Mr. Howard Yeung beneficially owned approximately ~~61.4%~~56.6% of our outstanding shares as of April ~~24, 2013.~~30, 2014. For as long as Mr. Yeung has a controlling interest in our company, he will have the ability to exercise a controlling influence over our business and affairs, including any determinations with respect to potential mergers or other business combinations involving us, our acquisition or disposition of assets, our incurrence of indebtedness, our issuance of any additional ordinary shares or other equity securities, our repurchase or redemption of ordinary shares and our payment of dividends. Similarly, as long as Mr. Yeung has a controlling interest in our company, he will have the power to determine or significantly influence the outcome of matters submitted to a vote of our shareholders, including the power to elect all of the members of our board of directors (except outside directors, within the meaning of Israeli law), or prevent an acquisition or any other change in control of us. Because the interests of Mr. Yeung may differ from the interests of our other shareholders, actions taken by him with respect to us may not be favorable to our other shareholders.

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

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

Quarterly variations in our operating results;

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

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

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

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

Changes in the status of our intellectual property rights;

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

Additions or departures of key personnel;

Future sales of our ordinary shares;

Delisting of our shares from the NASDAQ Capital Market; and

Stock market price and volume fluctuations.

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

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

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

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

We do not intend to pay dividends.

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

Risks Relating to Our Location in Israel

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

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

Since its establishment in 1948, Israel has been involved in a number of armed conflicts with its Arab neighbors and a state of hostility, varying from time to time in intensity and degree, has continued into ~~2013.~~2014. Also, since 2011, riots and uprisings in several countries in the Middle East and neighboring regions have led to severe political instability in several neighboring states and to a decline in the regional security situation. Such instability may affect the local and global economy, could negatively affect business conditions and, therefore, could adversely affect our operations. In addition, Iran has threatened to attack Israel and is widely believed to be developing nuclear weapons. Iran is also believed to have a strong influence among extremist groups in neighboring areas to Israel, such as Hamas in Gaza and Hezbollah in Lebanon. To date, these matters have not had any material effect on our business and results of operations; however, the regional security situation and worldwide perceptions of it are outside our control and there can be no assurance that these matters will not negatively affect us in the future.

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

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

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

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 U.S. courts for liquidated amounts in civil matters, including judgments based upon the civil liability provisions of those Acts.

The rights and responsibilities of our shareholders are governed by Israeli law and differ in some respects from those of a typical U.S. corporation.

We are incorporated under Israeli law and the rights and responsibilities of holders of our ordinary shares are governed by our articles of association and by Israeli law. These rights and responsibilities differ in some respects from the rights and responsibilities of shareholders in typical U.S. corporations. In particular, a shareholder of an Israeli company has a duty to act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain matters. Israeli law provides that these duties are applicable to shareholder votes at the general meeting with respect to, among other things, amendments to a company’s articles of association, increases in a company’s authorized share capital, mergers and actions and transactions involving interests of officers, directors or other interested parties which require the shareholders’ approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that he or she possesses the power to determine the outcome of a vote at a meeting of our shareholders, or who has, by virtue of the company’s articles of association, the power to appoint or prevent the appointment of an office holder in the company, or any other power with respect to the company, has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. There is little case law available to assist in understanding the implications of these provisions that govern shareholder behavior.

Israeli government programs and tax benefits may be terminated or reduced in the future.

We participate in programs of the Office of the Chief Scientist in the Ministry of Industry, Trade and Labor, or OCS, for which we receive funding for the development of technologies and products. The benefits available under these programs depend on meeting specified conditions. For more information about these programs see Item 5. “Operating and financial review – Research & Developments – Chief Scientist (OCS).” If we fail to comply with these conditions, we may be required to pay additional penalties, make refunds and may be denied future benefits. From time to time, the government of Israel has discussed reducing or eliminating the benefits available under these programs, and therefore these benefits may not be available to us in the future at their current levels or at all.

As a foreign private issuer whose shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain NASDAQ requirements. We follow Israeli law and practice instead of NASDAQ rules regarding the composition of the board of directors, director nomination process, compensation of executive officers and the requirement that our independent directors have regularly scheduled meetings at which only independent directors are present.

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

ITEM 4.

INFORMATION ON THE COMPANY

A. History and Development of the Company

We were incorporated under the laws of the State of Israel on December 8, 1970. We are a public limited liability company under the Israeli Companies Law 1999-5759, or the Israeli Companies Law, and operate under this law and associated legislation. Our registered offices and principal place of business are located at 7 Giborei Israel Street, Netanya ~~42504,~~4250407, Israel, and our telephone number is +972-9-892-1111. Our website address is www.rada.com. The information on our website is not incorporated by reference into this annual report.

We develop, manufacture and sell defense ~~electronics:~~electronics including, avionics solutions (including avionics for unmanned aerial vehicles), airborne data/video recording and management systems, inertial navigation systems and tactical land radars for force and border protection systems. In addition, we continue to sell and support our legacy commercial aviation ~~legacy~~ products and services, mainly through our Chinese subsidiary.

B. Business Overview

Industry Overview

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

Today's advanced defense electronics systems typically incorporate components that are derived from the industrial or the consumer electronics markets, especially from the telecom markets. Most of the defense electronics systems are built with commercial components and even with sub-systems, which ~~reduces~~reduce the overall price, and at the same time ~~generates~~generate complex obsolescence issues.

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

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

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

Products and Services

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

Our current product lines are:

Data/video recording and management for aerial ~~and land~~ platforms;

Inertial navigation systems for aerial and land platforms;

Avionics solutions (including avionics for UAVs); and

Radars for force and border protection systems (land based).

In addition, we continue to support our legacy commercial aviation test stations.

We also provide test and repair services through our China-based subsidiary.

Data/Video Recording and Management

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

Flight data recorders, or FDR, for fighter aircraft;

Digital video/audio/data recorders, or DVDR (with data transfer functions);

High-rate (no compression) data recorders, or HRDR, for aircraft and airborne pods;

~~VRDS – video~~Video recorders and airborne data servers, ~~(the~~or VRDS, the latest approach to avionic data ~~management);~~management;

A wide range of head-up-displays color video cameras, or HCVC, for fighter aircraft; and

A variety of ground debriefing solutions, or GDS.

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

Our GDS feature synchronized video, audio, data, and air combat maneuvering debriefing. GDS vary from personal, laptop-size debriefing units, through robust desktop multi-channel systems supporting the mission debriefing of four-aircraft formations up to large-scale simultaneous debriefing systems. These network-based systems support large numbers of participants operating from different locations, and provide advanced data management features.

Our products are fully qualified and operational with fixed and rotary-wing aircraft and land vehicles, and are backed by our ~~teams of~~support experts ~~dedicated to providing~~who provide global technical and maintenance support. Our customers include leading air forces and prime integrators worldwide, such as the Israeli Air Force, or IAF, the Chilean Air Force, GE Aviation, Lockheed Martin, Boeing, ~~Company,~~ HAL, Embraer, Rafael, IAI, and others.

Inertial Navigation Systems

Leveraging on our in-depth scientific research and algorithmic expertise, utilizing state-of-the-art fiber optic gyro, or FOG, and micro-electro mechanical systems, or MEMS, sensors, and taking advantage of our experience in electronic and mechanical design, we are introducing a line of advanced - yet affordable - inertial navigation systems, or INS. Our INS products are adaptable to the performance and interface requirements of multiple combat platforms and weapon systems. Among our navigation products are:

R-100F: FOG-based, navigation-grade Embedded GPS-INS;

R-200M: Compact, MEMS-based, multiple-sensor aided INS for combat platforms and weapons;

MAVINS – Modular Avionics and MEMS-Based INS: Specially-designed compact integrated solution for UAVs and disposable applications; and

Inertial measurement units or ~~IMU.~~IMUs.

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

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

Among our customers for navigation solutions are leading air forces and prime integrators worldwide, including the IAF, IAI, Rafael, Embraer, Indra Sistemas, S.A. and India's Defense Research and Development Organization.

Avionics Solutions

We have been a developer and manufacturer of core avionics systems for over 30 years. We currently offer a wide spectrum of military avionics systems designed for integration in new and upgraded military aircraft and UAVs worldwide. Our avionics solutions range from fully integrated avionics suites, MOTS core avionics subsystems, to tailor-made "built-to-spec" units, backed by our teams of experts dedicated to providing global technical and maintenance support.

In 2009 we were awarded, as a prime contractor and integrator, an intelligence, reconnaissance and surveillance upgrade program by a strategic customer for its aircraft fleet. We believe that this program places us among the few companies worldwide that are performing such upgrades and will lead to other such programs in the future.

Our avionics systems are easily adapted to western, eastern, and indigenous-origin platforms of all kinds. We provide our avionic expertise as team members and subcontractors and as prime contractors for avionic upgrades. In particular, our avionics for UAVs are extremely compact through modern board connectivity solutions, use of innovative conductive cooling techniques, withstand extreme environmental conditions and are very reliable and affordable.

We offer the following avionics solutions:

Complete integrated avionics upgrade suites for fighters and mission aircraft;

Mission and display computers;

Weapon management systems;

Data interface and processing computers;

Mission data recorders and debriefing solutions;

HUD video cameras;

INS;

Air data sensors; and

Avionics for UAVs (Interface control processors, ~~Engine~~engine control computers, Payload management computers, and ~~many~~ others).

Our avionics solutions are accepted by leading air forces and prime integrators worldwide, such as the IAF, Lockheed Martin, Boeing Company, GE Aviation, HAL, Embraer, IAI, Rafael and many others. Our units are installed onboard ~~the~~ F-16, F-15, A-4, Jaguar, MiG-27, Su-30MKI, Dhruv Helicopter, MiG-29 and Super-Tucano aircraft, and onboard a continuously-growing number of UAVs.

