**SECURITIES AND EXCHANGE COMMISSION  WASHINGTON, D.C. 20549FORM 20-F/A  Amendment No. 1       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934*For the fiscal year ended December  31, 2002*Commission File No. 0-11456********ELRON ELECTRONIC INDUSTRIES  LTD.**(Exact name of Registrant    as specified in its charter and translation of Registrant's name into English)******ISRAEL**(Jurisdiction of incorporation or organization)         **3 Azrieli Center, 42nd Floor, Tel-Aviv,    Israel 67023**(Address of principal executive    offices)****
Securities registered or to be registered pursuant to Section 12(b) of the Act:

**Not Applicable**(Title of Class)
Securities registered or to be registered pursuant to Section 12(g) of the Act:

**Ordinary Shares, nominal value 0.003  New Israeli Shekels per share**(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

**Ordinary Shares, nominal value 0.003  New Israeli Shekels per share**(Title of Class)
****

      Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the Annual Report: **29,180,970**

      Indicate  by check mark whether the registrant (1) has filed all reports required to be  filed by Section 13 of 15(d) of the Securities Exchange Act of 1934 during the  preceding 12 months (or for such shorter period that the registrant was required  to file such reports), and (2) has been subject to such filing requirements  for the past 90 days:                **                                                                                                              Yes [X]        No [  ]**

      Indicate  by check mark which financial statements the registrant has elected to follow:                                                                                              **Item  17 [  ]        Item 18 [X]**

**EXPLANATORY NOTE**
This Form 20-F/A is being filed solely to  amend the Annual Report on Form 20-F for the fiscal year ended December 31,  2002, filed by Elron Electronic Industries Ltd. (the ''Registrant'') on June  30, 2003 (the ''Form 20-F''), in the following ways:
•  
to replace an incorrect Report of        Independent Auditors relating to the consolidated financial statements        of Elbit Systems Ltd. as of December 31, 2002 contained in Item 18 of        the Form 20-F (the ''ESL Financial Statements''), which follow the consolidated        financial statements of the Registrant in the Form 20-F, with the correct        Reports of Independent Auditors by deleting the ESL Financial Statements,        including the incorrect accompanying Report of Independent Auditors, and        replacing them with the ESL Financial Statements, including the correct        accompanying Reports of Independent Auditors, included in this Form 20-F/A;
   • to correct an inadvertent error in the Share Ownership      table and related footnotes contained in Item 6 of the Form 20-F by deleting      such table and footnotes and including the correct information in the table      and related footnotes set forth below; and    • to correct an inadvertent error regarding the percentage      of the Registrant's ordinary shares held of record by persons registered      with addresses in the United States, contained in the introductory paragraph      of Item 7 under ''Major Shareholders,'' by deleting such paragraph and including      the correct information in the paragraph below.
Except for the replacement of the incorrect  Report of Independent Auditors relating to the ESL Financial Statements with  the correct Reports of Independent Auditors relating to the ESL Financial Statements,  no changes have been made to the financial statements of the Registrant or Elbit  Systems Ltd. as contained in the Form 20-F, and the balance of Item 18 of the  Form 20-F is hereby incorporated by reference.

Except for the correction of the inadvertent  errors in the Share Ownership table and related footnotes and the introductory  paragraph of Item 7 under ''Major Shareholders'', no changes have been made  to the information contained in Item 6 or Item 7 of the Form 20-F, and the balance  of Item 6 and Item 7 is hereby incorporated by reference.

This Form 20-F/A consists of a cover page,  this explanatory note, Items 6, 7 and 18 (each as amended) of the Form 20-F,  the ESL Financial Statements, including the accompanying Reports of Independent  Auditors, the signature page and the required certifications of the principal  executive officer and principal financial officer of the Registrant.

Other than as expressly set forth above,  this Form 20-F/A does not, and does not purport to, amend, update or restate  the information in the Form 20-F or reflect any events that have occurred after  the Form 20-F was filed.

2

**PART I****ITEM 6. DIRECTORS, SENIOR MANAGEMENT  AND EMPLOYEES****Share Ownership**
      The  number of our ordinary shares and options owned by each of our directors, and  by our directors and officers as a group, as of May 31, 2003, is as follows:
**Director****Ordinary Shares and Options**Ami Erel, Chairman (1)116,154 (2)Avraham Asheri0 Prof. Gabi Barbash0 Dr. Chen Barir0 Yaacov Goldman0 Michael Kaufmann0 Oren Lieder (1)0 Dr. Dalia Meggido0 Itzhak Ravid0 Prof. Daniel Sipper0 **All officers and directors as        a group**623,140(3)(1) Officer of DIC. Ownership excludes shares owned      by DIC. (2) Consists solely of options to purchase our ordinary      shares and includes options to purchase 19,334 ordinary shares granted subsequent      to May 31, 2003. (3) Includes options to purchase 618,525 of our ordinary      shares.**ITEM 7. MAJOR SHAREHOLDERS AND RELATED  PARTY TRANSACTIONS****Major Shareholders**
The following table sets forth, as of May  31, 2003, unless otherwise specified, the number of ordinary shares beneficially  owned by all shareholders known to us to beneficially own more than 5% of our  ordinary shares. The voting rights of our major shareholders do not differ from  the voting rights of other holders of our ordinary shares. As of May 31, 2003,  there were a total of 557 holders of record of our ordinary shares, of which  439 were registered with addresses in the United States. Such United States  holders represented as of such date, holders of record of approximately 6.45%  of our then ordinary shares.
**PART III****ITEM 18. FINANCIAL STATEMENTS.**
      The consolidated financial statements of Elbit Systems Ltd., including the accompanying Reports of Independent Auditors, follow the signature page of this Form 20-F/A.

3

SIGNATURE

      The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this Annual Report on its behalf.
Dated: July 21, 2003                                                         **ELRON ELECTRONIC INDUSTRIES      LTD.**               By: /s/      Doron Birger                                                            Name: Doron Birger            Title: President & Chief Executive      Officer               By: /s/      Tal Raz                                                                  Name: Tal Raz            Title: Vice President & Chief Financial      Officer
4

**CERTIFICATIONS**
I, Doron Birger, certify that:
1.     I have reviewed this      annual report on Form 20-F of Elron Electronic Industries Ltd.; and2.     Based on my knowledge,      this annual report does not contain any untrue statement of a material fact      or omit to state a material fact necessary to make the statements made,      in light of the circumstances under which such statements were made, not      misleading with respect to the period covered by this annual report.
Date: July 21, 2003 

/s/ Doron Birger                                         Doron Birger  President and Chief Executive Officer
I, Tal Raz, certify that:
1.     I have reviewed this      annual report on Form 20-F of Elron Electronic Industries Ltd.; and2.     Based on my knowledge,      this annual report does not contain any untrue statement of a material fact      or omit to state a material fact necessary to make the statements made,      in light of the circumstances under which such statements were made, not      misleading with respect to the period covered by this annual report.
Date: July 21, 2003

/s/ Tal Raz                                                 Tal Raz  Vice President and Chief Financial Officer
5

