032 Ordinary
shares were outstanding.

On June 22, 2003, the Company signed a memorandum of agreement,
pursuant to which it entered into an agreement with Bank Hapoalim
B.M. and Bank Leumi le-Israel B.M. (the "Banks") to restructure a
portion of the debt owed to the Banks. The closing took place on
September 24, 2003 (the date of the consummation of the
transaction). The carrying value of the restructured debt was
$3,451. As part of the restructuring, the Company issued
3,781,995 warrants to the Banks, paid cash of $1,100 and the
Banks forgave the remaining debt. The warrants issued to the
Banks have an exercise price equal to par value of the shares and
a term of 2.5 years. The warrants have a lock-up period of 21
months. The Banks have a put option to sell the warrants to the
Company's major shareholder for a consideration of $1,251. The
put option is exercisable by the Banks only once during the
period of 45 days commencing after the end of the period of 18
months from the date of the agreement. In addition, the Banks
granted the Company's major shareholder a call option that
requires the Banks to sell the warrants to the shareholder at the
exercise price of the put option with an additional payment equal
up to 25% of the increase in the market share price from the date
of the agreement up to a maximum of $0.14 per warrant. The call
option may be exercised by the shareholder during the period of
18 months from the date of the agreement and during a period of
45 days commencing after the termination of the put option. The
Banks also received 1,100,000 warrants having an exercise price
of $2.00 per share, and a term of five years.

The transaction was recorded in accordance with FAS No. 15,
"Accounting by Debtors and Creditors for Troubled Debt
Restructurings". The warrants issued to the Banks were recorded
at fair value ($1,267, net of issuance expenses). The fair value
of the warrants was based on the value of an Ordinary share at
the consummation date of the transaction (based on a valuation of
the warrants prepared by a valuation expert). The difference
between the consideration paid to the Banks and the carrying
amount of the debt of $1,013, was recognized as a gain on
restructuring of debt, net of issuance expenses, presented in
financial income (expenses), net, in the statement of operations.

In June 2002, in connection with the private placement described
above, the investors were issued warrants to purchase 4,302,041
of the Company's Ordinary shares. Such warrants are valid for
five years and are exercisable during the first 36 months after
issuance at an exercise price of $ 2 per share, and thereafter,
during the following 24 month period, at an exercise price which
will be equal to the higher of: (i) $2 per share or (ii) 50% of
the average closing price during the ten trading days prior to
the exercise date. The proceeds allocated to the warrants, based
on the relative fair value of the warrants and shares issued
amounted to $41.

F-28

NOTE 11:- SHAREHOLDERS' EQUITY (Cont.)

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

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

In May 2000, warrants to purchase 388,778 Ordinary shares were
issued to investors who participated in the February 2000 private
placements, at an exercise price of $2.75 per share, exercisable
until June 2003. During 2003, the Company extended the expiration
date of the warrants to June 2004. The extension was accounted
for in accordance with FIN No. 44, by applying a new measurement
date, which resulted in no additional compensation expense. As of
December 31, 2003, no shares were issued in respect to the
abovementioned warrants.

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 Capital
Investments, 1959:

The Company has been granted by the Israeli Government under the
Law for Encouragement of Capital Investments, 1959 ("the Law") an
"Approved Enterprise" status for one investment program in the
alternative benefit program. Since the Company is a "foreign
investors' company", as defined by the Law, it is entitled to a
ten-year period of benefits, for enterprises approved after April
1993. The main tax benefit from the said status is a tax
exemption for two years, and eight years of a reduced tax rate
(based on the percentage of foreign shareholding in each tax year
- 15%-20% tax rate) on income from its approved enterprise, for
the remainder of the benefit period commencing with the first
year in which the approved enterprise reports taxable income. The
commencement of the benefit period is subject to a limitation of
the earlier of twelve years from commencement of operations, or
fourteen years from receipt of approval. As the Company has not
yet reported any taxable income, the benefit period has not yet
commenced. Given the aforementioned conditions, the above benefit
program will expire in 2004.