TacticalRadars for Force and Border Protection Solutions

We develop advanced ground radars for tactical applications such as force protection and border protection. Our ~~radars are~~ pulse Doppler software-defined radars, ~~introducing hemispheric spatial coverage and multi-mission capabilities,~~ are solid-state, fully digital, do not include any moving parts, are compact, mobile and highly reliable, provide hemispheric spatial coverage and multi-mission capabilities and demonstrate unprecedented performance-to-price ratio.

~~The advantages of our radar technology and products are:~~

~~Non-uniform active electronically scanned array, or AESA Antenna, introducing spatial electronic scanning, track-while search capability and coverage of very high elevation angles~~

~~Accurate range and direction measurements~~

~~Resistance to jamming/noise using ECCM techniques~~

~~Multipath cancellation~~

~~Co-existence with nearby Systems~~

~~Automatic Self-Calibration~~

The asymmetric and irregular conflicts in which modern armies are engaged with in recent years dictate the needs for instantaneous and real-time intelligence, minimal cycle time for target acquisition, highly accurate weapons with minimal collateral damage and discrimination between hostiles and civilians. Our tactical radars, which move with the combat units in the field and are operated by them, provide the real-time knowledge of whether and from where they are being fired at, detect all relevant threats from any firing angles (including very high angles), discriminate among threats and provide the needed intelligence for any course of action, whether counter-fire or avoidance. The performance-over-price ratio of our radars makes them ideal solutions to the requirements imposed by the asymmetric arena.

We have developed two radar hardware platforms: the compact hemispheric radar, or CHR, which is tailored for use in combat vehicles and short-range protection applications; and the multi-mission hemispheric radar, or MHR, which is tailored for use in force and border protection applications. For each radar platform we implement several operational missions by changing the radar operational parameters.

The current operational missions of the CHR are the following:

The RPS-10 radar sensors for active protection systems, or APS, detect all relevant threats that may be fired at combat vehicles, including RPGs, anti-tank guided missiles (ATGMs) and projectiles and provide 360° hemispheric coverage. The system delivers threat data to the APS, enabling it to neutralize threats.

The RPS-15 comprehensive hostile fire management system for combat vehicle detects, tracks, classifies, and locates direct and elevated threats fired at combat vehicles, allowing the mobile force to successfully complete its mission while operating in a hostile environment.

The current operational missions of the MHR are the following:

The RPS-40 hostile fire detection radar system detects, tracks, classifies and locates direct and elevated threats fired at stationary or mobile forces. It computes the Point-Of-Origin (POO) and Point-Of-Impact (POI) of the threats, which may be rockets, artillery, mortars, ATGMs, RPGs, and ~~more.~~more other threats. The system can be integrated with any protection and Command, Control, Communications, Computers and Intelligence (C4I) system and be installed at stationary bases and posts, or onboard fighting vehicles.

The RPS-42 tactical hemispheric air surveillance radar system can detect, classify and track all types of aerial vehicles, including fighters, helicopters, UAVs, transport aircraft, etc. at tactical ranges. Mobile or stationary, the system can be integrated with any C4I system and other radars and sensors, and can operate either as a stand-alone, or as part of a large-scale surveillance system.

The RHS-44 radar system for border protection can detect, identify, and track aerial and surface border intruders including slow and small aircraft, vehicles, vessels, and pedestrians at tactical ranges. The RHS-44 can operate either as a stand-alone, or as part of a large-scale surveillance system.

Support of Legacy Products

We support our customers that use our commercial aviation test stations by providing ongoing maintenance and repair services through product support agreements.

Business Development, Sales and Marketing

Strategy

Our business development strategy is based on the following principles:

Maintaining our business focus on electronic systems for the military and para-military markets;

Expanding our product offerings by adding new applications to our existing product lines and by adapting our products to land systems;

Expanding our customer base by including our products in solutions and integrated systems for airborne and land vehicles;

Establishing sales channels with system integrators and major manufacturers such as Embraer, HAL, Lockheed Martin, Boeing, IMI, IAI, Rafael and others; and

Expanding our products base, business development and marketing activities to large potential markets, especially in the land systems and the Homeland Security segments, through identification of current and future applications that may become affordable by the injection of advanced commercial off-the-shelf technologies that offer superior performance and/or significant price savings, and developing new marketing channels aimed directly at these segments.

Strategic Relationships and Customers

As part of our strategy, we entered into a number of strategic relationships with leading global defense contractors and several air forces. We have focused our marketing and sales efforts to support these relationships.

Lockheed Martin. Lockheed Martin is the manufacturer of the F-16 aircraft, one of the most popular fighter aircraft in the western world today. We are supplying the DVDR and GDS for new F-16 aircraft production and for F-16 upgrade programs led by Lockheed Martin.

GE Aviation. GE Aviation is a world leader in avionics systems for fighter and commercial aircraft. We have prolonged and successful cooperation with GE for over 12 years. We are performing built-to-print production of several products for ~~GE, and in discussions of additional future opportunities.~~GE.

Israel Military Industries. IMI is a world leader in the field of APS for land platforms and is the developer and manufacturer of the "Iron Fist" APS. We are teamed with IMI on the integration and production of our RPS-10 radars as part of their “Iron Fist” APS solution for local and global customers. In July 2011, the “Iron Fist” APS successfully completed trials conducted by the U.S. Defense Department. The “Iron Fist” APS was selected by the Israel Defense Forces, or IDF, as the APS designed to protect the ~~Namer~~NAMER heavy infantry fighting vehicle.

Israel ~~Aircraft~~Aerospace Industries. We actively supply avionics and test equipment to four different divisions of IAI, and in particular to the LAHAV and MALAT divisions, who are major aircraft integrators and utilize our products and services.

Hindustan Aeronautics Ltd. HAL is the major aerospace integrator in India. We are currently cooperating with four divisions of HAL and supply DVDRs, HCVCs, GDS, support equipment and other services in growing numbers.

Embraer S.A. The Military Aircraft Division of the Brazilian aircraft manufacturer is a strategic customer. In addition to supplying avionics such as DVDR, INS and HCVC to Embraer, we are participating to a greater degree in Embraer’s programs through the development and supply of avionic units per their specifications and their training and support activities.

Rafael Advanced Defense Systems Ltd. Rafael is a world leader in the development and supply of missiles, smart weapons and pods of various types. Rafael has become a strategic customer of ours as a result of our development and production of a few advanced built-to-specification products in recent years.

Boeing Defense, Space and Security. Boeing, a provider of air defense and high-energy laser systems, has acquired our MHR in 2013 for evaluation of its use as part its directed energy tactical systems. Field testing of the MHR, which was recently delivered to Boeing, are ongoing and initial results are positive.

Air Forces. We are performing a major upgrade program for an air force in Latin America. We are the sole provider of digital recorders and debriefing solutions to another air force in the region. We are the primary provider of recorders and debriefing solutions to a major Asian air force. All these air forces introduce the potential of prolonged cooperation and are strategic customers of ours.

Business Development and Marketing

Our executive chairman, Maj. Gen. (Ret.) Herzle Bodinger, our chief executive officer, Mr., Zvi Alon, and our chief business development officer, Mr. Dov Sella, lead our business development and marketing efforts. We currently employ three additional professionals in the marketing and sales of our products. Our chief technology officer and our engineering department support our marketing and sales efforts with respect to proposal preparations and products demonstrations. In addition, we have business development consultants in Europe, South America and Asia who receive fees for ~~business successfully obtained using their services.~~sales generated by them.

The Israeli Ministry of Defense has historically supported, and continues to support, our marketing efforts through its defense export assistance branch and through various projects for the IDF and its related divisions. The Israeli Ministry of Industry, Commerce and Labor supports our marketing efforts through its Industrial Cooperation Authority by the exploitation of "Industrial Participation” commitments made to the government of Israel by major U.S. integrators such as Lockheed Martin, Boeing Company, General Dynamics Corporation, GE Aviation and others. There is no guarantee that this type of assistance will be available to us in the future.

In 2012 and 2013, our MHR and CHR production-standard prototypes underwent highly successful field tests and demonstrations in Israel and abroad. In October 2012 and 2013, we showcased our full range of tactical land radar solutions for the defense and HLS markets at the ~~AUSA~~Association of the United States Army (AUSA) Annual Meeting in Washington, ~~DC.~~D.C.

Fixed Price Contracts

The vast majority of our contracts are fixed-price contracts, under which 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 of increased or unexpected costs that may reduce our profits or even generate losses. This risk can be particularly significant under fixed-price contracts for research and development involving new technologies.

Our books and records may be subject to audits by the Israeli Ministry of Defense and other governmental agencies, including the U.S. Department of Defense. These audits may result in adjustments to contract costs and profits.

Principal Customers

Generally, we complete a few major transactions each year, each in an amount comprising ~~approximately~~more than 10% of our revenues for such year. As a result, each year a significant portion of our revenues is derived from a small number of customers. The following table sets forth our principal customers in ~~2010,~~ 2011, 2012 and ~~2012:~~2013:

	Percentage of Revenues									Percentage of Revenues
	2010			2011			2012			2011			2012			2013
Embraer S.A.		3	%		23	%		32	%		23	%		32	%		20	%
Lockheed Martin Corporation											2	%		5	%		17	%
Hindustan Aeronautics Ltd											8	%		6	%		17	%
Israel Aerospace Industries		10	%		17	%		11	%		17	%		11	%		12	%
A Latin America Customer		36	%		8	%		9	%		8	%		9	%		11	%
Israeli Ministry of Defense		17	%		13	%		5	%		13	%		5	%		1	%
Hindustan Aeronautics Ltd		4	%		8	%		6	%
GE Aviation		7	%		7	%		4	%		7	%		4	%		2	%
Russian Aircraft Corporation MiG		7	%		3	%		11	%		3	%		11	%		2	%

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

Recently Issued Accounting Standards

Effective January 1, 2012, we retrospectively adopted a new standard issued by the FASB by presenting total comprehensive income and the components of net income and other comprehensive income (loss) in two separate but consecutive statements. The adoption of this guidance resulted only in a change in the way we present other comprehensive income in our consolidated financial statements and did not have any impact on our results of operations, financial position or cash flows. Comparative amounts of previous periods are also presented.Not applicable.