                    ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES------------------------------------------------------------------------------                       CONSOLIDATED FINANCIAL STATEMENTS                            AS OF DECEMBER 31, 2002                            -----------------------                        (IN THOUSANDS OF U.S. DOLLARS)                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES------------------------------------------------------------------------------                                 C O N T E N T S                                 ---------------                                                                           PAGE                                                                         -------REPORT OF INDEPENDENT AUDITORS                                            2 - 2aCONSOLIDATED FINANCIAL STATEMENTS   Consolidated Balance Sheets                                            3 - 4   Consolidated Statements of Operations                                      5   Consolidated Statements of Changes in Shareholders' Equity             6 - 7   Consolidated Statements of Cash Flows                                  8 - 9   Notes to the Consolidated Financial Statements                        10 - 58                                  # # # # # # #                         REPORT OF INDEPENDENT AUDITORSTo the Shareholders of Elbit Systems Ltd.We have audited the accompanying consolidated balance sheet of Elbit SystemsLtd. (the "Company") and its subsidiaries as of December 31, 2002, and therelated consolidated statements of operations, changes in shareholders' equityand cash flows for the year then ended. These financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these financial statements based on our audits. The financialstatements of Elbit Systems Ltd. as of December 31, 2001 and for the years endedDecember, 2001 and 2000 were audited by other auditors who have ceasedoperations as a foreign associated firm of the Securities and ExchangeCommission Practice Section of the American Institute of Certified PublicAccountants and whose report dated March 24, 2002, expressed an unqualifiedopinion on those statements.We conducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.In our opinion, the consolidated financial statements referred to above, presentfairly, in all material respects, the consolidated financial position of theCompany and its subsidiaries as of December 31, 2002, and the consolidatedresults of their operations and cash flows for the year then ended, inconformity with accounting principles generally accepted in the United States.As discussed in Note 2 to the consolidated financial statements, the Companyadopted the provisions of Statement of Financial Accounting Standards No. 141,Business Combinations, and No. 142, Goodwill and Other Intangible Assets,effective January 1, 2002.                                           /s/ Luboshitz Kasierer                                              Luboshitz Kasierer                              An affiliate member of Ernst & Young InternationalHaifa, IsraelMarch 10, 2003                                 -2-This is a copy of the previously issued Independent Public Accountants' reportof Arthur Andersen.The report has not been reissued by Arthur Andersen.                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTSTo the Shareholders ofELBIT SYSTEMS LTD.We have audited the accompanying consolidated balance sheets of Elbit SystemsLtd. and its subsidiaries as of December 31, 2001 and 2000 and the relatedconsolidated statements of operations, changes in shareholders' equity and cashflows for each of the three years in the period ended December 31, 2001. Thesefinancial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these financial statements based onour audits.We conducted our audits in accordance with auditing standards generally acceptedin the United States. Those standards require that we plan and perform the auditto obtain reasonable assurance about whether the financial statements are freeof material misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements. An auditalso includes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.In our opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the consolidated financial position of ElbitSystems Ltd. and its subsidiaries as of December 31, 2001 and 2000, and theresults of its operations and its cash flows for each of the three years in theperiod ended December 31, 2001, in conformity with accounting principlesgenerally accepted in the United States.                                                     /s/ Luboshitz Kasierer                                                       Luboshitz Kasierer                                                         Arthur AndersenHaifa, IsraelMarch 24, 2002                                 -2a-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES                           CONSOLIDATED BALANCE SHEETS                         (In thousands of U.S. dollars)                                                                       DECEMBER 31,                                                                   -------------------                                                            NOTE     2002       2001                                                            ----   --------   --------CURRENT ASSETS      Cash and cash equivalents                                    $ 76,280   $ 40,583      Short-term bank deposits                                        1,650      1,446      Trade receivables, net                                (3A)    227,724    241,827      Other receivables and prepaid expenses                 (4)     34,376     36,209      Inventories, net of advances                           (5)    222,844    185,090                                                                   --------   --------         Total current assets                                       562,874    505,155                                                                   --------   --------INVESTMENTS AND LONG-TERM RECEIVABLES      Investments in affiliated companies and partnership   (6A)     21,947     19,583   Investments in other companies                           (6B)     11,104     11,909      Long-term receivables                                 (3B)     20,859     64,804      Long-term bank deposits and loan                       (7)      3,686      3,433   Severance pay fund                                                 6,641      6,528                                                                   --------   --------                                                                     64,237    106,257                                                                   --------   --------PROPERTY, PLANT AND EQUIPMENT, NET                           (8)    202,961    184,722                                                                   --------   --------OTHER ASSETS, NET                                            (9)      Goodwill and assembled work-force, net                         32,541     31,946      Know-how and other intangible assets, net                      73,228     73,337                                                                   --------   --------                                                                    105,769    105,283                                                                   --------   --------                                                                   $935,841   $901,417                                                                   ========   ========The accompanying notes are an integral part of the financial statements.                                       -3-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES                           CONSOLIDATED BALANCE SHEETS                (In thousands of U.S. dollars, except share data)                                                                                        DECEMBER 31,                                                                                    -------------------                                                                            NOTE      2002       2001                                                                          -------   --------   --------CURRENT LIABILITIES   Short-term bank credit and loans                                         (10)    $ 30,915   $ 46,894   Trade payables                                                                     83,463    108,617   Other payables and accrued expenses                                      (11)     142,526    135,386   Customers advances and amounts in excess of costs incurred               (12)     108,418     93,342                                                                                    --------   --------         Total current liabilities                                                   365,322    384,239                                                                                    --------   --------LONG-TERM LIABILITIES   Long-term loans                                                          (13)      73,173     69,202   Advances from customers                                                  (12)      40,411     29,840   Deferred income taxes                                                    (15)      16,413     21,989   Accrued severance pay                                                  (14, 2M)    24,486     15,231                                                                                    --------   --------                                                                                     154,483    136,262                                                                                    --------   --------CONTINGENT LIABILITIES AND COMMITMENTS                                      (16)MINORITY INTEREST                                                                      4,675      2,931                                                                                    --------   --------SHAREHOLDERS' EQUITY                                                        (17)   Share capital      Ordinary shares of NIS1 par value; Authorized - 80,000,000 shares         as of December 31, 2002 and 2001; Issued - 39,205,478 and         38,739,093 shares as of December 31, 2002 and 2001,         respectively; Outstanding -38,796,657 and 38,330,272 shares as         of December 31, 2002 and 2001, respectively                                  11,154     11,054   Accumulated other comprehensive loss                                               (2,882)        --   Additional paid-in capital                                                        248,387    244,625   Retained earnings                                                                 159,023    126,627   Treasury stock - 408,821 shares as of December 31, 2002 and 2001                   (4,321)    (4,321)                                                                                    --------   --------                                                                                     411,361    377,985                                                                                    --------   --------                                                                                    $935,841   $901,417                                                                                    ========   ========The accompanying notes are an integral part of the financial statements.                                       -4-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES                      CONSOLIDATED STATEMENTS OF OPERATIONS              (In thousands of U.S. dollars, except per share data)                                                                               YEAR ENDED                                                                     ------------------------------                                                                              DECEMBER 31,                                                                     ------------------------------                                                              NOTE     2002       2001       2000                                                              ----   --------   --------   --------Revenues                                                      (18)   $827,456   $764,501   $591,084Cost of revenues                                              (19)    605,313    553,957    432,786Restructuring expenses (inventory write-off)                               --         --     10,300                                                                     --------   --------   --------               Gross profit                                           222,143    210,544    147,998                                                                     --------   --------   --------Research and development costs, net                           (20)     57,010     58,759     44,274Marketing and selling expenses                                (21)     65,691     54,876     38,449General and administrative expenses                           (22)     41,651     43,216     26,251Acquired in-process research and development                               --         --     40,000Restructuring costs                                                        --         --     11,800                                                                     --------   --------   --------                                                                      164,352    156,851    160,774                                                                     --------   --------   --------            Operating income (loss)                                    57,791     53,693    (12,776)Financial income (expenses), net                              (23)     (3,035)    (2,617)       115Other income (expenses), net                                  (24)       (462)       774          3                                                                     --------   --------   --------         Income (loss) before taxes on income                          54,294     51,850    (12,658)Taxes on income                                               (15)      9,348     11,003      6,227                                                                     --------   --------   --------                                                                       44,946     40,847    (18,885)Equity in net (losses) earnings of affiliated companies and   partnership                                                            675       (598)    (1,429)Minority interest in losses (gains) of subsidiaries                      (508)       547       (217)                                                                     --------   --------   --------            Net income (loss)                                        $ 45,113   $ 40,796   $(20,531)                                                                     ========   ========   ========   Earnings (loss) per share                                  (17)      Basic net earnings (loss) per share                            $   1.17   $   1.07   $  (0.65)                                                                     ========   ========   ========      Diluted net earnings (loss) per share                          $   1.13   $   1.04   $  (0.65)                                                                     ========   ========   ========The accompanying notes are an integral part of the financial statements.                                       -5-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES                      CONSOLIDATED STATEMENTS OF CHANGES IN                              SHAREHOLDERS' EQUITY                (In thousands of U.S. dollars, except share data)                                                                                   ACCUMULATED                                              NUMBER OF              ADDITIONAL       OTHER                                             OUTSTANDING    SHARE      PAID-IN    COMPREHENSIVE    RETAINED   TREASURY                                                SHARES     CAPITAL     CAPITAL         LOSS        EARNINGS    SHARES                                             -----------   -------   ----------   -------------    --------   --------BALANCE AS OF JANUARY 1, 2000                25,422,396    $ 7,883    $ 52,697          --         $127,924   $(3,613)         Issuance of shares- in respect of            merger with El- Op               12,100,000      2,963     177,037          --               --        --      Exercise of options                       289,002         70         810          --               --        --      Tax benefit in respect         of options exercised                        --         --         889          --               --        --   Capital reserve in respect of      issuance of shares by      development stage investees                    --         --       3,874          --               --        --      Amortization of stock         compensation                                --         --         155          --               --        --      Dividends paid                                 --         --          --          --           (9,430)       --      Net loss                                       --         --          --          --          (20,531)       --                                             ----------    -------    --------         ---         --------   -------BALANCE AS OF DECEMBER 31, 2000              37,811,398     10,916     235,462          --           97,963    (3,613)      Exercise of options                       585,860        138       3,162          --               --        --      Tax benefit in respect of         options exercised                           --         --       1,363          --               --        --      Adjustment to capital reserve                  --         --      (3,874)         --               --        --      Amortization of stock         compensation                                --         --       8,512          --               --        --      Purchase of treasury shares               (66,986)        --          --          --               --      (708)      Dividends paid                                 --         --          --          --          (12,132)       --      Net income                                     --         --          --          --           40,796        --                                             ----------    -------    --------         ---         --------   -------BALANCE AS OF DECEMBER 31, 2001              38,330,272    $11,054    $244,625          --         $126,627   $(4,321)                                             ==========    =======    ========         ===         ========   =======                                                 TOTAL           TOTAL                                             SHAREHOLDERS'   COMPREHENSIVE                                                 EQUITY      INCOME (LOSS)                                             -------------   -------------BALANCE AS OF JANUARY 1, 2000                  $ 184,891             --         Issuance of shares- in respect of            merger with El- Op                   180,000             --      Exercise of options                            880             --      Tax benefit in respect         of options exercised                        889             --   Capital reserve in respect of      issuance of shares by      development stage investees                  3,874             --      Amortization of stock         compensation                                155             --      Dividends paid                              (9,430)            --      Net loss                                   (20,531)       (20,531)                                               ---------        -------BALANCE AS OF DECEMBER 31, 2000                  340,728             --      Exercise of options                          3,300             --      Tax benefit in respect of         options exercised                         1,363             --      Adjustment to capital reserve               (3,874)            --      Amortization of stock         compensation                               8,512             --      Purchase of treasury shares                    (708)            --      Dividends paid                              (12,132)            --      Net income                                   40,796         40,796                                                ---------        -------BALANCE AS OF DECEMBER 31, 2001                 $ 377,985         40,796                                                =========        =======The accompanying notes are an integral part of the financial statements.                                       -6-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES                      CONSOLIDATED STATEMENTS OF CHANGES IN                          SHAREHOLDERS' EQUITY (CONT.)                (In thousands of U.S. dollars, except share data)                                                                        ACCUMULATED                                   NUMBER OF              ADDITIONAL       OTHER                                  OUTSTANDING    SHARE      PAID-IN    COMPREHENSIVE   RETAINED   TREASURY                                     SHARES     CAPITAL     CAPITAL         LOSS       EARNINGS    SHARES                                  -----------   -------   ----------   -------------   --------   --------BALANCE AS OF DECEMBER 31, 2001    38,330,272    11,054     244,625            --       126,627    (4,321)      Exercise of options             466,385       100       4,040            --            --        --   Tax benefit in respect of      options exercised                    --        --         648            --            --        --   Amortization of stock      compensation                         --        --        (926)           --            --        --   Dividends paid                          --        --          --            --       (12,717)       --   Net income                              --        --          --            --        45,113        --      Minimum pension liability            --        --          --        (2,882)           --        --                                   ----------   -------    --------       -------      --------   -------BALANCE AS OF DECEMBER 31, 2002    38,796,657   $11,154    $248,387       $(2,882)     $159,023   $(4,321)                                   ==========   =======    ========       =======      ========   =======                                      TOTAL           TOTAL                                  SHAREHOLDERS'   COMPREHENSIVE                                      EQUITY      INCOME (LOSS)                                  -------------   -------------BALANCE AS OF DECEMBER 31, 2001      377,985              --      Exercise of options              4,140              --   Tax benefit in respect of      options exercised                  648              --   Amortization of stock      compensation                      (926)             --   Dividends paid                    (12,717)             --   Net income                         45,113          45,113      Minimum pension liability       (2,882)         (2,882)                                    --------         -------BALANCE AS OF DECEMBER 31, 2002     $411,361         $42,231                                    ========         =======The accompanying notes are an integral part of the financial statements.                                       -7-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES                     CONSOLIDATED STATEMENTS OF CASH FLOWS                         (In thousands of U.S. dollars)                                                                                             YEAR ENDED DECEMBER 31,                                                                                         ------------------------------                                                                                           2002       2001       2000                                                                                         --------   --------   --------CASH FLOWS FROM OPERATING ACTIVITIES   Net income (loss)                                                                     $ 45,113   $ 40,796   $(20,531)   Adjustments to reconcile net income (loss) to net cash provided by (used in)      operating activities:      Depreciation and amortization                                                        32,937     32,865     20,663            Amortization of deferred stock compensation                                      (926)     8,512        155      Acquired in-process research and development                                             --         --     40,000      Deferred income taxes                                                                (5,620)    (2,694)    (6,482)      Severance pay fund                                                                     (113)       167     (1,196)      Increase (decrease) in provision for severance pay                                    6,373       (800)     9,266      Gain (loss) on disposal of property and equipment                                       743       (327)      (575)      Tax benefit in respect of options exercised                                             648      1,363        889      Other adjustments                                                                       683       (117)      (921)      Minority interests in gains (losses) of subsidiaries                                    508       (547)       217      Equity in net losses (earnings) of affiliated companies and partnership                (675)       598      1,429   Changes in operating assets and liabilities:         Decrease (increase) in trade receivables, other receivables            and prepaid expenses                                                           58,554     (9,963)   (18,975)         Increase in inventories                                                          (55,106)   (72,165)   (25,228)         Increase (decrease) in trade payable and accrued expenses                        (19,321)    37,004     (3,520)         Increase (decrease) in advances received from customers                           42,999      6,489    (10,632)         Chief Scientist                                                                    9,197         --         --                                                                                         --------   --------   --------   Net cash provided by (used in) operating activities                                    115,994     41,181    (15,441)                                                                                         --------   --------   --------CASH FLOWS FROM INVESTING ACTIVITIES   Purchase of property, plant and equipment and other assets                             (46,003)   (45,244)   (40,374)   Investment grants received for property, plant and equipment                               119      1,334      1,533   Acquisition of subsidiaries and activities (Schedule A)                                 (5,280)    (3,344)    14,133   Investments in affiliated companies and subsidiaries                                    (1,681)      (801)   (13,126)   Proceeds from sale of property, plant and equipment and investments                        956      3,010      1,279      Long-term loan granted                                                                 (714)        --         --      Short-term loan repaid                                                                1,371         --         --   Long-term bank deposits paid                                                            (1,228)    (1,872)    (2,042)   Long-term bank deposits repaid                                                           1,689      2,322     23,419   Short-term bank deposits, net                                                             (204)       (57)      (638)                                                                                         --------   --------   --------         Net cash used in investing activities                                            (50,975)   (44,652)   (15,816)                                                                                         --------   --------   --------CASH FLOWS FROM FINANCING ACTIVITIES   Repayment of convertible debentures                                                         --         --       (283)   Proceeds from exercise of options                                                        4,140      3,300        787   Repayment of long-term credit for purchase of a building                                    --     (3,000)   (10,000)      Purchase of treasury stock                                                               --       (708)        --   Repayment of long-term bank loans                                                       (3,249)   (13,049)    (1,852)   Proceeds from long-term bank loans                                                       2,233     25,444     33,933   Dividends paid                                                                         (12,717)   (12,132)    (9,430)      Change in short-term bank credit and loans                                          (19,729)    (6,517)    32,321                                                                                         --------   --------   --------         Net cash provided by (used in) financing activities                              (29,322)    (6,662)    45,476                                                                                         --------   --------   --------NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                       35,697    (10,133)    14,219CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR                                     40,583     50,716     36,497                                                                                         --------   --------   --------CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                         $ 76,280   $ 40,583   $ 50,716                                                                                         ========   ========   ========The accompanying notes are an integral part of the financial statements.                                       -8-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES                  CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)                         (In thousands of U.S. dollars)                                                                  YEAR ENDED DECEMBER 31,                                                              -----------------------------                                                               2002      2001       2000                                                              -------   -------   ---------            SUPPLEMENTARY CASH FLOWS ACTIVITIES:               Cash paid during the year for:                  Income taxes                                $21,730   $ 9,469   $   9,360                                                              =======   =======   =========                  Interest                                    $ 2,947   $ 6,649   $   7,645                                                              =======   =======   =========NON CASH TRANSACTIONS   Debentures converted into shares                           $    --   $    --   $      93                                                              =======   =======   =========SCHEDULE A:Subsidiaries and activities acquired (*)Estimated net fair value of assets acquired and liabilities   assumed at the date of acquisition was as follows:      Working capital deficiency (working capital)            (excluding cash and cash equivalents)             $    --   $   888   $ (39,805)            Property, plant and equipment                        (275)   (1,886)    (80,493)         Know-how and other intangible assets                  (5,078)   (3,800)    (53,000)         Goodwill and assembled work-force                         --        --     (31,139)         In-process research and development                       --        --     (40,000)         Long-term liabilities                                     --     1,454      76,224         Purchase of investments in credit                         73        --          --                                                              -------   -------   ---------                                                               (5,280)   (3,344)   (168,213)                                                              -------   -------   ---------         Investment in subsidiary prior to consolidation           --        --       2,346            Less - amounts acquired by issuance of shares          --        --     180,000                                                              -------   -------   ---------                                                              $(5,280)  $(3,344)  $  14,133                                                              =======   =======   =========          (*)  El-Op in 2000 (see note 1C); AEL in 2001 (see note 1F); Defense               systems division of Elron Telesoft in 2002 (see note 1G).The accompanying notes are an integral part of the financial statements.                                      -9-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                         (In thousands of U.S. dollars)NOTE 1 - GENERAL     A.   Elbit Systems Ltd. (the "Company") is an Israeli corporation, 31%          owned by the Federmann Group and 20% owned by Elron Electronic          Industries Ltd. ("Elron"). The Company's shares are traded on the Tel          Aviv Stock Exchange and on the NASDAQ National Market in the United          States. The Company and its subsidiaries (the "Group") are engaged          mainly in the field of defense electronics. The Company's principal          wholly-owned subsidiaries are EFW Inc. ("EFW") and El-op          Electro-Optics Industries Ltd. ("El-Op").     B.   A majority of the Group's revenues were derived in recent years from          direct or indirect sales to governments or to government agencies. As          a result, a substantial portion of the Group's sales is subject to the          special risks associated with sales to governments or to government          agencies. These risks include, among others, the dependency on the          resources allocated by governments to defense programs, changes in          governmental priorities and changes in governmental approvals          regarding export licenses required for the Group products and for its          suppliers.     C.   In 2000, the Company completed its merger with El-Op and issued          12,100,000 ordinary shares to El-Op shareholders. The purchase price          based on the market value of the shares amounted to $180,000.          The merger was accounted for as a purchase and accordingly the          purchase price was allocated to the fair value of assets acquired and          liabilities assumed of El-Op.          El-Op is engaged primarily in the production and sales of military          products and systems in the electro-optical and electro-mechanical          sectors.          The excess of the purchase price over the fair value of the net          tangible assets acquired ("excess of cost"), in the amount of $109,000          was allocated, based primarily on an independent appraisal, as          follows: $40,000 was allocated to in-process research and development          ("R&D") which was charged to operations upon completion of the merger;          $58,000 was allocated to know-how ($45,000), trademarks ($8,000) and          assembled work-force ($5,000); $18,200 was recorded as a deferred tax          liability in respect of the differences between the allocation of the          aforementioned assets and their tax basis and the balance, amounting          to $29,200 was allocated to goodwill. These intangible assets are          included in other assets in the consolidated balance sheet and are          amortized over a period of 17 - 20 years, (except for goodwill and          assembled work-force which commencing January 1, 2002 are no longer          amortized - See Note 9). The Company began consolidating El-Op from          the third quarter of 2000.                                      -10-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 1 - GENERAL (CONT.)     C.   (Cont.)          At the merger date, El-Op was conducting design, development,          engineering and testing activities associated with the completion of          numerous projects aimed at developing next-generation technologies          that were expected to address emerging market demands in defense and          commercial markets. The value assigned to these assets was determined          by identifying significant research projects for which technological          feasibility had not been established, including development,          engineering and testing activities associated with the following          areas: thermal imaging (night vision); lasers; avionics; battle field          management; fire control systems; remote sensing; airborne/space          photography; enhanced landing systems; and other classified projects          for the U.S. and Israeli governments.          The nature of the efforts to develop the acquired in-process          technology into commercially viable products principally relates to          the completion of all planning, designing, prototyping, high-volume          verification and testing activities that are necessary to establish          that the proposed technologies meet their design specifications          including functional, technical and economic performance requirements.          In making its purchase price allocation, management considered present          value calculations of income, an analysis of project accomplishments          and remaining outstanding items and an assessment of overall          contributions as well as project risks. The value assigned to          purchased in-process technology was determined by estimating the costs          to develop the acquired technology into commercially viable products,          estimating the resulting net cash flows from the projects, and          discounting the net cash flows to their present value. The revenue          projection used to value the in-process R&D was based on estimates of          relevant market sizes and growth factors, expected trends in          technology, and the nature and expected timing of new product          introductions by the Company and its competitors. The resulting net          cash flows from such projects are based on management's estimates of          cost of sales, operating expenses and income taxes from such projects.                                      -11-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 1 - GENERAL (CONT.)     C.   (Cont.)          Aggregate revenues for the developmental El-Op products were estimated          to grow at a compounded annual growth rate of approximately 30 percent          for the five years following introduction, assuming the successful          completion and market acceptance of the major R&D programs. The          estimated revenues for the in-process projects were expected to peak          within five to six years of acquisition and then decline as other new          products and technologies are expected to enter the market.          The estimated costs of goods sold and operating expenses as a          percentage of revenues are expected to be lower than El-Op's on a          stand-alone basis primarily due to production efficiencies expected to          be achieved through economies of scale of the combined operations. As          a result of these savings, the combined company has the possibility of          achieving slightly higher margins in future periods.          The rates utilized to discount the net cash flows to their present          value were based on estimated cost of capital calculations. Due to the          nature of the forecast and the risks associated with the projected          growth and profitability of the developmental projects, a discount          rate of 18 to 20 percent was considered appropriate for the in-process          R&D. These rates are higher than the Company's overall weighted          average cost of capital due to the inherent uncertainties surrounding          the successful development of the purchased in-process technology, the          useful life of such technology and the uncertainty of technological          advances that are unknown at this time.          If none of the acquired R&D projects is successfully developed, the          sales and profitability of the combined company may be adversely          affected in future periods. The failure of any particular individual          project in-process would not likely impact the Company's financial          condition, results of operations or the attractiveness of the overall          El-Op investment. Financial results will be subject to uncertain          market events and risks, which are beyond the Company's control, such          as trends in technology, government spending, market size and growth          and product introduction or other actions by competitors.                                      -12-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 1 - GENERAL (CONT.)     C.   (Cont).          The following unaudited proforma data is based on historical financial          statements of the Company and El-Op and is provided for comparative          purposes only. The proforma information does not purport to be          indicative of the results that actually would have occurred had the          merger agreement been consummated prior to the beginning of the          reported periods.          The proforma information reflects the results of the Company's          operations assuming that the merger had been in effect as of January          1, 2000 and under the following assumptions:          1.   Goodwill and other intangible assets arising from the merger of               approximately $83,000, is amortized over an average period of 17               years.          2.   Excess of cost over equity purchased allocated to real estate               assets of approximately $25,000, is amortized over a period of 25               years.          3.   Deferred income taxes of approximately $18,000 have been recorded               in respect of the differences between the allocated value of the               aforementioned assets and their tax basis.          4.   The cost attributed to purchased in-process R&D projects, in the               amount of approximately $40,000 has been charged to operations               immediately as a non-recurring item and is not included in the               proforma consolidated results.          5.   Intercompany balances and material transactions have been               eliminated.                                      -13-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 1 - GENERAL (CONT.)     C.   (Cont).          6.   Management fees of approximately $3,000 per annum, which pursuant               to the merger agreement would not be paid in the future, were               eliminated in the proforma statements.                                                               YEAR ENDED DECEMBER 31,                                                                   2000 (UNAUDITED)                                                               -----------------------               Revenues - proforma                                    $699,114                                                                      ========               Net loss as reported                                   $(20,531)               Adjustments:               Elimination of the charge to operations for               purchased in-process research and development            40,000               Other adjustments, net                                   (2,570)                                                                      --------               Net income - proforma (1)(2)                           $ 16,899                                                                      ========               Basic net earnings per share - proforma                $   0.45                                                                      ========               Diluted net earnings per share - proforma              $   0.44                                                                      ========               (1)  The proforma net income for the year ended December 31, 2000                    includes restructuring expenses, net of taxes, in the amount                    of $16,800.               (2)  Included amortization of goodwill and assembled work force                    in the amount of approximately $1,100 which as of January 1,                    2002 are no longer being amortized.     D.   In 2000, EFW acquired the assets and the activities of Honeywell Inc.          relating to head-up displays and tracking systems for helmets in          consideration for $14,000. The excess of the purchase price over the          fair value of identified net tangible assets acquired, in the amount          of $11,100, was allocated to technology and other identifiable          intangible assets ($9,300), to be amortized over a period of 15 years          and to goodwill ($1,800).          