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

                  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                   for the fiscal year ended December 31, 2003

                           Commission File No. 0-28998
                                 --------------

                               ELBIT SYSTEMS LTD.

    (Exact Name of Registrant as Specified in its charter and Translation of
                        Registrant's Name into English)

                                     ISRAEL
                 (Jurisdiction of incorporation or organization)

                 ADVANCED TECHNOLOGY CENTER, HAIFA 31053, ISRAEL
                    (Address of principal executive offices)
                                 --------------

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

                                 NOT APPLICABLE

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

        ORDINARY SHARES, NOMINAL VALUE 1.0 NEW ISRAELI SHEKELS PER SHARE
                                (Title of Class)

        Securities for which there is a reporting obligation pursuant to
                           Section 15(d) of the Act:

         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:

                                39,746,125 SHARES

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

                   YES        |X|               NO         |_|

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

                   ITEM 17    |_|               ITEM 18    |X|


<PAGE>

                                TABLE OF CONTENTS
                                                                            Page

                International Disclosures Standards............................2
Item 1.   Identity of Directors, Senior Management and Advisors................2
Item 2.   Offer Statistics and Expected Timetable..............................2
Item 3.   Key Information......................................................2
            Selected Financial Data............................................2
            Forward Looking Statements.........................................4
            Risk Factors.......................................................4
Item 4.   Information on the Company..........................................11
            Business Overview.................................................11
            Major Activities..................................................13
            Revenues..........................................................14
            Systems and Products..............................................15
            Principal Subsidiaries............................................19
            Recent Acquisitions...............................................22
            Current Business Operations.......................................23
                 Airborne Systems.............................................23
                 Helmet Mounted Systems ......................................28
                 UAV Integrated Systems.......................................29
                 Tactical, Security and Naval Systems.........................30
                 Battlefield Management and Government Information Systems....32
                 Land Vehicle Systems.........................................34
                 Electro-Optical and Countermeasures Systems..................36
                 Technology Spin-Offs.........................................37
            Property, Plant and Equipment.....................................38
            Organizational Structure..........................................39
            Governmental Regulation...........................................40
            Buy-Back..........................................................41
            Financing Terms...................................................41
            Intellectual Property.............................................42
            Research and Development..........................................43
            Manufacturing.....................................................44
            Purchasing........................................................44
            Customer Satisfaction and Quality Assurance.......................45
            Service and Warranty..............................................45
            Marketing and Sales...............................................46
            Competition.......................................................46
            Major Customers...................................................47
            Conditions in Israel..............................................47


                                       (i)
<PAGE>

Item 5.  Operating Financial Review and Prospects - Management's Discussion
         and Analysis.........................................................50
            General...........................................................50
            Trends............................................................53
            Operating Results.................................................53
            2003 Compared to 2002.............................................57
            2002 Compared to 2001.............................................60
            Conditions in Israel..............................................63
            Liquidity and Capital Resources...................................64
            Impact of Inflation and Exchange Rates............................65
            Contractual Obligations...........................................67
            Off-Balance Sheet Transactions....................................67
Item 6.  Directors, Senior Management and Employees...........................68
            Directors and Executive Officers..................................68
            Compensation of Directors and Officers............................74
            Board Practices...................................................74
            Employees.........................................................75
            Share Ownership...................................................76
Item 7.  Major Shareholders and Related Party Transactions....................78
            Major Shareholders................................................78
            Related Party Transactions........................................80
Item 8.  Financial Information................................................86
            Consolidated Statements and Other Financial Information...........86
            Legal Proceedings.................................................86
            Dividend Distributions............................................86
Item 9.  Offer and Listing....................................................87
            Share Listings and Trading Prices.................................87
Item 10. Additional Information...............................................89
            General Provisions of Israeli Law and Related Provisions of
              Articles of Association.........................................89
            Approval of Certain Transactions..................................90
            Insurance and Indemnification of Directors and Officers...........91
            Material Contracts................................................93
            Exchange Controls and Other Limitations Affecting Security
                Holders.......................................................93
            Taxation..........................................................94
            Documents on Display..............................................97
Item 11. Quantitative and Qualitative Disclosure of Market Risk...............98
Item 12. Description of Securities Other than Equity Securities...............98
Item 13. Defaults, Dividend Arrearages and Delinquencies......................98
Item 14. Material Modifications to the Rights of Security Holders and
            Use of Proceeds...................................................98
Item 15. Controls and Procedures..............................................98
Item 16. 16.A - Audit Committee Financial Expert..............................99
         16.B - Code of Ethics................................................99
         16.C - Principal Accountant Fees and Services........................99
         16.D - Exemptions from Listing Standards for Audit Committees.......100
         16.E - Purchases of Equity Securities by the Issuer and Affiliated
                  Purchasers ................................................100
Item 17. Financial Statements................................................101
Item 18. Financial Statements................................................101
Item 19. Exhibits............................................................101



                                      (ii)
<PAGE>

                                     PART I

INTERNATIONAL DISCLOSURES STANDARDS

         Effective as of our consolidated financial statements for the year
ended December 31, 2000, Elbit Systems Ltd. (Elbit Systems) adopted United
States Generally Accepted Accounting Principles (U.S. GAAP). Unless otherwise
indicated, all financial information contained in this Form 20-F is in U.S.
dollars. References in this Form 20-F to the "Group" are to Elbit Systems and
our subsidiaries.



ITEM 1.   IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

         Information not required in Annual Report on Form 20-F.


ITEM 2.   OFFER STATISTICS AND EXPECTED TIMETABLE

         Information not required in Annual Report on Form 20-F.


ITEM 3.   KEY INFORMATION

SELECTED FINANCIAL DATA

         The following selected consolidated financial data of Elbit Systems for
the years ended December 31, 1999, 2000, 2001, 2002 and 2003 are derived from
Elbit Systems' audited consolidated financial statements of which the financial
statements as of December 31, 2002 and 2003 and for each of the years ended
December 31, 2001, 2002 and 2003, appear later in this Form 20-F. The audited
financial statements have been prepared in accordance with U.S. GAAP.







                                       2
<PAGE>


<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31
                                                                       ----------------------
                                                              1999      2000          2001       2002     2003
                                                              ----     -----          ----       ----     ----
                                                                         (U.S. dollars in millions)

INCOME STATEMENT DATA:

<S>                                                            <C>         <C>        <C>         <C>        <C>
Revenues............................................           $436        $591       $765        $827       $898

Cost of revenues....................................            320         433        554         605        674

Restructuring expenses - (inventory write-off)......             --          10         --          --         --

Gross profit........................................            116         148        211         222        224

Research and development costs, net.................             33          44         59          57         55

Marketing, selling, general and administrative
expenses, net.......................................             44          65         98         107        116

Acquired in-process research and development........             --          40         --          --         --

Restructuring costs.................................             --          12         --          --         --

Operating income (loss).............................             40         (13)        54          58         53

Finance income (expense)............................              2          --         (3)         (3)        (5)


Income (loss) before taxes on income................            $41        $(13)       $52         $54        $50

Taxes on income.....................................             10          6          11           9         11

Net income (loss)...................................            $31        $(21)       $41         $45        $46
                                                                ===        =====       ===         ===        ===

Earnings (loss) per share:

Basic net income (loss) per share...................          $1.23      $(0.65)     $1.07      $1.17       $1.18
Weighted average number of shares used in
computation (in thousands)..........................         25,128      31,572     37,975     38,489      39,061

Diluted net income (loss) per share.................          $1.16      $(0.65)     $1.04      $1.13       $1.14
Weighted average number of shares used in
computation (in thousands)..........................         26,488      31,572     39,359     39,863      40,230


<CAPTION>
                                                                                   DECEMBER 31
BALANCE SHEET DATA:                                                 1999        2000        2001       2002    2003
                                                                    ----        ----        ----       ----    ----
                                                                              (U.S. dollars in millions)

<S>                                                                 <C>         <C>        <C>       <C>       <C>
Cash, cash equivalents and short-term cash
investments...............                                          $45         $55        $42       $78       $77

Long-term deposits and loans........................                 17           4          3         4         2
Working capital.....................................                 20          74        121       206       199
Short-term debt.....................................                 12          51         47        31        15
Long-term debt......................................                  1          58         69        73        62
Shareholders' equity................................                185         341        378       411       452
Total assets........................................               $457        $827       $901    $1,000    $1,024

</TABLE>


                                       3
<PAGE>



FORWARD LOOKING STATEMENTS

         This Annual Report on Form 20-F contains "forward-looking" statements
within the meaning of Section 27A of the U.S. Securities Act of 1933 and Section
21E of the U.S. Securities and Exchange Act of 1934. These are statements that
are not historical facts and include statements about our beliefs and
expectations. These statements contain potential risks and uncertainties, and
actual results may differ significantly.

         Forward-looking statements are typically identified by the words
"believe," "expect," "intend," "estimate" and similar expressions. Those
statements appear in this Annual Report and include statements regarding the
intent, belief or current expectation of Elbit Systems or our directors or
officers. Actual results may differ materially from those projected, expressed
or implied in the forward-looking statements as a result of several factors
including, without limitation, the factors set forth below under the caption
"Risk Factors" (we refer to these factors are as Cautionary Statements). Any
forward-looking statements contained in this Annual Report speak only as of the
date of this Report, and we caution potential investors not to place undue
reliance on these statements. We undertake no obligation to update or revise any
forward-looking statements. All subsequent written or oral forward-looking
statements attributable to us or persons acting on our behalf are expressly
qualified in their entirety by the Cautionary Statements.


RISK FACTORS

GENERAL RISKS RELATED TO OUR BUSINESS

OUR REVENUES DEPEND ON A CONTINUED LEVEL OF GOVERNMENT BUSINESS. A significant
portion of our revenues come from contracts or subcontracts with domestic and
foreign government agencies. A reduction in the level of the purchase of our
systems, products, services and upgrade projects by these agencies, mainly the
Israeli Ministry of Defense (IMOD), the U.S. Department of Defense (DOD) and
governmental customers of our other major programs, would have a material
adverse effect on our business. The development of our business in the future
will depend on the continued willingness of the IMOD, the DOD and other
governmental purchasing agencies to commit substantial resources to defense
programs and, in particular, to continue to purchase our systems, products,
services and upgrade projects. For risks related to the IMOD budget see below
"Risks Related to Our Israeli Operations".

THE LEVEL OF OUR CONTRACTS MAY BE REDUCED DUE TO CHANGES IN GOVERNMENTAL
PRIORITIES AND AUDITS. The risk that governmental purchases of our systems,
products, services and upgrade projects may decline is affected by the
possibility that government purchasing agencies may:

     o    terminate, reduce or modify contracts or subcontracts if their
          requirements or budgetary constraints change;

     o    cancel multi-year contracts and related orders if funds become
          unavailable;

     o    shift spending priorities into other areas or for other products; and

     o    adjust contract costs and fees on the basis of audits.



                                       4
<PAGE>

WE DEPEND ON GOVERNMENTAL APPROVAL OF OUR EXPORTS. Many of our exports and the
receipt of technology and components from suppliers depend on receipt of export
license approvals from the Israeli Government, the U.S. Government and other
governments. Such licenses and approvals also are required for technological
exchanges with our customers and for employment of our technical personnel
abroad. There is no assurance that such approvals will be given in the future,
current approvals will not be revoked or governmental export policies will
remain unchanged. See below - Item 4. Information on the Company - Governmental
Regulations.

WE DEPEND ON INTERNATIONAL OPERATIONS. We depend on sales to customers outside
Israel. We expect that international sales will continue to account for a
significant portion of revenues for the foreseeable future. As a result, changes
in international, political, economic or geographic events could result in
significant shortfalls in orders or revenues. These shortfalls could cause our
business, financial condition and results of operations to be harmed. Some of
the risks of doing business internationally include:

-    unexpected changes in regulatory requirements;

-    our and our subcontractors inability to obtain export licenses;

-    imposition of tariffs and other barriers and restrictions;

-    burdens of complying with a variety of foreign laws;

-    political and economic instability; and

-    changes in diplomatic and trade relationships.

Some of these factors, such as the ability to obtain export licenses and changes
in diplomatic relations, may be affected by Israel's overall political
situation. See "Risks Related to Our Israeli Operations" below. In addition, the
economic and political stability of the countries of our major customers and
suppliers may also impact our business.

OUR REVENUES DEPEND ON OBTAINING FOLLOW-ON BUSINESS. Follow-on orders are
important because our contracts mainly are for fixed terms. These terms may be
up to five years or more, particularly for contracts where the customer has
options to purchase additional items. In addition, when we have supplied a
system for a defense platform, we often have the potential to supply other items
for that platform. If a customer is dissatisfied with our performance on a
particular program or if the customer's priorities change, it could negatively
affect our ability to receive follow-on business. Inability to obtain follow-on
business could result in a loss of revenues if revenues from the award of new
contracts do not offset the loss of follow-on business.

OUR CONTRACTS MAY BE TERMINATED FOR CONVENIENCE OF THE CUSTOMER. Our contracts
with the Government of Israel and other governments often contain provisions
permitting termination for convenience of the customer. Our subcontracts with
non-governmental prime contractors sometimes contain similar provisions. In
general, in order to reduce risks of financial exposure resulting from the early
termination of a contract, we attempt to flow down these requirements to our
subcontractors and expend funds for projects according to the contract
performance schedule. If the customer were to make an early termination for
convenience, in most cases we would be entitled to reimbursement for our
incurred



                                       5
<PAGE>

contract costs and a proportionate share of our fee or profit for work actually
performed. If, however, we are not entitled to such compensation, it could cause
us to suffer corresponding losses.

WE FACE RISKS OF CHANGES IN COSTS UNDER FIXED PRICE CONTRACTS. Most of our
contracts are fixed-price contracts, as opposed to cost-plus or cost-share type
contracts. Generally, a fixed-price contract price is not adjusted as long as
the work performed falls within the original contract scope. Under these
contracts, we often assume the risk that increased or unexpected costs may
reduce profits or generate a loss. However, long-term contracts sometimes allow
for price escalations based on specific labor and material indices. The risk can
be particularly significant under a fixed-price contract involving research and
development for new technology. The frequent need to bid on fixed price programs
before completing the necessary design may result in unexpected technological
difficulties, cost overruns and potential contractual penalties. Typically,
costs must be accounted for in the period they are recognized. In addition,
although we have extensive experience in these types of programs, there is
difficulty in forecasting long-term costs and schedules and the potential
obsolescence of products or components related to long-term fixed price
contracts.

WE FACE FLUCTUATIONS IN REVENUES AND PROFIT MARGINS. The level of our revenues
may fluctuate over different periods. These fluctuations may not relate directly
to changes in pricing or sales volume. Instead they may be dependent on our mix
of projects during any given period. In addition, since project revenues
generally are recognized in connection with achievement of specific milestones,
we may experience significant fluctuations in year-to-year and
quarter-to-quarter financial results. Similarly, our profit margins may vary
significantly from project to project. As a result, the overall profit margin in
a particular period is influenced by a number of conditions. These include the
types, size and stage of projects, the percentage of work performed by
subcontractors and the timing of the recognition of revenue.

WE SOMETIMES HAVE RISKS RELATING TO FINANCING FOR OUR PROGRAMS. A number of our
major projects require us to arrange, and sometimes to provide specific
guarantees in connection with, the customer's financing of the project although
we are not required to provide collateral covering the full amounts financed.
These include guarantees of Elbit Systems as well as guarantees provided by
financial institutions relating to advance payments received from customers. See
below - Item 4. Information on the Company - Financing Terms.

WE MAY EXPERIENCE PRODUCTION DELAYS OR LIABILITY IF SUPPLIERS FAIL TO MAKE
TIMELY DELIVERIES. The manufacturing process for some of our products consists
in large part of the assembly, integration and testing of purchased components.
Although generally we can obtain materials and purchase components from a number
of different suppliers, some components are available from a small number of
suppliers. In a few cases we work with suppliers that are effectively sole
source. If a supplier should stop delivery of such components, we would probably
be able to find other sources; however, this could result in added cost and
manufacturing delays. Moreover, if our subcontractors fail to meet their design,
delivery schedule or other obligations we could be held liable by our customers.
Therefore, we attempt to impose liability on our subcontractors on a
"back-to-back" basis to our liability to our customers. However, there can be no
assurance that we would be able to obtain full or partial recovery from our
subcontractors for those liabilities. In addition, when we act as a
subcontractor, the failure or inability of the prime contractor to perform its
contract with the customer may affect our ability to obtain payments under our
subcontract.



                                       6
<PAGE>


WE OPERATE IN A COMPETITIVE INDUSTRY. The defense electronics and
electro-optics, platform upgrade, homeland security and commercial aircraft
product markets in which we participate are highly competitive and characterized
by rapid technological change. If we are unable to improve existing systems and
products and develop new systems and technologies in order to meet evolving
customer demands, our business could be adversely affected. In addition, our
competitors could introduce new products with innovative capabilities, which
could adversely affect our business. There are many competitors in our markets.
We compete with many large and mid-tier defense contractors on the basis of
system performance, cost, overall value, delivery and reputation. Many of these
competitors are much larger than Elbit Systems and generally have greater
resources. Consequently, these competitors may be better positioned to take
advantage of economies of scale and develop new technologies. Some of these
competitors are also our suppliers in some programs.

OUR BUSINESS DEPENDS ON PROPRIETARY TECHNOLOGY THAT MAY BE INFRINGED. Many of
our systems and products depend on our proprietary technology for their success.
Like other technology oriented companies, we rely on a combination of patent,
trade secret, copyright and trademark laws, together with non-disclosure
agreements, contractual confidentiality clauses, including those in employment
agreements, and technical measures to establish and protect proprietary rights
in our products. Our ability to successfully protect our technology may be
limited because:

o    some foreign countries may not protect proprietary rights as fully as do
     the laws of the United States and Israel;

o    detecting infringements and enforcing proprietary rights may be time
     consuming and costly, diverting management's attention and company
     resources;

o    measures such as entering into non-disclosure agreements afford only
     limited protection;

o    unauthorized parties may attempt to copy aspects of our products and
     develop similar products or obtain and use information that we regard as
     proprietary; and

o    competitors may independently develop products that are substantially
     equivalent or superior to our products or circumvent intellectual property
     rights.

In addition, others may allege infringement claims against us and affiliated
companies. The cost of responding to infringement claims could be significant,
regardless of whether the claims are valid.

WE WOULD BE ADVERSELY AFFECTED IF WE ARE UNABLE TO RETAIN KEY EMPLOYEES. Our
success depends in part on a limited number of key management, scientific and
technical personnel and our continuing ability to attract and retain highly
qualified personnel. There is competition for the services of such personnel.
The loss of the services of key personnel, and the failure to attract highly
qualified personnel in the future, may have a negative impact on our business.

OUR INDUSTRY HAS EXPERIENCED SIGNIFICANT CONSOLIDATION. As the number of
companies in the overall defense industry has decreased in recent years, the
industry has experienced substantial consolidation, increasing the market share
of some prime contractors. Failure to maintain our relationships with these
major contractors could negatively impact our future business. In addition, some
of these companies are vertically integrated with in-house capabilities similar
to ours in certain areas.



                                       7
<PAGE>

WE FACE ACQUISITION AND INTEGRATION RISKS. Over the past several years we have
made a number of acquisitions and investments in companies that complement our
business. See below - Item 4. Information on the Company - Recent Acquisitions
and - Current Business Operations. We intend to continue to acquire businesses
that complement our operations. Elbit Systems' growth may place significant
demands on our management and our operational, financial and marketing
resources. In connection with acquisitions and the opening of new facilities we
have increased and may continue to increase the number of our employees. In
addition, we have expanded and may continue to expand the scope and geographic
area of our operations. We believe this growth will increase the complexity of
our operations and the level of responsibility exercised by both existing and
new management personnel. Failure to successfully integrate and manage our
growth may have a material adverse effect on our business, financial condition,
results of operations or prospects.

OUR DUE DILIGENCE IN ACQUISITIONS MAY NOT ADEQUATELY COVER ALL RISKS. There may
be liabilities or risks that we fail or are unable to discover in the course of
performing due diligence investigations relating to businesses we have acquired
or merged with or may acquire in the future. Examples of these liabilities
include employee benefits contribution obligations and non-compliance with
applicable environmental requirements by prior owners for which we, as a
successor owner, may be responsible. Such risks may include changes in estimated
costs to complete programs and estimated future revenues. In addition, there may
be additional costs relating to acquisitions including, but not limited to,
possible purchase price adjustments. Moreover, if the value of the acquired
company were to decrease after the acquisition, or after follow-on investments
in that company, we could face impairment issues. We try to minimize these risks
by conducting due diligence as we deem appropriate under the circumstances.
However, there is no assurance that we have identified, or in the case of future
acquisitions, will identify, all existing or potential risks. Also, although
generally we require the sellers of acquired businesses or assets to indemnify
us against undisclosed liabilities, we cannot assure you that the
indemnification will be enforceable, collectible or sufficient to fully offset
the possible liabilities. Such liabilities could have a material adverse effect
on our business, financial condition, results of operations or prospects.