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 debt securities, loans from our principal shareholders, short-term loans and credit facilities from banks (most recently Bank Leumi Le-Israel B.M. and the Israeli branch of State Bank of India, or the Banks), research and development grants from the government of Israel and the Israel-U.S. Binational Industrial Research and Development Foundation, investment grants for approved enterprise programs and marketing grants from the government of Israel.

As of December 31, ~~2012,~~2013, we owed ~~$2.0~~$0.9 million under an annual line of credit and ~~$1.2~~$0.93 million of secured borrowing with a bank against specific accounts receivable. In addition, the Banks provided ~~$1.8~~$1.2 million of guarantees on our behalf, mainly to our customers and suppliers in the ordinary course of business. The guarantees are secured by a first priority floating charge on all of our assets and by a fixed charge on our property in Beit She'an, goodwill (intangible assets), unpaid share capital and insurance rights (rights to proceeds on insured assets in the event of loss). Our agreements with the Banks prohibit us from: (i) selling or otherwise transferring any assets except in the ordinary course of business; (ii) placing a lien on our assets without the Banks' consent; or (iii) declaring dividends to our shareholders.

~~Our~~We had working capital as of December 31, ~~2011~~2012 of $2 million and a working capital deficit of $0.152 million at December 31, ~~2012, was $3.0 million and $2.04 million, respectively.~~2013. Cash and cash equivalents amounted ~~to $1.1 million as of December 31, 2011 compared~~ to $1.2 million as of December 31, ~~2012.~~2012 compared to $2.1 million as of December 31, 2013. Short-term and long-term bank deposits and restricted bank deposits amounted to ~~$1.8~~$1.3 million as of December 31, ~~2011~~2012 compared to ~~$1.4~~$1.0 million as of December 31, ~~2012.~~2013.

In July 2008, we borrowed $1.5 million from Faith Content Development Limited, or FCD, a company controlled by Mr. Yeung, our controlling shareholder, in order to facilitate further development of our INS technology. This loan ~~bears~~carried interest ofat LIBOR + 3% payable at the beginning of every quarter. Principal payments equal to $90,000 each were payable in six equal installments commencing July 1, 2009 and the remaining principal amount was to be payable in eight equal installments, commencing April 1, 2011. On August 29, 2012, ~~our controlling shareholder~~FCD agreed to postpone the repayment of $1.5 million of the principal that was due to be repaid, ~~to him,~~so that 50% of such amount would be paid on December 15, 2012 and the remaining 50% would be payable on February 15, 2013.

In August 2013, FCD agreed to reissue $350,000 of the loan that had been previously repaid by our company in March 2013 and to facilitate an additional short term loan in the amount of up to $1,000,000 to be repaid by December 31, 2013, or the Credit Facility. The Credit Facility provided for interest at 3.5% per annum above the three month LIBOR rate. In September 2013, we borrowed $850,000 under the Credit Facility and the total amount of the loan increased to $1.2 million. As of ~~February 15, 2013~~April 30.2014, we ~~have~~repaid the amount due under the Credit Facility but not ~~repaid such principal amounts and as a result we are incurring~~the remaining balance of the original INS loan ($1,150,000). We continue to incur default interest payment at the rate of Libor +7%. on such loan.

In October 2010, a $3 million convertible note originally issued to Mr. Yeung in October 2007 ( subsequently assigned by him to FCD), was extended to October 2012. In addition, the expiration date of a warrant to purchase up to an aggregate of 1,578,947 ordinary shares granted to Mr. Yeung at such time was extended to October 2014. The convertible note bears interest at a rate of six-month LIBOR + 3.5% and is convertible into ordinary shares at a conversion price of $2.09 per share. The ~~Note~~note is secured by a second degree floating charge over all of our assets. From January 2013, the loan bears default increased interest rate of LIBOR + 7.5%. See Item 7B. “Major Shareholders and Related Party Transactions - Related Party Transactions.”

In September 2011, we entered into a revolving loan agreement with ~~Faith Content Development Ltd., or FCD, an entity controlled by Mr. Yeung.~~FCD. The loan was in the principal amount of $1.7 million, bearing interest of three month LIBOR + 2.5% per annum. The principal and all the unpaid and accrued interest was paid on February 29, 2012 with the proceeds from a new loan from FCD and Mr. Ben Zion Gruber, a shareholder and member of our board of directors. The loan was approved by our Audit Committee and Board of Directors, and the transaction was also approved by our shareholders at an extraordinary meeting of shareholders held in January 2012. FCD provided $2.7 million and Mr. Ben Zion Gruber provided $300,000. We used $1.7 million of the loan to repay in full all of the amounts due and payable under the September 2011 loan, as described above. The remaining portion of the loan was added to our working capital. The loan bears interest at the rate of the greater of three months LIBOR + 5% per annum, or 7% per annum. Interest is payable quarterly in arrears and the principal iswas due on February 28, 2014. ~~As of December 31, 2012, the outstanding balance of this loan was $3.0 million.~~ In addition, on February 28, 2012, we issued to FCD and to Mr. Ben Zion Gruber warrants to purchase 1,080,000 and 120,000 ordinary shares, respectively, at an exercise price of $2.50 per share. These warrants have a term of three years. The second degree floating charge that was granted with respect to the convertible note of 2007 secures this loan as well. As of December 31, 2013, the outstanding balance of this loan was $3.0 million.

Due to our cash flow and working capital difficulties we were not able to timely and fully make the repayment of interest and principal amounts to our shareholders as described above. As a result we are required to pay the default interest on account of all such loans and all such loans may be accelerated by our lenders. However, we have ~~reached~~entered into a "standstill agreement" with our lenders, according to which, except in extraordinary circumstances, no action will be taken to accelerate the loans or to exercise their rights prior to January 31, ~~2014.~~2015. As of April 30, 2014, we continue to incur default interest based on this agreement.

We made capital expenditures of ~~$705,000~~$351,000 in the year ended December 31, ~~2012,~~2013, primarily for machinery and equipment. We currently do not have any significant capital spending or purchase commitments.

Cash Flows

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

	Year ended December 31,									Year ended December 31,
	2010			2011			2012			2011			2012			2013
	(U.S. dollars in thousands)									(U.S. dollars in thousands)
Net cash provided by (used in) operating activities		(1,685	)		(1,372	)		(752	)		(1,372	)		(752	)		1,432
Net cash provided by (used in) investing activities		(2,027	)		147			(219	)		147			(219	)		(85	)
Net cash provided by financing activities		3,552			1,475			1,008
Net cash provided (used in) by financing activities											1,475			1,008			(435	)
Effect of exchange rate changes on cash and cash equivalents		23			7			20			7			20			61
Net increase (decrease) in cash and cash equivalents		(137	)		257			57
Net increase in cash and cash equivalents											257			57			973
Cash and cash equivalents at beginning of the year		987			850			1,107			850			1,107			1,164
Cash and cash equivalents at end of the year		850			1,107			1,164			1,107			1,164			2,137

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

j.i.

Impairment of long-lived assets:

The Company's long-lived assets are reviewed for impairment in accordance with ASC 360, "Property, Plant and Equipment",; whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. As of December 31, ~~2012~~2013,2012 and 2011, no impairment losses have been identified.

k.j.

Goodwill

Goodwill represents excess of the costs over the net assets of businesses acquired. Under ASC 350, "Intangibles- Goodwill and Other", goodwill acquired in a business combination should not be amortized. ASC 350 requires goodwill to be tested for impairment at least annually or between annual tests in certain circumstances, and written down when impaired.

ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment while the second phase (if necessary) measures impairment. In the first phase of impairment testing, goodwill attributable to each of the reporting units is tested for impairment by comparing the fair value of each reporting unit with its carrying value. The Company determines its fair value according to the Company's market capitalization and the goodwill was tested for impairment by comparing the fair market value with its carrying amount. As of December 31, ~~2012,~~2013, no impairment ~~losses~~indicators have been identified. As a result, step two was not ~~required.~~required..

l.k.

Research and development costs:

Research and development costs, net of participation grants, include costs incurred for research and development and are expensed as incurred.

The Company received royalty-bearing grants, from the Chief Scientist's Office of the Israeli Ministry of Industry, Trade and ~~Labour~~Labor ("OCS") for the purpose of partially funding research and development projects. The grants are recognized as a deduction from research and development costs ~~or capitalized costs on the basis of costs incurred(see~~incurred (see also ~~note 11b)~~Note 10b).

ASC 985, "Software", requires capitalization of certain software development, costs subsequent to the establishment of technological feasibility. Based on the Company's product development process, technological feasibility is established upon completion of a working model.

Research and development costs incurred in the process of developing product masters and the Company's Test System Programs Sets ("TPS") software library, integrated with the Company's test station, are charged to expenses as incurred. Costs incurred by the Company between completion of the working model and the point at which the product is ready for general release has been capitalized.

~~F - 14~~

~~RADA ELECTRONIC INDUSTRIES LTD.~~

~~AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars in thousands~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

m.l.

Income taxes:

The Company accounts for income taxes in accordance with ASC 740, "Income Taxes". 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.

F - 14

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value.

The Company applies ASC 740-10. ASC 740-10 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with ASC 740. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes.

The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The adoption of ASC 740-10 did not result in a change in the Company's accumulated deficit. The Company did not record any provision in connection with ASC 740-10 as of December 31, ~~2012~~2013 and ~~2011.~~2012.

n.m.