Pro forma information in accordance with statement of financial          accounting standards SFAS No. 141 has not been provided, since the          revenues and net income of the Honeywell Inc. head-up display tracking          business were not material in relation to total consolidated revenues          and net loss.                                      -14-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 1 - GENERAL (CONT.)     E.   In the third quarter of 2000, the Company commenced a program of          restructuring its business, improving efficiency and reducing          expenses. The program consisted of the consolidation of redundant          activities, reduction of workforce, elimination of excessive          inventories and equipment and other related actions. The program was          accounted in accordance with EITF Issue 94-3, "Liability Recognition          for Certain Employee Termination Benefits and Other Costs to Exit an          Activity (including Certain Costs in a Restructuring)", SAB-100,          "Restructuring and Impairment Charges" and SFAS No. 121 "Accounting          for the Impairment of Long-Lived Assets and for Long-Lived Assets to          be Disposed of". Pursuant to the program, the Company wrote-off          inventories in the amount of $10,300 and equipment in the amount of          $5,100. The equipment will not be used in the future by the Company as          this equipment is less efficient than other equipment held by the          Company.          Through December 31, 2001, the Company paid $3,500 as part of its          restructuring plan. The amount includes payments made to consultants,          travel and other out-of-pocket expenses.          In addition, the Company accrued and paid $3,200 for employee          severance benefits. The Company's plan included termination of the          employment of a total of 61 manufacturing, marketing and corporate          employees both in Israel and in the U.S.     F.   In 2001, the Company acquired a 62.5% interest in Aeroeletronica -          Industrial de Componentes Avionicos S.A. ("AEL"), a Brazilian company          located in Porto Alegre, for approximately $3,450. In July 2002, the          Company acquired the remaining 37.5% interest for an additional $900.          The consideration paid includes approximately $1,200 (in cash) held in          escrow, pending final resolution of certain liabilities and          contingencies of AEL to be resolved over a period of five years          following the acquisition. The excess of cost over equity purchased of          approximately $6,700 was allocated to land ($1,200) and identifiable          intangible assets ($5,500), to be amortized over a period of 8 years.          AEL serves as a center for the production and logistics support of          defense electronics for programs in Brazil.                                      -15-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 1 - GENERAL (CONT.)     F.   (CONT.)          The results of AEL's operations have been included in the consolidated          financial statements from the date of purchase.          Pro forma information in accordance with SFAS No. 141 has not been          provided, since the revenues and net income of AEL were not material          in relation to total consolidated revenues and net income.     G.   In January 2002, the Company acquired from Elron Telesoft Inc. and its          subsidiaries ("Elron Telesoft") the assets and the activities of the          Defense Systems Division of Elron Telesoft ("the Government Division")          in consideration for $5,700. The excess of the purchase price over the          fair value of net tangible assets acquired in the amount of          approximately $5,100 was allocated to technology and other intangible          assets to be amortized over an average period of 3 years.          The Government Division is engaged mainly in the development of          communication systems, information technology and image intelligence          processing for defense and military applications.          The results of the Government Division have been included in the          consolidated financial statements from the first quarter of 2002.          Pro forma information in accordance with SFAS No. 141 has not been          provided, since the revenues and net income of the Government Division          were not material in relation to total consolidated revenues and net          income.NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES     The consolidated financial statements have been prepared in accordance with     generally accepted accounting principles in the United States ("US GAAP").     As applicable to the financial statements of the Company, such principles     are substantially identical to accounting principles generally accepted in     Israel, except as described in Note 26.                                      -16-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     A.   USE OF ESTIMATES          The preparation of financial statements in conformity with generally          accepted accounting principles requires management to make estimates          and assumptions that affect the amounts reported and disclosure of          contingent assets and liabilities in the financial statements and          accompanying notes. Actual results could differ from those estimates.     B.   FINANCIAL STATEMENTS IN U.S. DOLLARS          The Company revenues are generated mainly in U.S. dollars. In          addition, most of the Company's costs are incurred in U.S. dollars.          Company's management believes that the U.S. dollar is the primary          currency of the economic environment in which the Company operates.          Thus, the functional and reporting currency of the Company is the U.S.          dollar.          Transactions and balances originally denominated in U.S. dollars are          presented at their original amounts. Transaction and balances in other          currencies have been remeasured into U.S. dollars in accordance with          principles set forth in SFAS No. 52.          Accordingly items have been remeasured as follows:          Monetary items - at the exchange rate in effect on the balance sheet          date.          Nonmonetary items - at historical exchange rates.          Revenue and expense items - at the exchange rates in effect as of the          date of recognition of those items (excluding depreciation and other          items deriving from non-monetary items).          All exchange gain and losses from the remeasurement mentioned above          are reflected in the statement of operations in financial income or          expenses.          Balances linked to the Consumer Price Index in Israel ("CPI") are          stated using the relevant published index.                                      -17-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     C.   PRINCIPLES OF CONSOLIDATION          The consolidated financial statements include the accounts of the          Company and its subsidiaries.          The consolidated subsidiaries include El-op, EFW and other Israeli and          non - Israeli subsidiaries.          Intercompany transactions and balances including profit from          intercompany sales not yet realized outside the Group have been          eliminated upon consolidation.     D.   CASH AND CASH EQUIVALENTS          All short-term highly liquid investments with an original maturity of          three months or less are considered cash equivalents.     E.   SHORT-TERM BANK DEPOSITS          Short-term bank deposits are disposits with maturities of more than          three months but less than one year. The short-term bank deposits are          presented at their cost.     F.   INVENTORIES          Inventories are stated at the lower of cost or net realizable value.          Inventory write-offs are provided for slow-moving items or          technological obsolescence for which recoverability is not probable.          Cost is determined as follows:          o    Raw materials, parts and supplies using the average cost method.          o    Costs on long-term contracts represent recoverable costs incurred               for production, allocable operating overhead and, where               appropriate, research and development costs.          Advances from customers are allocated to the applicable contract          inventories and are reflected as an offset against the related          inventory balances.                                      -18-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     G.   INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES          Investments in non-marketable shares of companies in which the Group          holds less than 20% and the Group does not have the ability to          exercise significant influence over operating and financial policies          of the companies are recorded at the lower of cost or estimated fair          value.          Investments in companies and partnership over which the Group can          exercise significant influence (generally, entities in which the Group          holds between 20% and 50% of voting rights) are presented using the          equity method of accounting. The Group generally discontinues applying          the equity method when its investment (including advances and loans)          is reduced to zero and it has not guaranteed obligations of the          affiliate or otherwise committed to provide further financial support          to the affiliate.          In certain investments, the Group applies EITF 99-10, "Percentage Used          to Determine the Amount of Equity Method Losses", according to which          the Company recognizes equity method losses based on the ownership          level of the particular investee security or loan held by the company          to which the equity method losses are being applied.          Management evaluates investments in affiliates, partnership and other          companies for evidence of other than temporary declines in value. When          relevant factors indicate a loss in value that is other than          temporary, the Company records a provision for the decline in value.     H.   LONG-TERM TRADE RECEIVABLES          Long-term trade receivables from extended payment agreements are          recorded initially at their estimated present values (determined based          on the original rates of interest). Imputed interest is recognized          using the effective interest method and is included as a component of          interest income in the accompanying statements.     I.   LONG-TERM BANK DEPOSITS          Bank deposits with maturities of more than one year are presented at          cost including accumulated interest.                                      -19-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     J.   PROPERTY, PLANT AND EQUIPMENT, NET          Property, plant and equipment are stated at cost, net of accumulated          depreciation and investment grants. For equipment produced for the          Group's own use, cost includes materials, labor and overhead, but not          in excess of the fair value of replacement equipment. Depreciation is          calculated by the straight-line method over the estimated useful life          of the assets at the following annual rates:                                                               %                                                            -------          Buildings                                           2 - 4 (mainly 4%)          Instruments, machinery and equipment              10 - 33          Office furniture and other                         6 - 33          Motor vehicles                                    15 - 33 (mainly 15%)          Land rights and leasehold improvements - over the term of the lease.     K.   IMPAIRMENT OF LONG-LIVED ASSETS          The Company's long-lived assets and certain identifiable intangible          assets are reviewed for impairment in accordance with SFAS No. 144          "Accounting for the impairment or Disposal of Long-Lived Assets"          whenever events or changes in circumstances indicate that the carrying          amount of an asset may not be recoverable. Recoverability of assets to          be held and used is measured by a comparison of the carrying amount of          an asset to the future undiscounted cash flows expected to be          generated by the asset. If an asset is considered to be impaired, the          impairment to be recognized is measured by the amount by which the          carrying amount of the assets exceed its fair value.     L.   OTHER ASSETS          Other assets include mainly goodwill, know-how and trademarks acquired          in connection with the purchase of subsidiaries and activities.          Know-how and trademarks are amortized over their estimated useful          lives using the straight-line method.          Goodwill represents excess of the cost of acquired entities over the          net of the amounts assigned to assets acquired and liabilities          assumed. Goodwill that arose from acquisitions prior to July 1, 2001,          was amortized until December 31, 2001, on a straight-line basis over          10 - 20 years. Under SFAS No. 142, "Goodwill and Other Intangible          Assets", such goodwill shall no longer be amortized effective as of          January 1, 2002.                                      -20-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)          SFAS No. 142 requires goodwill to be tested for impairment on adoption          and at least annually thereafter or between annual tests in certain          circumstances, and written down when impaired, rather than being          amortized as previous accounting standards required. 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. If the carrying value exceeds the fair value, impairment is          measured by comparing the implied fair value of goodwill to its          carrying value. Fair value of a reporting unit is determined using          discounted cash flows. Significant estimates used in the methodology          include estimates of future cash flows, further short-term and          long-term growth rates and weighted average cost of capital for each          of the reportable units.          The adoption of SFAS 142 did not affect the financial position and          results of operations of the Group as of January 1, 2002.     M.   SEVERANCE PAY          Under Israeli law and employment agreements, the Group's companies in          Israel are required to make severance payments and, in certain          situations, pay pensions to terminated employees. The calculation is          based on the employee's latest salary and the period of his          employment. The companies' obligation for severance pay and pension is          provided by monthly deposits with insurance companies, pension funds          and by an accrual.          The value of severance pay funds is presented in the balance sheet and          includes profits accumulated to balance sheet date. The amounts          deposited may be withdrawn only after fulfillment of the obligations          pursuant to Israeli severance pay law or labor agreements. The value          of the deposited funds are based on the cash surrendered value of          these funds and include immaterial profits.          Severance pay expenses for the years ended December 31, 2000, 2001 and          2002, amounted to approximately $5,591, $8,097 and $10,138,          respectively.                                      -21-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     N.   REVENUE RECOGNITION          The Company generates revenues from long-term contracts involving the          design, development, manufacture and integration of defense systems          and products and providing support and services for such systems and          products. Revenues from long-term contracts are recognized based on          SOP 81-1 "Accounting for Performance of Construction-Type and Certain          Production - Type Contracts" on the percentage of completion method.          Sales and anticipated profit under long-term fixed-price production          type contracts are recorded on a percentage of completion basis,          generally using units of delivery as the measurement basis for effort          accomplished. Estimated contract profit is included in earnings in          proportion to recorded sales.          Sales under certain long-term fixed-price contracts which, among other          things require a significant amount of development effort in relation          to total contract value, are recorded using the cost-to-cost method of          accounting where sales and profit are recorded based on the ratio of          costs incurred to estimated total costs at completion but not before          the Company achieves certain milestones.          Sales under cost-reimbursement-type contracts are recorded as costs          are incurred. Applicable estimated profits are included in earnings in          the proportion that incurred costs bear to total estimated costs.          Estimated gross profit or loss from long-term contracts may change due          to changes in estimates resulting from differences between actual          performance and original forecasts. Such changes in estimated gross          profit are recorded in results of operations when they are reasonably          determinable by management, on a cumulative catch-up basis.          Amounts representing contract change orders, claims or other items are          included in sales only when they can be reliably estimated and          realization is probable. Penalties and awards applicable to          performance on contracts are considered in estimating sales and profit          rates, and are recorded when there is sufficient information to assess          anticipated contract performance.                                      -22-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)          Anticipated losses on contracts are charged to earnings when          identified.          The Company estimates the costs that may be incurred under its basic          warranty and records a liability in the amount of such costs at the          time revenue is recognized. The specific terms and conditions of those          warranties vary depending upon the product sold and the country in          which the Company does business. Factors that affect the Company's          warranty liability include the number of delivered units, engineering          estimates and anticipated rates of warranty claims. The Company          periodically assesses the adequacy of its recorded warranty liability          and adjusts the amount as necessary.     O.   RESEARCH AND DEVELOPMENT COSTS          Research and development costs, net of participations, are charged to          operations as incurred.          Group sponsored research and development costs primarily include          independent research and development and bid and proposal efforts.          Under certain arrangements in which a customer shares in product          development costs, the Group's portion of such unreimbursed costs is          expensed as incurred. Customer-sponsored research and development          costs incurred pursuant to contracts are accounted for as contract          costs.          Certain group companies in Israel receive royalty-bearing grants from          the Government of Israel and from other sources for the purpose of          funding approved research and development projects. These grants are          recognized at the time the applicable company is entitled to such          grants on the basis of the costs incurred and are presented as a          deduction from research and development costs.     P.   INCOME TAXES          The Group accounts for income taxes in accordance with SFAS No. 109,          "Accounting for 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 bases of assets and liabilities and are measured          using the enacted tax rates and laws that will be in effect when the          differences are expected to reverse. The Group provides a valuation          allowance, if necessary, to reduce deferred tax assets to their          estimated realizable value.                                      -23-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     Q.   CONCENTRATION OF CREDIT RISKS          Financial instruments that potentially subject the Group to          concentrations of credit risk consist principally of cash and cash          equivalents, short-term and long-term deposits, trade receivables and          long-term receivables.          The majority of the Group's cash and cash equivalents is invested in          dollar instruments with major banks in Israel and in the U.S.          Management believes that the financial institutions that hold the          Group investments are financially sound and accordingly, minimal          credit risk exists with respect to these investments.          The Group's trade receivables are derived primarily from sales to          large and solid customers and governments located mainly in Israel,          the United States and Europe. The Group performs ongoing credit          evaluations of its customers and to date, has not experienced any          unexpected material losses except for a one time loss in 2002 of          approximately $4,600 due to the insolvency of one of the Group's          customers. An allowance for doubtful accounts is determined with          respect to those amounts that the Group has determined to be doubtful          of collection and by a general reserve.     R.   DERIVATIVE FINANCIAL INSTRUMENTS          The Group accounts for derivatives and hedging based on SFAS No. 133,          "Accounting for Derivative Instruments and Hedging Activities". SFAS          No. 133 requires the Company to recognize all derivatives on the          balance sheet at fair value. If the derivative meets the definition of          a hedge and is so designated, depending on the nature of the hedge,          changes in the fair value of derivatives will either be offset against          the change in fair value of the hedged assets, liabilities, or firm          commitments through earnings or recognized in other comprehensive          income until the hedged item is recognized in earnings. The          ineffective portion of a derivative's change in fair value is          recognized in earnings.          For derivative instruments not designated as hedging instruments, the          gain or loss is recognized in current earnings during the period of          change.                                      -24-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)          The Company enters into forward exchange contracts to hedge certain          firm commitments denominated in foreign currencies. The purpose of the          Company's foreign currency hedging activities is to protect the          Company from risk that the eventual dollar cash flows from the sale of          products to international customers will be adversely affected by          changes in the exchange rates.          