RISKS RELATED TO OUR ISRAELI OPERATIONS

CONDITIONS IN ISRAEL MAY AFFECT OUR OPERATIONS. Political, economic and military
conditions in Israel directly affect our operations. Since the establishment of
the State of Israel in 1948, a number of armed conflicts have taken place
between Israel and its Arab neighbors. A state of hostility, varying in degree
and intensity has led to security and economic problems for Israel, despite
Israel having signed peace agreements with Egypt and Jordan. Since 2000, there
has been ongoing hostilities between Israel and the Palestinians, which has
adversely affected the peace process and at times has negatively influenced
Israel's economy as well as its relationship with several other countries. There
is no assurance that the current situation with the Palestinians will improve
or, if it did, that the political and economic situation in Israel would improve
as a result.

POLITICAL TRADE RELATIONS COULD LIMIT OUR ABILITY TO SELL OR BUY
INTERNATIONALLY. We could be adversely affected by the interruption or reduction
of trade between Israel and its trading partners. Some countries, companies and
organizations continue to participate in a boycott of Israeli firms and others
doing business with Israel or with Israeli companies. Also, over the past two
years there have been calls in Europe and elsewhere to reduce trade with Israel.
To date, these measures have not had a material adverse effect on



                                       8
<PAGE>

our business. However, there can be no assurance that restrictive laws, policies
or practices directed towards Israel or Israeli businesses will not have an
adverse impact on our business.

MANY OF OUR OFFICERS AND EMPLOYEES ARE OBLIGATED TO PERFORM MILITARY RESERVE
DUTY IN ISRAEL. Generally, Israeli adult male citizens and permanent residents
are obligated to perform annual military reserve duty up to a specified age.
They also may be called to active duty at any time under emergency
circumstances. Since we began operations, we have operated effectively under
these requirements, including during hostilities in recent years with the
Palestinians and the war in Iraq. However, no assessment can be made as to the
full impact of such requirements on our workforce or business if conditions
should change.

ISRAEL'S ECONOMY MAY CONTINUE TO BE UNSTABLE. Over the years, Israel's economy
has been subject to a number of factors that have affected its stability. These
include periods of inflation, low foreign exchange reserves, fluctuations in
world commodity prices, military conflicts and civil unrest. For these and other
reasons, the Government of Israel has intervened in different sectors of the
economy. Such intervention has included employing fiscal and monetary policies,
import duties, foreign currency restrictions and controls of wages, prices and
foreign currency exchange rates. Recently the Bank of Israel issued regulations
regarding the lending limits of Israeli banks to companies considered to be in
an affiliated group, which could limit the amount available to us to borrow from
such banks. The Israeli Government has periodically changed its policies in all
of these areas and has recently initiated further economic reforms. These
policies may make it more difficult for us to operate our business as we have in
the past.

CHANGES IN THE U.S. DOLLAR - NEW ISRAELI SHEKEL (NIS) EXCHANGE RATE. The change
in the exchange rate between the NIS and the U.S. dollar was a decrease of 7.6%
in 2003, an increase of 7.3% in 2002 and an increase of 9.3% in 2001. For the
first five months of 2004 the dollar-NIS exchange rate increased by 4.0%. While
most of our sales and expenses are denominated in dollars, a portion of our
expenses is paid in NIS, and most of our sales to customers in Israel are in
NIS. Our primary expenses paid in NIS that are not linked to the dollar are
employee expenses in Israel and lease payments on some of our Israeli
facilities. As a result, a change in the value of the NIS compared to the dollar
could affect our research and development expenses, manufacturing labor costs
and general and administrative expenses. See below - Item 5. Operating Financial
Review and Prospects - Management's Review and Analysis - Impact of Inflation
and Exchange Rates - Inflation and Devaluation.

REDUCTION IN ISRAELI GOVERNMENT SPENDING OR CHANGES IN PRIORITIES FOR DEFENSE
PRODUCTS MAY ADVERSELY AFFECT OUR EARNINGS. The Israeli Government may reduce
its expenditures for defense items or change its defense priorities in the
coming years. In recent years the Israeli Government budget approval process has
been extended. Also, the overall budget as well as the IMOD NIS budget, have
been subject to reductions as part of an economic reform initiative. To date,
our current programs have not been significantly impacted by such reductions,
but there is no assurance that our programs will not be affected in the future.
If there is a reduction in Israeli Government defense spending for our programs
or a change in priorities to products other than ours, our revenues and earnings
could be reduced.



                                       9
<PAGE>


ISRAELI GOVERNMENT PROGRAMS AND TAX BENEFITS MAY BE TERMINATED OR REDUCED IN THE
FUTURE. Elbit Systems and some of our Israeli subsidiaries participate in
programs of the Israeli Chief Scientist's Office (OCS) and the Israel Investment
Center, for which we receive tax and other benefits. The benefits available
under these programs depend on our meetings specified conditions. If we fail to
comply with these conditions, we may be required to pay additional taxes and
penalties, make refunds and be denied future benefits. From time to time, the
Government of Israel has discussed reducing or eliminating the benefits
available under these programs. See below - Item 4. Information on the Company -
Conditions in Israel - Chief Scientist Funding. We cannot assure you that these
benefits will be available in the future at their current levels or at all.

IT MAY BE DIFFICULT TO ENFORCE A NON-ISRAELI JUDGMENT AGAINST US, OUR OFFICERS
AND DIRECTORS. We are incorporated in Israel. Most of our executive officers and
directors are nonresidents of the United States, and a substantial portion of
our assets and the assets of these persons are located outside the United
States. Therefore, it may be difficult for an investor, or any other person or
entity, to enforce against us or any of those persons in an Israeli court a U.S.
court judgment based on the civil liability provisions of the U.S. federal
securities laws. It may also be difficult to effect service of process on these
persons in the United States. Additionally, it may be difficult for an investor,
or any other person or entity, to enforce civil liabilities under U.S. federal
securities laws in original actions filed in Israel. See below - Item 4.
Information on the Company - Conditions in Israel - Enforcement of Judgments.

















                                       10
<PAGE>


ITEM 4.    INFORMATION ON THE COMPANY

BUSINESS OVERVIEW

         MAIN ACTIVITIES

         We develop, manufacture and integrate advanced, high-performance
defense electronic and electro-optic systems for customers throughout the world.
Elbit Systems focuses on designing, developing, manufacturing and integrating
command, control, communication, computer, intelligence, surveillance and
reconnaissance (C4ISR) systems for defense and homeland security applications.
We also perform upgrade programs for airborne, land and naval defense platforms,
often as a prime contractor.

         Our major areas of operations include:

         o     aircraft and helicopter systems and upgrades;

         o     helmet mounted systems;

         o     unmanned air vehicle (UAV) integrated systems;

         *     tactical, security and naval systems;

         o     battlefield management and government information systems;

         o     land vehicle systems and upgrades;

         o     electro-optic and countermeasures systems and products;

         o     services; and

         o     technology spin-offs for commercial applications.

         These major activities have a number of common and related elements.
Therefore, marketing, research and development, manufacturing, performance of
programs, sales and after sales support often are conducted jointly among these
areas of activities.

         We tailor and adapt our technologies, integration skills, market
knowledge and battle-proven systems to each customer's individual requirements
in both existing and new platforms. By upgrading existing platforms with
advanced electronic and electro-optic technologies, Elbit Systems provides
customers with cost-effective solutions, and our customers are able to improve
their technological and operational capabilities within limited defense budgets.



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<PAGE>

         MARKET ENVIRONMENT

         The military actions in recent years in Iraq and Afghanistan and
ongoing terrorist activities have caused a shift in the defense priorities for
many of our major customers. We continue to perform platform upgrades. However,
more emphasis is being placed on command, control, computers, communications and
intelligence (C4I) systems, as well as intelligence, surveillance and
reconnaissance (ISR) systems. These include information systems, intelligence
gathering, border and perimeter security, UAVs, space and satellite based
defense capabilities and homeland security applications. There is also a growing
demand for cost effective logistic support and training services. We believe our
existing systems, products and capabilities place us in a position to meet
emerging customer requirements in many of these areas. We also believe that some
types of upgrade programs and electronic and electro-optic systems, particularly
those that emphasize C4ISR, will continue to be a significant portion of defense
budgets in many countries.

         The worldwide defense market has been characterized over the last
decade by significant consolidation and merger and acquisition activities. Part
of our growth strategy includes our continued activity in mergers and
acquisitions both in Israel and internationally. We view positively the declared
policy of the Government of Israel to privatize portions of government-owned
industries and view Elbit Systems as a natural candidate to acquire some of
these activities.

         We operate as a multi-domestic organization in order to meet the needs
of our customers around the world. The Group's structure enables us to benefit
from the synergy of our overall capabilities while at the same time focus on
local requirements.

         COMPANY HISTORY

         In 2000, Elbit Systems merged (the Merger) with Elop Electro-Optics
Industries, Ltd. (El-Op). Following the Merger, El-Op became a wholly-owned
subsidiary of Elbit Systems. See below - Item 7. Major Shareholders and Related
Party Transactions - Related Party Transactions - Agreements Relating to the
Merger. The Merger enhanced our position as the largest non-government owned
defense company in Israel.

         We have many decades of operational experience. Elbit Systems was
formed in 1996 as part of the Elbit Ltd. corporate demerger, which spun-off
Elbit Ltd.'s defense related assets and business to Elbit Systems. From its
founding in 1966 until the demerger, Elbit Ltd. was involved, among other
operations, in a wide range of defense related airborne, ground, naval and C4I
programs throughout the world, and Elbit Systems continues these activities.
Also, El-Op has more than 60 years of experience in the electro-optics area.
Except as otherwise stated, the following description assumes that we have owned
and operated El-Op and the defense related business of Elbit Ltd. during the
periods described.

         TRADING SYMBOLS AND ADDRESS

         Elbit Systems' shares are traded on the Nasdaq National Market (Nasdaq)
under the symbol "ESLT" and on the Tel-Aviv Stock Exchange (TASE).

         Our main offices are in the Advanced Technology Center, Haifa 31053,
Israel, and our main telephone number at that address is (972-4) 8315315.




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<PAGE>


MAJOR ACTIVITIES

         AIRCRAFT AND HELICOPTER PROGRAMS AND SYSTEMS. We supply advanced
airborne electronic and electro-optic systems and products to leading aircraft
manufacturers and end users. Such airborne systems and products include weapons
guidance and fire control systems, mission computers, cockpit management
systems, display systems, head-up displays, digital maps, night vision systems,
forward-looking infra-red (FLIR) systems, laser range finders and designators,
airborne C4I systems, cockpit instruments, stabilized line-of-sight payloads,
aerial reconnaissance systems, store management systems, digital video recording
systems, mission planning and mission debriefing systems, simulators and virtual
training aids. Elbit Systems also is a prime contractor for aircraft and
helicopter upgrade programs. We act as the upgrade integrator, and supply
systems and products, for airborne platforms including:

         o     fixed wing aircraft such as the F-4, F-5, F-15, F-16, F-18, F-35,
               T-38, T-45, MiG-21, SU-25, SU-30, C-130, A-4, A-19, Mirage, AL-X,
               AM-X, IAR-99, AT-63 Pampa, Beechcraft, Gulfstream-550, MD-10,
               MD-11, Airbus A300 and A310; and

         o     helicopters such as the CH-47, CH-53, Cobra, Puma, Super Puma,
               OH-58 Kiowa Warrior, AH-64 Apache, H-60 Black Hawk, S-70
               Blackhawk, MI8, MI-17, MI-24, Linx, EC225 and EC725 and the V-22
               Osprey tilt rotorcraft.

         HELMET MOUNTED SYSTEMS. We design and supply advanced helmet mounted
systems for fighter aircraft and helicopter pilots and land applications. These
include tracking and display systems for target designation, weapon and sensor
slaving and processing and display of tactical information for pilots, both for
day and night flying. Our helmet mounted systems are supplied as part of Elbit
Systems' upgrade programs as well as on a stand-alone basis.

         UAV INTEGRATED SYSTEMS. We design and supply integrated UAV systems and
mini-UAV systems. We design and manufacture a variety of UAV platforms,
including the Hermes family of UAVs. We also design and supply C4I ground
stations systems for UAVs.

         TACTICAL, SECURITY AND NAVAL SYSTEMs. We design, manufacture and
integrate a range of tactical and security systems and products for airborne,
naval and homeland security applications. These include laser and infrared
seeker kits for guided munitions, naval combat management systems, shipboard
combat system integration, naval electro-optic observation systems, naval
tactical trainers, submarine electronic support management systems, shipboard
decoy countermeasure launching systems, satellite communication systems,
maritime and coastal control systems, facility perimeter security products,
electronic fences and electro-optic warning systems for defense, police, border
and coast guards and homeland security uses.

         BATTLEFIELD MANAGEMENT AND GOVERNMENT INFORMATION SYSTEMS. We design,
manufacture and integrate C4I systems for ground forces and battlefield
management applications. These include artillery command and control systems,
day-night observation systems, C4I battlefield management systems for
headquarters command and for low-echelon armored formations, tactical
communications systems and tactical ground reconnaissance systems. We also
design and manufacture governmental information technology systems and
integrated intelligence gathering systems for border control, crime prevention
and other governmental applications.



                                       13
<PAGE>


         LAND VEHICLE PROGRAMS AND SYSTEMS. We upgrade and modernize tanks and
other combat vehicles both as a prime contractor and as a systems supplier to
leading platform manufacturers. Our land vehicle systems include fire control
systems, electric gun, turret drive and stabilization systems, command and
control systems, FLIRs, gunner's and commander's sights, lasers, laser warning
systems, displays, life support systems and hydraulic systems for tanks,
personnel carriers and other combat vehicles. We also supply training systems
for tanks and fighting vehicles. Land vehicle programs containing our systems
and products include the Merkava, M1 Abrams, Centurion, M-60, T-55, T-72,
Bradley A-3, MLRS, HIMARS, AMX-30, SK-105, MK-109, ULAN and LAV.

         ELECTRO-OPTIC AND COUNTERMEASURES SYSTEMS. Through El-Op, our
wholly-owned subsidiary, we design and manufacture a full range of
electro-optics sensors and systems for space, air, land and sea applications.
The range of electro-optics products includes space cameras and specialized
sensors, airborne reconnaissance and observation systems, FLIRs for land, naval
and airborne applications, laser range finders and laser designators based on
diode pumped technology used in manned and unmanned airborne vehicles and land
and naval platforms. Our electro-optic solutions are used for detection,
identification and intelligence gathering as well as for land vehicle upgrades.
El-Op's ISR related business activities - space cameras, airborne reconnaissance
and observation & surveillance - share a broad infrastructure of technologies
that provide image intelligence, long range observation solutions for space,
air, sea and land based sources. In the space area, El-Op also maintains
in-house Israel's national space electro-optics infrastructure and is currently
a principal subcontractor for the Israeli Ofek satellites. In addition, El-Op
supplies dedicated satellite payloads for space research and advanced
multi-spectral and high resolution pan-chromatic cameras for commercial
satellites.

         SERVICES. We provide a wide range of logistic support, training,
simulation, maintenance and repair services for our customers around the world.
This includes cutting edge simulators for air, land and naval platforms; "power
by the hour" flight training under private finance initiatives; and establishing
and operating maintenance and repair centers.

         TECHNOLOGY SPIN-OFFS. We are engaged in spin-offs of our defense
technologies to commercial applications. Our spin-off activities to date are in
the areas of medical equipment, optical communications, commercial satellites
and satellite communication for commercial aircraft.


REVENUES

         The table below shows Elbit Systems' consolidated revenues for groups
of major areas of operations for the years ended December 31, 2001, 2002 and
2003:

<TABLE>
<CAPTION>
                                                                           2001        2002         2003
                                                                           ----        ----         ----

<S>                                                                         <C>          <C>          <C>
Airborne Systems:                                                           $334         $373         $374
Land Vehicle Systems:                                                        126          136          200
C4ISR Systems:                                                               106          123          134
Electro-Optic Systems:                                                       163          148          140
Other (mainly non-defense engineering and production):                        36           48           50
                                                                            ----         ----         ----
Total:                                                                      $765         $828         $898
                                                                            ====         ====         ====

</TABLE>




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<PAGE>

SYSTEMS AND PRODUCTS

         The following is a brief description of our main systems and products:

         AIRCRAFT AND HELICOPTER SYSTEMS
         -------------------------------

         COCKPIT MANAGEMENT SYSTEMS - for reduced pilot workload while operating
         complex weapons platforms.

         AIRBORNE COMPUTERS - for mission management performance.

         WEAPON DELIVERY AND NAVIGATION SYSTEMS - for controlling weapon
         delivery and navigation.

         DISPLAY SYSTEMS - for processing and displaying tactical information,
         including head-up and multi-functional displays.

         AIRBORNE C4I SYSTEMS - for airborne, command, control, communication
         and intelligence and situational awareness.

         DIGITAL MAP SYSTEMS AND MASS MEMORY DEVICES - for storing digitized
         mapping information and providing pilots with mapping and other
         tactical information correlated with aircraft position.

         STORES MANAGEMENT SYSTEMS - for operating and releasing airborne
         weapons.

         DIGITAL VIDEO RECORDING DEVICES - for mission and maintenance
         debriefing.

         ENHANCED VISION SYSTEMS - for all weather landing of commercial and
         military aircraft.

         COCKPIT INSTRUMENTATION - altimeters, pressure meters, cockpit
         indicators and avionics test equipment for civil and military aircraft.

         SIMULATORS - for airborne and ground flight training.

         VIRTUAL TRAINING AIDS - for flight simulator training.

         HELMET MOUNTED SYSTEMS
         ----------------------

         PILOT HELMET MOUNTED SYSTEMS - for air superiority, target designation,
         weapon and sensor slaving and information display.

         NIGHT VISION SYSTEMS - for improving range and clarity of what pilots
         see while flying at low altitude and with poor flight visibility.

         LAND HELMET MOUNTED SYSTEMS - for use on land platforms and individual
         soldier applications.



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<PAGE>

         COCKPIT MAPPING SYSTEMS - advanced adaptive technologies for line of
         sight alignment in a cockpit.


         UAV INTEGRATED SYSTEMS
         ----------------------

         UAV SYSTEMS -comprehensive systems, including the air vehicle,
         payloads, data link, ground control system and ground support
         equipment.

         HERMES 1500 - medium altitude long endurance UAV system designed for
         Corps and Command level support missions and for maritime patrol.

         HERMES 450 - tactical long endurance UAV system designed for Division
         level support missions.

         HERMES 180 - tactical short range UAV system designed for Brigade level
         support missions.

         SKYLARK - man-packed close range UAV system for Company and Battalion
         level support missions.


         TACTICAL,  SECURITY AND NAVAL  SYSTEMS
         --------------------------------------

         WEAPON GUIDANCE SYSTEMS - laser and infrared kits for guiding precision
         weapons launched from aircraft.

         NAVAL COMBAT MANAGEMENT SYSTEMS (CMS) - command and control, data
         links, sensors and effector control systems for naval ships including
         integrated tactical information and operation of weapon systems.

         NAVAL COMBAT SYSTEMS INTEGRATION - integration of weapons and sensors
         for naval platforms.

         STABILIZED ELECTRO-OPTICAL PAYLOADS - for naval observation and
         electro-optical line of sight fire control systems.

         COMPUTERIZED NAVAL SIMULATORS - for tactical training of naval officers
         at shore-based locations.

         SUBMARINE ELECTRONIC WARFARE SYSTEMS - electronic support measurements
         (ESM) for threat identification and electro-magnetic analysis.

         SHIPBOARD DECOY COUNTERMEASURE LAUNCHING SYSTEMS - sophisticated
         countermeasures deployment of chaff and flair against missile threats.

         SATELLITE COMMUNICATION SYSTEMS- VSAT communication systems with high
         band rate data and voice transfer for land and naval forces.



                                       16
<PAGE>

         HOMELAND SECURITY SYSTEMS - for border and coastal control, facility
         security, data base management, security data mining, aviation security
         applications, energy infrastructure security and electronic and
         electro-optical perimeter and access control.


         BATTLEFIELD MANAGEMENT AND GOVERNMENT INFORMATION SYSTEMS
         ---------------------------------------------------------

         ARTILLERY C4I SYSTEMS - for command, control and communication among
         artillery units.

         BATTLEFIELD MANAGEMENT SYSTEMS - comprehensive solutions comprising
         advanced electro-optical sensors, multi functional displays, command
         and control software, information and dissemination systems and
         advanced mission computers, for enabling coordination between fighting
         vehicles, that provide situational awareness to peace-keeping
         operations and maneuvering forces, including combat vehicles,
         engineering corps and logistic support personnel.