Severance pay:

The Company's agreements with most of its employees are in accordance with section 14 of the Severance Pay Law -1963, under which the Company's contributions for severance pay shall be instead of severance compensation. Upon release of the policy to the employee, no additional liability exists between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee.

The Company's liability for severance pay for the employees that are not under section 14 is calculated pursuant to Israel's Severance Pay Law, based on the most recent salary of the employees as of the balance sheet date less monthly deposits for insurance policies and/or pension funds. Employees are entitled to one month's salary for each year of employment or a portion thereof.

The carrying value of deposited funds includes profits (losses) accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillment of the obligations pursuant to Israeli severance pay law or labor agreements.

Severance expense recorded in the statement of operations is net of interest and other income accumulated in the deposits. Severance expense for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010~~2011 amounted to $483, $562 and $583, ~~and $668,~~ respectively.

~~F - 15~~

~~RADA ELECTRONIC INDUSTRIES LTD.~~

~~AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars in thousands~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

o.n.

Fair value of financial instruments:

The Company measures its financial instruments at fair value. Fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

F - 15

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1 -

Valuations based on quoted prices in active markets for identical assets that the Company has the ability to access. Valuation adjustments and block discounts are not applied to Level 1 instruments. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these products does not entail a significant degree of judgment.

Level 2 -

Valuations based on one or more quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3 -

Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

The availability of observable inputs can vary from investment to investment and is affected by a wide variety of factors, including, for example, the type of investment, the liquidity of markets and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment and the investments are categorized as Level 3.

The carrying amount of cash and cash equivalents, restricted deposits, trade receivables, other accounts receivable, bank credit and current maturities of long term loans, trade payables and other accounts payable approximate their fair value due to the short-term maturity of these instruments.

Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

~~F - 16~~

~~RADA ELECTRONIC INDUSTRIES LTD.~~

~~AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars in thousands~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

The following table presents the Company's assets (liabilities) measured at fair value on a recurring basis at December 31, ~~2012~~2013 and ~~2011:~~2012:

F - 16

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

December 31, 2011
Level 1 Level 2 Level 3 Total
Derivatives:

Foreign currencies derivatives $ - $ (87 ) $ - $ (87 )

Total $ - $ (87 ) $ - $ (87 )

December 31, 2012
Level 1 Level 2 Level 3 Total
Derivatives:

Foreign currencies derivatives $ - $ 151 $ - $ 151

Total $ - $ 151 $ - $ 151

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

p.n.

Fair value of financial instruments (Cont.):

	December 31, 2012
	Level 1		Level 2		Level 3		Total
Derivatives:

Foreign currencies derivatives	$	-	$	151	$	-	$	151

Total	$	-	$	151	$	-	$	151

	December 31, 2013
	Level 1		Level 2		Level 3		Total
Derivatives:

Foreign currencies derivatives	$	-	$	46	$	-	$	46

Total	$	-	$	46	$	-	$	46

Concentrations of credit risk:

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

The Company's cash and cash equivalents and restricted cash are mainly held in U.S. dollars with major banks in Israel. Management believes that the financial institutions that hold the Company's investments are institutions with high credit standing, 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, Asia, South America and Israel. The Company performs ongoing credit evaluations of its customers and to date has not experienced any material losses. An allowance for doubtful accounts is determined with respect to these amounts that the Company has determined to be doubtful of collection. The allowance is computed for specific debts and the collectability is determined based upon the Company's experience.

The Company has no off-balance sheet credit risks.

q.p.

Comprehensive income (loss):

The Company accounts for comprehensive income in accordance with ASC 220, "Comprehensive Income". This statement establishes standards for the reporting and display of comprehensive income and its components.

F - 17

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Comprehensive income (loss) (Cont.):

Comprehensive income generally represents all changes in shareholders' equity during the period except those resulting from investments by, or distributions to, shareholders.

~~F - 17~~

~~RADA ELECTRONIC INDUSTRIES LTD.~~

~~AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars in thousands~~

~~NOTE 2:-~~

~~SIGNIFICANT ACCOUNTING POLICIES (Cont.)~~

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”, which is effective for annual reporting periods beginning after December 15, 2011. Accordingly, the Company adopted ASU 2011-05 on January 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity. Upon adoption of the new guidance, the Company elected to present a separate statement of consolidated comprehensive income.

The components of accumulated other comprehensive income (loss), net ~~relates to gains on foreign currency translation adjustments~~of taxes were ~~in the amount of $468 and $443 at December 31, 2012 and 2011, respectively.~~as follows:

	Year ended December 31,
	2013		2012		2011

Foreign currency translation differences	$	547	$	468	$	443

r.q.

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 not material as of December 31, ~~2012~~2013 and ~~2011.~~

~~Share-based compensation:~~

2012.

~~At December 31, 2012, the Company has one stock-based employee compensation plan, which is described in Note 12b.~~

The Company accounts for stock-based compensation under ASC 718, "Compensation – Stock Compensation", which requires the measurement and recognition of compensation expense based on estimated fair values for all share-based payment awards made to employees and directors.

ASC 718 requires companies to estimate the fair value of equity-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company's statements of operations.

The Company estimates the fair value of stock options on the grant date using the Black-Scholes-Merton option-pricing model. No options were granted during the years ended December 31, 2012, 2011 and 2010. In addition, all outstanding options at December 31, 2012 were expired on January 26, 2013 due to expiry of the Company's option plan after 10 years.

F - 18

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

t.r.

Revenue recognition:

The Company generates revenues mainly from the sale of products and from long-term fixed price contracts of defense electronics as follows: data recording and management systems, inertial navigation systems for air and land applications, avionics solutions, avionics for UAVs, and land radar for force and border protection applications. In addition, the Company provides manufacturing, development and product support services.

The Company also generates revenues from repair services using its Automated Test Equipment ("ATE") mainly through CACS.

Product revenues:

The Company recognizes revenue from sales of products in accordance with ASC 605-10, "Revenue Recognition" (Formerly "Staff Accounting Bulletin ("SAB") No. 104"). Product revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed or determinable, delivery of the product to the customer has occurred and the Company has determined that collection of the fee is probable. If the product requires specific customer acceptance, revenue is deferred until customer acceptance occurs or the acceptance provisions lapse, unless the Company can objectively and reliably demonstrate that the criteria specified in the acceptance provisions are satisfied.

Revenues from long-term fixed price contracts which provide a substantial level of development efforts are recognized in accordance with ASC 605-35 ("Construction-Type and Production-Type contracts"), using contract accounting on a percentage of completion method in accordance with the "Input Method". The percentage of completion is determined based on the ratio of actual costs incurred to total costs estimated to be incurred over the duration of the contract. With regard to contracts for which a loss is anticipated, a provision is made for the entire amount of the estimated loss at the time such loss becomes evident. As of December 31, ~~2012~~2013 and ~~2011,~~2012, the provision for estimated losses identified is ~~$583~~$41 and ~~$56,~~$583, respectively.

Revenues under long-term fixed-price contracts that involve both development and production are recorded using the cost-to-cost method (development phase) and units-of-delivery method (production phase) as applicable to each phase of the contract, as the basis to measure progress toward completion.

F - 19

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

Revenue recognition (Cont.):

Estimated gross profit or loss from long-term contracts may change due to changes in estimates resulting from differences between actual performance and original forecasts. Such changes in estimated gross profit or loss are recorded in results of operations when they are reasonably determinable by management, on a cumulative catch-up basis.

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

Service revenues:

Revenues from services are recognized as the services are performed.

u.s.

Basic and diluted net income (loss) per share:

Basic net income (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year. Diluted net income (loss) per share is computed based on the weighted average number of Ordinary shares outstanding during each year, plus dilutive potential Ordinary shares considered outstanding during the year in accordance with ASC 260, "Earnings Per Share". For the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010,~~2011, all the outstanding options, convertible notes and warrants have been excluded from the computation of diluted net income (loss) per share, since their effect is anti-dilutive.

F - 20

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 2:-

SIGNIFICANT ACCOUNTING POLICIES (Cont.)

v.t.

Derivatives and hedging:

The Company accounts for derivatives and hedging based on ASC 815, "Derivatives and Hedging", as amended and related Interpretations. ASC 815 requires the Company to recognize all derivatives on the balances sheet at fair value. If a derivative meets the definition of a hedge and is so designated, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings (for cash flow hedge transactions) or recognized in other comprehensive income until the hedged item is recognized in earnings (for fair value hedge transactions).

The ineffective portion of a derivative's change in fair value is recognized in earnings. If a derivative does not meet the definition of a hedge, the changes in the fair value are included in earnings. Cash flows related to such hedges are classified as operating activities.

The Company enters into forward exchange contracts in order to limit the exposure to exchange rate fluctuation associated with payroll expenses mainly incurred in NIS. ~~Any~~Since the derivative instruments that the Company holds do not meet the definition of hedging instruments under ASC 815, any gain or loss derived from such instruments is recognized immediately as financial expenses, net.

As of December 31, ~~2012~~2013 and December 31, ~~2011,~~2012, the fair value of the outstanding forward contracts is ~~$151~~$46 which was recorded in other receivables against financial income and ~~$87~~$151 which was recorded in accruals against financial expenses, respectively.

~~Recently issued accounting standards:~~

Effective January 1, 2012, the Company retrospectively adopted a new standard issued by the Financial Accounting Standards Board by presenting total comprehensive income and the components of net income and other comprehensive income (loss) in two separate but consecutive statements. The adoption of this guidance resulted only in a change in how the Company presents other comprehensive income in the Company's consolidated financial statements and did not have any impact on the Company's results of operations, financial position or cash flows. Comparative prior periods amounts are also presented.