In addition, in order to ensure the dollar value of certain assets and          liabilities, the Group has enters into forward exchange contracts. As          of December 31, 2002, the Group had contracts with notional value of          approximately $21,400 to purchase and sell foreign currencies. These          contracts mature in 2003.          The fair value of the foreign exchange contracts as of December 31 ,          2002 amounted to $1,178.     S.   STOCK-BASED COMPENSATION          The Company has elected to follow Accounting Principles Board Opinion          No. 25 ("APB 25") "Accounting for Stock Issued to Employees" and FASB          Interpretation No. 44 ("FIN 44") "Accounting for Certain Transactions          Involving Stock Compensation" in accounting for its employee stock          option plans. Under APB 25, compensation expense is recognized based          on the intrinsic value method where by compensation expense is equals          to the excess if any of the quoted market price of the stock at the          grant date of the award or other measurement date, over the amount an          employee must pay to acquire the stock. The Company recognize the          expense over the vesting period of the award.          In respect of phantom share options the Company applies compensation          accounting under SFAS No. 123, "Accounting for Stock-Based          Compensation" as amended by SFAS No. 148, the Company is required to          disclose pro forma information regarding stock based employee          compensation cost net income (loss) and basic and diluted net income          (loss) per share, as if the Company had accounted for its employee          share options under the fair value method of SFAS 123. The fair value          for these options was estimated at the grant date using a          Black-Scholes                                      -25-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)          option pricing model with the following weighted average assumptions          for 2000, 2001 and 2002: risk-free interest rates of 6%, 2% and 1.34%          respectively, dividend yields of 2.0%, 2.03% and 1.99% respectively,          volatility of 49.5%, 33.8% and 21.2% respectively, and a weighted          average expected life of the options of 6 years.          Pro forma information under SFAS 123 is as follows:                                                             YEAR ENDED DECEMBER 31,                                                          ----------------------------                                                            2002      2001      2000                                                          -------   -------   --------          Net income (loss) as reported                   $45,113   $40,796   $(20,531)          Stock based compensation as reported               (926)    8,512        155          Stock based compensation under             SFAS 123                                      (3,695)   (3,665)      (730)                                                          -------   -------   --------          Pro forma net income (loss)                     $40,492   $45,643   $(21,106)                                                          =======   =======   ========          Basic net income (loss) per share as             reported                                     $  1.17   $  1.07   $  (0.65)                                                          =======   =======   ========          Pro forma basic net income (loss) per share     $  1.05   $  1.20   $  (0.67)                                                          =======   =======   ========          Diluted net income (loss) per share as             reported                                     $  1.13   $  1.04   $  (0.65)                                                          =======   =======   ========          Pro forma diluted net income (loss) per share   $  1.02   $  1.16   $  (0.67)                                                          =======   =======   ========                                      -26-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     T.   FAIR VALUE OF FINANCIAL INSTRUMENTS          The carrying amount reported in the balance sheet for cash and cash          equivalents, short-term deposits, trade receivables, other          receivables, short-term bank loans, short-term trade payables and          other payables approximate their fair values due to the short-term          maturities of such instruments.          Long-term loans are estimated by discounting the future cash flows          using current interest rates for loans of similar terms and          maturities. The carrying amount of the long-term loans approximates          their fair value.          The fair value of foreign currency contracts (used for hedging          purposes) is estimated by obtaining current quotes from investment          bankers.          It was not practicable to estimate the fair value of the Company's          investments in shares of non-public affiliates and other Companies          because of the lack of a quoted market price and the inability to          obtain valuation of each Company without incurring excessive costs.          The carrying amounts of these Companies were $31,492 and $33,051 as of          December 31, 2001 and 2002, respectively and represent the original          cost and, in the case of affiliates, include the Company's equity in          the earnings or losses of the affiliates since the dates of          acquisition.     U.   BASIC AND DILUTED NET EARNINGS (LOSS) PER SHARE          Basic net earnings (loss) per share is computed based on the weighted          average number of ordinary shares outstanding during each year.          Diluted net earning (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. Outstanding stock options are excluded from the calculation of          the diluted net earning (loss) per ordinary share when such securities          are anti-dilutive. The total weighted average number of shares related          to the outstanding options excluded from the calculation of diluted          net loss per share was 647 for the year ended December 31, 2000 (2001          and 2002 - none).                                      -27-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     V.   IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS          In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs          Associated with Exit or Disposal Activities," which addresses          significant issue regarding the recognition, measurement and reporting          of costs associated with exit and disposal activities, including          restructuring activities. SFAS No. 146 requires that costs associated          with exit or disposal activities be recognized when they are incurred          rather than at the date of a commitment to an exit or disposal plan.          SFAS No. 146 is effective for all exit or disposal activities          initiated after December 31, 2002. SFAS No. 146 also requires          liabilities accrued in respect of such cost to be measured at fair          value. The Company does not expect the adoption of SFAS No. 146 to          have a material impact on its results of operations or financial          position.          In November 2002, the FASB issued FASB Interpretation No. 45,          "Guarantor's Accounting and Disclosure Requirements for Guarantees,          Including Indirect Guarantees of Indebtedness of Others, an          interpretation of FASB Statements No. 5, 57, and 107 and Rescission of          FASB Interpretation No. 34 ("FIN No.45"). FIN No. 45 elaborates on the          disclosures to be made by a guarantor in its interim and annual          financial statements about its obligations under certain guarantees          that it has issued. It also clarifies that a guarantor is required to          recognize, at the inception of a guarantee, a liability for the fair          value of the obligation undertaken in issuing the guarantee. FIN No.          45 does not prescribe a specific approach for subsequently measuring          the guarantor's recognized liability over the term of the related          guarantee. It also incorporates, without change, the guidance in FASB          Interpretation No.34, "Disclosure of Indirect Guarantees of          Indebtedness of Others", which is being superseded. The disclosure          provisions of FIN No. 45 are effective for financial statements of          interim or annual periods that end after December 15, 2002, and the          provisions for initial recognition and measurement are effective on a          prospective basis for guarantees that are issued or modified after          December 31, 2002, irrespective of a guarantor's year-end. The Company          does not expect the adoption of FIN No. 45 to have a material impact          on its results of operations or financial position.                                      -28-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)     W.   RECLASSIFICATIONS          Certain financial statement data for prior years has been reclassified          to conform with current year financial statement presentation.NOTE 3 - TRADE RECEIVABLES, NET     A.   Trade receivables                                                                 DECEMBER 31,                                                            -------------------                                                              2002       2001                                                            --------   --------     Open accounts (*)                                      $177,465   $175,275     Unbilled receivables                                     53,670     69,752     Less - allowance for doubtful accounts                   (3,411)    (3,200)                                                            --------   --------                                                            $227,724   $241,827                                                            ========   ========     (*)  Includes affiliated companies                     $  9,647   $ 14,257                                                            ========   =======     B.   Long-term trade receivables include amounts due to the Company in          connection with certain contracts. The receivables are guaranteed by          governmental authorities and their majority portion is insured by          financial institutions. The receivables are denominated in U.S          dollars, payable over a period of one and a half years and bear          intrest rates of Libor + 1.5%.NOTE 4 - OTHER RECEIVABLES AND PREPAID EXPENSES                                                                  DECEMBER 31,                                                               -----------------                                                                2002      2001                                                               -------   -------     Prepaid expenses                                          $12,244   $13,445     Government departments                                      5,915     4,937     Employees                                                   1,029       710     Deferred income taxes                                      11,675    11,631     Other                                                       3,513     5,486                                                               -------   -------                                                               $34,376   $36,209                                                               =======   =======                                      -29-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 5 - INVENTORIES, NET OF ADVANCES                                                                DECEMBER 31,                                                             -------------------                                                               2002       2001                                                             --------   --------     Cost of long-term contracts in progress                 $205,318   $155,712     Raw materials                                             75,579     70,133     Advances to suppliers and subcontractors                  25,047     30,955                                                             --------   --------                                                              305,944    256,800     Less -        Cost of contracts in progress deducted        from customer advances                                                               10,658     10,961                                                             --------   --------                                                              295,286    245,839     Less -        Advances received from customers                       67,624     49,969        Provision for losses                                    4,818     10,780                                                             --------   --------                                                             $222,844   $185,090                                                             ========   ========     (*)  The Company has transferred legal title of inventories to certain          customers as collateral for advances received.NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES     A.   INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD                                                                  DECEMBER 31,                                                               -----------------                                                                2002       2001                                                               -------   -------          SCD (1)                                              $15,713   $13,036          VSI (2)                                                3,893     2,030          Red C (3)                                                 --     2,549          Opgal (4)                                              2,028     1,894          Others (5)                                               313        74                                                               -------   -------                                                               $21,947   $19,583                                                               =======   =======          (1)  Semi Conductor Devices ("SCD"), a partnership, held 50% by the               Company and 50% by Rafael Armaments Development Authority Ltd.               ("Rafael"). SCD is engaged in the development and production of               various thermal detectors and laser diodes.                                      -30-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES         (CONT.)     A.   INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD (CONT.)          (2)  Vision Systems International LLC ("VSI") based in San Jose,               California is a limited liability company that is held 50% by               EFW. VSI operates in the area of helmet mounted display systems               for fixed wing military and paramilitary aircraft.          (3)  Red C Optical Networks Inc. ("Red C") is engaged in the               multi-focal optic communications sector and is held 36.5% by               El-Op. Red C designs, develops and manufacture optical amplifiers               for dense wave-length multiplexing (DWDM) optical networks for               telecommunication renders. In 2002 the investment in Red C was               written off.          (4)  Opgal Optronics Industries ("Opgal") Ltd., is an Israeli company               owned 50.1% by the Company and 49.9% by a subsidiary of Rafael.               Opgal focuses mainly on commercial applications of thermal               imaging and electro-optic technologies. The Company jointly               controls Opgal with Rafael, and therefore Opgal is not               consolidated in the Company's financial statements.          (5)  Mediguide Inc. ("Mediguide") and its Israeli subsidiary,               Mediguide Ltd., were established in 2000 as a spin-off from the               Company, which holds the majority of Mediguide's ordinary shares.               In 2001 and 2002, Mediguide issued preferred shares to other               investors in consideration for approximately $6,000 based on a               pre-money valuation of $14,000 - $17,000. The preferred shares               entitle the other investors to preference rights in any               liquidation event. Therefore, the Company did not record any gain               as a result of the above transaction. In addition the preferred               shares entitle their holders to certain participating rights.               Accordingly based on the guidance in EITF 96-16, the Company               ceased consolidating its investment in Mediguide and accounts for               the investment in Mediguide under the equity method of               accounting.          (6)  See Note 16(E) for guarantees.                                      -31-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES         (CONT.)     B.   INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE COST METHOD                                                                  DECEMBER 31,                                                               -----------------                                                                 2002      2001                                                               -------   -------          Sultam (1)                                           $ 3,500   $ 3,500          ISI (2)                                                7,230     7,230          Other                                                    374     1,179                                                               -------   -------                                                               $11,104   $11,909                                                               =======   =======          (1)  Sultam Systems Ltd. ("Sultam"), held 10% by the Company, is               engaged in the development and manufacturing of military systems               in the artillery sector.          (2)  ImageSat International N.V. ("ISI"), held 14% (10% on a fully               diluted basis) by the Company, is engaged in the operation of               satellite photography formations and commercial delivery of               satellite photography for civil purposes.NOTE 7 - LONG -TERM BANK DEPOSITS AND LOAN                                                                   DECEMBER 31,                                                                 ---------------                                                                  2002     2001                                                                 ------   ------     Deposits with bank for loans granted to        employees (*)                                            $2,037   $2,238     Other deposits with bank                                       935    1,195     Long-term loan                                                 714       --                                                                 ------   ------                                                                 $3,686   $3,433                                                                 ======   ======     (*)  The deposits are linked to the Israeli CPI, bear annual interest of 4%          and are presented net of current maturities of $680 (2001 - $746).                                      -32-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 8 - PROPERTY, PLANT AND EQUIPMENT, NET                                                               DECEMBER 31,                                                          ---------------------                                                             2002        2001                                                          ---------   ---------     Cost (1):        Land, buildings and           leasehold improvements (2)                     $ 127,932   $ 114,690        Instruments, machinery           and equipment (3)                                167,105     145,114           Office furniture and other                        24,790      22,093           Motor vehicles                                    24,393      19,715                                                          ---------   ---------                                                            344,220     301,612     Accumulated depreciation                              (141,259)   (116,890)                                                          ---------   ---------     Depreciated cost                                     $ 202,961   $ 184,722                                                          =========   =========     Depreciation expenses for the years ended December 31, 2000, 2001 and 2002     amounted to $24,177, $24,517 and $26,525 respectively.     (1)  Net of investment grants received (mainly for instruments, machinery          and equipment) in the amounts of approximately $38,300 and $38,420 as          of December 31, 2001 and 2002, respectively. Cost includes assets          fully depreciated and still in use in the amount of $124,000 and of          $134,000 as of December 31, 2001 and 2002, respectively.     (2)  Includes, rights in approximately 9,225 square meters of land in,          Tirat Hacarmel Israel, of which approximately 2,300 square meters are          owned while the remaining land is leased from the Israel Land          Administration until the years 2014 to 2024 with an option to renew          the lease for additional periods up to 49 years. The Company's rights          in the land have not yet been registered in its name.          Includes, rights in approximately 10,633 square meters of land in          Rehovot, Israel. The land is leased from the Israel Land          Administration until the year of 2043 with an option to renew the          lease for additional periods up to 49 years. The Company's rights in          the land have not yet been registered in its name.     (3)  Includes equipment produced by the Group for its own use in the amount          of $4,913 and $5,517 as of December 31, 2001 and 2002, respectively.     (4)  As for pledges of assets - see Note 16(G).                                      -33-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 9 - OTHER ASSETS, NET     A.                                                                            