         HEADQUARTERS MANAGEMENT SYSTEMS -C4I systems for tactical headquarters
         at level of Battalion to Corps level.

         TACTICAL GROUND RECONNAISSANCE SYSTEMS - for border control and ground
         reconnaissance operations.

         TACTICAL DATA COMMUNICATION SYSTEMS - for information exchange for
         ground applications, using data radios, modems, protocols, message
         handling systems, voice over IP and tactical internet.

         BORDER, PERIMETER AND FACILITY SECURITY SYSTEMS - for use by armed
         forces, police, border patrols, coast guards and security personnel to
         monitor by innovative means border crossing points, airports, seaports,
         military bases, high risk installations and other sensitive areas.

         INFORMATION TECHNOLOGY AND INTEGRATED INTELLIGENCE GATHERING SYSTEMS -
         for crime prevention, anti-money laundering and other governmental
         applications.

         LAND VEHICLE SYSTEMS
         --------------------

         FIRE CONTROL SYSTEMS - for target identification, acquisition and
         engagement, incorporating thermal imaging, laser range finders, day TV,
         digital ballistic computers and sensors using day and night vision
         systems and displays.

         ELECTRIC GUN AND TURRET DRIVE SYSTEMS - for controlling electrically
         driven turrets and guns, using advanced brushless technology and
         digital/software based servo systems.

         COMMAND AND CONTROL SYSTEMS - for data processing and situational
         awareness of vehicle crews and commanders.

         COLOR FLAT PANEL DISPLAYS - for presentation of maps and command and
         control data, as well as video generated by thermal imaging systems.



                                       17
<PAGE>

         MASS STORAGE DEVICES - for storage of maps and battle command
         information using solid state memory devices based on commercial off
         the shelf and PCMCIA technology.

         COMMANDER PANORAMIC SIGHTS - for 360(o) independent panoramic target
         location and identification and gun-turret direction, using day and
         night vision systems.

         LASER WARNING SYSTEMS - for identifying and pinpointing the angular
         direction of laser sources generated by laser range finders and laser
         guided and laser beamrider missiles.

         SIMULATOR AND TRAINING SYSTEMS - for tank and fighting vehicle
         training, based on optical and computerized image generation
         technology.

         HYDRAULIC SYSTEMS - for vehicle fueling, braking, suspension and power
         pack operation.

         LIFE SUPPORT SYSTEMS - for environmental, climate and nuclear,
         bacterial and chemical (NBC) protection and control.

         ELECTRO-OPTIC AND COUNTERMEASURES SYSTEMS
         -----------------------------------------

         FLIR SYSTEMS - for thermal imaging observation without need for natural
         or artificial light for air, land and sea platforms, including
         hand-carried portable solutions.

         LASER RANGE-FINDERS AND DESIGNATORS - for range finding and designation
         of targets for air, land and naval platforms based on flash lamp and
         solid state diode pumped technologies, including eye-safe systems.

         PAYLOADS - for observation, target acquisition, target engagement
         training and fire control using stabilized line-of-sight systems,
         incorporating laser range finders or designators and thermal and TV
         cameras.

         COUNTERMEASURES SYSTEMS - for airborne, land and naval applications.

         AERIAL RECONNAISSANCE SYSTEMS - for long-range and day/night
         information collection from high, medium and low altitude in
         penetrating and stand-off missions using digital photography,
         transmission, processing and display systems.

         LONG-RANGE DAY & NIGHT SURVEILLANCE SYSTEMS - for improving day and
         night vision, including computerized information processing.

         SPACE CAMERAS AND TELESCOPES- advanced panchromatic and multi-spectral
         cameras for high resolution, remote sensing satellites.





                                       18
<PAGE>

PRINCIPAL SUBSIDIARIES

         EL-OP

         Based in Rehovot, Israel, our wholly-owned subsidiary El-Op operates in
the area of electro-optic systems and products mainly for defense, space and
homeland security applications. It has significant design, engineering and
manufacturing capabilities. El-Op has a broad customer base, both in Israel and
internationally.

         El-Op designs, engineers, manufactures and supports a wide range of
advanced electro-optic airborne, land, naval and space systems and products
described elsewhere in this Form 20-F. See below "Current Business Operations -
Aircraft and Helicopter Systems - Aircraft Head-Up Displays, Aircraft
Electro-Optic Systems, Aerial Reconnaissance Systems and Electro-Optics Products
for Helicopters; Land Vehicle Systems - Merkava and Thermal Imaging Systems;
Tactical, Security and Naval Systems - Naval Programs; and Electro-Optical and
Countermeasures Systems".

         EFW

         We conduct most of our business in the United States through our
wholly-owned subsidiary, EFW Inc. (EFW) and EFW's subsidiaries. EFW is
incorporated in Delaware and based in Fort Worth, Texas. In 1993, EFW acquired
most of the assets of General Dynamics Corporation's (General Dynamics)
Electronics Manufacturing Center in Fort Worth, which mainly manufactured and
supplied electronic components for F-16 aircraft. Over the last decade EFW has
expanded its activities to a number of additional areas involving tactical
aircraft, helicopters, land vehicles, UAVs and smart munitions. These include
programs for the V-22 Osprey tilt rotorcraft, the Bradley A-3 fighting vehicle,
the Multiple Launch Rocket System, the AH-64 Apache helicopter, the UH-60
Blackhawk helicopter, the OH-58D Kiowa Warrior helicopter, the A-10 aircraft,
the F/A-18 aircraft, the C-130 transport aircraft as well as additional systems
for the F-16. EFW is involved in a number of joint projects with Elbit Systems
and with other U.S. defense companies.

         As described below, EFW and Rockwell Collins Inc. each own 50% of
Vision Systems International LLC, which is engaged in the area of helmet mounted
systems for fighter aircraft.

         EFW has expanded significantly through mergers and acquisitions. These
include acquisition of a wholly-owned subsidiary in Merrimack, New Hampshire, as
part of the Merger with El-Op in 2000. The New Hampshire operations are engaged
mainly in developing and manufacturing cockpit instruments and enhanced vision
systems for civil and military aircraft and observation and targeting systems
for land vehicles and aircraft. The New Hampshire operations also are involved
in manufacturing medical instrumentation.

         Also in 2000, EFW acquired the Display and Orientation Products
business of Honeywell Inc. (Honeywell). This business includes the military
helmet display and tracker activities that were performed by Honeywell, a major
part of which is the production and support of helmet mounted systems for the
U.S. Army's Apache helicopters. Part of this business is based in Warner Robins,
Georgia, and the other activities are carried out at EFW's Fort Worth and
Alabama facilities.

         In 1999, EFW acquired International Enterprises, Inc. (IEI), a
wholly-owned subsidiary located in Talladega, Alabama, that provides repair,
maintenance and logistics support for a number of military electronic systems
and components installed on aircraft, helicopters and ground support equipment
for the U.S. military and other customers worldwide. IEI serves as EFW's focal
point for after-market support capability.



                                       19
<PAGE>

         Major customers of EFW and its subsidiaries include Lockheed Martin
Corporation (Lockheed Martin), the Boeing Company (Boeing), the U.S. Army, U.S.
Navy, U.S. Air Force, U.S. Marine Corps, the IMOD, United Defense, Gulfstream
Aircraft Corporation, Federal Express, Honeywell International Inc., Oto Melara
S.p.A., CMI - Cockerill Mechanical Industries S.A. and Bayer Pharmaceutical
Company. Recent contract awards include development of displays for F/A-18 E/F
aircraft, design of an electronic unit for the helmet mounted system and design
of a new mission computer for the AH-64 Apache helicopter, development and
supply of smart displays for the UH-60 Q/L Blackhawk helicopter, development and
supply of Enhanced Vision Systems and head-up displays for Federal Express wide
body aircraft, multi-year supply of commercial data entry electronic units,
commercial central interface units, color multi-function displays and digital
video recorders for the F-16, development and supply of multi-function displays
for the C-130, and supply of displays for the A-10. See below "Current Business
Operations - Aircraft and Helicopter Systems - Helmet Mounted Systems and - Land
Vehicle Systems".

         EFW and its subsidiaries also act as prime contractors for U.S. Foreign
Military Funding programs. See below "Governmental Regulations - Foreign
Military Funding". EFW has extensive engineering and manufacturing capabilities
at its Fort Worth and New Hampshire facilities. Its Alabama and Georgia
facilities have significant maintenance and repair capabilities.

         EFW, Elbit Systems and the DOD are parties to a Special Security
Agreement (SSA). The SSA provides controls and procedures to protect classified
information and export controlled data received by EFW and its subsidiaries in
performing U.S. Government contracts. The SSA also allows EFW and its
subsidiaries to participate in classified U.S. Government programs even though,
due to its ownership by Elbit Systems, EFW is considered under the control of a
non-U.S. interest. Under the SSA, a Government Security Committee was
permanently established to supervise and monitor compliance with EFW's security
procedures. The SSA also requires EFW's board of directors to include outside
directors who have no other affiliation with Elbit Systems or its subsidiaries.
EFW's board of directors also contains officers of EFW and up to two inside
directors, who have other affiliations with Elbit Systems. The SSA requires
outside directors and officers of EFW who are directors, and some other senior
officers, to be U.S. resident citizens and eligible for DOD personal security
clearances.

         VSI

         Vision Systems International LLC (VSI) is a limited liability investee
company based in San Jose, California. EFW and Rockwell Collins Inc. (Rockwell
Collins), through Kaiser Electronics, each own 50% of VSI. Founded in 1996, VSI
acts on a world-wide basis on behalf of Rockwell Collins/Kaiser and Elbit
Systems/EFW in the area of helmet mounted display systems for fixed wing
military and paramilitary aircraft. VSI performs marketing, project management,
contract administration and systems engineering. Elbit Systems, EFW and Kaiser
each have provided VSI with licenses to use their helmet mounted display
technologies. In general, VSI subcontracts product development and production to
its owners on an approximately equal basis. Each owner has equal representation
on VSI's management.

         VSI is the prime contractor to Boeing and Lockheed Martin for the
design and manufacture of the Joint Helmet Mounted Cueing System (JHMCS) for the
U.S. Air Force and U.S. Navy F-15, F-16 and F/A-18 aircraft. VSI also has
contracts to supply helmet mounted systems for fighter aircraft to the Israel
Air Force (IAF), the Danish Air Force and other customers. In May 2003, VSI was
selected to develop a dual-seater version of the JHMCS and in January 2004 was
authorized to begin full scale JHMCS production. In addition, in October 2003,
Lockheed Martin selected VSI as its team member to develop



                                       20
<PAGE>

the helmet mounted system for the U.S. F-35 Joint Strike Fighter (JSF). See
below "Current Business Operations - Helmet Mounted Systems".

         CYCLONE. Cyclone Aviation Products Ltd. (Cyclone) is a wholly-owned
Israeli subsidiary of Elbit Systems. Located near Karmiel, Israel, Cyclone
designs and produces composite and metal structural parts for civil and military
aircraft. Cyclone also performs maintenance, integration of systems and upgrades
for aircraft and helicopters. Both directly and through its Snunit subsidiary,
Cyclone works with Elbit Systems in supplying flight training services for fixed
wing aircraft and helicopters of the IAF. Cyclone's customers include the IMOD,
the U.S. Air Force, Boeing, Lockheed Martin, Vought Aircraft Industries Inc.,
Bell Helicopters Textron Inc., Sikorsky Aircraft Company (Sikorsky), Israel
Aircraft Industries Ltd. (IAI) and other aircraft manufacturers and end users
around the world. See below "Current Business Operations - Aircraft and
Helicopter Systems - Civil Aviation and - Logistics Support Services".

         SILVER ARROW. Silver Arrow LP (Silver Arrow), is an Israeli limited
partnership owned by Elbit Systems together with a wholly-owned holding company
subsidiary of Elbit Systems. It is part of Elbit Systems' UAV business, which is
located both in Rishon Le-Zion and Haifa, Israel. Silver Arrow develops and
manufactures UAVs. Silver Arrow jointly developed with the IMOD the Hermes 1500,
a medium altitude endurance UAV, and is developing the Hermes 180 proposed for
the UK Watchkeeper program. Silver Arrow also developed and is manufacturing the
Hermes 450 for the Israel Defense Forces (IDF). In addition, Silver Arrow
performs joint projects with Elbit Systems. UAV Engines Ltd., a wholly-owned
British subsidiary of Silver Arrow, manufactures engines for UAVs and other
applications. See below "Current Business Operations - UAV Integrated Systems".

         ORTEK . Ortek Ltd. (Ortek) is a wholly-owned Israeli subsidiary of
Elbit Systems. Located in Sderot, Israel, Ortek operates mainly in the field of
security and surveillance systems and tactical products including night vision
instruments based on starlight amplification. It develops and manufactures
electro-optical systems for day and night use, counter-terrorism systems and
other homeland security systems including for border, perimeter and access
control. See below "Current Business Operations - Tactical, Security and Naval
Systems and - Battlefield Management and Government Information Systems".

         KINETICS. Kinetics Ltd. (Kinetics), based in Airport City, Israel, is
owned 51% by Elbit Systems. The balance is owned by founding employees and
private investors in Israel and the United States. Some of these other
shareholders have a "put" option that, if exercised, would require Elbit Systems
to acquire their shares in Kinetics at a specified price. Kinetics develops
technologies, systems and products in the field of advanced life support and
environmental controls, such as climate control systems and nuclear, biological
and chemical protection systems for combat vehicles. Also, Kinetics develops and
manufactures other products for land vehicles, such as hydraulic, fuel, braking
and suspension systems, an auxiliary power unit for land vehicle power pack
systems and hydraulic systems for aircraft. Kinetics sells its products to the
IDF, the U.S. Army and other customers. Kinetics wholly-owns Real-Time
Laboratories, LLC. a company based in Boca Raton, Florida, engaged in the U.S.
market in similar activities to those of Kinetics. See below "Current Business
Operations - Land Vehicle Systems - Environmental Control and Hydraulic
Systems".

         SCD. Semi-Conductor Devices (SCD) is an Israeli investee partnership
equally owned by Elbit Systems and Rafael Armaments Development Authority Ltd.
(Rafael). Located in Leshem, Israel, SCD develops and manufactures infrared
detectors for thermal imaging equipment and laser diodes used in defense and
commercial applications. SCD also owns approximately 17%, on a fully-diluted
basis, of



                                       21
<PAGE>

CyOptics Inc., a spin-off company engaged in the development of optical
communications components based on Indium Phosphide technology. See below
"Current Business Operations - Electro-Optical and Countermeasures Systems and -
Technology Spin-Offs".

         OPGAL. Opgal - Optronics Industries Ltd. (Opgal) is an Israeli investee
company owned 50.1% by Elbit Systems and 49.9% by a subsidiary of Rafael.
Located in Karmiel, Israel, Opgal focuses mainly on commercial applications of
thermal imaging and electro-optic technologies. Its developments include an
enhanced vision sensor designed to assist in landing aircraft under limited
visibility and harsh weather conditions. Opgal also designs thermal imaging
cameras and FLIR systems for applications, such as surveillance, industrial,
medical and fire fighting. It also produces OEM FLIR cameras for defense
applications. See below "Current Business Operations - Aircraft and Helicopter
Systems - Civil Aviation and - Electro-Optical and Countermeasures Systems.


         OTHERS. We have several other smaller subsidiaries and investee
companies in Israel and other countries.


RECENT ACQUISITIONS


         During the past year we have expanded our capabilities through several
acquisitions.

         In June 2003, El-Op acquired Optronics Instruments & Products N.V.
(O.I.P.) based in Oudenaarde, Belgium. O.I.P. was purchased from Delft
Instruments, N.V. of the Netherlands for approximately $1.8 million. O.I.P.
develops, manufactures and supports electro-optical products, mainly for the
defense and space markets. O.I.P. has established long-term relationships with
customers in Belgium, other European countries and international customers.

         In July 2003, Elbit Systems acquired approximately 55% of the shares of
AD&D Aero Design and Development Ltd. (AD&D) for approximately $1.4 million.
AD&D is an Israeli company involved in the development of unmanned vehicles
(airborne, land and marine) and other advanced technologies.

         In October 2003, Elbit Systems purchased approximately 8% of the common
shares of AeroAstro, Inc. (AeroAstro) in consideration of $1 million. AeroAstro,
located in Ashburn, Virginia, is an established small satellite technology
company, involved in advanced micro and nanospacecraft applications. AeroAstro
manufacturers low-cost satellite systems and components used in its own
spacecraft and for spacecraft development in and outside the U.S.

         In December 2003, Cyclone signed an agreement relating to the purchase
of the business activities of the Aircraft Systems Division (the Aircraft
Division) of Israel Military Industries Ltd. (IMI), located in Tirat HaCarmel,
Israel. The Aircraft Division manufactures weapons, pylons and external fuel
tanks for fighter aircraft. The acquisition is subject to conclusion of
arrangements with the employees' representatives and the Israel Finance Ministry
and receipt of approvals required by law.




                                       22
<PAGE>

CURRENT BUSINESS OPERATIONS

         The contract amount for programs described below is provided only where
the amount is considered to be material to Elbit Systems. The areas of operation
described below often operate in an interrelated manner.


         AIRCRAFT AND HELICOPTER SYSTEMS

         NATURE OF OUR AIRBORNE SYSTEMS AND UPGRADES

         Fighter and transport aircraft and helicopters require advanced
electronic and electro-optic systems to perform their complex missions
accurately, reliably and efficiently. Our airborne systems are used in upgrading
and modernizing fighter aircraft and helicopters, extending the useful life of a
fleet and provide a cost-effective alternative to replacing existing equipment.
Our systems are also installed as original equipment in new aircraft.

         Our airborne systems and products include, head-up displays, mission
computers, digital maps, displays, display processors, weapon control systems,
airborne C4I systems, FLIRs, laser products, cockpit instruments, payloads and
aerial reconnaissance systems. We also supply helmet mounted display and
tracking systems as described below. By reducing the pilot's workload, these
systems are designed to provide greater accuracy, reliability and efficiency in
performing missions.

         Aircraft and helicopter upgrade programs are a part of Elbit Systems'
business strategy. We have implemented this strategy over the past several years
in major upgrade programs for existing aircraft and helicopters.

         AIRCRAFT AVIONICS SYSTEMS AND UPGRADE PROGRAMS

         In March 2004, EFW was selected by Boeing to develop displays for
F/A-18 E/F aircraft over a two-year period.

         In 2002, Elbit Systems was awarded contracts by the Brazilian
Government and by a subsidiary of the Brazilian aircraft company Embraer -
Empresa Brasileira de Aeronautica S.A. (Embraer) for the production and logistic
support phases of the AL-X Super Tucano aircraft program for the Brazilian Air
Force. The contracts are valued at more than $80 million and are being performed
over a period of approximately four years. Under the contracts Elbit Systems
supplies avionics systems, equipment and logistic support for 76 AL-X light
attack and trainer aircraft being manufactured by Embraer for the Brazilian Air
Force. This followed completion by Elbit Systems of a development contract for
the AL-X. We began delivering production aircraft in January 2004. The avionics
system for the AL-X includes an advanced mission computer, liquid crystal
displays, head-up display and a navigation system. In addition, Elbit Systems is
supplying simulators, planning mission stations and debriefing stations.
Maintenance and logistic support to the Brazilian Air Force are provided mainly
through Elbit Systems' Brazilian subsidiary Aeroeletronica - Industria de
Componentes Avionicos S.A. (AEL), located in Porto Alegre, Brazil. Program
funding is provided in part through a financing arrangement between the
Brazilian Government and commercial banks. The contracts call for "buy-back" to
be performed over a multi-year period. See below "Buy Back".



                                       23
<PAGE>

         In 2001, Elbit Systems began work under contracts for the Brazilian F-5
Aircraft Modernization Program. The program calls for the upgrade of 46 F-5
aircraft for the Brazilian Air Force. Elbit Systems contracts for the program
are with Embraer and the Brazilian Government, with a total value of
approximately $230 million to be performed over a six-year period. The contract
with Embraer provides for an avionics upgrade, which includes an electronic
warfare (EW) suite, mission computers, radar, displays and other avionics
products. Prototype flight testing began in January 2004 and delivery of
production aircraft is scheduled during 2005. The contract with the Brazilian
Government covers a logistic support program including establishment of an
in-country maintenance center based at AEL. Program funding is provided through
a financing arrangement between the Brazilian Government and commercial banks.
We obtained an insurance policy from the Israeli Foreign Trade Risk Insurance
Company (IFTRIC) covering up to 90% of our financial exposure under the program,
subject to the policy's terms. The program also includes buy-back provisions.

         During 2003, we completed work and received the remaining payments
under the contract for the upgrade of MiG-21 aircraft for the Romanian Air
Force. The total contract value amounted to approximately $385 million. The
upgraded aircraft have flown more than 30,000 flights. The contract contains
buy-back provisions. We recently entered into an annual follow-on logistic
support contract.