F - 21

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 3:-

CONTRACTS IN PROGRESS

Amounts included in the consolidated financial statements, which relate to unbilled receivables are classified as current ~~assets..~~assets. Summarized below are the components of the amounts:

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

	December 31,
	2013			2012

Costs incurred on uncompleted contracts, net *)	$	35,032		$	13,946
Estimated earnings		5,221			5,267

		40,253			19,213
Less - billings and progress payments		37,205			16,401

Costs and estimated earnings in excess of billings on uncompleted contracts		3,048			2,812

Less: Long-term portion		(1,017	)		(1,064	)

Costs and estimated earnings in excess of billings on uncompleted contracts - Current portion	$	2,031		$	1,748

December 31,
2012 2011

Costs incurred on uncompleted contracts, net *) $ 13,946 $ 19,464
Estimated earnings (loss) 5,267 3,377

19,213 22,841
Less - billings and progress payments 16,401 20,943

Costs and estimated earnings in excess of billings on uncompleted contracts 2,812 1,898

Less: Long-term portion (1,064 ) (1,084 )

Current portion $ 1,748 $ 814

(*)

Net of OCS grants in the amount of $15 and $313 as of December 31, 2013 and 2012 respectively (see Note 10b).

~~(*) Net of OCS grants in the amount of $313 and $275 as of December 31, 2012 and 2011 respectively (see Note 11b).~~

NOTE 4:-

~~OTHER ACCOUNTS~~LONG-TERM RECEIVABLES AND ~~PREPAID EXPENSES~~OTHER DEPOSITS

	December 31,				December 31,
	2012		2011		2013		2012

Prepaid expenses	$	356	$	238	$	250	$	356
Government institutions		265		366		79		265
Derivative instruments		151		-		46		151
Other		167		123		37		167

	$	939	$	727	$	412	$	939

F - 22

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 5:-

INVENTORIES

	December 31,				December 31,
	2012		2011		2013		2012

Raw materials and components	$	2,747	$	2,430
Raw materials					$	3,833	$	2,747
Work in progress		3,885		4,529		2,157		3,885
Finished goods		640		696		808		640

	$	7,272	$	7,655	$	6,798	$	7,272

Write-offs of inventories for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010~~2011 amounted to $313, $72 ~~$136~~ and ~~$133,~~$136, respectively. The write-offs were due to slow-moving items and excess inventories and were recorded in cost of revenues.

NOTE 6:- LONG TERM RECEIVABLES AND DEPOSITS

~~NOTE 6:-~~

~~LONG TERM RECEIVABLES AND DEPOSITS~~

	December 31,				December 31,				��
	2012		2011		2013		2012

Costs and estimated earnings in excess of billings on uncompleted contracts (see Note 3)	$	1,064	$	1,084	$	1,017	$	1,064
Restricted deposits		42		440		38		42
Leasing deposits		54		39		78		54

	$	1,160	$	1,563	$	1,133	$	1,160

F - 23

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 7:-

PROPERTY, PLANT AND EQUIPMENT

	December 31,				December 31,
	2012		2011		2013		2012
Cost:

Factory building	$	1,989	$	1,989	$	1,989	$	1,989
Other buildings		1,329		1,319		1,371		1,329
Machinery and equipment (*)		8,934		11,628		9,095		8,934
Office furniture and equipment		399		393		411		399
Leasehold improvements		208		208		209		208

		12,859		15,537		13,075		12,859
Accumulated depreciation:

Factory building		1,741		1,660		1,821		1,741
Other buildings		622		570		674		622
Machinery and equipment (*)		6,783		9,704		7,173		6,783
Office furniture and equipment		293		278		311		293
Leasehold improvements		96		48		110		96

		9,535		12,260		10,089		9,535

Depreciated cost	$	3,324	$	3,277	$	2,986	$	3,324

(*)

Write-offs of machinery and equipment (cost and accumulated depreciation) for the years ended December 31, 2013, 2012 and 2011 amounted to $333, $3,502 and $0 respectively. The write-offs are due to fully depreciated assets that are no longer in use.

Depreciation expense amounted to $752, $742 ~~$797~~ and ~~$741~~$797 for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010,~~2011, respectively.

As for charges, see Note ~~11f.~~10e.

F - 24

~~RADA ELECTRONIC INDUSTRIES LTD.~~

~~AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars in thousands~~

~~NOTE 8:-~~

~~OTHER ASSETS~~

~~Intangible assets, net:~~

December 31, 2012 December 31, 2011

Useful
Life from date of acquisition
Gross carrying amount Accumulated amortization Amortized balance Gross carrying amount Accumulated amortization Amortized balance
(Years)
Test Systems
Programs Sets
("TPS")
5 - 10 $ 8,275 $ 8,275 $ - $ 8,275 $ 8,120 $ 155

~~Amortization expense was $155, $154 and $221 for the years ended December 31, 2012, 2011 and 2010, respectively.~~

~~NOTE 9:-~~

~~BANK CREDIT AND LOANS~~

~~Current maturities~~

December 31,
2012 2011

Loan in U.S. dollars from shareholder (1,2,3) $ 3,968 $ 2,405
Bank credit (5) 3,172 3,933
Convertible note from its controlling shareholder, net (4) 3,000 2,810

$ 10,140 $ 9,148

~~Long-term loans:~~

December 31,
2012 2011

Loan in U.S. dollars from its controlling shareholder (1) $ - $ 176

~~F - 25~~

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 9:8:-

BANK CREDIT AND LOANS

Current maturities

	December 31,
	2013		2012

Loan in U.S. dollars from shareholders (1,2,3)	$	5,307	$	3,968
Convertible note from controlling shareholder, net (4)		3,000		3,000
Bank credit (5)		1,887		3,172

	$	10,194	$	10,140

In July 2008, the Company entered into a $1,500 loan agreement with its controlling shareholder. The loan bears interest of LIBOR+3% payable at the beginning of every quarter. During September 2012 an amendment to the finance agreement was signed, according to which, the controlling shareholder agreed to lend to the company $1,148 in addition to the then remaining unpaid loan amount of $352, to support the development efforts. The loan bears interest of LIBOR+3% which was to be payable in two equal installments of $750 each, in December 2012 and February 2013. During March 2013 $350 out of the open balance due was repaid.

In August 2013 the Company and the controlling shareholder amended the loan agreement whereby an additional amount of $350 was provided to the Company to be repaid on December 31, 2013, and the remaining $1,150 to be repaid according to the Standstill agreement (Note 8 (4)). The company returned the $350 in February 2014.

In august 2013 the Company and the controlling shareholder agreed on an additional short term loan in the amount of up to $1,000 (the "New Loan"). The New Loan bears an interest rate of LIBOR+3.5%, to be repaid by the Company by December 31, 2013. In September 2013 the controlling shareholder granted under this new loan an amount of $850. In February 2014 the Company repaid this Loan.

F - 25

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 8:-

BANK CREDIT AND LOANS ~~(Cont.)~~(Cont)

In July 2008, the Company entered into a $1,500 loan agreement with its controlling shareholder. The loan was provided mainly in order to facilitate the development of the Company's inertial navigation system technology (“INS Technology”). The loan bears interest of LIBOR+3% payable at the beginning of every quarter. The controlling shareholder received a non-exclusive license to sell the INS Technology for non-military/commercial purposes. The non-exclusive license granted under this agreement will automatically convert into an exclusive license should the Company default on any of its obligations under the loan agreement. The fair value of the non-exclusive license at the transaction date is deemed de minimis. During September 2012 an amendment to the finance agreement was signed, according to which, the controlling shareholder agreed to lend of the company $1,148 in addition to the then remaining unpaid loan amount of $352, to support the development efforts. The loan bears interest of LIBOR+3% and which was to be payable in two equal installments of $750 each, up until February 10, 2013, and has not yet been repaid by the Company (see also Note 17). As of December 31, 2012, a total balance of $1,500 is due.

In September 2011 the Company entered into a revolving loan agreement ("September loan agreement") with its controlling shareholder in the amount of $1,700. The loan carried interest at the rate of three month LIBOR+2.5% per annum.

3. 2.

During February, 2012, in order to finance future operations, ~~including the continued development of the INS Technology and land radar for protection systems,~~ the Company entered into a $3,000 loan agreement ("February Agreement") with an entity affiliated with its controlling shareholder and another shareholder. The controlling shareholder provided $2,700 and the other shareholder provided $300. Of such amount, $1,700 was used to repay in full the outstanding amount due and payable under the September loan ~~agreement.~~agreement (Note 8 (1)). The loan bears interest at the rate of the greater of three months LIBOR+5% per annum, or 7% per annum. Interest is payable quarterly in arrears. The principal of the loan will be repaid on February 28, 2014. The loan granted by the controlling shareholder is secured by a floating charge over all of the Company's assets that are subordinated to the specific and floating charges over the Company's assets that were granted to certain banks and financing institutes. As part of this loan agreement the Company issued 1,200,000 warrants at an exercise price of $2.5 per share for a term of three years (see Note 12c). The transaction was accounted for as a Debt Instruments with Detachable Warrants in accordance with ASC 470-20. The total amount of discount on the loan as a result of the allocated proceeds attributable to the warrants feature amounting to $708, is amortized over the term of the loan using the effective interest method pursuant to ASC 835, "Interest". The loan is classified as a short term loan due to the fact that the Company has failed to repay a convertible note issued to its controlling shareholder as mentioned in section 4 below (see also Note 17).annum

Interest is payable quarterly in arrears. The principal of the loan should have been repaid on February 28, 2014.

~~F - 26~~

The loan provided by the controlling shareholder is secured by a floating charge over all of the Company's assets that are subordinated to the specific and floating charges over the Company's assets that were granted to certain banks and financing institutes.