DECEMBER 31,                                                     WEIGHTED-AVERAGE   -------------------                                                     NUMBER OF YEARS      2002       2001                                                     ----------------   --------   --------          Original cost:             Know-how (1)                                  12.5                    $ 74,716                                                                        $ 81,019             Trade marks (2)                                 17            8,000      8,000             Goodwill and assembled work-force (3)                        37,578     36,983                                                                         126,597    119,699          Accumulated amortization:             Know-how                                                     14,666      8,704             Trade marks                                                   1,125        675             Goodwill and assembled work-force                             5,037      5,037                                                                        --------   --------                                                                          20,828     14,416                                                                        --------   --------          Amortized cost                                                $105,769   $105,283                                                                        ========   ========          (1)  Includes mainly know-how acquired in the merger with El-Op               ($45,000), know-how acquired in the acquisition of AEL and the               Government Division ($10,600) and intangible assets acquired from               Honeywell Inc. ($9,300) (see Notes 1C, 1D, 1F and 1G).          (2)  Includes trade marks acquired in the merger with El-Op.          (3)  Includes mainly intangible assets acquired in the merger with               El-Op ($34,200) and intangible assets acquires from Honeywell               Inc. ($1,800). Until January 1, 2002, goodwill and assembled               work-force were amortized at an annual rate of 5% - 10%.     B.   Amortization expenses amounted to $5,401, $8,348 and $6,412 for the          years ended December 31, 2000, 2001 and 2002, respectively.     C.   The annual amortization expense relating to intangibles existing as of          December 31, 2002 for each of the five years in the period ending          December 31, 2007 is estimated to be approximately $7,000.                                      -34-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 9 - OTHER ASSETS, NET (CONT.)     The following information is presented to reflect net income and earnings     per share for all prior periods adjusted to exclude amortization of     goodwill.                                                                 YEAR ENDED                                                                 DECEMBER 31,                                                            -------------------                                                              2001       2000                                                            -------    --------     Reported net income (loss)                             $40,796    $(20,531)     Goodwill amortization                                    2,760       2,012                                                            -------    --------     Adjusted net income (loss)                             $43,556    $(18,519)                                                            =======    ========     Earnings per share     Reported basic earnings (loss) per share               $  1.07    $  (0.65)     Goodwill amortization                                     0.08        0.06                                                            -------    --------     Adjusted basic earnings per share                      $  1.15    $  (0.59)                                                            -------    --------     Reported diluted earnings (loss) per share             $  1.04    $  (0.65)     Goodwill amortization                                     0.07        0.06                                                            -------    --------     Adjusted diluted earnings (loss) per share             $  1.11       (0.59)                                                            =======    ========NOTE 10 - SHORT-TERM BANK CREDIT AND LOANS                                                         DECEMBER 31,                                             ----------------------------------------                                                2002        2001      2002      2001                                             ----------   -------   -------   -------                                                INTEREST RATE %                                             --------------------     Short-term bank loans:        In U.S dollars                            3 - 5   2.5 - 3   $12,683   $12,922        In NIS unlinked                              --   4.7 - 8        --    13,273                                                                    -------   -------                                                                     12,683    26,195                                                                    -------   -------     Short-term bank credit:        In NIS unlinked                      2.8 - 10.9         8     5,241     1,869        In U.S dollars                       3.2 -  3.6   2 - 2.5     6,378    15,967                                                                    -------   -------                                                                     11,619    17,836                                                                    -------   -------     Current maturities of long-term loans                            6,613     2,863                                                                    -------   -------                                                                    $30,915   $46,894                                                                    =======   =======                                      -35-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 11 - OTHER ACCOUNTS PAYABLES AND ACCRUED EXEPNSES                                                                 DECEMBER 31,                                                             -------------------                                                               2002       2001                                                             --------   --------     Payroll and related expenses                            $ 27,912   $ 25,736     (1)      Provision for vacation pay                       20,492     18,380     Government departments                                    22,443     28,750     (2)      Provision for warranty                           26,641     22,723     Cost provisions and other                                 45,038     39,797                                                             --------   --------                                                             $142,526   $135,386                                                             ========   ========NOTE 12 - CUSTOMERS ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED                                                                 DECEMBER 31,                                                             -------------------                                                               2002       2001                                                             --------   --------     Advances received                                       $227,111   $184,112     Less -        Advances presented under long-term           liabilities                                         40,411     29,840        Advances deducted from inventories                     67,624     49,969                                                             --------   --------                                                              119,076    104,303     Less -        Costs of contracts in progress                         10,658     10,961                                                             --------   --------                                                             $108,418   $ 93,342                                                             ========   ========                                      -36-                               ELBIT SYSTEMS LTD.             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 13 - LONG-TERM LOANS                                                                             DECEMBER 31,                                                 INTEREST     YEARS OF    -----------------                                   LINKAGE          %         MATURITY      2002      2001                               ---------------   --------   -----------   -------   -------     Banks                     U.S dollars        Libor +                                                  0.5%-5%   2003 - 2007   $67,206   $70,719     Banks                     NIS-unlinked       Israeli                                                  Prime     2003 - 2036     3,383     1,346     Office of chief           NIS-linked to        scientist              the Israeli-CPI    4%        2003 - 2006     9,197        --                                                                          -------   -------                                                                           79,786    72,065     Less-current maturities                                                6,613     2,863                                                                          -------   -------                                                                          $73,173   $69,202                                                                          =======   =======     The Libor rate as of December 31, 2002 was 1.34%.     The Israeli Prime rate as of December 31, 2002 was 10.5%     The maturities of these loans after December 31, 2002 are as follows:     2003 - current maturities                                           $ 6,613     2004                                                                 54,278     2005                                                                  4,499     2006                                                                  4,506     2007                                                                  7,062     2008 and thereafter                                                   2,828                                                                         -------                                                                         $79,786                                                                         =======     In connection with bank credits and loans, including performance guarantees     issued by banks and bank guarantees securing certain advances from     customers, the Company and certain subsidiaries are obligated to meet     certain loan covenants. Management believes that the Company and the     subsidiaries meet the conditions of these covenants as of balance sheet     date.NOTE 14 - BENEFIT PLANS     Retirement Benefits:     Subsidiaries in the U.S. sponsor defined benefit retirement plans ("Plans")     which are a noncontributory plans, covering substantially all of the U.S.     employees, that provide monthly pension to eligible employees upon     retirement, in amounts based on years of service and average compensation.                                      -37-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 14 - BENEFIT PLANS (CONT.)     The following table reconciles the benefit obligations, Plans assets,     funded status and net asset (liability) information of the Plans:                                                                DECEMBER 31,                                                            -------------------                                                              2002       2001                                                            --------   --------     Benefit obligation at beginning of year                $ 22,358   $ 18,474     Service cost                                              2,067      1,766     Interest cost                                             1,678      1,461     Actuarial losses                                          2,955      1,338     Benefits repaid                                            (619)      (681)                                                            --------   --------     Benefit obligation at end of year                        28,439     22,358                                                            --------   --------     Plans assets at beginning of year                        16,167     17,846     Actual return on plan assets                             (1,560)    (1,121)     Contributions by employer                                 1,571        123     Benefits repaid                                            (619)      (681)                                                            --------   --------     Plans assets at end of year                              15,559     16,167                                                            --------   --------     Funded status of Plans (underfunded)                    (12,880)    (6,191)     Unrecognized prior service cost                             234        223     Unrecognized net actuarial loss                           7,582      1,508                                                            --------   --------     Net amount recognized                                    (5,064)    (4,460)                                                            ========   ========     Net asset (liability) consists of:     Accrued benefit liability                               (10,298)    (4,667)     Intangible asset                                            234        207     Accumulated other comprehensive income                    5,000         --                                                            --------   --------     Net amount recognized                                  $ (5,064)  $ (4,460)                                                            ========   ========     Weighted average assumptions :        Discount rate as of December 31,                        6.75%      7.38%        Expected long-term rate of return on           Plans assets                                         9.00%      9.50%        Rate of compensation increase                           3.00%      3.00%                                      -38-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 14 - BENEFIT PLANS (CONT.)                                                      YEAR ENDED DECEMBER 31,                                                    ---------------------------                                                     2002       2001      2000                                                    -------   -------   -------     Components of net periodic pension cost:              Service cost                          $ 2,067   $ 1,766   $ 1,904              Interest cost                           1,678     1,461     1,253              Expected return on Plan assets         (1,597)   (1,666)   (1,680)        Amortization of prior service cost               28        24        25        Recognized of net actuarial gain               (340)      (38)     (312)        One-time FAS 88 charge for 2001 SRP              --       177        --                                                    -------   -------   -------              Net periodic pension cost             $ 1,836   $ 1,724   $ 1,190                                                    =======   =======   =======DEFINED CONTRIBUTION PLAN     The 401(k) savings plan ("401(k) plan") is a defined contribution     retirement plan that covers all eligible employees, as defined in section     401(k) of the U.S. Internal Revenue Code. Employees may elect to contribute     a percentage of their annual gross compensation to the 401(k) plan. The     Company may make discretionary matching contributions as determined by the     Company. Total expense under the 401(k) plan amounted to $1,369 for the     year ended December 31, 2002 (2001 - $639).NOTE 15 - TAXES ON INCOME     A.   APPLICABLE TAX LAWS          (1)  MEASUREMENT OF TAXABLE INCOME UNDER ISRAEL'S INCOME TAX               (INFLATIONARY ADJUSTMENTS) LAW, 1985:               Results for tax purposes are measured and reflected in accordance               with the change in the Israeli Consumer Price Index ("CPI"). As               explained above in Note 2B, the consolidated financial statements               are presented in U.S. dollars. The differences between the change               in the Israeli CPI and in the NIS/U.S. dollar exchange rate cause               a difference between taxable income and the income before taxes               reflected in the consolidated financial statements.                                      -39-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 15 - TAXES ON INCOME (CONT.)     APPLICABLE TAX LAWS (CONT.)               In accordance with paragraph 9(f) of SFAS No. 109, the Company               has not provided deferred income taxes on the above difference               between the reporting currency and the tax basis of assets and               liabilities.          (2)  TAX BENEFITS UNDER ISRAEL'S LAW FOR THE ENCOURAGEMENT OF INDUSTRY               (TAXES), 1969:               The Company and certain subsidiaries (mainly El-Op and Cyclone)               are "Industrial Companies", as defined by the Law for the               Encouragement of Industry (Taxes), 1969, and as such, these               Companies are entitled to certain tax benefits, mainly               amortization of costs relating to know-how and patents over eight               years, accelerated depreciation and the right to deducte for tax               purpose public issuance expenses.          (3)  TAX BENEFITS UNDER ISRAEL'S LAW FOR THE ENCOURAGEMENT OF CAPITAL               INVESTMENTS, 1959:               Four expansion programs of the Company have been granted               "Approved Enterprise" status under Israel's Law for the               Encouragement of Capital Investments, 1959. For these expansion               programs, the Company has elected to receive grant. Accordingly               the income of the Company derived from the "Approved Enterprise"               expansion programs is tax exempt for two-year period and subject               to reduced tax rates of 25% for five-year period commencing in               the year in which the Company first generates taxable income               (limited to twelve years from commencement of                                      -40-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 15 - TAXES ON INCOME (CONT.)     APPLICABLE TAX LAWS (CONT.)               production or fourteen years from the date of approval, whichever               is earlier). As of December 31, 2002, the tax benefits for these               expansion programs will expire between 2002 to 2007.               Three expansion programs of El-Op have been granted, such               "Approved Enterprise" status. For these expansion programs, El-Op               has elected the alternative tax benefits track. In this track the               income of El-Op derived from the "Approved Enterprise" expansion               programs is tax exempt for a two-year period and subject to               reduced tax rates of 25% for a five-year period commencing in the               year which the company first generates taxable income (limited to               twelve years from commencement of production or fourteen years               from the date of approval, whichever is earlier). As of December               31, 2002, the tax benefits for these expansion programs will               expire between 2003 to 2005.               The entitlement to the above benefits is subject to the companies               fulfilling the conditions specified in the above refereed law,               regulations published there under and the letters of approval for               the specific investments in "Approved Enterprises". In the event               of failure to comply with these conditions, the benefits may be               canceled and the companies may be required to refund the amount               of the benefits, in whole or in part, including interest. (For               liens - see Note 16F). As of December 31, 2002, management               believes that the companies are meeting all conditions of the               approvals.               The tax-exempt income attributable to the "Approved Enterprise"               can be distributed to shareholders without imposing tax liability               on the companies only upon the complete liquidation of the               companies. As of December 31, 2002, retained earnings included               approximately $74,000 in tax-exempt profits earned by the Group's               "Approved Enterprise". The Company's Board of Directors has               decided that its policy is not to declare dividends out of such               tax-exempt income. Accordingly, no deferred income taxes have               been provided on income attributable to the Company's "Approved               Enterprise".               If the retained tax-exempt income is distributed in a manner               other than on the complete liquidation of the Company, it would               be taxed at the corporate tax rate applicable to such profits as               if the Company had not elected alternative tax benefits               (currently - 25%) and an income tax liability would be incurred               of approximately $ 19,000 as of December 31, 2002.                                      -41-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 15 - TAXES ON INCOME (CONT.)     A.   APPLICABLE TAX LAWS (CONT.)          (3)  Tax benefits under the Israel's Law for the Encouragement of     Capital Investments, 1959 (Cont.)               Income from sources other then the "Approved Enterprise" during               the benefit period will be subject to tax at the regular               corporate tax rate of 36%.               Since the Company and El-Op are operating under more than one               approval, and since part of their taxable income is not entitled               to tax benefits under the abovementioned law and is taxed at the               regular tax rate of 36%, the effective tax rate is the result of               a weighted combination of the various applicable rates and tax               exemptions, and the computation is made for income derived from               each approval on the basis of formulas specified in the law and               in the approvals.     B.   TAX ASSESSMENTS          1.   The Company and El-Op have received final tax assessments through               December 31, 2000. EFW has received final tax assessments through               December 31, 1997.          2.   