F-29

NOTE 12:- TAXES ON INCOME (Cont.)

In the event of a distribution of cash dividends out of
tax-exempt income, the Company will be liable to corporate tax at
a rate of 25% in respect of the amount distributed.

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

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

The entitlement to the above mentioned benefits is conditional
upon the Company's fulfilling the conditions stipulated by the
above mentioned law, regulations published hereunder and the
certificates of approval for the specific investments in approved
enterprises. In the event of failure to comply with these
conditions, the benefits may be canceled and the Company may be
required to refund the amount of the benefits, in whole or in
part, with the addition of linkage differences, to the CPI and
interest. As at December 31, 2003, management believes that the
Company complies with the aforementioned conditions.

c. 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.

d. As of December 31, 2003, the net operating loss carryforward for
tax purposes relating to the Company in Israel amounted to
approximately $43,000. Carryforward losses in Israel may be
carried forward indefinitely and may be offset against future
taxable income.

As of December 31, 2003, carryforward losses relating to
non-Israeli companies (U.S. and China), amounted to approximately
$9,750.

As the Company believes that the tax assets in respect of these
carryforward losses amounting to approximately $19,000 is not
more likely than not to be realized, the Company has recorded a
valuation allowance in respect of the entire amount of the
deferred tax asset relating to the carryforward losses.

e. Income (loss) before income taxes:

Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------
Domestic $ 867 $ (2,175) $ (2,837)
Foreign (109) (308) (532)
------------ ------------ -----------
$ 758 $ (2,483) $ (3,369)
============ ============ ===========

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

F-30

NOTE 12:- TAXES ON INCOME (Cont.)

g. Amendment 132 to Israel's Income Tax Ordinance:

In July 2002, Amendment No. 132 to Israel's Income Tax Ordinance
("the Amendment") was approved by the Israeli parliament and is
effective as of January 1, 2003. The principal objectives of the
Amendment were to broaden the categories of taxable income and to
reduce the tax rates imposed on employment income.

There are no material implications of the Amendment applicable to
the Company, except certain modifications in the qualified
taxation tracks of employee stock options. As a result, in 2003,
the Company entered into the 2003 share option plan.

NOTE 13:- SELECTED STATEMENTS OF OPERATIONS DATA

a. Financial income (expenses), net:

Year ended December 31,
-----------------------------------------
2003 2002 2001
------------ ------------ -----------

Income:
Gain on restructuring of debt, net
(see Note 11c) $ 1,013 $ - $ -
Foreign currency exchange differences - 169 335
Interest on cash equivalents 9 4 33
------------ ------------ -----------
1,022 173 368
------------ ------------ -----------
Expenses:
Foreign currency exchange differences 22 - -
Interest on short-term loans and
other credit balances 230 253 424
Bank commissions 59 96 63
Interest to related parties - 89 61
Loss on extinguishment of debt - 83 -
Others 3 16 30
------------ ------------ -----------
314 537 578
------------ ------------ -----------
$ 708 $ (364) $ (210)
============ ============ ===========

b. Other expenses, net:

Impairment of loan to Jetborne (see
Note 5) $ - $ (290) $ -
Loss on sale of subsidiary - - (30)
Others, net (2) - -
------------ ------------ -----------
$ (2) $ (290) $ (30)
============ ============ ===========

F-31

NOTE 14:- RELATED PARTY TRANSACTIONS

There are no related party balances as of December 31, 2003 and 2002.
Related party transactions reflected in the statement of operations
for the years ended December 31, 2003, 2002 and 2001 are as follows:

Year ended December 31,
-----------------------------------
2003 2002 2001
---------- ---------- ----------
Related party (*):

Revenues $ - $ 394 $ -
========== ========== ==========
Purchases $ - $ - $ 43
========== ========== ==========
Shareholder:

Interest expense $ - $ 89 $ 61
========== ========== ==========

Loss on extinguishment of loan $ - $ 83 $ -
========== ========== ==========

(*) A company controlled by Company shareholder.