         In 2001, Elbit Systems began work on a contract with the Romanian
aircraft company Craiova, S.A. to supply the avionics systems for four IAR-99
training aircraft of the Romanian Air Force. The aircraft were delivered to the
Romanian Air Force in 2003, and we received a follow-on logistic support
contract that we expect to complete during 2004.

         In 2001, Elbit Systems signed a contract with Lockheed Martin Aircraft
Argentina S.A. for the avionics upgrade of 24 AT-63 Pampa aircraft for the
Argentinean Air Force. In 2002, completion of the contract was delayed due to
the economic situation in Argentina. Based on an understanding reached in 2004
between Lockheed Martin and the Argentinean Government to resume the program,
Elbit Systems anticipates resuming work during 2004, with deliveries to be
completed by 2007.

         In 2001, Elbit Systems and TAM, the Georgian aircraft manufacturer,
conducted the maiden flight of an upgraded SU-25 "Scorpion" aircraft. The
upgraded aircraft contains new avionics systems developed by Elbit Systems. In
December 2003, Elbit Systems was awarded a contract to deliver to Georgia
avionics for upgraded SU-25 Scorpion aircraft, with delivery scheduled for 2005.

         In 2003, Elbit Systems completed a contract in the amount of
approximately $66 million for the avionics upgrade of F-5 aircraft of the Royal
Thai Air Force.

         F-16 PROGRAMS

         For more than two decades, we have supplied numerous customers with
systems and electronic components for F-16 aircraft. We have supplied systems
for the IAF's entire F-16 fleet. In addition, we have received a number of
contracts from the U.S. Government, Lockheed Martin, the prime contractor of the
F-16, and others, to supply electronic and electro-optic systems for F-16
aircraft used by the U.S. Air Force and other air forces.



                                       24
<PAGE>

         In recent years, Elbit Systems, EFW, El-Op and Cyclone have received a
number of orders to supply additional systems and equipment, as well as to
repair equipment, for F-16 aircraft of the IAF and other Lockheed Martin
customers. We are supplying a wide range of items to Lockheed Martin for the new
IAF F-16 aircraft (F-16I). These items include mission computers, helmet mounted
systems, head-up displays, display systems, stores management systems,
structural assemblies and other equipment.

         In recent years, EFW was awarded F-16 related contracts to develop and
supply the commercial central interface unit, color multi-function display
systems (CMFDS) and a digital video recorder. EFW also is supplying advanced air
to ground, air to air and emergency jettison remote interface units to Lockheed
Martin for an F-16 customer and supplies commercial data entry electronic units
(CDEEU) for the F-16. In February 2004, EFW was awarded a contract by the U.S.
Air Force to provide more than 1,200 CDEEUs in support of the CCIP program for
pre-Block 40 F-16 aircraft. The contract will be performed over a three-year
period.

         El-Op was awarded a contract in 2001 to supply the head-up display for
the F-16I. El-Op also supplies aerial reconnaissance systems for the F-16.

         Cyclone manufactures the leading edge flap for U.S. Air Force F-16
aircraft. During 2002, Cyclone was awarded orders for the supply of other
structural parts for the F-16, including the horizontal stabilizer, the rudder,
the ventral fin and the engine access doors.

         As of December 31, 2003, our overall F-16 related systems and
components backlog, which extends through 2007, totaled approximately $175
million.

         AIRCRAFT HEAD-UP DISPLAYS. El-Op supplies its head-up displays for
fixed-wing fighter and trainer aircraft such as the F-4, F-5, F-16, T-38,
MiG-21, SU-30, A-4, AL-X. AM-X and MD-11.

         AIRCRAFT ELECTRO-OPTIC SYSTEMS. El-Op supplies laser designators for a
range of airborne platforms.  In 2003, El-Op completed deliveries under a
contract to supply laser designators for the U.S. Navy's F-18 aircraft. El-Op
also has supplied laser designators for other airborne applications such as the
laser designator for the U.S. Apache and Kiowa Warrior helicopters and for
Rafael's "Litening" pod.

         AERIAL RECONNAISSANCE SYSTEMS. El-Op supplies airborne reconnaissance
systems for a range of fighter aircraft including the F-16. In 2000, El-Op was
awarded a contract to supply advanced airborne reconnaissance systems for the
Turkish Air Force's RF-4E aircraft. The program is expected to be completed
during 2004.

         HELICOPTER UPGRADE PROGRAMS

         In April 2004, EFW was selected by Boeing to design a new mission
computer for the Apache AH-64 helicopter. The contract is to be performed over a
two-year period.

         In May 2003, Elbit Systems' contract with Turkish Aerospace Industries
became effective for the modernization of the Turkish Armed Forces Command
Sikorsky S-70 Blackhawk helicopters. Elbit Systems acts as the avionics systems
integrator and is developing and supplying "glass cockpit" avionics and advanced
mission equipment. The program is to be performed in two stages, development and
production, over a four-year period.



                                       25
<PAGE>

         In 2002 and 2003, Elbit Systems was awarded follow-on orders by
Sikorsky to provide the weapons management system for the upgrade of Black Hawk
helicopters. This followed award of the original contract from Sikorsky in 2001.
We completed deliveries of these systems during 2002 and anticipate completing
logistic support orders during 2004.

         In 2002, Elbit Systems completed a $118 million contract for the
Romanian Air Force's Puma IAR 330 helicopter upgrade program. The program
included development and production of avionics systems and conversion of
utility helicopters to attack helicopter capability. An immaterial amount
remains to be paid through 2004. The contract contains buy-back provisions.

         V-22 DIGITAL MAP AND DISPLAY SYSTEMS. We supply both digital maps and
multi-function display systems for the U.S. Armed Forces' V-22 Osprey tilt rotor
aircraft (V-22). Our digital map provides pilots with real-time high resolution
digital topographical images and other information pilots need to perform their
missions. We developed and supplied the digital map system for the V-22 under a
contract of EFW with Boeing. In 1998, Boeing awarded EFW a contract for the V-22
Active Matrix Liquid Crystal Multi-function Display Upgrade Program. The program
calls for delivery of display subsystems for 246 V-22 aircraft, for a total
value of approximately $40 million over seven years. EFW is also under contract
from Boeing to produce a series of interface units for the V-22. In 2002, EFW
was awarded orders by Boeing to redesign the V-22's display electronic unit and
digital map. These orders are to be completed in 2004.

         DIGITAL MAPS AND DISPLAYS FOR EUROCOPTER. In 2000, Elbit Systems
received a contract from Eurocopter S.A. (Eurocopter) to supply digital map
systems and displays for French search and rescue helicopters. Deliveries were
completed in 2002. Following completion of a display development contract
received in 2001, in April 2003, we received an order from Eurocopter to supply
120 smart displays, to be delivered over a two-year period.

         ELECTRO-OPTIC PRODUCTS FOR HELICOPTERS. El-Op supplies several products
for heliborne applications. These include laser range-finders and target
designators including those based on solid state diode pumped laser technology.
In 2002, El-Op was awarded a contract to develop and supply its Laser Obstacle
Ranging & Display Systems (LORD) for IAF helicopters. Performance of the
contract is through 2005. El-Op is developing a laser designator for an upgrade
of the OH-58D Kiowa Warrior surveillance helicopter. El-Op also supplies the
laser-spot tracker integrated with the fire-control system, as well as display
monitors, for the AH-64 Apache helicopter. EFW's New Hampshire operations
supplies the upgraded FLIR enhanced night targeting system for the U.S. Marines'
AH-IW Super Cobra helicopters. In addition, El-Op's laser designator is a
central component in that night targeting system. El-Op completed a contract for
the development of a laser designator for the RAH-66 Comanche combat helicopter
before the U.S. Army's announcement in 2003 of its decision to terminate the
Comanche program. Therefore, El-Op's contract for the Comanche program was not
negatively effected. El-Op also supplies electro-optic payloads for a variety of
helicopters.

         CIVIL AVIATION

         EFW's New Hampshire operations design and manufacture a range of
altimeters, pressure monitors, other cockpit indicators and avionics test
equipment for commercial as well as military aircraft. In 2001, the U.S. Federal
Aviation Administration (FAA) certified the installation of the Enhanced Vision
System (EVS) on General Dynamics' Gulfstream-550 business jet. The EVS is
designed and produced by EFW's New Hampshire operations and utilizes an advanced
FLIR system developed together with Opgal. EVS projects an image on the pilot's
head-up display, providing FLIR picture overlaying the outside view in a
conformal manner. It is designed to improve flight safety and situational
awareness and



                                       26
<PAGE>

allows the pilot to detect lights and ground features such as runways, aircraft
and buildings at night and in low visibility conditions. EVS is installed as a
baseline system on Gulfstream-550 aircraft and is an option on Gulfstream-500
aircraft. In May 2003, EVS also was installed and became operational on the
Gulfstream-400.

         In October 2003, EVS was selected for installation on FedEx Express'
Boeing MD-10, MD-11 and Airbus A300 and A310 aircraft fleet. The contract calls
for certification by 2006 and installations on aircraft beginning in 2007. In
December 2003, EFW's New Hampshire operations entered into a contract with
Honeywell International Inc. to develop and supply, together with El-Op, head-up
display overhead projection units for the FedEx Express fleet. The contract
calls for deliveries through 2012. In addition, the New Hampshire operations and
El-Op are currently working on a cost sharing contract with the Maryland
Advanced Design Laboratory awarded in 2002 to develop a low cost solution for
head-up displays for the General Aviation market. The project is being performed
for the U.S. National Air and Space Agency (NASA) and is scheduled to be
completed during 2005.

         Cyclone manufactures structural parts for several types of commercial
aircraft.

         FLIGHT TRAINING SERVICES

         We provide aircraft flight training systems and services. In June 2004,
Cyclone was awarded a ten-year contract from the IMOD for the operation and
maintenance of the helicopters of the IAF Flight School. Under the contract,
which will be executed by providing flight hours on a "power by the hour" basis,
Cyclone will provide full maintenance services to the IAF Bell 206 and Cobra
AH-1A helicopters. The contract is valued at approximately $40 million.

         In 2002, Snunit Aviation Services Ltd., an Israeli company established
by Elbit Systems and Cyclone, was awarded a contract for the supply and
operation of the new light trainer aircraft for the IAF. The contract for
operation of the aircraft is for ten years and is based on an operational
concept known as Private Finance Initiative (PFI), adopted for the first time by
the IAF. Under the PFI concept, we purchase, own, maintain and operate the
aircraft and make them available to the IAF, who is charged according to flight
hours. Full scale operation of the training beginning in 2003.

         SIMULATORS

         In January 2004, we were awarded a contract from the IMOD to maintain
the IAF Blackhawk and CH-53 helicopter simulators for a five-year period. In
November 2003, we received a contract to upgrade the IAF's F-16 Block 15
simulator, with performance over a two-year period. The contract also calls for
us to provide 10 years of maintenance for the simulator.

         In November 2003, Elbit Systems was awarded a contract by the U.S.
State Department to supply full mission/full motion simulators for Mi-24 and
Mi-8 helicopters for the Uzbekistan Air Force over a two-year period. The
contract is part of the U.S. Government's "Operation Enduring Freedom".

         We are supplying simulators for the AL-X and F-5 programs for the
Brazilian Air Force. Simultec S.A., our wholly-owned Romanian subsidiary,
manufactures training systems and flight simulators for the Romanian Ministry of
Defense. See above "Aircraft Avionics Systems and Upgrade Programs". In 2002,
Elbit Systems was awarded a contract by Havelsan S.A., the Turkish defense
contractor, to supply simulator sub-systems that were delivered in 2003 for the
Turkish Air Force's F4-E trainer aircraft.



                                       27
<PAGE>

In May 2003, Havelsan exercised its option for sub-systems for a second
simulator to be delivered in 2004.

         LOGISTIC SUPPORT SERVICES

         We provide logistic support services for fixed wing aircraft and
helicopters such as repair, maintenance and supply of spare parts to the IAF and
other customers, often as a part of our upgrade and other programs. Acquisitions
in recent years have added to our logistic support capabilities for a wide range
of aircraft in Israel, the United States, Brazil and for other customers.

         Cyclone performs various levels of maintenance services for a number of
types of military and commercial aircraft and helicopters. Its facilities near
Karmiel, Israel include hangars and a runway. In 2003, Cyclone also obtained a
license to use another runway and facilities in Israel for aircraft maintenance
for the IAF. At IEI in Alabama and at EFW's facilities in Georgia, we repair and
maintain electronic systems and components for aircraft, helicopters and ground
support equipment for U.S. and other customers. IEI also assists customers in
establishing the appropriate level of maintenance and repair close to the user
to improve operational readiness.  At AEL in Porto Alegre, Brazil, we are
implementing a logistic support center for our aircraft modernization programs
for the Brazilian Air Force.


         HELMET MOUNTED SYSTEMS

         FIGHTER AIRCRAFT HELMET MOUNTED SYSTEMS

         Elbit Systems' pilot helmet mounted systems are in operation with a
number of customers throughout the world. For over 15 years we have been
designing and manufacturing Display and Sight Helmet (DASH) systems. DASH allows
the pilot to target the weapons systems by looking at the target and also
displays flight information on the helmet's visor. The DASH system has been
purchased by the IAF and other customers. In 2000, we were awarded a contract by
Lockheed Martin to supply the DASH IV helmet mounted cueing system for the IAF's
F-16I aircraft. Boeing previously awarded EFW a contract to supply the DASH as
the helmet mounted display system for the IAF's F-15I aircraft.

         Since 2000, VSI has received several contracts from Boeing and Lockheed
Martin to supply production quantities of the Joint Helmet Mounted Cueing System
(JHMCS) and associated development and integration efforts. The JHMCS was
developed under contracts awarded by Boeing and Lockheed Martin to VSI. It is
used in United States Air Force and Navy F-15, F-16 and F/A-18 fighter aircraft.
The JHMCS provides visual information to the pilot and other crew members, based
on the position and orientation of the operator's head. The JHMCS has been
successfully flown in all three aircraft types. In April 2003, VSI was awarded
an approximately $60 million contract from Boeing to deliver an additional 300
JHMCS' over an 18-month period and in January 2004 was authorized to start full
rate production. Also, in May 2003, VSI was awarded a contract by Boeing to
develop a dual-seater version of the JHMCS for delivery in 2004.

         In October 2003, VSI was awarded an approximately $85 million contract
by Lockheed Martin to develop the helmet mounted system for the U.S. F-35 Joint
Strike Fighter (JSF) Program. The majority of the development effort is
scheduled to be completed in 2006 with continuing support activities through
2012. The JSF helmet mounted system is expected to contain the most advanced
helmet mounted display ever designed and will be used as the aircraft's primary
flight and weapon delivery system.



                                       28
<PAGE>

         VSI also performs helmet mounted display programs for other customers.
In 2000, VSI was awarded a contract by the Danish Government to supply the
helmet mounted systems for Lockheed Martin's F-16 Mid-Life Upgrade (MLU) Program
for the Danish Air Force. The Government of Norway ordered the same system in
2002. Other MLU countries may also use the same system.

         HELICOPTER HELMET MOUNTED SYSTEMS

         Elbit Systems' Night Vision Goggles Head-Up Display (NVG/HUD) system
allows helicopter pilots continuous head-up operation, which greatly improves
night-flying safety. The NVG/HUD is operational in the IAF, having been
integrated into various assault and attack helicopters. Over the past ten years
Elbit Systems and EFW have supplied more than 4,000 NVG/HUD systems for a
variety of U.S. Army programs. In recent years, we also received contracts to
supply NVG/HUD systems for customers and end users in Korea, Australia, Canada,
the U.K. and other countries. In 2002, EFW was selected to supply NVG/HUDs for
the Agusta 129 helicopter over a five-year period. Also, in 2002, EFW was
selected by the U.S. Army as the prime contractor to supply the NVG/HUD to the
U.S. Army over a five-year period.

         In 2000, EFW acquired Honeywell's display and orientation products
business, which mainly includes supply of the Integrated Helmet Display and
Sighting System (IHADSS) for the U.S. Army and other users of Apache helicopters
and for the Italian-made Agusta 129 helicopter. In 2002, Boeing awarded EFW a
contract to upgrade the AH-64 Apache IHADSS system with new electronics to
achieve increased image resolution to accommodate longer range thermal imaging
systems being developed for the AH-64. This contract is to be completed in 2004.
In March 2004, EFW received a follow-on order to complete qualification and
transition the new system to full rate production.

         UAV INTEGRATED SYSTEMS

         OVERVIEW OF UAV BUSINESS. Recent advances in technology have resulted
in an increased use of UAVs for many military applications, particularly in the
area of ISR. The ongoing military actions in Afghanistan and Iraq use UAVs
extensively. As part of our business strategy to enter into this expanding
market, in the early 1990's we acquired an interest in Silver Arrow, which
develops and manufactures UAVs and conducts joint programs with Elbit Systems.

         UAV SYSTEMS

         Silver Arrow develops and manufactures several types of UAV platforms
for the IDF and other customers. These include the Hermes family of UAVs,
including the Hermes 1500, the Hermes 450 and the Hermes 180.

         The Hermes 1500 is a medium altitude long endurance UAV for maritime
patrol and other types of support missions. The Hermes 450 supplies real time
intelligence data to ground forces. The Hermes 180 is a tactical short range UAV
designed for brigade-level intelligence, surveillance, target acquisition and
reconnaissance missions.

         We also are involved in smaller UAVs, such as the Skylark and the
Seagull. The Skylark is a man-packed UAV for close range, over the hill
surveillance and reconnaissance. The Seagull is a foldable and canister
deployable tactical close range UAV.



                                       29
<PAGE>

         Elbit Systems also develops and supplies ground control stations for
the operation of UAVs, including advanced systems based on C4I technology. In
addition, we supply to the IDF the latest generation of surveillance UAVs, based
on the Hermes 450. Silver Arrow's U.K. subsidiary, UEL Engines Ltd., produces
engines for UAVs.

         UAV PROGRAMS

         In February 2004, the IMOD selected Elbit Systems to supply Skylark
mini-UAVs for operational evaluation by the IDF ground forces. The initial
contract is to be completed during 2004. Recently, we issued several
international proposals for Skylark, and an order for operational evaluation of
a Skylark system has been received from an European country.

         In July 2003, EFW was awarded a contract with SENTEL Corporation to
operate Elbit Systems' Hermes-450 UAV system at Fallon Naval Air Station in
Nevada. The contract is in support of the DOD's Joint UAV test and evaluation
exercise and is anticipated to be completed in 2004.

         In February 2003, a team consisting of Elbit Systems/Silver Arrow and
Thales Sensors Ltd. (as prime contractor) was one of two teams selected by the
United Kingdom Ministry of Defense to conduct the System Integration Assurance
Phase (SIAP) of the Assessment Study of the Watchkeeper Tactical UAV program.
The SIAP ended in March 2004, following which the team submitted a detailed
proposal for the Demonstration, Manufacture and Initial Support Phase (DMIS).
The Watchkeeper is a tactical UAV system that will provide real-time battlefield
intelligence and fire support to British Army unit commanders.

         In October 2003, Elbit Systems signed a cooperation agreement with ADI
Limited of Australia to bid for the Australian Department of Defense's JP129
tactical UAV program.

         Elbit Systems received contracts from the Israeli Government to act as
the prime contractor under a program to develop and supply integrated defense
electronic systems. We completed the first phase of this program in 2002. During
2002 and 2003, we received additional orders. As of December 31, 2003, we had a
backlog for the program of approximately $87 million, to be performed mainly
through 2006.

         TACTICAL, SECURITY AND NAVAL SYSTEMS

         PRECISION GUIDANCE SYSTEMS

         In the area of guided munitions, we developed and are supplying our
"Whizzard" family of precision guided systems. The Whizzard family includes the
"OPHER" and "Lizard" systems. OPHER is a thermal-imaging, autonomous precision
guidance system. The Lizard system provides munitions guidance towards laser
designated targets.

         In March 2003, under an order received by EFW from Northrop Grumman
Corporation (NG), our semi-active laser seeker was successfully tested with NG's
brilliant anti-armor (BAT) munitions - Viper Strike. Orders for additional units
were received in 2003. These munitions are used in connection with the Hunter
UAV.



                                       30
<PAGE>

         In 2002, Elbit Systems received a contract to supply Lizard systems to
the Venezuelan Air Force over a two-year period. In 2001, Elbit Systems received
a contract from the Italian Ministry of Defense to supply Lizard systems over a
three-year period. Deliveries under these two contracts are completed.  We have
supplied OPHER systems to customers such as the IDF, the Italian Air Force and
the Romanian Air Force and are currently supplying Lizard systems to several
customers.

         HOMELAND SECURITY SYSTEMS

         We are involved in the homeland security market that includes airports,
coastal authorities and other sensitive facilities . These efforts are a natural
extension of our expertise gained in the development of our C4I and battlefield
management systems, UAVs and electro-optic systems. National and local
governments are allocating greater resources in this area in light of increasing
terrorist threats around the world. This has led to increased opportunities for
systems and products that meet the growing demand for perimeter and homeland
security solutions.