~~RADA ELECTRONIC INDUSTRIES LTD.~~

~~AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars~~As part of this loan agreement the Company issued 1,200,000 warrants at an exercise price of $2.5 per share for a term of three years (see Note 11c). The transaction was accounted for as a Debt Instruments with Detachable Warrants in ~~thousands~~

~~NOTE 9:-~~

~~BANK CREDIT AND LOANS (Cont)~~

accordance with ASC 470-20. The total amount of discount on the loan as a result of the allocated proceeds attributable to the warrants feature amounting to $708, is amortized over the term of the loan using the effective interest method pursuant to ASC 835.

The loan was classified as a short term loan due to the fact that the Company has failed to repay a convertible note issued to its controlling shareholder as mentioned in section 4 below. According to the standstill agreement the amounts of $3,000 bears additional default interest rate of 5%.

4. 3.

~~During~~

Dring December 2007, the Company issued a convertible note in the amount of $3,000 to its controlling shareholder, and warrants to purchase up to an aggregate of 1,578,947 ordinary shares at an exercise price of $2.38 per share for a term of five years. The principal was due on December 2010. During October 2010, the maturity date of the convertible note was extended to October 2012 and the expiration date of the warrants was extended to October 2014. The convertible note bears interest at a rate of six-month LIBOR + 3.5% which was 3.96% at December 31, 2010 and it is convertible into Ordinary shares at a conversion price of $2.09 per share. The transaction was accounted for as a modification of debt accordance with ASC 470-50, "Debt". As a result, the Company recorded a discount on the convertible note of $451 ~~due~~Due the modification. The discount was amortized over the term of the extended note using the interest ~~method (see also Note 17).~~method. As of December 31, ~~2012,~~2013, the Company did not repay the convertible note principal of $3,000. From January 2013 the loan bears default increased interest rate of LOBOR +7.5%.

F - 26

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 8:-

BANK CREDIT AND LOANS (Cont)

During April, 2013, the Company entered into a "standstill agreement" with its controlling shareholder and another shareholder, according to which those shareholders will not take any action, or otherwise exercise their rights, with respect to the collection of loans in the total amount of $7,500 at least until January 31, 2014. According to the agreement, all remaining balances of unpaid loans bears additional default interest rate as originally agreed in the loan agreements. During April 2014 the agreement termination date was extended to January 31, 2015. As of April 30, 2014 all the loan amounts included in the agreement were not yet repaid.

The Company has an annual line of bank credit ~~from banks~~ of ~~$2,000~~$1,000 out of which ~~$1,986~~$953 was fully utilized as of December 31, ~~2012,~~2013, and a line of credit for guarantees of approximately ~~$2,340,~~$1,307, out of which ~~$1,790~~$1,243 was utilized as of December 31, ~~2012.~~2013. In addition, the Company may secure borrowing with one of its banks against specific accounts receivables up to ~~$1,750.~~$2,250. As of December 31, ~~2012,~~2013, the Company secured borrowings against specific accounts receivables in the amount of ~~$1,186~~$934 (see also Note ~~11g)~~10f).

The annual average interest rate on the lines of credit is ~~3.18%~~3.63% at December 31, ~~2012.~~2013.

The guarantees are secured by a first priority floating charge on all of our assets and by a fixed charge on goodwill (intangible assets), unpaid share capital and insurance rights (rights to proceeds on insured assets in the event of loss).

The agreements with the Banks prohibit the Company from: (i) selling or otherwise transferring any assets except in the ordinary course of business, (ii) placing a lien on our assets without the Banks’ consent, or (iii) declaring dividends to its shareholders.

NOTE 9:-

OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES

	December 31,
	2013		2012

Payroll and related accruals	$	1,895	$	1,719
Accrued expenses - subcontractors		1,053		883
Accrued expenses		607		564
Accrued commissions		434		357
Tax authorities		361		140
Others		-		87

	$	4,350	$	3,750

F - 27

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 10:-

~~OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES~~

December 31,
2012 2011

Payroll and related accruals $ 1,719 $ 1,951
Accrued expenses - subcontractors 883 1,060
Accrued expenses 564 453
Accrued royalties - 55
Accrued commissions 357 201
Tax authorities 140 122
Advance from customers - 112
Contracts in progress - provision for estimated losses - 56
Others 87 116

$ 3,750 $ 4,126

~~NOTE 11:-~~

COMMITMENTS AND CONTINGENT LIABILITIES

As of December 31, ~~2012,~~2013, the Company was not a party to any legal proceedings.

The Company's research and development efforts have been partially financed through royalty-bearing programs sponsored by the OCS. In return for the OCS's participation, the Company is committed to pay royalties at a rate ranging from 3% to 5% of sales of the products whose research was supported by grants received from the OCS, up to 100% of the amount of such participation received linked to the U.S. dollar. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required. The Company's total obligation for royalties, net of royalties paid or accrued, totaled approximately $1.5M as of December 31, ~~2012.~~2013. The total amount of royalties charged to operations for the years ended December 31, 2013, 2012 ~~2011~~ and ~~2010~~2011 was approximately ~~$0,~~$12, $6 and $1, ~~and $6,~~ respectively. As of December 31, ~~2012,~~2013, the company received total grants from the OCS in the amount of ~~$5,594.~~

~~Research and development grants received from the OCS, amounted to $142, $382 and $179 in the years ended December 31, 2012, 2011 and 2010, respectively.~~

$5,545.

Research and development grants received from the OCS, amounted to $15, $142 and $382 in the years ended December 31, 2013, 2012 and 2011, respectively.

Research and development projects undertaken by the Company were partially financed by the Binational Industrial Research and Development Fund ("BIRD") Foundation. The Company is committed to pay royalties to the BIRD Foundation at a rate of 5% of sales proceeds generating from projects for which the BIRD Foundation provided funding up to 150% of the sum financed by the BIRD Foundation. The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required. The Company's total obligation for royalties, net of royalties paid or accrued, totaled approximately $2,066 as of December 31, 2012. No royalties were charged to operations for the years ended December 31, 2012, 2011 and 2010.

~~F - 28~~

The obligation to pay these royalties is contingent on actual sales of the products and in the absence of such sales, no payment is required. The Company's total obligation for royalties, net of royalties paid or accrued, totaled approximately $2,066 as of December 31, 2013. No royalties were charged to operations for the years ended December 31, 2013, 2012 and 2011

~~RADA ELECTRONIC INDUSTRIES LTD.~~

~~AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars in thousands~~

~~NOTE 11:-~~

~~COMMITMENTS AND CONTINGENT LIABILITIES (Cont.)~~

The Company's offices in Netanya, Israel are rented under a non-cancelable operating lease expiring January 31, 2015. In addition, the Company's motor vehicles are rented under operating leases.

Annual minimum future rental commitments under these leases, at exchange rates in effect on December 31, ~~2012,~~2013, are approximately as follows:

2013	$	661
2014		541	$	688
2015		45		179
2016				82

	$	1,247	$	949

Lease expense for the years ended December 31, 2013, 2012 and 2011 was $747, $783 and ~~2010 was $783,~~ $878, ~~and $906,~~ respectively.

F - 28

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE 10:- COMMITMENTS AND CONTINGENT LIABILITIES (Cont)

In 2008, the Company entered in to a lease agreement to purchase machinery in the amount of approximately $224, which was accounted for as a capital lease under ASC 840, "Leases". The total amount of the lease liability was $16 and $45 as of December 31, 2012 and 2011 respectively.

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

g.f.

The Company provides bank guarantees to its customers and others in the ordinary course of business. The guarantees which are provided to customers are to secure advances received at the commencement of a project or to secure performance of operational milestones. The total amount of bank guarantees provided to customers and others as of December 31, ~~2012~~2013 is approximately ~~$1,790.~~$1,243

NOTE ~~12:~~11:-

SHAREHOLDERS' EQUITY

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.

Stock option plans:

In 2003, the Company's Board approved the adoption of Israeli Employee Stock Option Plan ("the Plan"), which authorized the grant of options to purchase up to an aggregate of 1,666,667 Ordinary shares (in 2006 the Company's Board approved an increase in the plan by an additional 500,000 options), respectively, to officers, directors, consultants and key employees of the Company and its subsidiary. Options granted under the Plan expire within a maximum of ten years from adoption of the plan. One third of the options granted under the Company's Plan vest immediately on the grant date and the remaining two thirds vest ratably over two years. Compensation expense is recognized by the straight-line method.

~~F - 29~~

~~RADA ELECTRONIC INDUSTRIES LTD.~~

~~AND ITS SUBSIDIARY~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~U.S. dollars in thousands~~

~~NOTE 12:-~~

~~SHAREHOLDERS' EQUITY (Cont.)~~

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, ~~2012, 341,832~~2013, all outstanding options from last year were ~~available for grant under the Plan. Upon exercise of options by employees, the Company satisfies the requirements by issuing newly issued shares.~~

~~Transactions related~~expired due to the ~~above Plan (including warrants to directors) during the year ended December 31, 2012 were as follows:~~plan expiry.

Year ended December 31, 2012

Amount of
options

Weighted
average
exercise
price

Weighted average remaining contractual term
(in years)
Aggregate intrinsic value

Options outstanding at beginning of year 718,573 $ 2.45 1.07 $ -

Options outstanding at end of year 718,573 $ 2.45 0.07 $ -

Vested and expected to vest at December 31, 2012 718,573 $ 2.45 0.07 $ -

Exercisable options at end of year 718,573 $ 2.45 0.07 $ -

~~Share based compensation for the years ended December 31, 2012, 2011 and 2010 was $0, $0 and $31 respectively.~~

F - 3029

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE ~~12:~~11:-

SHAREHOLDERS' EQUITY (Cont.)