The Company and El-Op have received in previous years pre-rulings               from the tax authorities, which allowed them to transfer               development products and assets to companies under their               ownership without any tax liability pursuant to section 104 of               the Israeli Income Tax Ordinance. The pre-rulings specify terms               for the companies to comply, usually for a two - year period.               Noncompliance with the terms of the pre-rulings will result in               the retroactive cancellation of the aforementioned exemption from               taxes. Tax implications upon non-compliance are estimated by               management to be immaterial to the Group's results.                                      -42-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 15 - INCOME TAXES (CONT.)     C.   NON - ISRAELI SUBSIDIARIES          Non-Israeli subsidiaries are taxed based on tax laws in their          countries of residence (mainly in the U.S.).     D.   INCOME (LOSS) BEFORE TAXES ON INCOME                                                            YEAR ENDED                                                           DECEMBER 31,                                                   ----------------------------                                                     2002      2001      2000                                                   -------   -------   --------          Income (loss) before taxes on             income income:             Domestic                              $42,317   $44,212   $(13,779)             Foreign                                11,977     7,638      1,121                                                   -------   -------   --------                                                   $54,294   $51,850   $(12,658)                                                   =======   =======   ========     E.   TAXES ON INCOME                                                           YEAR ENDED                                                          DECEMBER 31,                                                 ------------------------------                                                    2002        2001      2000                                                 ----------   -------   -------          Taxes on income:          Current taxes:             Domestic                            $   11,654   $ 9,385   $ 8,710             Foreign                                  6,114     3,048       879                                                 ----------   -------   -------                                                     17,768    12,433     9,589                                                 ----------   -------   -------          Deferred income taxes:             Domestic                                (3,561)     (839)   (5,309)             Foreign                                 (2,059)     (591)    1,947                                                 ----------   -------   -------                                                     (5,620)   (1,430)   (3,362)                                                 ----------   -------   -------          Taxes in respect of prior years         (*)(2,800)       --        --                                                 ----------   -------   -------                                                 $    9,348   $11,003   $ 6,227                                                 ==========   =======   =======          (*)  A reduction of tax expenses due to adjustments of estimated taxes               and completion of tax assessments for prior years in respect of               various Group companies.                                      -43-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 15 - INCOME TAXES (CONT.)     F.   DEFERRED INCOME TAXES          Deferred income taxes reflect the net tax effect of temporary          differences between the carrying amount of assets and liabilities for          financial reporting purposes and the amounts used for income tax          purposes. Significant components of net deferred tax assets and          liabilities are as follows:                                                                             DEFERRED                                                                    TAX ASSET (LIABILITY(1))                                                                    ------------------------                                                           TOTAL      CURRENT   NONCURRENT                                                         --------     -------   ----------          As of December 31, 2002          Deferred tax assets:             Reserve and allowances                      $ 12,770     $ 4,797    $  7,973             Inventory                                      6,878       6,878          --             Net operating loss carryforwards               2,326          --       2,326                                                         --------     -------    --------             Valuation allowance (2)                       (2,326)         --      (2,326)                                                         --------     -------    --------             Net deferred tax assets                       19,648      11,675       7,973                                                         --------     -------    --------          Deferred tax liabilities:          Property, plant and equipment                    (9,209)         --      (9,209)          Other assets                                    (15,177)         --     (15,177)                                                         --------     -------    --------                                                          (24,386)         --     (24,386)                                                         --------     -------    --------          Net deferred tax assets (liabilities)          $ (4,738)    $11,675    $(16,413)                                                         ========     =======    ========          As of December 31, 2001 Deferred tax assets:          Reserve and allowances                         $  9,067     $ 4,308    $  4,759          Inventory                                         7,323       7,323          --          Net operating loss carryforwards                  4,248          --       4,248                                                         --------     -------    --------          Valuation allowance (2)                          (2,202)         --      (2,202)                                                         --------     -------    --------          Net deferred tax assets                          18,436      11,631       6,805                                                         --------     -------    --------          Deferred tax liabilities:          Property, plant and equipment                   (12,111)         --     (12,111)          Other assets                                    (16,683)         --     (16,683)                                                         --------     -------    --------                                                          (28,794)         --     (28,794)                                                         --------     -------    --------          Net deferred tax assets (liabilities)          $(10,358)    $11,631    $(21,989)                                                         ========     =======    ========                                      -44-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 15 - INCOME TAXES (CONT.)     F.   DEFERRED INCOME TAXES (CONT.)          (1)  Current tax asset is included in other receivables. Noncurrent               tax liability is included as a long-term liabilitiy.          (2)  During 2002, the Company increased the valuation allowance due to               an increase in accumulated operating loss carryforwards not               expected to be utilized.     G.   The Company's Israeli subsidiaries have estimated total available          carryforward tax losses of approximately $2,200 as of December 31,          2002. The Company's non-Israeli subsidiaries have estimated          available carryforward tax losses of approximately $200 as of December          31 2002 to offset against future taxable profits for an indefinite          period. Deferred tax assets in respect of the above carryforward          losses amount to approximately $2,400 in respect of which a valuation          allowance has been recorded in the amount of approximately $2,400.     H.   Reconciliation of the theoretical tax expense, assuming all income is          taxed at the statutory rate applicable to income of the Company, and          the actual tax expense as reported in the statements of operations, is          as follows:                                                                         YEAR ENDED                                                                        DECEMBER 31,                                                                ----------------------------                                                                  2002      2001      2000                                                                -------   -------   --------          Income (loss) before taxes as reported in the             consolidated statements of operations              $54,294   $51,850   $(12,658)          Statutory tax rate                                         36%       36%        36%                                                                =======   =======   ========          Theoretical tax expense (benefit)                     $19,546   $18,666   $ (4,557)          Tax benefit arising from reduced rate as an             "Approved Enterprise"                               (9,054)   (7,697)    (4,015)          Tax adjustment in respect of different tax rate for             foreign subsidiaries                                  (461)     (952)      (469)          Operating carryforward losses for which             valuation allowance was provided                     2,189       101        318                                      -45-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 15 - INCOME TAXES (CONT.)          Increase (decrease) in taxes resulting from             nondeductible expenses                                (263)      571     15,280          Difference in basis of measurement for             financial reporting and tax return purposes            458       832       (684)          Taxes in respect of prior years                        (2,800)       --         --          Other differences, net                                   (267)     (518)       354                                                                -------   -------   --------          Actual tax expenses                                   $ 9,348   $11,003   $  6,227                                                                =======   =======   ========          Effective tax rate                                       17.2%     21.2%        --                                                                =======   =======   ========NOTE 16 - CONTINGENT LIABILITIES AND COMMITMENTS     A.   Royalty commitments          1.   The Company and certain Israeli subsidiaries partially finance               their research and development expenditures under programs               sponsored by the Office of the Chief Scientist of Israel ("OCS")               for the support of research and development activities conducted               in Israel. At the time the participations were received,               successful development of the related projects was not assured.               In exchange for participation in the programs by the OCS, the               Company and the subsidiaries agreed to pay 2% - 3.5% of total               sales of products developed within the framework of these               programs. The royalties will be paid up to maximum amount               equaling 100% to 150% of the grants provided by the OCS, linked               to the dollar and for grants received after January 1, 1999, also               bearing annual interest at a rate based on LIBOR. The obligation               to pay these royalties is contingent on actual sales of the               products and in the absence of such sales, payment of royalties               is not required.               In some cases, the Government of Israel participation (through               the OCS) is subject to export sales or other conditions. The               maximum amount of royalties is increased in the event of               production outside of Israel.               The Company and certain of its subsidiaries are also obligated to               pay certain amounts to the Israeli Ministry of Defense and others               on certain sales including sales resulting from the development               of certain technology.               Royalties expenses or accrued amounted to $6,661, $8,252 and               $14,471 in 2000, 2001 and 2002, respectively.                                      -46-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 16 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)          2.   In September 2001, the OCS issued "Regulations for the               Encouragement of Research and Development in Industry" (rules for               determining the level and payment of royalties) ("the               regulations"). The regulations allow large R&D intensive               companies to reach certain agreements with the OCS regarding               determination of the amount and payment schedule of royalties,               subject to certain conditions.     A.   Royalty commitments (Cont.)          If the Company elects to adopt the regulations, it will have to record          a significant one-time expense resulting from accruing liability for          an absolute amount of royalties.          As of the date the financial statement was approved, the Company has          not concluded discussions or finalized any agreements with the OCS          with respect to the company.          In May 2002 El-Op's Board of Directors approved an arrangement,          proposed by the OCS, according to which El-Op will pay commencing in          2002 an agreed amount of $10,632 in exchange for a release from all          obligations to pay royalties in the future. As a result El-Op recorded          an expense for the agreed amount net of the accrual for royalties          previously recorded by El-OP.     B.   Commitments in respect of long-term projects          In connection with long-term projects in certain countries, the          Company and certain subsidiaries undertook to use its respective best          efforts to make or facilitate purchases or investments in those          countries at certain percentages of the amount of the projects. The          companies' obligation to make or facilitate third parties making such          investments and purchases is subject to commercial conditions in the          local market, typically without a specific financial penalty. The          maximum aggregate undertaking as of December 31, 2002 amounted to          $715,000 to be performed over a period of up to 11 years, is typically          tied to a percentage (up to 100%) of the amount of the specific          contract.          In the opinion of management, the actual amount of the investments and          purchases is anticipated to be less than that mentioned above, since          certain investments and purchases can result in reducing the overall          undertaking on more than a one to one basis.                                      -47-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 16 - CONTINGENT LIABILITIES AND COMMITMENTS (CONT.)     C.   Legal claims          The Company and its subsidiaries are involved in legal claims arising          in the ordinary course of business, including claims by employees,          consultants and others. Company's management, based on the opinion of          its legal counsel, believes the amount of such claims in excess of the          accruals recorded in the financial statements will not have a material          adverse effect on the financial position or results of operations of          the Group.     D.   Lease commitments          The future mininum lease commitments of the Group under various          non-cancelable operating lease agreements in respect of premises,          motor vehicles and office equipment are as of December 31, 2002:          2003                                                           $ 8,197          2004                                                             8,985          2005                                                             4,834          2006                                                             4,156          2007 and there after                                             3,877                                                                         -------                                                                         $30,049                                                                         =======          Rent expenses for the years ended December 31, 2000, 2001 and 2002          amounted to $7,411, $7,978, and $9,215, respectively.     E.   The Company has provided, on a proportional basis to its ownership          interest, guarantees for two of its investees in respect of credit          lines from banks amounting to $10,600 (2001- $10,700), of which          $10,200 (2001 - $9,700) relates to a foreign investee owned 50% by          El-Op. The guarantees will exist as long as the credit lines are in          effect. The Company would be liable to perform under the guarantee for          any debt the investee would be in default under the terms of the          credit line.                                      -48-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)       (In thousands of U.S. dollars, except for share and per share data)NOTE 16 - CONTINGENT LIABILITIES, AND COMMITMENTS (CONT.)     F.   A lien on the Group's Approved Enterprises has been registered in          favor of the State of Israel. Grants received in respect of projects          which have not yet been approved amount to approximately $3,600.(see          note 15 A (3) above).     G.   Guarantees in the amount of approximately $374,000 were issued by          banks securing certain advances from customers and performance bonds          on behalf of Group companies.     H.   Certain Group companies recorded fixed charges on most of their          machinery and equipment, mortgages on most of their real estate and          floating charges on most of their assets.NOTE 17 - SHAREHOLDER'S EQUITY     A.   SHARE CAPITAL          Ordinary shares confer upon their holders voting rights, the right to          receive dividends and the right to share in excess sets as upon          liquiation of the Company.     B.   1996 EMPLOYEE STOCK OPTION PLAN          In 1996, the Company adopted an employee stock option plan pursuant to          which options to buy 2,100,000 ordinary shares may be granted to          employees. In April 1998, the Company amended the plan in order to be          able to grant an additional 322,000 options. The exercise price          approximates market price of the share at the grant date less 15%. The          options vested over a period of two to four years from the date of          grant and expire no later than six years from the date of grant. The          plan is implemented in accordance with Section 102 of the Israeli          Income Tax Ordinance.     C.   2000 EMPLOYEE STOCK OPTION PLAN          In 2000, the Company adopted another employee stock option plan for          employees comprising options to purchase up to 2,500,000 ordinary          shares. The exercise price approximates market price of the shares at          the grant date. The plan includes an additional 2,500,000 options to          be issued as "phantom" shares options that grant the option holders a                                      -49-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)       (In thousands of U.S. dollars, except for share and per share data)NOTE 17 - SHAREHOLDER'S EQUITY (CONT.)          number of shares reflecting the benefit component of the options          exercised, as calculated at the exercise date, in consideration for          their par value only. Options vest over a period of one to four years          from the date of grant and expire no later than six years from the          date of grant.          Any options, which are canceled or forfeited before expiration, become          available for future grants. As of December 31, 2002, 466,042 options          of the Company were still available for future grants.     D.   "PHANTOM" SHARE OPTIONS          The phantom share options are considered as part of a variable plan as          defined in APB 25, and accordingly the compensation cost of the          options is measured by the difference between the market price of the          Company's shares and the exercise price of the options at the end of          every reporting period and amortized by the accelerated method over          the remaining vesting period.     E.   A summary of the Company's share option activity under the plans is as          follows:                                                         DECEMBER 31,                            ------------------------------------------------------------------                                    2000                   2001                   2002                            --------------------   --------------------   --------------------                                        WEIGHTED               WEIGHTED               WEIGHTED                                         AVERAGE                AVERAGE                AVERAGE                            NUMBER OF   EXERCISE   NUMBER OF   EXERCISE   NUMBER OF   EXERCISE                             OPTIONS      PRICE     OPTIONS      PRICE     OPTIONS      PRICE                            ---------   --------   ---------   --------   ---------   --------Outstanding-beginning of   the year                 1,471,830    $ 2.35    5,671,918    $11.26    5,107,634    $11.93   Granted                  4,530,662     12.32       98,840     12.91       27,000     14.92   Exercised                 (268,753)     7.64     (598,348)    11.93     (558,901)     9.45   Forfeited                  (61,821)     7.13      (64,776)    12.50      (64,009)    11.33                            ---------    ------    ---------    ------    ---------    ------Outstanding - end of the   year                     5,671,918    $11.26    5,107,634    $11.93    4,511,724    $12.26                            =========    ======    =========    ======    =========    ======Options exercisable at   the end of the year        748,760    $ 5.10      373,138    $ 7.56    2,287,790    $12.18                            =========    ======    =========    ======    =========    ======                                      -50-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)       (In thousands of U.S. dollars, except for share and per share data)NOTE 17 - SHAREHOLDER'S EQUITY (CONT.)     