         Elbit Systems, El-Op and Ortek develop and supply detection sensors and
other products for facility security, border and coastal control, perimeter
protection and combating terrorist activity. Products in this area include
thermal imaging detection systems, remote controlled surveillance systems and
smart perimeter protection systems. Customers in this field include the Israeli
Police, the IMOD and several international defense forces and security
organizations. In 2002, we enhanced our capabilities in this area by acquiring
the balance of Ortek's shares, giving us a 100% ownership interest.

         In 2002, Elbit Systems was awarded a contract by the IMOD to supply an
electronic warning systems "smart" fence. Elbit Systems is executing the program
through Ortek. The first phase of the project includes construction of an
electronic perimeter system and warning system spanning 25 kilometers, with
potential for expansion.

         We also are supplying a border control registration system and an
anti-money laundering system to the Israeli Government. See below - "Battlefield
Management and Government Information Systems - Governmental Information
Technology and Intelligence Gathering Systems".

         El-Op currently is applying its defense based technologies to develop a
Multi-Spectral Infrared Countermeasure System (MUSIC) for commercial aircraft
applications in preventing terrorism. MUSIC enables identification of
shoulder-launched missiles resulting in a break of the missile lock on the
target. In June 2004, we announced the Government of Israel's selection of an
El-Op - Rafael team to deliver an advanced protection suite against shoulder
launched missiles for Israel's civil aircraft fleet as the long-term solution
for Israel's civil aviation protection plan. The combined system is based on
Rafael's "Britening"TM suite and El-Op's MUSIC system.

         NAVAL SYSTEMS

         Over the past two decades, we have worked with the Israeli Navy to
develop high capability naval command and control systems for surface ship
applications. These systems are currently being used by the Israeli Navy and
several other navies throughout the world.

         For more than ten years, we have been the prime contractor for the C4I
system for the Israeli Navy SAAR 5 corvette class missile boat. We also
developed and supply the anti-missile decoy countermeasure launching system for
the SAAR 5 program.



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<PAGE>

         In 2003, Elbit Systems completed work under a contract with Ingalls
Shipbuilding of Pascagoula, Mississippi, as part of Ingalls upgrade of
Venezuelan Navy LUPO frigates. Under the contract Elbit Systems was responsible
for the overall integration of the ship combat management systems, sensors and
EW systems, and we supplied the hardware and software of the command and control
system.

         We develop advanced naval training simulators. Our simulators address
the need to improve training due to the high cost of activating naval forces.
Our naval training systems provide realistic simulations of combat conditions at
sea. They are used in on-shore facilities for training in naval tactical command
decision procedures, anti-submarine warfare and electronic warfare. Our training
systems are currently used by the Israeli Navy and several other navies. In
2003, Elbit Systems supplied the fourth generation of our tactical trainer
system to the Israeli Navy.

         El-Op supplies electro-optic products for naval applications to several
customers. In January 2003, El-Op was awarded a contract by the IMOD to upgrade
electro-optics observation and surveillance systems for the Israeli Navy through
2004, and further orders are anticipated in 2004. El-Op also supplies
electro-optic shipboard payloads to several navy and maritime forces for both
observation and fire control applications.

         Elbit Systems has developed and supplied several naval electronic
intelligence systems. The systems are designed to detect and recognize threats
under a wide range of conditions and to initiate automatic countermeasures to
protect ships against enemy missiles. Our systems equip the Israeli Navy Dolphin
class submarines and are installed on board submarines of several navies
worldwide. In 2001, Elbit Systems was awarded a contract by the German shipyard
Howaldtswerke Deutsche Werft to supply our Timmex II EW system for submarines.
In 2002, the contract was increased to include an additional system, and we
delivered the first system in 2003. The contract is to be performed over a
four-year period.

         EFW's New Hampshire operations supplies navigation systems for the
Israel Navy's Nirit patrol boats.


         BATTLEFIELD MANAGEMENT AND GOVERNMENT INFORMATION SYSTEMS

         NATURE OF OUR BATTLEFIELD MANAGEMENT AND GOVERNMENT INFORMATION
SYSTEMS. We design our C4I and battlefield systems to manage the growing amount
of data supplied by information systems and sensors in defense, border control,
crime prevention and other government intelligence gathering applications. This
is an area of growing importance in light of increased priority for
communications among defense forces and the growing need of many governments for
anti-terrorism measures, such as ISR, access control and integrated intelligence
gathering. Our C4I battlefield and information systems process and interpret
data received from the different sources and present it in an user-friendly
format. We integrate advanced software tools with general and special purpose
hardware into full C4I battlefield and information technology systems.

         GROUND FORCES AND BATTLEFIELD MANAGEMENT SYSTEMS

         Our ground C4I and battlefield management systems are supplied through
turn-key projects for tactical command and control. We provide solutions from
the level of individual fighting vehicles, mortars and artillery to the
divisional and headquarters command level. Our systems are based on



                                       32
<PAGE>

hardware and software building blocks, including tactical computers, modems,
communication controllers, data radios, military WLAN radios and digital map
systems among others. We also provide products for facilitating operations in
the battlefield based on commercial off-the-shelf technology (COTS).

         In December 2003, Elbit Systems was awarded a contract by the Royal
Netherlands Army (RLNA) to supply battle management system equipment for the
RLNA ground forces. The equipment includes enhanced tactical computers
integrated with tactical communication devices and data communication software.
The contract will be performed over a one-year period.

         The IDF selected Elbit Systems to develop and deliver Enhanced Tactical
Computers (ETCs), which serve as the hardware building blocks for the IDF's
ground command and control systems. These building blocks are based on high
performance military computers, "ruggedization" of COTS circuit boards for
application in harsh military environments, as well as specialized displays and
communication controllers for higher echelon levels. The ETCs are equipped with
several types of communication interfaces and powerful display features. We also
develop, manufacture and supply ETCs to a number of customers worldwide.

         In 2002, Elbit Systems was selected by the IMOD to act as the prime
contractor for the IDF's Ground Forces Digitalization program. Under the
program, the existing command, control and communications systems of the IDF's
ground forces will be integrated, combining additional systems and applications.
The purpose of the program is to enable coordination between forces at different
command levels, provide situational awareness to maneuvering forces and improve
overall operational capabilities, including survivability and accuracy. In 2002,
Elbit Systems received an initial order from the IMOD to perform a system
requirements review for the program. The IMOD and Elbit Systems are currently in
the process of negotiating a detailed contract for the overall program. If the
detailed contract is implemented, the program, which is to be performed over a
multi-year period, is expected to be material to Elbit Systems, both because of
its scope and its contribution to our technology base.

         In 2002, Elbit Systems was awarded a contract by the IMOD to serve as
prime contractor for the IDF's Battle Management Systems for Battalion Combat
Teams program. The program includes the development, supply and support of
advanced electro-optical sensors, multi-functional displays, command and control
software, information and dissemination systems and advanced mission computers.
The program will enable coordination among the IDF's main battlefield tanks,
armored fighting vehicles and infantry fighting vehicles. It will provide
situational awareness to maneuvering forces and improve the overall operational
capabilities of fighting units. The first phase of the program, including
initial deployment, is being performed over a two-year period.

         In 2000, ESL Advanced Information Technology GmbH (AIT), Elbit Systems'
wholly-owned Austrian subsidiary, received a contract to supply artillery
command and control systems for the Austrian Army. We anticipate completing
deliveries under the contract in 2004.

         Soltam Systems Ltd. (Soltam) of Yokneam, Israel, in which Elbit Systems
owns a 10% equity interest, develops and manufactures artillery systems and
products for the IDF and other customers. We have developed systems integrating
Soltam's products with our fire control and command and control systems,
including a program currently being performed for the IMOD.



                                       33
<PAGE>

         GOVERNMENTAL INFORMATION TECHNOLOGY AND INTELLIGENCE GATHERING SYSTEMS

         We acquired the assets of the Government Systems Division of Elron
Telesoft (formerly part of the NCC Group) in 2002. These activities include
computerized communication systems, information technology and image
intelligence processing for defense and other governmental applications in
Israel and abroad. Over the last two years we have received orders from the
Israeli Government for these types of applications.

         In May 2003, Elbit Systems was awarded a contract for the development
and support of an information processing system for the Israeli Money-Laundering
Prohibition Authority (IMPA). The project is to be performed over a two-year
period. The project will provide IMPA with an information technology system that
includes a database and a collection center for relevant data from financial
institutions such as banks, insurance companies and customs authorities. The
project includes the management of an official data base containing the currency
transactions and suspicious activities reports submitted to IMPA by the Israeli
financial community, as well as reports of enrichment from governmental law
enforcement and information resources and from corresponding governmental
financial intelligence units in other countries.

         In 2001, Elbit Systems was awarded a contract by the Israeli Government
for the development and supply of the National Border Control Registration
System (BCRS). BCRS is a computerized system for registration and control of all
of Israel's border crossing points. The system, which will be deployed at all
Israeli airports, sea ports and land entry points, supports border inspection
processes and helps control the passage of vehicles and goods. The contract is
expected to be completed during 2004.


         LAND VEHICLE SYSTEMS

         NATURE OF OUR LAND VEHICLE SYSTEMS

         Our land vehicle systems capabilities combine Elbit Systems' electronic
tank systems experience with El-Op's electro-optics expertise. The combined land
vehicles business offers capabilities ranging from complete tank modernization
programs with full logistics support, to situational awareness and battle
management systems, advanced day and night fire control systems incorporating
eye-safe lasers and advanced FLIRs, electrical turret drive and stabilization
systems to life support and hydraulic systems.

         The survivability of tanks and other combat vehicles on the modern
battlefield depends largely on their ability to achieve a first-round hit. This
requires the gunner to quickly and accurately coordinate many complex tasks with
a large number of variables. Elbit Systems was one of the first companies to
introduce modern electronic technology in tank applications using our expertise
in developing advanced avionics systems to adapt and to develop control systems
and electronics for combat vehicles. We replaced manually operated fire control
systems with an advanced digital tank fire control system, improving on-the-move
hit probability and reducing the time required for targeting.

         For over twenty years, we have been developing and supplying a family
of fire control systems for new and upgraded main battle tanks, medium and light
tanks and light armored vehicles. Our systems integration expertise and
extensive experience in developing and manufacturing these systems led to an
expansion into a new generation of tank turret drive systems. We developed an
electric gun and turret drive and stabilization system that can be integrated
with the fire control system to improve turret stabilization and accuracy. This,
in turn, improves fire-on-the-move performance.



                                       34
<PAGE>

         El-Op is a long time developer and producer of electro-optic systems
for combat vehicles in Israel and abroad. These systems include eye safe laser
range finders, second generation thermal imaging systems, gunners sights with or
without line-of-sight stabilization, commander panoramic sights, computers and
sensors. We supply our integrated battle management systems as part of our
modern fire control systems sold to the IDF and to other customers around the
world. We also furnish combat vehicle logistic support services to the IDF.

         MERKAVA

         All of the models of the most advanced IDF battle tank, the Merkava,
use our fire control and electric gun and turret drive and stabilization systems
as original equipment. We are both a prime and a subcontractor for the supply of
systems to various Merkava tank models.

         Elbit Systems, El-Op and Kinetics are supplying a significant number of
systems for the IDF's newest Merkava tank, the MK-4. These systems include the
day/night gunner and commander sighting systems, the electronic gun and turret
drive system, flat panel displays, advanced warning systems against laser guided
threats (TDS), life support systems and a battle management system.

         During the last two years, we were awarded several orders for the
development and supply of electronic and optical systems and electrical drive
systems for the Merkava. In January 2004, Elbit Systems was awarded orders by
the IMOD to supply electronic and electro-optical systems for the Merkava MK-4.
The orders will be performed over a two to three-year period. El-Op is the prime
contractor to the IMOD for all Merkava tank fire control systems. In 2002, El-Op
was awarded a contract to upgrade the firing computer of the IDF's Merkava and
M-60 tanks. Kinetics also supplies several systems, including the life support
system, for Merkava programs. As of December 31, 2003, we had a total of $129
million in our backlog relating to Merkava orders, to be supplied through 2006.

         TURKISH M-60 MODERNIZATION PROGRAM. In March 2004, the definitive
agreement for Elbit Systems' portion of the Turkish Army M60A1 Tank
Modernization Program became effective. The contract, in the amount of
approximately $183 million, was signed with the IMOD, with deliveries to be
completed over a four-year period. The contract is for the supply of electronic
and electro-optical fire control systems, electrical gun and turret drive
systems and support equipment for the Program. Elbit Systems' contract is being
performed within the framework of the agreement for the Program between Israel
Military Industries Ltd. and the Turkish Ministry of Defense. The contract
contains buy-back obligations. See below "Buy-Back".

         MULTIPLE LAUNCH ROCKET SYSTEM (MLRS) AND HIGH MOBILITY ARTILLERY ROCKET
SYSTEM (HIMARS). EFW is a subcontractor to Lockheed Martin for the U.S. Army
MLRS M270A1 upgrade program. EFW supplies the fire control system that includes
an on-board computer processor, a 14-inch color flat panel display, a mass
storage device and a keyboard. Following EFW's completion of development, in
2002 and 2003 Lockheed Martin awarded EFW production and retrofit contracts. EFW
currently has more than 330 systems under contract to be performed through 2004.
The equipment developed for MLRS is also directly compatible with the HIMARS to
be used by the U.S. Army and U.S. Marine Corps.



                                       35
<PAGE>

         BRADLEY A-3 PROGRAM. EFW is a subcontractor for the U.S. Army Bradley
A-3 fighting vehicle modernization program. EFW was awarded contracts by United
Defense, the prime contractor for the program, to develop and supply the turret
and hull processors, the gunners' and commanders' hand stations, the position
interface box and the map operational software. EFW completed the development
contracts and was awarded multi-year production contracts by United Defense for
those systems. These contracts are to be performed through 2004.

         ARMORED FIGHTING VEHICLE PROGRAM. In 1999, a Western European prime
contractor awarded contracts to Elbit Systems to supply advanced fire control
systems for armored fighting vehicles. The amount of the contracts is
approximately $43 million, to be performed over a five-year period.

         THERMAL IMAGING SYSTEMS. El-Op has sold more than 700 thermal imaging
systems for the Leopard 2/A5 commander sight to customers including the armed
forces of Germany, the Netherlands, Sweden and Denmark and more than 2,000
thermal imaging systems to other customers for different types of tanks.

         TRAINING SYSTEMS. Elbit Systems and EFW have supplied tank gunnery
training systems to the IDF and the U.S. Army. We are currently supplying the
Deployable Range Training and Safety System (DRTSS) to the U.S. Army. This
system provides real time crew gunnery evaluation, recorded after action video,
battle status assessment, positive target recognition, ammunition conservation
and reduces friendly fire casualties. DRTSS has been fielded at the Forts Hood,
Carson, and Stewart tank gunnery ranges.

         ENVIRONMENTAL CONTROL AND HYDRAULIC SYSTEMS. Kinetics develops advanced
life support systems, including environmental and climate control and NBC
protection systems, for combat vehicles. Kinetics also develops and manufactures
hydraulic, fuel, braking and suspension systems as well as an auxiliary power
unit for combat vehicles of the IDF, the U.S. Army and other customers.

         ROBOTIC GROUND VEHICLES

         Elbit Systems and El-Op are involved in the development of robotic
ground vehicles for defense and homeland security applications. In March 2004,
Elbit Systems teamed with SciAutonics LLC to compete in the U.S. Defense
Advanced Research Projects Agency (DARPA) Grand Challenge in which the team
finished second out of numerous competitors.

         ELECTRO-OPTICAL AND COUNTERMEASURES SYSTEMS

         ELECTRO-OPTICS

         El-Op has more than 60 years of experience in the field of
electro-optics and designs and manufactures electro-optic systems and products
for defense, space, homeland security and commercial applications worldwide.
This includes expertise in thermal imaging, laser systems, optronic stabilized
payloads, head-up displays, space and airborne reconnaissance systems and
electro-optic countermeasures. These systems are supplied for spaceborne,
airborne, land and naval applications as described above. In addition, El-Op
develops and supplies payload based observation and fire control systems for
naval and airborne platforms, including day and night vision and laser range
finders and designators.



                                       36
<PAGE>

         SCD also develops and manufactures infrared detectors and laser diodes
for electro-optical applications. Opgal develops electro-optics "engines" that
combine detectors with proprietary electronics for commercial and homeland
security applications.

         During 2003, El-Op received orders, exceeding $100 million in the
aggregate, from customers worldwide for hand held, surveillance and homeland
security and armored vehicles applications of thermal imaging products and
systems.

         SPACE

         El-Op is actively expanding space applications for its technology and
products. El-Op has developed a variety of cameras for the Ofek Satellite,
including the Ofek-5 launched in 2002, and for other initiatives of the Israel
Space Agency. In 2000, EROS A1, a commercial reconnaissance satellite, began
transmitting images taken by an advanced digital camera developed and
manufactured by El-Op. EROS A1 was launched by ImageSat International N.V. in
which El-Op owns a minority interest. See below "Technology Spin-Offs". El-Op
previously won an international solicitation for the development of an advanced
electro-optic multi-spectral space camera for the Korean Space Agency.

         In October 2003, Elbit Systems acquired a minority interest in
AeroAstro, Inc., a U.S. company engaged in development of advanced micro and
nano space systems and components, focusing on remote sensors and optical
systems. (See above "Recent Acquisitions"). In May 2004, El-Op signed a
cooperation agreement with OHB-System A.G. of Germany relating to space-related
activities.

         TECHNOLOGY SPIN-OFFS

         Both Elbit Systems and El-Op explore on an ongoing basis potential
spin-offs of their defense related technologies for commercial applications. Our
technology spin-offs are involved in intra-body navigation medical equipment,
optical communications, commercial satellites and internet communications for
commercial aviation. The following is a description of our current technology
spin-offs.

         MediGuide

         Elbit Systems established MediGuide Inc. (MediGuide) in 2000.
MediGuide, through its wholly-owned Israeli subsidiary, leverages specific
technologies developed by Elbit Systems in the defense area for use in various
medical procedures and intra-body navigation. Elbit Systems provided MediGuide
with an exclusive license to use specific technologies for medical applications,
and MediGuide provided Elbit Systems with a cross license to use MediGuide's
developments for defense applications. Outside equity investments were made in
MediGuide by venture capital groups in 2000 through 2002.

         In May 2003, MediGuide signed an agreement with Boston Scientific
Corporation (BSC) to develop and commercialize technology platforms in the
fields of 3-D intravascular imaging and intrabody navigation. The agreement
included an equity investment by BSC in MediGuide, co-development
responsibilities for integrating BSC's device platforms with MediGuide's
proprietary guidance system, exclusive global distribution by BSC for a
specified period and an option for BSC to acquire MediGuide at a future time.
Following the investment by BSC, Elbit Systems equity interest in MediGuide, on
a fully-diluted basis, is approximately 44%.



                                       37
<PAGE>

         Starling - In 2001, Rafael and Elbit Systems established a joint
venture known as "Starling" Advanced Communications. In October 2003, the joint
venture was incorporated in Israel under the name Starling Advanced
Communications Ltd. (Starling). Starling combines the expertise of both parties
to develop products in the area of internet communications through satellite
transmissions and broad band information transfer for commercial aircraft.
Rafael contributes expertise in the area of aerial antennas, and Elbit Systems
contributes expertise in the area of satellite communications and broad band
information transfer for aircraft. Rafael assigned its interest in Starling to
RDC Rafael Development Corporation Ltd. (RDC), an Israeli company jointly owned
by Rafael and Elron Electronic Industries Ltd.

         ImageSat - El-Op has an approximately 14% equity interest (10% on a
fully diluted basis) in ImageSat International N.V. (ImageSat). Other
shareholders include IAI and private equity groups. ImageSat is involved in the
operation of satellites for commercial and other applications and providing
satellite imagery. ImageSat's EROS A1 satellite contains an advanced digital
camera produced by El-Op.

         RedC - El-Op owns an approximately 36.5% equity interest in RedC
Optical Networks Inc. (RedC). The other major shareholder is MRV Communications
Inc. Through its wholly-owned Israeli subsidiary, RedC designs, develops and
produces optical amplifiers for dense wave-length multiplexing (DWDM) optical
networks for telecommunication vendors.

         CyOptics - Our 50%-owned partnership SCD owns an approximately 17%
equity interest in CyOptics Inc. (CyOptics). Through its wholly-owned Israeli
subsidiary, CyOptics is involved in the development of wave-length domain
multiplexing components for optical communications.