~~No options~~Transactions related to the above Plan (including warrants to directors) during the year ended December 31, 2013 were ~~granted in 2011 and 2012. All options were expired on January 26, 2013 due to expiry of the 2003 plan.~~as follows:

~~The aggregate intrinsic value in~~

	Year ended December 31, 2013
	Amount of options			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value

Options outstanding at beginning of year		718,573		$	2.45		1.07	$	-
Options expired		(718,573	)	$	2.45		1.07	$	-

Options outstanding at end of year		-			-		-	$	-

Share based compensation for the ~~table above represents the total intrinsic value (the difference between the Company's closing stock price on~~years ended December 31, 2013, 2012 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on December 31, 2012. As of December 31, 2012, no options were in-the-money. As of December 31, 2012 there2011 was ~~no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Company's stock option plans.~~$0 each year.

Warrants:

As of December 31, ~~2012,~~2013, warrants to purchase ~~2,778,947~~1,200,000 Ordinary shares were outstanding. 1,578,947 of these warrants were issued on December 10, 2007 in connection with the issuance of a convertible note of $3,000 to its controlling shareholder, at an exercise price of $2.38 per share for a term of five years. During October 2010, the expiration date of the warrants was extended to October 2014, and the conversion price was set at $2.09 per share.

During February 2012, pursuant to 2012 loan agreement the Company issued warrants to purchase 1,200,000 Ordinary shares at an exercise price of $2.5 per share for a term of three years.

The fair value of the warrants was based on the Black-Scholes-Merton option-pricing model, assuming a stock price of $2.04, a risk free interest of 0.41%, a volatility factor of 52.5%, dividend yield of 0% and contractual life of three years.

NOTE 12:-

TAXES ON INCOME

The Israeli corporate tax rate was 24% in 2011 and 25% in 2012 and 2013.

On December 5, 2011, the "Knesset" (Israeli parliament) passed the Law for Tax Burden Reform (Legislative Amendments), 2011 ("the Law") which, among others, cancels effective from 2012, the scheduled reduction in the corporate tax rate. The Law also increases the corporate tax rate to 25% in 2012. In view of this increase in the corporate tax rate to 25%, as above, the real capital gain tax rate and the real betterment tax rate were also increased accordingly.

On August 5, 2013, the "Knesset" issued the Law for Changing National Priorities (Legislative Amendments for Achieving Budget Targets for 2013 and 2014), 2013 ("the Budget Law"), which consists, among others, of fiscal changes whose main aim is to enhance the collection of taxes in those years.

F - 3130

RADA ELECTRONIC INDUSTRIES LTD.

AND ITS SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

U.S. dollars in thousands

NOTE ~~13:~~12:-

TAXES ON INCOME (Cont)

These changes include, among others, increasing the corporate tax rate from 25% to 26.5%, cancelling the reduction in the tax rates applicable to privileged enterprises (9% in development area A and 16% elsewhere) and, in certain cases, increasing the rate of dividend withholding tax within the scope of the Law for the Encouragement of Capital Investments to 20% effective from January 1, 2014. There are also other changes such as taxation of revaluation gains effective from August 1, 2013. The provisions regarding revaluation gains will become effective only after the publication of regulations defining what should be considered as "retained earnings not subject to corporate tax" and regulations that set forth provisions for avoiding double taxation of overseas assets. As of the date of approval of these financial statements, these regulations have not been issued.

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

			Page NoNo.

PART I			1
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		1
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE		1
ITEM 3.	KEY INFORMATION		1
	A.	Selected Financial Data	1
	B.	Capitalization and Indebtedness	2
	C.	Reasons for the Offer and Use of Proceeds	2
	D.	Risk Factors	2
ITEM 4.	INFORMATION ON THE COMPANY		12
	A.	History and Development of the Company	12
	B.	Business Overview	12
	C.	Organizational Structure	20
	D.	Property, Plants and Equipment	2021
ITEM 4A.	UNRESOLVED STAFF COMMENTS		2021
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS		21
	A.	Operating Results	21
	B.	Liquidity and Capital Resources	2728
	C.	Research and Development, Patents and Licenses	2930
	D.	Trend Information	3031
	E.	Off-Balance Sheet Arrangements	3031
	F.	Tabular Disclosure of Contractual Obligations	3031
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		3132
	A.	Directors and Senior Management	3132
	B.	Compensation	3334
	C.	Board Practices	3334
	D.	Employees	3844
	E.	Share Ownership	3945
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		4046
	A.	Major Shareholders	4046
	B.	Related Party Transactions	4147
	C.	Interests of Experts and Counsel	4248
ITEM 8.	FINANCIAL INFORMATION		4248
	A.	Consolidated Statements and Other Financial Information	4248
	B.	Significant Changes	4249
ITEM 9.	THE OFFER AND LISTING		4349
	A.	Offer and Listing Details	4349
	B.	Plan of Distribution	4349
	C.	Markets	4450
	D.	Selling Shareholders	4450
	E.	Dilution	4450
	F.	Expense of the Issue	4450
ITEM 10.	ADDITIONAL INFORMATION		44 50
	A.	Share Capital	44 50
	B.	Memorandum and Articles of Association	4450
	C.	Material Contracts	47 53
	D.	Exchange Controls	47 53
	E.	Taxation	4753
	F.	Dividend and Paying Agents	5366
	G.	Statement by Experts	5366
	H.	Documents on Display	53 66
	I.	Subsidiary Information	5466

ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS	5461
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	5461

PART II		5561
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	5561
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	5561
ITEM 15.	CONTROLS AND PROCEDURES	5562
ITEM 16.	RESERVED.	5663
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	5663
ITEM 16B.	CODE OF ETHICS	5663
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	5763
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	5764
ITEM 16E.	PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	5764
ITEM 16F.	CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT	5764
ITEM 16G.	CORPORATE GOVERNANCE	5764
ITEM 16H.	MINE SAFETY DISCLOSURE	5765
PART III		5866
ITEM 17.	FINANCIAL STATEMENTS	5866
ITEM 18.	FINANCIAL STATEMENTS	5866
ITEM 19.	EXHIBITS	5866

	Year Ended December 31,
	2009			2010			2011			2012			2013
	(U.S. dollars in thousands, except per share data)
Revenues	$	18,442		$	27,523		$	19,405		$	21,551		$	21,761
Cost of revenues		12,223			20,117			13,800			16,233			17,160
Gross profit		6,219			7,406			5,605			5,318			4,601
Research and development, net		1,616			1,182			2,543			2,423			1,459
Marketing and selling		1,607			2,563			2,106			1,664			1,959
General and administrative		1,937			1,732			1,944			2,137			1,919
Operating income (loss)		1,059			1,929			(988	)		(906	)		(736	)
Financial expense, net		832			1,184			531			1,149			1,907
Net Income (loss)	$	227		$	745		$	(1,519	)	$	(2,055	)		(2,643	)
Net (income) loss attributable to non-controlling interest		(14	)		(11	)		(7	)		4			8
Net income (loss) attributable to RADA Electronic Industries' shareholders	$	213		$	734		$	(1,526	)	$	(2,051	)		(2,635	)
Basic and diluted net income (loss) per Ordinary share attributable for RADA Electronic Industries' shareholders	$	0.02		$	0.08		$	(0.17	)	$	(0.23	)	$	(0.30	)
Weighted average number of shares used to compute basic and diluted net income (loss) per share		8,862			8,869			8,899			8,919			8,919


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


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

	Year Ended December 31,
	2008			2009			2010			2011			2012
	(U.S. dollars in thousands, except per share data)
Revenues	$	17,881		$	18,442		$	27,523		$	19,405		$	21,551
Cost of revenues		13,665			12,223			20,117			13,800			16,233
Gross profit		4,216			6,219			7,406			5,605			5,318
Research and development, net		686			1,616			1,182			2,543			2,423
Marketing and selling		1,517			1,607			2,563			2,106			1,664
General and administrative		1,837			1,937			1,732			1,997			2,243
Operating income (loss)		176			1,059			1,929			(1,041	)		(1,012	)
Financial expense, net		(734	)		(832	)		(1,184	)		(478	)		(1,043	)
Net Income (loss)	$	(558	)	$	227		$	745		$	(1,519	)	$	(2,055	)
Net (income) loss attributable to non-controlling interest		(18	)		(14	)		(11	)		(7	)		4
Net income (loss) attributable to RADA Electronic Industries' shareholders	$	(576	)	$	213		$	734		$	(1,526	)	$	(2,051	)
Basic and diluted net income (loss) per Ordinary share attributable for RADA Electronic Industries' shareholders	$	(0.07	)	$	0.02		$	0.08		$	(0.17	)	$	(0.23	)
Weighted average number of shares used to compute basic and diluted net income (loss) per share		8,855			8,862			8,869			8,899			8,919

	As of December 31,
	2009		2010		2011		2012		2013
	(U.S. dollars in thousands)
BALANCE SHEET DATA:
Working capital (deficiency)	$	4,773	$	7,594	$	2,954	$	1,977	$	(152	)
Total assets		18,989		27,098		24,190		22,886		22,007
Short-term credits and current maturities of long-term loans		184		4,274		6,338		7,140		7,194
Convertible note - short term		2,482		-		2,810		3,000		3,000
Long-term debt, net of current maturities		1,410		881		176		-		-
Convertible note - long term		-		2,598		-		-		-
Shareholders' equity		7,291		8,583		7,224		5,906		3,350

Contractual Obligations	Payments due by Period										Payments due by Period
	Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 years		Total		Less than 1 year		1-3 Years		3-5 Years		More than 5 years
Long-term debt obligations	$	6,984,000	$	6,984,000		-		-		-	$	8,307,000	$	8,307,000		-		-		-
Operating lease obligations		1,247,000		661,000		586,000		-		-		949,000		688,000		261,000		-		-
Total	$	8,231,000	$	7,645,000	$	586,000		-		-	$	9,256,000	$	8,995,000	$	261,000		-		-