E.   (Cont.)          The options outstanding as of December 31, 2002, have been separated          into ranges of exercise price, as follows:                                     OPTIONS OUTSTANDING                          OPTIONS EXERCISABLE                   ----------------------------------------------------   ---------------------------------                       NUMBER        WEIGHTED AVERAGE      WEIGHTED            NUMBER          WEIGHTED                    OUTSTANDING AS       REMAINING          AVERAGE        OUTSTANDING AS       AVERAGE                   OF DECEMBER 31,   CONTRACTUAL LIFE      EXERCISE       OF DECEMBER 31,      EXERCISEEXERCISE PRICE           2002             (YEARS)       PRICE PER SHARE         2002        PRICE PER SHARE----------------   ---------------   ----------------   ---------------   ---------------   ---------------$10.61-$12.16           252,853            1.45              $10.71            242,478           $10.67$12.18-$15.07         2,135,897            3.92               12.35          1,024,368            12.39$12.18-$15.07(*)      2,122,974            3.90               12.35          1,020,944            12.34                      ---------            ----              ------          ---------           ------                      4,511,724            3.77              $12.26          2,287,790           $12.18                      =========            ====              ======          =========           ======          (*)  Phantom share options.          Where the Company has recorded deferred stock compensation for options          issued with an exercise price below the fair value of the ordinary          shares, the deferred stock compensation is amortized and recorded as          compensation expense ratably over the vesting period of the options.          Compensation expense (income) of approximately $155, $8,512 and $(926)          were recognized during the years ended December 31, 2000, 2001 and          2002, respectively.     F.   The weighted average exercise price of options granted during the          years ended December 31, 2000, 2001 and 2002 were:                                             EXCEEDS                                           MARKET PRICE   LESS THAN MARKET PRICE                                           ------------   ----------------------                                                  YEAR ENDED DECEMBER 31,                                           -------------------------------------                                               2000            2001     2002                                              ------          ------   ------          Weighted-average             exercise price                   $12.32          $12.91   $14.92                                      -51-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)       (In thousands of U.S. dollars, except for share and per share data)NOTE 17 - SHAREHOLDER'S EQUITY (CONT.)     G.   Computation of basic and diluted net earning (loss) per share                                 YEAR ENDED                       YEAR ENDED                       YEAR ENDED                             DECEMBER 31, 2002                 DECEMBER 31, 2001                DECEMBER 31, 2000                      -------------------------------  --------------------------------  -------------------------------                       NET INCOME                           TO        WEIGHTED          NET INCOME TO   WEIGHTED                      SHAREHOLDERS   AVERAGED    PER   SHAREHOLDERS    AVERAGED    PER   SHAREHOLDERS   AVERAGED    PER                       OF ORDINARY  NUMBER OF   SHARE   OF ORDINARY     NUMBER    SHARE   OF ORDINARY    NUMBER    SHARE                         SHARES       SHARES   AMOUNT     SHARES      OF SHARES  AMOUNT     SHARES     OF SHARES  AMOUNT                      ============  =========  ======  =============  =========  ======  ============  =========  ======Basic net earnings   (losses)              $45,113      38,489    $1.17     $40,796       37,975    $1.07    $(20,531)     31,572   $(0.65)Effect of dilutive   securities:      Employee stock         options              --       1,374                   --        1,384                   --          --                         -------      ------              -------       ------             --------      ------Diluted net   earnings (losses)     $45,113      39,863    $1.13     $40,796       39,359    $1.04    $(20,531)     31,572   $(0.65)                         =======      ======    =====     =======       ======    =====    ========      ======   ======     H.   Treasury shares          The Company's shares held by the Company are presented at cost and          deducted from shareholder's equity.     I.   Dividend policy               In the event that cash dividends are declared by the Company,          such dividends will be paid in NIS or in foreign currency subject to          any statutory limitations. The Company has decided not to declare          dividends out of tax exempt earnings.                                      -52-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)       (In thousands of U.S. dollars, except for share and per share data)NOTE 18 - MAJOR CUSTOMERS AND GEOGRAPHIC INFORMATION     A.   Revenues are attributed to geographic areas based on location of the          end customers as follows:                                                      YEAR ENDED DECEMBER 31,                                                  ------------------------------                                                    2002       2001       2000                                                  --------   --------   --------          Europe                                  $144,862   $179,560   $124,127          U.S.                                     267,686    206,627    189,147          Israel                                   225,674    226,650    159,593          Other                                    189,234    151,664    118,217                                                  --------   --------   --------                                                  $827,456   $764,501   $591,084                                                  ========   ========   ========     B.   Revenues are generated by the following product lines:                                                      YEAR ENDED DECEMBER 31,                                                  ------------------------------                                                    2002       2001       2000                                                  --------   --------   --------          Airborne systems                        $372,756   $334,201   $257,884          Armored vehicles systems                 135,700    126,300    111,800          Command, control, communications             Systems                               122,700    105,800    113,700          Electro-optical systems                  148,200    162,700     91,100          Others                                    48,100     35,500     16,600                                                  --------   --------   --------                                                  $827,456   $764,501   $591,084                                                  ========   ========   ========     C.   Revenues from single customers, which exceed 10% of total revenues in          the reported years:                                                         YEAR ENDED DECEMBER 31,                                                         -----------------------                                                            2002   2001   2000                                                            ----   ----   ----          Customer A                                         18%    20%    26%     D.   Long-lived assets by geographic areas:                                                              DECEMBER 31,                                                          -------------------                                                            2002       2001                                                          --------   --------          U.S                                             $ 83,814   $ 84,864          Israel                                           211,256    194,690          Other                                             13,660     10,451                                                          --------   --------                                                          $308,730   $290,005                                                          ========   ========                                      -53-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 19 - COST OF REVENUES                                                                 YEAR ENDED DECEMBER 31,                                                              ------------------------------                                                                2002       2001       2000                                                              --------   --------   --------     Materials                                                $237,918   $182,936   $133,900     Labor                                                     195,213    187,558    148,063     Subcontractors                                            126,579    129,057     78,983     Maintenance of buildings and services                      30,643     28,824     15,374     Other manufacturing expenses                               37,655     31,342     30,644     Depreciation                                               20,662     20,979     12,713     Royalties                                                  14,471      8,252      6,661                                                              --------   --------   --------                                                               663,141    588,948    426,338     Amortization of intangibles assets                          1,552      3,497      1,706     Increase (decrease) in provision for costs, warranties        and expected losses                                     (4,257)        29      3,975                                                              --------   --------   --------                                                               660,436    592,474    432,019                                                              --------   --------   --------     Less:        Cost of equipment produced for own use                   5,517      4,913      6,651        Increase (decrease) in inventories of           contracts in-progress                                49,606     33,604     (7,418)                                                              --------   --------   --------                                                                55,123     38,517       (767)                                                              --------   --------   --------                                                              $605,313   $553,957   $432,786                                                              ========   ========   ========NOTE 20 - RESEARCH AND DEVELOPMENT COSTS, NET                                                       YEAR ENDED DECEMBER 31,                                                     ---------------------------                                                       2002      2001      2000                                                     -------   -------   -------     Total expenses                                  $62,560   $67,871   $53,251     Less - participations                             5,550     9,112     8,977                                                     -------   -------   -------                                                     $57,010   $58,759   $44,274                                                     =======   =======   =======NOTE 21 - MARKETING AND SELLING EXPENSES                                                       YEAR ENDED DECEMBER 31,                                                     ---------------------------                                                       2002      2001      2000                                                     -------   -------   -------     Salaries and related expenses                   $24,692   $23,379   $14,205     Constancy Fee's                                  24,782    20,648    11,546     Advertising and exhibitions                       5,301     4,792     3,130     Depreciation                                      3,883     2,709     1,584     Other                                             7,033     3,348     7,984                                                     -------   -------   -------                                                     $65,691   $54,876   $38,449                                                     =======   =======   =======                                      -54-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 22 - GENERAL AND ADMINISTRATIVE EXPENSES                                                        YEAR ENDED DECEMBER 31,                                                     ---------------------------                                                       2002      2001      2000                                                     -------   -------   -------     Salaries and related expenses                   $24,741   $27,113   $12,074     Office expenses                                   7,198     7,060     4,063     Depreciation and amortization                     3,540     2,730     3,947     Other                                             6,172     6,313     6,167                                                     -------   -------   -------                                                     $41,651   $43,216   $26,251                                                     =======   =======   =======NOTE 23 - FINANCIAL INCOME (EXPENSES), NET                                                        YEAR ENDED DECEMBER 31,                                                      --------------------------                                                        2002      2001      2000                                                      -------   -------   ------     Income:           Interest on cash equivalents and bank              deposits                                $ 1,547   $ 2,179   $2,574        Other                                           2,073     2,841    3,949                                                      -------   -------   ------                                                        3,620     5,020    6,523                                                      -------   -------   ------     Expenses:        On long-term bank debt and debentures           2,026     3,033    1,442        On short-term bank credit and loans             3,415     3,806    3,626        Other                                           1,214       798    1,340                                                      -------   -------   ------                                                        6,655     7,637    6,408                                                      -------   -------   ------                                                      $(3,035)  $(2,617)  $  115                                                      =======   =======   ======NOTE 24 - OTHER INCOME (EXPENSES), NET                                                         YEAR ENDED DECEMBER 31,                                                         -----------------------                                                           2002   2001    2000                                                          -----   ----   -----     Gain (loss) on disposal of property, plant        and equipment                                     $(743)  $327   $ 597     Other, net                                             281    447    (594)                                                          -----   ----   -----                                                          $(462)  $774   $   3                                                          =====   ====   =====                                      -55-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)NOTE 25 - RELATED PARTIES TRANSACTIONS AND BALANCES                                                        YEAR ENDED DECEMBER 31,                                                     ---------------------------                                                       2002      2001      2000                                                     -------   -------   -------     Income -        Sales (*)                                    $37,924   $28,675   $11,168        Expenses charged                             $   902   $   633   $   626     Cost and expenses -        Supplies and services                        $10,457   $11,125   $ 7,392        Participation in expenses (*)                $ 1,498   $ 1,632   $ 1,464        Financial expenses                           $   110   $   193        --                                                         DECEMBER 31,                                                      ----------------                                                       2002      2001                                                      ------   -------     Trade receivables (*)                            $9,647   $14,257     Trade payables                                   $4,006   $ 2,016     (*) The amounts relate mainly to transactions with VSI.     The Company's President and CEO is entitled for a three-year period,     starting in July 2000, to an annual bonus of not less than 1% of the     Company's net income after tax (excluding unusual expenses such as     amortization of goodwill), and is also entitled to up to 10% of the number     of options or shares issued by the Company to its employees and under the     same terms (see Note 17). A former director of the Company received an     annual bonus of 1% of the Company's net income after tax (excluding unusual     expenses such as amortization of goodwill) from July 2000 to December 2001     and an additional bonus equal to the compensation derived from 400,000     options of the Company.NOTE 26 - RECONCILIATION TO ISRAELI GAAP     As described in Note 1, the Company prepares its financial statements in     accordance with U.S. GAAP. The effects of the differences between US GAAP     and Israeli GAAP on the Company's financial statements are detailed below.     Differences between US GAAP and Israeli GAAP:                                      -56-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)     A building purchased from Elbit Ltd.     ------------------------------------     According to generally accepted accounting principles in Israel, the     Company charged to capital reserves the excess of the amount paid over net     book value of a building acquired from Elbit Ltd in 1999.     According to US GAAP, the entire amount paid is considered as the cost of     the building acquired.     Proportional consolidation method     ---------------------------------     According to Israeli GAAP, a jointly controlled company should be included     according to the proportional consolidation method. According to US GAAP,     the investment in such a company is recorded according to the equity     method.     Tax benefit in respect of options exercised     -------------------------------------------     According to Israeli GAAP, tax benefits from employee options exercised are     recorded as a reduction of tax expense. According to US GAAP, the     difference between the above mentioned tax benefits and the benefits     recorded in respect of compensation expense in the financial statements is     credited to capital reserves.     Goodwill     --------     Effective January 1, 2002 the Company adopted SFAS 142, "Goodwill and Other     Intangible Assets" according to which goodwill and intangible assets with     indefinite lives are no longer amortized periodically but are reviewed     annually for impairment (or more frequently if impairment indicators     arise). According to Israeli GAAP, all intangibles, including goodwill     should be amortized.NOTE 26 - RECONCILIATION TO ISRAELI GAAP     1. EFFECT ON NET INCOME AND EARNINGS PER SHARE                                                                     YEAR ENDED                                                                    DECEMBER 31                                                             -------------------------                                                              2002     2001      2000                                                             ------   ------   -------     A) Net earnings (loss) as reported           according to U.S. GAAP                            45,113   40,796   (20,531)           Adjustments to Israeli GAAP                       (4,227)   1,767     1,822                                                             ------   ------   -------           Net earnings (loss) according to Israeli              GAAP                                           40,886   42,563   (18,709)                                                             ======   ======   =======     B) Earnings per share           Basic net earnings (loss) per share              As reported according to U.S. GAAP               1.17     1.07     (0.65)              As per Israeli GAAP                              1.03     1.11     (0.59)                                      -57-                     ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES             NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)                         (In thousands of U.S. dollars)           Diluted net earnings (loss) per share              As reported according to U.S. GAAP               1.13     1.04     (0.65)              As per Israeli GAAP                              0.96     1.11     (0.59)     2. EFFECT ON SHAREHOLDERS' EQUITY                                                                       AS PER                                        AS REPORTED   ADJUSTMENTS   ISRAELI GAAP                                        -----------   -----------   ------------     AS OF DECEMBER 31, 2002        Shareholders' equity              411,361       (11,076)       400,285                                          =======       =======        =======     AS OF DECEMBER 31, 2001        Shareholders' equity              377,985       (12,149)       365,836                                          =======       =======        =======                                 # # # # # # # #                                      -58-