PROPERTY, PLANT AND EQUIPMENT

         Our executive offices and main research and development facilities are
located on approximately 774,000 square feet of property in the Advanced
Technology Center in Haifa, Israel, including the newly constructed building
described below. We own approximately 375,000 square feet of our main facilities
in Haifa. The remainder of our facilities in Haifa is leased. We also have
ownership and long-term leasehold rights in a facility of approximately 65,000
square feet near our headquarters building in Haifa. Our main manufacturing
operations are located in a facility of approximately 169,000 square feet in
Karmiel, Israel that is leased from Elbit Ltd. See below - Item 7. Major
Shareholders and Related Party Transactions - Transactions with Elron and
Affiliated Companies. We also lease approximately 41,000 square feet in Petach
Tikva, Israel.

         In May 2004, we completed construction and began using a new building
that houses our offices and operations and that is connected to our current
headquarters building in Haifa. The new building covers approximately 357,500
square feet of building space, including underground parking facilities. We own
half of the building and lease the other half from Matam - Advanced Technology
Center Ltd. (Matam). The new facility will consolidate most of our operations
currently spread throughout numerous buildings, most of which are leased, in the
Advanced Technology Center in Haifa. Total costs to Elbit Systems for the land
and construction of the new building are approximately $20 million.

         El-Op owns approximately 421,000 square feet of property and leases
approximately 12,000 square feet of its facilities in Rehovot, Israel, in
addition to the new facility described below. These facilities contain El-Op's
headquarters, offices, development facilities and manufacturing operations. In


                                       38
<PAGE>

June 2003, El-Op completed construction and began using a new 188,000 square
foot facility adjacent to its existing main building in Rehovot. The new
building consolidates El-Op's main premises. Total building costs to El-Op for
the new facility were approximately $15 million.

         EFW owns approximately 25 acres of property in Fort Worth, Texas. That
property includes a 155,000 square foot facility containing EFW's offices and
manufacturing operations. EFW's New Hampshire subsidiary owns properties in
Merrimack, New Hampshire covering a total of approximately 71 acres. This
includes buildings containing offices and manufacturing operations of
approximately 410,000 square feet. The New Hampshire operations are currently in
negotiations to sell approximately 44 unbuilt acres on the Merrimack property.
In June 2003, the New Hampshire operations sold a facility in Nashua, New
Hampshire, of approximately 50,000 square feet, in consideration for
approximately $2 million. IEI owns property covering approximately 38 acres in
Talladega, Alabama, on which are located offices and manufacturing facilities of
approximately 64,000 square feet. The operation in Warner Robins, Georgia
occupies approximately 13,000 square feet of leased facilities.

         Cyclone owns approximately 1,406,100 square feet of property near
Karmiel, Israel. This includes approximately 210,000 square feet on which its
offices, manufacturing, maintenance and hangar facilities are located. Kinetics
owns office, laboratory and manufacturing facilities in Airport City, Israel,
covering approximately 32,000 square feet. Silver Arrow leases facilities in
Rishon Le-Zion, Israel, covering approximately 26,000 square feet. Ortek owns
approximately 109,000 square feet of property in Sderot, Israel, which includes
approximately 16,000 square feet of offices and manufacturing facilities.

         AEL owns approximately 282,000 square feet of property in Porto Alegre,
Brazil, including offices and buildings covering approximately 23,000 square
feet.

         Over the last two years the average annual investment in our
facilities, other than the new building projects in Haifa and Rehovot, amounted
to approximately $38 million, most of which was used to purchase machinery and
equipment. We believe that our current facilities are adequate for our
operations as now conducted.

ORGANIZATIONAL STRUCTURE


         Our beneficial ownership interest in, and place of incorporation of,
our major subsidiaries and investees is set forth below. Our equity and voting
interests in these entities are identical.

<TABLE>
<CAPTION>
      --------------------------------------------------------------------------------------------------------------
                                                        Elbit Systems Ltd.
      --------------------------------------------------------------------------------------------------------------
            |            |               |            |             |               |             |              |
            |            |               |            |             |               |             |              |
            |            |               |            |             |               |             |              |
       -----------    ----------    ----------    ----------     ---------      ---------     ---------      ---------
<S>     <C>             <C>             <C>       <C>           <C>             <C>           <C>            <C>
       EFW            El-Op         Cyclone       Ortek          Silver         Kinetics      SCD            Opgal
       (Delaware)     (Israel)      (Israel)      (Israel)       Arrow          (Israel)      (Israel)       (Israel)
          100%          100%          100%          100%         (Israel)         51%           50%           50.1%
                                                                   100%
       -----------    ----------    ----------    ----------     ---------      ---------     ---------      ---------
            |
       ------------
           VSI
       (California)
           50%
       ------------
</TABLE>



                                       39
<PAGE>

GOVERNMENTAL REGULATION

         GOVERNMENT CONTRACTING REGULATIONS. We operate under laws, regulations
and administrative rules governing defense contracts, mainly in Israel and the
United States. Some of these carry major penalty provisions for non-compliance,
including disqualification from participating in future contracts. In addition,
our participation in governmental procurement processes in Israel, the United
States and other countries is subject to specific regulations governing the
conduct of the procurement process.

         ISRAELI EXPORT REGULATIONS. Israel's defense export policy regulates
the sale of a number of our systems and products. Current Israeli policy
encourages exports to approved customers of defense systems and products such as
ours, as long as the export is consistent with Israeli Government policy. A
permit is required for an export and must be obtained to initiate a sales
proposal. We also must receive a specific export license for any hardware
eventually exported. In 2003, approximately 50% of our revenue was derived from
exports subject to Israeli export regulations.

         U.S. AND OTHER EXPORT REGULATIONS. EFW's export of defense products,
military technical data and technical services to Israel and other countries is
subject to applicable approvals of the U.S. Government. Such approvals are
typically in the form of an export license or a technical assistance agreement
(TAA). Other U.S. companies wishing to export defense products or military
related services and technology to our Israeli entities are also required to
obtain such licenses and TAAs. This applies to data required by our Israeli
entities to perform work for U.S. programs. Licenses are also required for
Israeli nationals assigned to work at our U.S. affiliated companies. An
application for an export license or a TAA requires disclosure of the intended
sales of the product and the use of the technology. The U.S. Government may deny
the export license or TAA if it determines that a transaction is counter to U.S.
policy or national security. Other governments' export regulations also affect
our business from time to time, particularly with respect to end user
restrictions of our suppliers' governments. Recently, some European governments
have indicated the possibility of limiting defense exports to Israel.

         "BUY AMERICAN" LAWS. The U.S. "Buy American" laws impose price
differentials or prohibitions on procurement of products purchased under U.S.
Government programs. The price differentials or prohibitions apply to products
that are not made in the United States or that do not contain U.S. components
making up at least 50% of the total cost of all components in the product.
However, a Memorandum of Agreement between the United States and Israeli
Governments waives the Buy American laws for specified products, including
almost all the products currently sold in the United States by Elbit Systems,
El-Op and our other Israeli subsidiaries.

         FOREIGN MILITARY FUNDING (FMF). EFW and its subsidiaries participate in
United States FMF programs. These programs require countries, including Israel,
receiving military aid from the United States to use the funds to purchase
products containing mainly U.S. origin components. In most cases, subcontracting
under FMF contracts to non-U.S. entities is not permitted. As a consequence, EFW
and its subsidiaries generally either perform FMF contracts themselves or
subcontract with U.S. suppliers.

         ANTITRUST LAWS. Antitrust laws and regulations in Israel, the United
States and other countries often require governmental approvals for transactions
that are considered to limit competition. Such transactions may include
cooperative agreements for specific programs or areas, as well as mergers and
acquisitions.




                                       40
<PAGE>

BUY-BACK

         As part of their standard contractual requirements for defense
programs, several of our customers include "buy-back" provisions. These
provisions are typically best efforts obligations to make, or to facilitate
third parties to make, specified transactions in the customer's country. Such
transactions may include the purchase of local goods and services; cooperative
ventures with, or investment in, local entities; and transfers of equipment,
infrastructure or know-how for the benefit of local parties. In most cases, the
buy-back transactions are to be fulfilled over a multi-year period that extends
after completion of deliveries under the contract.


         Elbit Systems is required to make or facilitate local purchases or
goods and services only if the local suppliers can meet the commercial and
technical competitive terms of the specific procurement. Thus, the local
industry must be able to meet the price of other international suppliers for the
procurement in question as well as to meet the required delivery schedule and
technical and quality specifications. Typically, if the local supplier is unable
to meet such conditions following the award of a purchase order, the buy-back
credit is nonetheless granted. To date, we have not encountered significant
difficulties in identifying qualified local suppliers and placing purchase
orders.


         We typically have the right to apply multiplier factors in calculating
the amount of buy-back credit recognized, and certain types of investments and
transactions receive buy-back credit of up to several times the value of the
specific transaction. Therefore, even if the buy-back provisions apply in an
aggregate amount of up to 100% of the price of the contract with our customer,
the actual effective buy-back obligation amount typically is significantly less
due to the application of the multiplier factors.


         Although failure to meet a best efforts buy-back obligation may limit
our ability to be awarded future business from the applicable customer, in most
cases buy-back is not linked to delivery payments or subject to specific or
material contractual monetary penalties. The buy-back activities are a normal
part of doing business in the defense industry with these customers. Over the
number of years that we have been performing buy-back activities, we have not
experienced significant difficulties in meeting our buy-back obligations, and
therefore these buy-back activities are not believed to represent a material
financial risk to our operations. Elbit Systems' maximum aggregate buy-back
undertakings as of December 31, 2003 were approximately $630 million, to be
fulfilled over a period of up to 11 years.




FINANCING TERMS

         TYPES OF FINANCING. There are several types of financing terms
applicable to our defense contracts. In some cases, we receive progress payments
according to a percentage of the cost incurred in performing the contract.
Sometimes we receive advances from the customer at the beginning of the project
and also receive milestone payments for achievement of specific milestones. In
some programs we extend credit to the customer, sometimes based on receipt of
guarantees or other security. In other situations work is performed before
receipt of the payment, which means that we finance all or part of the project's
costs. Occasionally, we assist in arranging third party financing for our
customers. Financing arrangements may extend beyond the term of the contract's
performance. When we believe it is necessary, we seek to protect all or part of
our financial exposure by letters of credit, insurance or other measures,
although in some cases such measures may not be available.



                                       41
<PAGE>

         ADVANCE PAYMENT GUARANTEES. In some cases where we receive advances
prior to incurring contract costs or making deliveries, the customer may require
guarantees against advances paid. These guarantees are issued either by
financial institutions or by us. We have received substantial advances from
customers under some of our contracts. If a contract is canceled for default and
there has been an advance or progress payment, we may be required to return
payments to the customer as provided in the specific guarantee. As part of the
guarantees we provide to receive progress payments or advance payments, some of
our customers require us to transfer to them title in inventory acquired with
such payments. In addition, we receive payments for some of our projects in
currencies other than U.S. dollars. In such cases, we sometimes elect to adopt
measures to reduce the risk of exchange rate fluctuations. As of December 31,
2003, the balance of customer advances that were covered by guarantees amounted
to approximately $183 million.

         PERFORMANCE GUARANTEES. A number of projects require us to provide
performance guarantees in an amount equal to a percentage of the contract price.
Some of our contracts contain clauses that impose penalties or reduce the amount
payable to us if there is a delay or failure in completion of a phase of work,
including in some cases during the warranty period. We provide these types of
guarantees in the normal course of our business. As of December 31, 2003, the
balance of performance guarantees for Group companies amounted to approximately
$206 million.

         FINANCIAL RISKS RELATING TO OUR PROJECTS. The nature of our projects
and contracts creates some potential financial risks, including risks relating
to dependence on governmental budgets, fixed price contracts for development
effort, schedule extensions beyond our control, termination for the customer's
convenience, potential for monetary penalties for late deliveries and liability
for subcontractors.

         AUDIT REGULATIONS. The IMOD audits our books and records relating to
its contracts with us. Our books and records and other aspects of projects
related to U.S. defense contracts are subject to audit by the U.S. Defense
Contract Audit Agency. Such audits review compliance with applicable government
contracting cost accounting and other applicable standards. If discrepancies
were found this could result in a downward adjustment of the applicable
contract's price. Some other customers obtain similar rights under specific
contract provisions.


INTELLECTUAL PROPERTY

         PATENTS, TRADEMARKS AND TRADE SECRETS. We hold more than 230 patents in
Israel, the United States and other countries relating to approximately 90
different inventions. El-Op alone holds approximately 130 patents on some 55
different products or applications. Our technology spin-off companies often rely
in part on our patented technology. In a few cases we hold trademarks relating
to specific products. A significant part of our intellectual property assets
relates to unique applications of advanced software-based technologies,
development process and production technologies. These applications are often
not easily patentable, but are considered as our trade secrets and proprietary
information. We take a number of measures to guard our intellectual property
against infringement as well as to avoid infringement of other parties'
intellectual property.

         GOVERNMENT RIGHTS IN DATA. The IMOD usually retains specific rights to
technologies and inventions resulting from our performance under Israeli
Government contracts. This generally includes the right to disclose the
information to third parties, including other defense contractors that may be
our competitors. Consistent with common practice in the defense industry,
approximately 30% of our



                                       42
<PAGE>

revenues in 2003 was dependent on products incorporating technology that a
government customer may disclose to third parties. When the Israeli Government
funds research and development, it usually acquires rights to data and title to
inventions. We often may retain a non-exclusive license for such inventions. The
Israeli Government usually is entitled to receive royalties on export sales to
the extent that such sales result from government financed development. However,
if only the end product is purchased, we normally retain the principal rights to
the technology. Sales of our products to the U.S. Government and some other
customers are subject to similar conditions. Subject to applicable law,
regulations and contract requirements, we attempt to maintain our intellectual
property rights and provide customers with the right to use the technology only
for the specific project under contract.

         LICENSING. In the relatively few cases where we manufacture under
license, the licensor typically is entitled to royalties or other types of
compensation. However, EFW's acquisition in 2000 of the display and orientation
product business of Honeywell included an exclusive, royalty free license to use
the applicable technology for defense applications. See above "Principal
Subsidiaries - EFW". Occasionally, we license parts of our intellectual property
to customers as part of the requirements of a particular contract. We also
sometimes license technology to other companies for specific purposes or
markets. Our technology spin-offs typically receive licenses to use relevant
parts of our intellectual property for their designated business purposes. See
above "Technology Spin-Offs - MediGuide and - Starling".

RESEARCH AND DEVELOPMENT

         We invest in research and development (R&D) according to a long-term
plan based on estimated market needs. Our R&D efforts focus on anticipating
operational needs of our customers, achieving reduced time to market and
increasing affordability. We emphasize improving existing systems and products
and developing new ones using emerging or existing technologies.

         We perform R&D projects to produce new systems for the IMOD and other
customers. These projects give us the opportunity to develop and test emerging
technologies. We developed new tools for fast prototyping for both the design
and development process. This permits the operational team members to
effectively specify requirements and to automatically transfer them into
software code. Examples of our ongoing defense-related R&D projects include
those for night operation capabilities, laser systems, display systems, helmet
mounted systems, C4I systems, electric tank turret drive systems and homeland
security systems. We also perform R&D in the area of commercial aviation and
through our technology spin-offs.

         We employ more than 1,600 software and hardware development and systems
engineers engaged in advance programs for airborne, ground and naval defense,
homeland security and space applications. Approximately 60% of our total
workforce is engaged in research, development and engineering.

         In addition to the R&D funded by our customers, we invest in our own
research and development activities. This investment is in accordance with our
strategy and plan of operations. The table below shows amounts we invested in
R&D activities for the years ended December 31, 2001, 2002 and 2003:




                                       43
<PAGE>

<TABLE>
<CAPTION>
                                                            2001          2002        2003
                                                            ----          ----        ----
                                                                (U.S. dollars in millions)

<S>                                                        <C>           <C>           <C>
Total Investment                                           $67.9         $62.6         $65.5
Less Government of Israel Participation*                     9.1           5.6          10.6
                                                           -----         -----         -----
Net Investment                                             $58.8         $57.0         $54.9
                                                           =====         =====         =====
------------
</TABLE>
*See above - "Government Rights in Data" and see below - "Conditions in Israel -
Chief Scientist Funding"


MANUFACTURING

         We manufacture and assemble most of our systems at Elbit Systems'
production facility in Karmiel, Israel, at El-Op's facilities in Rehovot,
Israel, and at EFW's facilities in Fort Worth, Texas and Merrimack, New
Hampshire. These facilities contain warehouses, electronic assembly areas, test
evaluators and final test stations. They also have mechanical workshops,
infrastructure for "through hole" automated and semi-automated assembly, fully
automated surface mount technology lines and clean rooms. We have fully
independent capabilities in electronic card assembly, electro-optic components,
solid state components integration, environmental testing and final testing,
including space simulation and thermal chambers. We also have computerized
logistics systems for managing manufacturing and material supply. In New
Hampshire we also manufacture commercial avionics and medical equipment in FAA
and U.S. Food and Drug Administration approved facilities.

         Cyclone, Silver Arrow, Kinetics, Ortek, SCD, Opgal and AEL also perform
manufacturing and assembly at their facilities. EFW's operations in Talladega,
Alabama, also contain facilities for manufacturing test equipment and other
items. Some components of our products are manufactured in Romania at S.C. A-E
Electronics S.A., a majority-owned Romanian subsidiary of Elbit Systems that
manufactures military components and at Elmet International SRL, a wholly-owned
subsidiary of Elbit Systems involved in machining and metal works.


PURCHASING

         The central purchasing services of Elbit Systems in Israel are based in
our plant in Karmiel. In the U.S., purchasing activities are based at EFW's Fort
Worth, New Hampshire and Alabama facilities. EFW also assists Elbit Systems in
procurement activities in the United States, as does Elmec Inc., a wholly-owned
subsidiary of Elbit Systems located in Chelmsford, Massachusetts. El-Op, Cyclone
and most of our other operating subsidiaries also conduct purchasing activities.

         We generally are not dependent on any single sources of supply. We
manage our inventory according to project requirements. In some projects,
specific major subcontractors are designated by the customer.




                                       44
<PAGE>

CUSTOMER SATISFACTION AND QUALITY ASSURANCE

         We invest in continuous improvement of processes to ensure customer
satisfaction throughout all stages of our operations. This includes development,
engineering, design and integration of hardware and software, manufacturing,
installation and service. Our quality teams are involved in assuring compliance
with processes and administrating quality plans. These activities begin at the
precontract stage and continue through the customer's acceptance of the product.

         Elbit Systems uses a project management method based on Theory of
Constraints (TOC) in all development projects. Using advanced software, work
plans are continuously updated and are available to all integrated product team
members. This method makes management more efficient and improves our ability to
meet schedule demands of complex projects. Another TOC methodology is used
successfully to manage the manufacturing floor in Karmiel. We also use methods
such as Keizen and Lean.

         Our processes are based on a cutting edge tool case and CAD-CAM tools.
This infrastructure, together with well defined development methodology and
management tools, assists us in ensuring high quality and on time implementation
of projects.

         Representatives of our customers generally test our products before
acceptance. Branches of the IDF and other customers have authorized us to accept
our products on their behalf. In addition, Elbit Systems is certified for
Software Compatibility Maturity Model (CMM) Level 3 by the U.S. Software
Engineering Institute (SEI), indicating a high level of software maturity and
software development capability. Elbit Systems is certified for ISO-9001:2000
including ISO-90003 for software and ISO-14001 and AS9100. El-Op is certified
for ISO-9001:2000, ISO-14001 and OSHAS 18001. Cyclone and Silver Arrow are
certified for ISO-9001:2000. All the above are certified by the National
Standard Institution of Israel (SU).

         EFW is certified for ISO-9001:2000 and AS9100. Its New Hampshire
operations are certified for ISO 9001:2000 and AS91000. They are certified by
the American Standard Institute. IEI is certified to ISO 9001:2000 and AS9100 by
NFS International Strategic Registrars. The quality system of IEI also complies
with NATO AQAP requirements.


SERVICE AND WARRANTY

         We instruct our customers on the proper maintenance of our systems and
products. In addition, we often offer training and provide equipment to assist
our customers in performing their own maintenance. In many programs, we are
required to supply technical support for specified periods. In these cases, we
supply technical support both by a local support team and by experts sent from
our main facilities.

         We generally provide a one-year warranty for our systems and products
following delivery to the customer. We maintain reserves for warranty
obligations specifically determined for each project based on our experience and
engineering estimates.




                                       45
<PAGE>

MARKETING AND SALES

         We actively take the initiative in identifying the individual defense
needs of our customers throughout the world. We then focus our research and
development activities on systems designed to provide tailored solutions to
those needs. We often provide demonstrations of prototypes and existing systems
to potential customers.

         We market our systems and products either as a prime contractor or as a
subcontractor to various governments and defense contractors worldwide. In
Israel, we sell our military systems and products mainly to the IMOD, which
procures all equipment for the IDF. Our marketing and technical support
personnel for sales in Israel operate out of our headquarters in Haifa, El-Op's
facilities in Rehovot, our offices in Tel-Aviv and the facilities of our other
Israeli subsidiaries. We are assisted in marketing our systems, products and
services in other parts of the world through subsidiaries, joint ventures,
consultants and representatives.