Name	Age	Position
Herzle Bodinger	7071	Executive Chairman of the Board of Directors
Zvi Alon	5960	Chief Executive Officer
Dov Sella	5758	Chief Business Development Officer
Shiri Lazarovich	3839	Chief Financial Officer
Oleg Kiperman	5960	Chief Technology Officer
Adrian Berg	6566	Director
Roy Kui Chuen Chan	6667	Director
Ben Zion Gruber (1)(2)	5455	Director
Michael Letchinger	5758	Director
Nurit Mor (1)(2)	6970	Outside director
~~Eli Akavia~~Elan Sigal (1)(2)	6546	Outside director

(1) Member of the Audit Committee (2) Member of the Compensation Committee

		Salaries, fees, commissions and bonuses				Pension, retirement and similar benefits
All directors and executive officers as a group, consisting of 11 persons		$	987,296			$	264,286

Name	Number of Ordinary Shares Beneficially Owned (1)		Percentage of Ownership(2)			Number of Ordinary Shares Beneficially Owned (1)		Percentage of Ownership(2)
Herzle Bodinger		--		--			--		--
Zvi Alon		--		--			--		--
Dov Sella		--		--			--		--
Shiri Lazarovich		--		--			--		--
Oleg Kiperman (3)		4,000		*			4,000		*
Adrian Berg (4)		1,533		*			1,533		*
Roy Kui Chuen Chan (5)		1,533		*			1,533		*
Ben Zion Gruber (6)		120,000		1.3	%		120,000		1.3	%
Michael Letchinger		--		--			--		--
Nurit Mor		--		--			--		--
Eli Akavia		--		--
Elan Sigal							--		--
All directors and executive officers as a group (11 persons)		127,066		1.4	%		127,066		1.4	%

Name	Number of Ordinary Shares Beneficially Owned(1)		Percentage of Ownership(2)			Number of Ordinary Shares Beneficially Owned(1)		Percentage of Ownership(2)
Howard P.L. Yeung (3) (5)		7,991,872		61.4	%		6,556,465		56.6	%
Kenneth Yeung (4) (5)		450,029		5.0	%		450,029		5.0	%

Year	High		Low		High		Low
2008	$	2.80	$	0.50
2009	$	3.09	$	0.52	$	3.09	$	0.52
2010	$	2.93	$	1.81	$	2.93	$	1.81
2011	$	4.48	$	1.55	$	4.48	$	1.55
2012	$	2.37	$	0.95	$	2.37	$	0.95
2013					$	2.26	$	0.96

2011	High		Low
First Quarter	$	3.53	$	2.14
Second Quarter	$	4.48	$	2.85
Third Quarter	$	4.28	$	1.80
Fourth Quarter	$	2.64	$	1.55

2012	High		Low
First Quarter .	$	2.37	$	1.70
Second Quarter	$	2.00	$	1.04
Third Quarter .	$	1.47	$	0.97
Fourth Quarter	$	1.51	$	0.95

2013	High		Low
First Quarter .	$	1.92	$	1.05
Second Quarter	$	1.52	$	0.96
Third Quarter .	$	1.60	$	1.00
Fourth Quarter	$	2.26	$	1.33

2014	High		Low
First Quarter	$	1.80	$	1.26
Second Quarter( through April-25)	$	1.73	$	1.41

	High		Low
October 2012	$	1.51	$	0.95
November 2012	$	1.28	$	1.07
December 2012	$	1.17	$	1.04
January 2013	$	1.20	$	1.05
February 2013	$	1.92	$	1.13
March 2013	$	1.59	$	1.12
April (through April 22, 2013)	$	1.19	$	0.96

	High		Low
October 2013	$	2.26	$	1.37
November 2013	$	1.94	$	1.53
December 2013	$	1.69	$	1.33
January 2014	$	1.58	$	1.26
February 2014	$	1.57	$	1.33
March 2014	$	1.80	$	1.40

	Year Ended December 31				Year Ended December 31
Services Rendered:	2011		2012		2012		2013
Audit (1)	$	99,000	$	93,000	$	93,000	$	99,000
Other						-		5,000
Total (2)	$	99,000	$	93,000	$	93,000	$	104,000

Index to Financial Statements	F-1
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Operations	F-5
Consolidated Statements of Other Comprehensive Income (loss)	F-6
Consolidated Statements of Changes in Shareholders' Equity	F-7
Consolidated Statements of Cash Flows	F-8
Notes to Consolidated Financial Statements	F-10

Exhibit	Description
1.1	Memorandum of Association of the Registrant (1)
1.2	Articles of Association of the Registrant (1)
2.1	Specimen of Share Certificate (1)
4.1	Loan Agreement dated July 1, 2008, between the Registrant and Faith Content Development Ltd. (2)
4.2	License Agreement dated July 2, 2008 between the Registrant and Faith Content Development Ltd. (3)

12.1	Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act, as amended
12.2	Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities Exchange Act, as amended
13.1	Certification of the Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
13.2	Certification of the Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS	XBRL Instance Document.* ~~(4)~~
101.SCH	XBRL Taxonomy Extension Schema Document.* ~~(4)~~
101.CAL	XBRL Taxonomy Calculation Linkbase Document.* ~~(4)~~
101.LAB	XBRL Taxonomy Label Linkbase Document.* ~~(4)~~
101.PRE	XBRL Taxonomy Presentation Linkbase Document.* ~~(4)~~
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document.* ~~(4)~~

	Page

Report of Independent Registered Public Accounting Firm	F-2

Consolidated Balance Sheets	F-3 – F-4

Consolidated Statements of Operations	F-5

Consolidated Statements of ~~Other~~ Comprehensive Income (loss)	F-6

Consolidated 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-36~~F-35

Haifa, Israel	/s/Kost Forer Gabbay & Kasierer KOST FORER GABBAY & KASIERER
April ~~24, 2013~~30, 2014	A Member of Ernst & Young Global

	Number of				Additional		Accumulated other					Non						Number of					Additional		Accumulated other					Non
	Ordinary		Share		paid-in		comprehensive		Accumulated			controlling			Total			Ordinary		Share			paid-in		comprehensive		Accumulated			controlling			Total
	shares		capital		capital		income		deficit			interest			equity			shares		capital			capital		income		deficit			interest			equity

Balance at January 1,2010		8,868,857		119		69,578		316		(62,722	)		570			7,861
Share-based compensation for employees		-		-		31		-		-			-			31
Discount on convertible loan due to modification of debt		-		-		451		-		-			-			451
Other comprehensive income		-		-		-		76		-			19			95
Net income		-		-		-		-		734			11			745

Balance at December 31, 2010		8,868,857		119		70,060		392		(61,988	)		600			9,183
Balance at January 1,2011																			8,868,857		119			70,060		392		(61,988	)		600			9,183
Exercise of options		49,790		*) -		116		-		-			-			116			49,790		*	)		116		-		-			-			116
Other comprehensive income		-		-		-		51		-			13			64			-		-			-		51		-			13			64
Net Loss		-		-		-		-		(1,526	)		7			(1,519	)
Net loss																			-		-			-		-		(1,526	)		7			(1,519	)

Balance at December 31, 2011		8,918,647		119		70,176		443		(63,514	)		620			7,844			8,918,647		119			70,176		443		(63,514	)		620			7,844
Issuance of warrants to shareholders						708										708								708										708
Other comprehensive income								25					7			32										25					7			32
Net Loss										(2,051	)		(4	)		(2,055	)
Net loss																												(2,051	)		(4	)		(2,055	)

Balance at December 31, 2012		8,918,647		119		70,884		468		(65,565	)		623			6,529			8,918,647		119			70,884		468		(65,565	)		623			6,529
Other comprehensive income																										79					20			99
Net loss																												(2,635	)		(8	)		(2,643	)

Balance at December 31, 2013																			8,918,647		119			70,884		547		(68,200	)		635			3,985

	%

Factory and other buildings	4
Machinery and equipment	7 - 33
Office furniture and equipment	6 - 15

	December 31, 2011
	Level 1		Level 2			Level 3		Total
Derivatives:

Foreign currencies derivatives	$	-	$	(87	)	$	-	$	(87	)

Total	$	-	$	(87	)	$	-	$	(87	)

	December 31, 2012								December 31, 2011
	Useful Life from date of acquisition		Gross carrying amount		Accumulated amortization		Amortized balance		Gross carrying amount		Accumulated amortization		Amortized balance
	(Years)
Test Systems Programs Sets ("TPS")		5 - 10	$	8,275	$	8,275	$	-	$	8,275	$	8,120	$	155

	Year ended December 31, 2012
	Amount of options		Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value

Options outstanding at beginning of year		718,573	$	2.45		1.07	$	-

Options outstanding at end of year		718,573	$	2.45		0.07	$	-

Vested and expected to vest at December 31, 2012		718,573	$	2.45		0.07	$	-

Exercisable options at end of year		718,573	$	2.45		0.07	$	-

	Year ended December 31,
	2013			2012			2011

Income:

Foreign currency exchange differences	$	15		$	166		$	395
Interest on cash equivalents and restricted deposits		12			18			20
Others		-			31			197

		(27	)		(215	)		(612	)
Expenses:

Interest on convertible note and loans from shareholders		729			376			159
Withholding taxes of Interest to convertible note and loans from shareholders		205			106			53
Amortization of discount on a convertible note and loans from shareholders		489			516			212
Foreign currency exchange differences		135			60			288
Interest on loans from banks and other credit balances		84			26			27
Bank commissions and others		292			280			404

		1,934			1,364			1,143

	$	1,907		$	1,149		$	531

	RADA ELECTRONIC INDUSTRIES LTD.

	By:	/s/ Zvi Alon
	~~Name:~~	Name: Zvi Alon
	~~Title:~~	Title: Chief Executive Officer