         In the U.S., EFW leads our marketing activities, both from Fort Worth
and from offices in the Washington, D.C. area. The New Hampshire operations and
IEI also market their products and services. EFW operates under an SSA that
allows it and its subsidiaries to work on certain classified U.S. Government
programs. See above "Principal Subsidiaries - EFW".

         Over the past several years, Elbit Systems, El-Op and EFW have entered
into cooperation agreements with major defense contractors in the United States.
These agreements provide for joint participation in marketing and performance of
a range of projects. In other countries, we actively pursue business
opportunities as either a prime contractor or a subcontractor, usually together
with local companies. Often we enter into cooperation agreements with other
companies for such opportunities.

         The following table provides Elbit Systems' net revenues by geographic
regions, expressed as a percentage of total revenues for the periods indicated:

                                             Year Ended December 31
                                             ----------------------
                                         2001         2002          2003
                                         ----         ----          ----
         Israel                           30%           27%          29%
         United States                    27%           32%          37%
         Europe                           23%           18%          12%
         Others                           20%           23%          22%



COMPETITION

         We operate in a competitive environment for most of our projects,
systems and products. Competition is based on product and program performance,
price, reputation, reliability, maintenance costs and responsiveness to customer
requirements. This includes the ability to respond to rapid changes in
technology. In addition, our competitive position sometimes is affected by
specific requirements in particular markets.



                                       46
<PAGE>

         In recent years consolidation in the defense industry has affected
competition. This has decreased the number but increased the relative size and
resources of our competitors. We adapt to market conditions by adjusting our
business strategy to changing defense market conditions. We also anticipate
continued competition in defense markets due to declining defense budgets in
many countries.

         Competitors in the sale of some of our products to the Government of
Israel include IAI and Rafael among others. From time to time we also cooperate
with some of our competitors on specific projects.

         Outside of Israel, we compete in a number of areas with major
international defense contractors. These include divisions and subsidiaries of
Boeing, Northrop Grumman Corporation, Honeywell, BAE Systems Ltd., Rockwell
Collins, Thales S.A. and Harris Corporation. Our competitors also include a
number of other major defense contractors in the United States and Europe. Most
of these competitors have greater financial, marketing and other resources than
ours. We also compete with numerous smaller companies and other Israeli
companies around the world.

         Overall, we believe we are able to compete on the basis of our systems
development and technological expertise, our systems' combat-proven performance
and our policy of offering customers overall solutions to technological,
operational and financial needs.


MAJOR CUSTOMERS

         Sometimes, our revenues from an individual customer account for more
than 10% of our revenues in a specific year. Our only such customer during the
last three years was the IMOD, who accounted for 20% of our revenues in 2001,
18% in 2002 and 21% in 2003.


CONDITIONS IN ISRAEL

         POLITICAL, MILITARY AND ECONOMIC RISKS. Our operations in Israel are
subject to several potential political, military and economic risks. See above -
Item 3. Key Information - Risk Factors - Risks Related to our Israeli
Operations.

         TRADE AGREEMENTS

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

         Israel and the European Community are parties to a Free Trade Agreement
that provides some advantages for Israeli exports to most European countries and
requires Israel to lower its tariffs on imports from these countries over a
number of years. Israel and the United States entered into an agreement to
establish a Free Trade Area that eliminates tariff and some non-tariff barriers
on most trade



                                       47
<PAGE>

between the two countries. An agreement between Israel and the European Free
Trade Association, which includes Austria, Norway, Finland, Sweden, Switzerland,
Iceland and Liechtenstein, established a free-trade zone between Israel and
those nations.

         CHIEF SCIENTIST FUNDING

         The Government of Israel, through the OCS, encourages research and
development projects oriented towards export products and participates in the
funding of such projects.

         Under the terms currently applying to OCS funding, companies receiving
funding must pay the Israeli Government a royalty of usually 2% to 5% of the
sales of products developed from a project funded by the OCS. These payments
start with the beginning of sales of such products and typically end when 100%
of the dollar value of the grant is repaid. For grants provided starting in
1999, the recipient must also pay interest payments to the OCS on the amount of
the grant. The annual interest payment rate is LIBOR. The terms of Israeli
Government participation also require that the manufacture of products developed
with government grants be performed in Israel, unless a special approval has
been granted. Separate Israeli Government consent is required to transfer to
third parties technologies developed through projects in which the Government
participates.

         In 2002, El-Op reached agreement with the OCS to join an OCS initiative
applicable to large, research and development intensive Israeli companies. This
initiative allows participating companies to receive OCS funding for generic
research and development without the need for payment of future royalties.
However, as a condition to joining the initiative, companies are required to
reach agreement with the OCS on an unconditional prepayment for existing OCS
funded programs in exchange for a release by the OCS from all obligations. Under
El-Op's agreement with the OCS, El-Op is paying $10.6 million over a five-year
period beginning in 2002 in exchange for a release of El-Op's obligations to pay
further royalties.

         ISRAELI LABOR LAWS. Our employees in Israel are subject to Israeli
labor laws. Some employees are also affected by some provisions of collective
bargaining agreements between the Histadrut - General Federation of Labor in
Israel and the Coordination Bureau of Economic Organizations, which includes the
Industrialists' Association. These labor laws and collective bargaining
provisions mainly concern the length of the work day, minimum daily wages for
professional workers, insurance for work-related accidents, procedures for
dismissing certain employees, determination of severance pay and other
conditions of employment.

         SEVERANCE PAY. Under Israeli law, our Israeli companies are required to
make severance payments to terminated Israeli employees, other than in some
cases of termination for cause. The severance reserve is calculated based on the
employee's last salary and period of employment. The severance pay and pension
obligation is discharged by payment of premiums to insurance companies under
approved plans and to pension funds. The balance of the severance liability not
covered by these deposits is recorded as a liability on the balance sheet. The
deposits presented in the balance sheet include profits accumulated to the
balance sheet date. The amounts deposited may be withdrawn only after
fulfillment of the obligations under the Israeli laws relating to severance pay.

         NATIONAL INSURANCE INSTITUTE. Israeli employees and employers are
required to pay predetermined sums to the National Insurance Institute, which is
similar to the U.S. Social Security Administration. These amounts also include
payments for national health insurance. The payments to the



                                       48
<PAGE>

National Insurance Institute are equal to approximately 14.6% of wages. The
employee contributes approximately 66% and the employer contributes
approximately 34%.


       ENFORCEMENT OF JUDGMENTS

       Israeli courts may enforce U.S. and other foreign jurisdiction final
executory judgments for liquidated amounts in civil matters, obtained after due
process before a court of competent jurisdiction. This enforcement is made
according to the private international law rules currently applicable in Israel,
which recognize and enforce similar Israeli judgments, provided that:

       o    adequate service of process has been made and the defendant has
            had a reasonable opportunity to be heard;

       o    the judgment and its enforcement are not contrary to the law,
            public policy, security or sovereignty of the State of Israel;

       o    the judgment was not obtained by fraud and does not conflict with
            any other valid judgment in the same matter between the same
            parties;

       o    an action between the same parties in the same matter is not
            pending in any Israeli court at the time the lawsuit is
            instituted in the foreign court; and

       o    the judgment is no longer subject to a right of appeal.

       Foreign judgments enforced by Israeli courts generally will be payable in
Israeli currency. The usual practice in Israel in an action to recover an amount
in a non-Israeli currency is for the Israeli court to provide for payment of the
equivalent amount in Israeli currency at the exchange rate in effect on the
judgment date. Under existing Israeli law, a foreign judgment payable in foreign
currency may be paid in Israeli currency at the foreign currency's exchange rate
on the payment date or in foreign currency. Until collection, an Israeli court
judgment stated in Israeli currency will ordinarily be linked to the Israeli
Consumer Price Index (CPI) plus interest at the annual rate (set by Israeli
regulations) in effect at that time. Judgment creditors must bear the risk of
unfavorable exchange rates.












                                       49
<PAGE>




ITEM 5.     OPERATING FINANCIAL REVIEW AND PROSPECTS -
            MANAGEMENT'S DISCUSSION AND ANALYSIS

         The following discussion and analysis should be read together with
Elbit Systems' audited consolidated financial statements and notes appearing in
Item 18 below.


GENERAL

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

         For a description of our significant accounting policies see below -
Item 18. Financial Statements - Note 2 (Significant Accounting Policies).

         Our results of operations and financial condition are based on the
preparation of consolidated financial statements in conformity with U.S. GAAP.
The preparation of the consolidated financial statements requires management to
select accounting policies for critical accounting areas as well as estimates
and assumptions that affect the amounts reported in the financial statements.
Significant changes in assumptions or conditions and changes in critical
accounting policies could materially impact our operating results and financial
condition.

         We believe our most critical accounting policy relates to revenue
recognition based on SOP 81-1 "Accounting for Performance of Construction Type
and Certain Production Type Contracts," which is relevant to most of our
revenues.

         Under SOP 81-1, we adopted the "percentage of completion" accounting
method. Under this method, we recognize revenues and profits on long-term fixed
price contracts generally based on the ratio of costs incurred to estimates of
costs to be incurred for the total contract. Under this approach, we compare
estimated costs to complete an entire contract to total revenues for the term of
the contract to arrive at an estimated gross margin percentage for each
contract. The updated estimated gross margin percentage is applied, and the
current period gross profit is the difference between the cumulative earned
gross profit and the gross profit reported for the prior period.

         Management reviews these estimates periodically, and the effect of any
change in the estimated gross margin percentage for a contract is reflected in
cost of sales in the period in which the change becomes known. If increases in
projected costs to complete are sufficient to create a loss in completing the
contract, the entire estimated loss is charged to operations in the period the
loss first becomes known.

         A number of internal and external factors affect our cost estimates,
including labor rates, estimated future material prices, revised estimates of
uncompleted work, efficiency variances, linkage to indices and exchange rates,
customer specifications and testing requirement changes. If any of the above
factors were to change, or if different assumptions were used in the application
of this and other accounting policies, it is likely that materially different
amounts would be reported in our consolidated financial statements.



                                       50
<PAGE>


         IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS

         Consistent with Statement of Financial Accounting Standards (SFAS) No.
142, "Goodwill and Other Intangible Assets," goodwill is not amortized and is
tested at least annually for impairment. According to SFAS 142, an impairment
loss will be recognized when the carrying value of the goodwill is not
recoverable and exceeds its fair value.

         The methods commonly used to value a subsidiary company are the Income,
Market and Cost approaches. Our subsidiaries' fair market value was estimated
using two valuation methodologies: the Income Approach and the Market Approach.

         As of December 31, 2003, our goodwill amounted to $32.6 million. We
tested our goodwill as of December 31, 2003 and concluded that no assessment of
impairment loss was necessary.

         Consistent with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," we evaluate long-lived assets for impairment and
assess their recoverability based upon anticipated future cash flows. As of
December 31, 2003, our long-lived assets amounted to $296.7 million, including
$67.4 million in intangible assets, and we concluded that no impairment loss was
necessary.

         Should future impairment tests we make indicate impairment in the value
of our goodwill or long-lived assets, this may have a material effect on our
financial results in the period in which the impairment is determined.

         NEW ACCOUNTING STANDARDS

         In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of ARB No. 51
(FIN 46). In December 2003, the FASB modified FIN 46 to make certain technical
corrections and address implementation issues that arose. FIN 46 provides a new
framework for identifying Variable Interest Entities (VIEs) and determining when
a company should include the assets, liabilities, non-controlling interests and
results of activities of a VIE in the activities of the company's financial
statements. The provisions of FIN 46 were adopted as of March 31, 2004. Based on
our review to date, the adoption of FIN 46 has not had an effect on our
financial statements.


INVESTMENT IN AFFILIATES, PARTNERSHIP AND OTHER ENTITIES.

         We evaluate investments in affiliates, partnerships and other entities.
When relevant factors indicate an other than temporary decline in the fair value
of these investments below their book values, we adjust the investment to the
estimated fair value. The value of these entities is subject to ongoing changes
resulting from their business conditions. No write offs were required in 2003.


OFF-BALANCE SHEET AND OTHER LONG-TERM ARRANGEMENTS AND COMMITMENTS

         In connection with long-term projects in specific countries, Elbit
Systems and some of our subsidiaries undertook to use their respective best
efforts to make or facilitate purchases or investments in those countries at
certain percentages (typically up to 100%) of the amount of the specific
contract. Our



                                       51
<PAGE>

obligations to make or facilitate third parties making such investments and
purchases are subject to commercial conditions in the local market, usually
without a specific financial penalty. The maximum aggregate undertaking as of
December 31, 2003 amounted to $630 million to be performed over a period of up
to 11 years. See above - Item 4. Information on the Company - Buy-Back.

         Elbit Systems and some of other Israeli subsidiaries partially finance
their research and development expenditures under programs sponsored by the
Office of the Chief Scientist in Israel (OCS) for the support of research and
development activities conducted in Israel. At the time the OCS participations
were received, successful development of the related projects was not assured.
In exchange for OCS participation in the programs, Elbit Systems and the
subsidiaries agreed to pay 2% - 5% of total sales of products developed within
the framework of these programs. The obligation to pay these royalties is
contingent on actual sales of the products. See above - Item 4. Information on
the Company - Conditions in Israel - Chief Scientist Funding.

         Elbit Systems and some of our subsidiaries are also obligated to pay
agreed upon amounts to the IMOD and others on specific sales including sales
resulting from the development of specified technology. See above - Item 4.
Information on the Company - Intellectual Property - Government Rights in Data.

         Future minimum lease commitments of the Group under various
non-cancelable operating lease agreements for premises, motor vehicles and
office equipment as of December 31, 2003 are as follows: $8.5 million for 2004,
$6.2 million for 2005, $5.6 million for 2006, $5.5 million for 2007 and $5.5
million for 2008 and thereafter. See above - Item 4. Information on the Company
- Property, Plant and Equipment.

         We had, as of December 31, 2003, approximately $399.2 million in
guarantees issued on our behalf by banks, mainly in respect of advance payment
and performance guarantees provided in the regular course of business. See above
- Item 4. Information on the Company - Financing Terms.


ACQUISITIONS DURING 2003.

         See above - Item 4. Information on the Company - Recent Acquisitions.


BACKLOG

         Our backlog includes firm orders received from customers for systems,
products and projects that have yet to be completed. Our policy is to include
orders in our backlog only when specific conditions are met. Examples of these
conditions may include, among others, program funding, receipt of advances,
letters of credit and guarantees from customers. As a result, from time to time
we could have unbooked orders in excess of the level of backlog.

         We reduce system and product backlog when revenues for a specific
contract are recognized. We reduce project backlog as delivery or acceptance
occurs or when contract milestones or engineering progress under the long-term
contracts are recognized as achieved. In some cases we reduce project backlog
when costs are incurred. In the unusual event of a contract cancellation, we
would also be required to reduce our backlog accordingly. The method of backlog
recognition used often changes



                                       52
<PAGE>

depending on the particular contract. As of December 31, 2003, we had a backlog
of approximately $1,752 million, of which 63% was for orders outside Israel, as
opposed to $1,689 million, of which 62% was for orders outside of Israel, as of
December 31, 2002. Approximately 80% of our backlog as of December 31, 2003 is
scheduled to be performed during 2004 and 2005. The majority of the 20% balance
is scheduled to be performed in 2006 and 2007. Backlog information and any
comparisons of backlog as of different dates may not necessarily represent an
indication of future sales.


TRENDS

         Trends in the defense electronics and homeland security markets in
which we operate have been impacted by the nature of recent conflicts and
terrorism activities throughout the world. Lessons learned in Operation Iraqi
Freedom, Afghanistan, and the attacks of September 11, 2001, among other events,
have increased the focus of defense forces on low intensity conflicts and
homeland security.

         In the defense electronics market, there is an increasing demand for
products and systems in the areas of C4ISR. Accordingly, while we continue to
perform platform upgrades, more emphasis is being placed on C4ISR, including
information systems, intelligence gathering, situational awareness, precision
guidance, all weather and day/night operations, border and perimeter security,
UAVs, space and satellite based defense capabilities and homeland security
systems. There is also a growing demand for cost effective logistic services and
training. We believe that our core technologies and abilities will enable us to
take advantage of many of these emerging trends, as well as to continue to
participate in the "Current Force" legacy operations of our customers.

         In recent years consolidations in the defense industry have affected
competition. This has decreased the number but increased the relative size and
resources of our competitors. We adapt to evolving market conditions by
adjusting our business strategy to changing defense market conditions. We also
anticipate continued competition in defense markets due to declining defense
budgets in many countries. We believe in our ability to compete on the basis of
our systems development and technological expertise, combat-proven performance
and policy of offering customers overall solutions to technological, operational
and financial needs.



OPERATING RESULTS

IMPACT OF PHANTOM OPTIONS

         The change in Elbit Systems' share price affected our financial results
due to the impact of the employee stock option plan adopted in 2000. The program
was comprised of options for 5 million shares, divided into options to purchase
up to 2.5 million shares and an additional 2.5 million "phantom" options. The
phantom options grant the option holders a number of shares corresponding to the
benefit component of the options exercised, as calculated on the exercise date,
in consideration for their par value only, and are considered as a variable
option plan. The actual number of options granted as of December 31, 2003 was
approximately 4.5 million. As of December 31, 2003, approximately 3.535 million
of these options remained unexercised, of which approximately 2.367 million were
vested. See below - Item 6. Directors, Senior Management and Employees - Share
Ownership - Elbit Systems' Stock Option Plans - Post Merger Plan.



                                       53
<PAGE>

         Under U.S. GAAP, the total compensation is computed periodically
according to the change in the share price and amortized as compensation
expense, or income, based on the vesting period of the options. The effect is
allocated mainly to our cost of goods sold and general and administrative
expenses, with smaller amounts allocated to R&D and sales and marketing
expenses. The amounts of the expenses related to the stock option compensation
are included in the Non-U.S. GAAP disclosure below.

         During 2003, Elbit Systems' share price changed from a TASE closing
price of $16.00 at the end of 2002 to $18.06 at the end of 2003. Since the
phantom stock options are accounted for as part of a variable stock option plan,
the total benefit of unexercised options is re-measured at the end of each
reporting period based on the share price on that date. See below - Item 18.
Financial Statements - Notes 17 D - F (Phantom Share Options). As a result of
this change in the share price, the effect of the share price linked
compensation on the gross profit in 2003 was not material. The price of our
shares may continue to affect net income in the future as long as a substantial
number of phantom options remain unexercised.














                                       54
<PAGE>



SUMMARY OF FINANCIAL RESULTS

         The following table sets forth the consolidated statements of
operations of Elbit Systems and our subsidiaries for the years ended December
31, 2003 and December 31, 2002.

<TABLE>
<CAPTION>
                                                                            For the year
                                                                        ended on December 31
                                                     ---------------------------------------------------------------
                                                                  2003                                2002
                                                     --------------------------           --------------------------
                                                             $            %                      $               %
                                                     --------------   ---------           --------------    --------

<S>                                                         <C>          <C>                   <C>           <C>
Total revenues                                              897,980      100.0                 827,456       100.0
Cost of revenues                                            673,561       75.0                 605,313        73.2
                                                     --------------   ---------           --------------    --------
Gross profit                                                224,419       25.0                 222,143        26.8
                                                     --------------   ---------           --------------    --------

Research and development expenses, net                       54,919        6.1                  57,010         6.9

Marketing and selling expenses                               69,943        7.8                  65,691         7.9

General and administrative expenses                          46,077        5.1                  41,651         5.0
                                                     --------------   ---------           --------------    --------
                                                            170,939       19.0                 164,352        19.9
                                                     --------------   ---------           --------------    --------

Operating  profit                                            53,480        6.0                  57,791         7.0

Financing expenses, net                                      (4,870)      (0.5)                 (3,035)       (0.4)

Other income (expenses), net                                    903        0.1                    (462)       (0.1)
                                                     --------------   ---------           --------------    --------
Income before income taxes                                   49,513        5.5                  54,294         6.6

Provision for income taxes                                   11,334        1.3                   9,348         1.1
                                                     --------------   ---------           --------------    --------
                                                             38,179        4.2                  44,946         5.5
Minority interest
Company's share of income of                                    557        0.1                   (508)       (0.1)
     affiliated entities                                      7,209        0.8                     675         0.1
                                                     --------------   ---------           --------------    --------

Net income                                                   45,945        5.1                  45,113         5.5
                                                      =============   =========           ============      ========

Diluted earnings per share                                     1.14                               1.13
                                                      =============                       ============
Weighted average number of shares
     used in computation                                     40,230                             39,863
                                                      =============                       ============

</TABLE>




                                       55
<PAGE>



NON-U.S. GAAP DISCLOSURE

         The following table sets forth our results of operations excluding the
effect of our phantom stock option plan (phantom plan) in 2003 and 2002, the
non-recurring charge related to the agreement reached by El-Op with the OCS and
the tax adjustment in 2002.

<TABLE>
<CAPTION>
                                                                               For the year
                                                                            ended December 31
                                                           -----------------------------------------------------
                                                                 2003                            2002
                                                           ----------------------  -----------------------------
                                                            $             %               $                 %
                                                           ------------  --------  -----------------  ----------
                                                           (In thousands of U.S. dollars except per share data)

<S>                                                             <C>          <C>             <C>            <C>
GROSS PROFIT AS REPORTED                                        224,419      25.0            222,143        26.8
Non-recurring charge due to OCS agreement                             -         -              9,801         1.2
Non-cash expense (income) related to
phantom plan                                                      2,608       0.3              (509)           -
                                                           ------------  --------  -----------------  ----------
Gross  profit  excluding  phantom plan effect in 2003 and
2002, and non-recurring OCS charge in 2002                      227,027      25.3            231,435        28.0
                                                           ============  ========  =================  ==========

OPERATING  PROFIT AS REPORTED                                    53,480       6.0             57,791         7.0
Non-recurring charge due to OCS agreement                             -         -              9,801         1.2
Non-cash expense (income) related to
phantom plan                                                      4,741       0.5              (926)       (0.1)
                                                           ------------  --------  -----------------  ----------
Operating  profit  excluding  phantom plan effect in 2003
and 2002, and non-recurring  OCS charge in 2002                  58,221       6.5             66,666         8.1
                                                           ============  ========  =================  ==========

NET EARNINGS AS REPORTED                                         45,945       5.1             45,113         5.5

Non-recurring charge due to OCS agreement, net                        -         -              7,840         0.9
Tax adjustment                                                        -         -            (2,800)        (0.3)

Non-cash expense (income) related to
phantom plan, net                                                 3,793       0.4              (741)       (0.1)
                                                           ------------  --------  -----------------  ----------
Net  earnings  excluding  phantom plan effect in 2003 and
2002, non-recurring OCS charge and tax adjustment in 2002        49,738       5.5             49,412         6.0
                                                           ============  ========  =================  ==========

DILUTED EARNINGS PER SHARE AS REPORTED                             1.14                         1.13

Diluted earnings per share excluding  phantom plan effect
in  2003  and  2002,  non-recurring  OCS  charge  and tax
adjustment in 2002                                                 1.24                         1.24
                                                           ============            =================
</TABLE>


                                       56
<PAGE>

2003 COMPARED TO 2002

REVENUES

         Our consolidated revenues increased by 8.5%, from $827.5 million in
2002 to $898.0 million in 2003.

         Our revenues generated by groups of areas of operations in 2002 and
2003 was as follows:

<TABLE>
<CAPTION>
                                                                                           Year ended
                                                                   ---------------------------------------------------------
                                                                         December 31, 2003            December 31, 2002
                                                                   ------------------------      ---------------------------
                                                                   $ millions           %           $ millions           %
<S>                                                                    <C>            <C>              <C>             <C>
            Airborne systems                                           373.6          41.6             372.8           45.1
            Land vehicle systems                                       199.8          22.2             135.7           16.4
            C4ISR systems                                              133.9          14.9             122.7           14.8
            Electro-optics systems                                     140.5          15.7             148.2           17.9
            Other  (mainly non-defense
            engineering and production services)                        50.2           5.6              48.1            5.8
                                                                        ----           ---              ----            ---
            Total                                                      898.0         100.0             827.5          100.0
                                                                       =====         =====             =====          =====

</TABLE>
         We maintained our revenue from airborne systems projects, resulting
mainly from upgrade programs in their final stages and newer projects in Brazil
and other countries. Revenues also included new programs in the U.S. (F-16 and
others). The increase in the land vehicle systems revenues of approximately 47%
was mainly due to revenues from the major projects Elbit Systems and our
subsidiaries performed in Israel (Merkava), and in the U.S. (Bradley and MLRS).

         The geographic breakdown of revenues in 2002 and 2003 was as follows::


<TABLE>
<CAPTION>
                                                                                           Year ended
                                                                   ---------------------------------------------------------
                                                                         December 31, 2003            December 31, 2002
                                                                   ------------------------      ---------------------------
                                                                   $ millions           %           $ millions           %
<S>                                                                   <C>            <C>             <C>             <C>
                  Israel                                              255.7          28.5            225.7           27.3
                  United States                                       332.3          37.0            267.7           32.3
                  Europe                                              109.4          12.2            144.9           17.5
                  Other countries                                     200.5          22.3            189.2           22.9
                                                                      -----          ----            -----           ----
                  Total                                               898.0         100.0            827.5          100.0
                                                                      =====         =====            =====          =====

</TABLE>

         Our sales are mainly to governmental entities and prime contractors
under government defense programs, subjecting the level of our revenues to
governmental budgetary constraints.



                                       57
<PAGE>

         Revenues are generated mainly from sales to the United States, Israel
and countries in Europe, Latin America and Asia. The recent economic situation
in Israel has created uncertainty with respect to the Israeli Government general
and defense budgets. Revenues from customers in the United States increased by
24%, from $267.7 million to $332.3 million. Revenues also increased in other
countries, mainly in Latin America and Asia, while revenues in Europe declined
as deliveries under some major programs entered final phases. The IMOD accounted
for 18% of our revenues in 2002 and 21% in 2003 and was the only customer to
exceed 10% of our revenues in those years.

GROSS PROFIT

         Our gross profit represents the aggregate results of our activities and
projects and is based on the mix of programs in which we engaged during the
reported period. Reported gross profit in 2003 was $224.4 million (with a gross
profit margin of 25.0%) as compared to $222.1 million (gross profit margin of
26.8%) in 2002.

         Our cost of goods sold in the year ended December 31, 2003 included
$2.6 million in non-cash expenses resulting from our phantom option plan, as
compared to income of $0.5 million in the year ended December 31, 2002.
Excluding non-cash expenses related to our phantom option plan, gross profit in
the year ended December 31, 2003 was $227.0 million, or 25.3% of revenues.
Excluding the non-recurring charge under the OCS agreement and the phantom
option plan effect, gross profit in the year ended December 31, 2002 was $231.4
million, or 28% of revenues.

         The reduction in gross profit margin resulted mainly from our ongoing
involvement in significant engineering projects that required investment of
increased time and costs in order to achieve project milestones. These projects
represent cutting edge technology and were mainly in the areas of aerial
reconnaissance, space-based electro-optic payloads and advanced airborne
systems. In addition, our gross profit in 2003 was negatively impacted by the
increase in the value of the NIS against the U.S. dollar. See ""Impact of
Inflation and Exchange Rates - Inflation and Devaluation" below.

         Despite the decrease in our gross profit margin in the fourth quarter
of 2003, we believe that our average annual gross profit margin for 2004 will
not be materially different from our annual gross profit margin in 2003, with
possible quarterly variations.

RESEARCH AND DEVELOPMENT (R&D)

         We continually invest in R&D in order to maintain and further advance
our technologies, in accordance with a long-term plan, based on our estimate of
future market needs. Our R&D activities in the reported period were in
accordance with our plans. Some of these activities are coordinated with, and
partially funded by, third parties, including the IMOD and the OCS. These
programs were mainly in the areas of advanced airborne systems, cutting edge
electro-optics technology and products for surveillance, aerial reconnaissance,
lasers and space based sensors. We experienced increased IMOD and OCS
participation in these programs.

         Gross R&D expenses in 2003 totaled $65.5 million (7.3% of revenues), as
compared with $62.6 million (7.6% of revenues) in 2002. Net R&D expenses (after
deduction of third party participation, including the IMOD and the OCS) in 2003
totaled $54.9 million (6.1% of revenues), as compared to $57.0 million (6.9% of
revenues) in 2002.



                                       58
<PAGE>

MARKETING AND SELLING EXPENSES

         We invest significantly in developing new markets and pursue at any
given time various business opportunities. The continued investment in
developing new business opportunities, as well as the increasing length of time
required for marketing efforts until orders are received, impact our marketing
and selling expenses.

         Marketing and selling expenses in 2003 were $69.9 million (7.8% of
revenues), as compared to $65.7 million (7.9% of revenues) in 2002. Excluding
the phantom option plan non-cash expenses in 2003, marketing and selling
expenses in the year ended December 31, 2003 were $69.2 million (7.7% of
revenues), as compared to $65.8 million and 8.0% of revenues in 2002.

         The increase in these expenses was due mainly to increased marketing
efforts in the U.S. and European markets, in view of identified business
opportunities.

GENERAL AND ADMINISTRATIVE (G&A) EXPENSES

         Reported G&A expenses in 2003 were $46.1 million (5.1% of revenues), as
compared to $41.7 million (5.0% of revenues) in 2002. Excluding the phantom
option plan non-cash expenses in 2003, G&A expenses in the year ended December
31, 2003 were $44.9 million (5.0% of revenues), as compared to $41.9 million and
5.1% of revenues for the year ended December 31, 2002.
         .

         In the second half of 2003, our G&A expenses consolidated for the first
time the expenses related to newly acquired companies (O.I.P. and AD&D). See
above - Item 4. Information on the Company - Recent Acquisitions. Additional
increases in G&A expenses in 2003 compared to 2002 were related to an increase
in insurance expenses and the cost of various audit and control activities,
including expenses related to compliance with the U.S. Sarbanes-Oxley Act of
2002.

OPERATING INCOME

         As a result of all of the above, reported operating income in 2003 was
$53.5 million (6.0% of revenues), as compared to $57.8 million (7.0% of
revenues) in 2002.

         For the year ended December 31, 2003, our operating profit included
$4.7 million in non-cash expenses associated with our phantom option plan, as
compared to an income of $0.9 million in the year ended December 31, 2002.
Excluding non-cash expenses related to the phantom option plan, operating income
totaled $58.2 million (6.5% of revenues) in the year ended December 31, 2003.
Excluding the non-recurring charge under the OCS agreement and the phantom
option plan effect, operating income in the year ended December 31, 2002 was
$66.7 million, or 8.1% of revenues.

FINANCING EXPENSES (NET)

         Net financing expenses in 2003 were $4.9 million, as compared to $3.0
million of net financing expenses in 2002.

         The increase in the net financing expenses during the year ended
December 31, 2003, as compared to the year ended December 31, 2002, resulted
mainly from a higher level of short-term loans from banks, and from the effect
of the devaluation in 2003 of the U.S. dollar against the NIS on NIS denominated
loans.



                                       59
<PAGE>

TAXES ON INCOME

         Our tax rate represents a weighted average of the tax rates to which
the various entities in the Group are subject. The changes in the effective tax
rate are attributable mainly to the mix of the tax rates in the various tax
jurisdictions in which the Group's entities generating the taxable income
operate. Provision for taxes in 2003 was $11.3 million (effective tax rate of
22.9%), as compared to a provision for taxes of $9.3 million (effective tax rate
of 17.2%) in 2002.

         The provision for taxes in 2002 included reduction of tax expenses in
the amount of $2.8 million that was made in the third quarter of 2002, due to
adjustment of estimated taxes and completion of tax assessments for prior years
in respect of various Group entities. Excluding the tax reduction mentioned
above, our tax rate for the year 2002 would have been 22.4%.

SHARE IN EARNINGS OF AFFILIATED ENTITIES

         In 2003, we had net income of $7.2 million from our share in earnings
of affiliated entities, as compared to $0.7 million in 2002.

         The affiliated entities in which we hold 50% or less in shares or
voting rights and are therefore not consolidated in our financial statements,
operate mainly in our core business areas, including electro-optics and airborne
systems. The earnings from affiliated entities in 2003 resulted mainly from SCD
and VSI. See above - Item 4. Information on the Company - Principal
Subsidiaries.

NET EARNINGS AND EARNINGS PER SHARE (EPS)

       Reported net earnings in 2003 were $45.9 million (5.1% of revenues), as
compared to reported net earnings of $45.1 million (5.5% of revenues) in 2002.
Reported fully diluted EPS was $1.14 in 2003, as compared to $1.13 in 2002.

       Excluding the phantom option plan non-cash expenses in 2003, net earnings
in 2003 were $49.7 million (5.5% of revenues) and the fully diluted EPS was
$1.24. Excluding the non-recurring charge under the OCS agreement, the phantom
option plan effect and the tax adjustment, net earnings in 2002 were $49.4
million (6% of revenues) and the fully diluted EPS was $1.24.

       The number of shares used for computation of diluted EPS in 2003 was
40,230 thousand shares, as compared to 39,863 thousand shares in 2002. The
increase in the number of shares used for computation of diluted EPS was due
mainly to the exercise of options by employees during 2003.


2002 COMPARED TO 2001

REVENUES

         Our revenues increased from $764.5 million in 2001 to $827.5 million in
2002.



                                       60
<PAGE>

         Our revenues generated by groups of areas of operations in 2001 and
2002 were as follows:

<TABLE>
<CAPTION>
                                                                2001                     2002
                                                                ----                     ----
                                                                  (U.S. dollars in millions)

<S>                                                           <C>                       <C>
         Airborne systems                                     334.2                     372.8
         Land vehicles systems                                126.3                     135.7
         C4ISR systems                                        105.8                     122.7
         Electro-optics systems                               162.7                     148.2
         Other (mainly non-defense engineering and
         production services                                   35.5                      48.1
                                                               ----                      ----
           Total                                              764.5                     827.5
                                                              =====                     =====
</TABLE>

         Revenues increased in 2002 mainly in airborne systems, which increased
by $38.6 million and in C4ISR systems, which increased by $16.9 million.

         The geographic breakdown of revenues in 2001 and 2002 was as follows:

<TABLE>
<CAPTION>
                                                                  2001                   2002
                                                                  ----                   ----

<S>                                                              <C>                       <C>
         Israel                                                  30%                       27%
         United States                                           27%                       32%
         Europe                                                  23%                       18%
         Other countries                                         20%                       23%
</TABLE>

         Revenues in the United States increased by 29.6%, from $206.6 million
to $267.7 million. Revenues also increased in other countries, mainly in Latin
America and Asia, while revenues in Europe declined as deliveries under some
major programs entered final phases. In Israel, we were able to maintain our
revenue level in 2002, despite of the budgetary pressures faced by the IMOD.

GROSS PROFIT

         Reported gross profit in 2002 was $222.1 million (gross profit margin
of 26.8%) as compared to $210.5 million (gross profit margin of 27.5%) in 2001.

         Gross profit included $9.8 million of non-recurring charges related to
El-Op's program with the OCS in 2002, and $0.8 million of goodwill amortization
in 2001. Excluding these charges, the gross profit and gross profit margin in
2002 were $231.9 million and 28.0%, respectively, as compared to $211.3 million
and 27.6%, respectively in 2001. Gross profit in 2001 included expenses of $2.9
million related to Elbit Systems' share price linked compensation costs. The
effect of the share price linked compensation on the gross profit in 2002 was
not material. Our gross profit for 2002 was also affected by the write-off in
the amount of approximately $6.3 million in the second quarter of 2002 relating
to Cyclone's project with Dornier.



                                       61
<PAGE>

R&D

         Gross R&D expenses in 2002 totaled $62.6 million (7.6% of revenues), as
compared with $67.9 million (8.9% of revenues) in 2001. The decrease in R&D
expenses as a percentage of revenues was caused mainly by a different mix of R&D
work we performed under customer funded and internally funded R&D projects, as
well as a result of our continued efforts to increase the efficiency of our R&D
operations.

         Net R&D expenses (after deduction of the OCS participation) in 2002
totaled $57.0 million (6.9% of revenues), as compared to $58.8 million (7.7% of
revenues) in 2001.

MARKETING AND SELLING EXPENSES

         Marketing and selling expenses in 2002 were $65.7 million (7.9% of
revenues), as compared to $54.9 million (7.2% of revenues) in 2001.

         Our marketing and selling expenses increased in 2002 as compared to
2001 mainly due to the need to invest a higher level of resources in generating
new business and the increased length of time required for marketing efforts
until orders are received. In addition, we continued to invest in expanding into
new markets.

G&A EXPENSES

         Reported G&A expenses in 2002 were $41.7 million (5.0% of revenues), as
compared to $43.2 million (5.7% of revenues) in 2001.

         Due to changes in Elbit Systems' share price in the reported periods,
our G&A expenses included share price linked compensation expenses of $5.2
million in 2001, while in 2002 these expenses were not material. Excluding
goodwill amortization and share price linked compensation, our G&A expenses in
2001 were $36.0 million. In 2001, G&A expenses included amortization of goodwill
of approximately $2.0 million.

         G&A expenses in 2002 included $2.8 million in amortization of
intangible assets related to activities and companies that were not consolidated
in the same period in 2001, including mainly the equity interest in AEL in
Brazil and the business of the Elron Telesoft Government Division in Israel,
which we acquired in the second half of 2001 and in January 2002, respectively.

OPERATING INCOME

         As a result of all of the above, reported operating income in 2002 was
$57.8 million (7.0% of revenues), as compared to $53.7 million (7.0% of
revenues) in 2001.

         Excluding the non-recurring charge related to El-Op's OCS program in
2002 and goodwill amortization in 2001, our operating income and operating
margin in 2002 (as a percentage of revenues) were $67.6 million and 8.2%,
respectively, compared to $56.5 million and 7.4% in the comparable period in
2001. The operating profit in 2001 included share price linked compensation
expenses of $9.1 million. In 2002, we had income related to share price linked
compensation that was not material.




                                       62
<PAGE>

FINANCE EXPENSE (NET)

         Net finance expense in 2002 was $3.0 million, as compared to $2.6
million of net finance expense in 2001.

         The increase in the net finance expense resulted mainly from the
increased financing we required due to the higher level of its revenues,
operating assets and investments.

TAXES ON INCOME

         Provision for taxes for 2002 was approximately $9.3 million, as
compared to a provision for taxes of $11.0 million in 2001. The provision for
taxes in 2002 included reduction of tax expenses in the amount of $2.8 million
that was made in the third quarter of 2002, due to adjustment of estimated taxes
and completion of tax assessments for prior years in respect of various Group
companies.

         Our effective tax rate in 2002 was 17.2%, as compared to 21.2% in 2001.
Excluding the tax reduction mentioned above, our tax rate for 2002 would have
been 22.4%, due mainly to the mix of the tax rates in the various tax
jurisdictions in which the Group's companies generating the taxable income
operate, since our tax rate represents the Group's weighted average tax rate.

EPS

         Reported net earnings in 2002 were $45.1 million (5.5% of revenues), as
compared to reported net earnings of $40.8 million (5.3% of revenues) in 2001.
Reported fully diluted EPS was $1.13 in 2002, as compared to $1.04 in 2001.

         Net earnings in 2002, excluding non-recurring charges related to the
OCS program and prior years tax adjustments, were $50.2 million (6.1% of
revenues), as compared to $40.8 million (5.3% of revenues) in 2001. Excluding
these charges and adjustments, diluted EPS was $1.26 in 2002. Excluding
amortization of goodwill, net earnings and diluted EPS in 2001 were $43.6
million and $1.11, respectively. Net earnings in 2001 included $7.1 million in
expenses related to share price linked compensation. In 2002 we had income
related to share price linked compensation that was not material.

         The number of shares used for computation of diluted EPS in 2002 and
2001 was approximately 39.9 million shares and 39.4 million shares,
respectively. The increase in the number of shares was due mainly to the
exercise of options during the period.



CONDITIONS IN ISRAEL

         For information on how our operating results may be affected by
conditions in Israel see above - Item 3. Key Information - Risks Factors - Risks
Related to Our Israeli Operations; and Item 4. Information on the Company -
Conditions in Israel.



                                       63
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

         Our cash flow is effected by the cumulative cash flow of our various
projects in the reported periods. Project cash flows are affected by the timing
of the receipt of advances and the collection of accounts receivable from
customers. These relate to specific events during the project, while expenses
are ongoing. As a result, our cash flow may vary from a period to another. Our
policy is to invest our cash surplus mainly in interest bearing deposits, in
accordance with our projected needs.

FINANCIAL RESOURCES

         The financial resources available to us include profits, collection of
accounts receivable, advances from customers and Government of Israel programs
such as the OCS and development grants. In addition, Elbit Systems has access to
bank credit lines and financing in Israel and abroad based on our capital,
assets and activities. We also have the possibility of raising funds through
offering of shares to the public from time to time subject to market conditions.
Elbit Systems and some subsidiaries are obligated to meet various financial
covenants set forth in our respective loan and credit agreements. As of May 31,
2004, each of the companies subject to financial covenants were in compliance
with the applicable covenants.

         In 2003, the Controller of the Banks in Israel instituted new
regulations governing lending by Israeli banks to groups of affiliated
borrowers. Under these regulations the banks are limited in their maximum
exposure to groups of affiliated companies under a combined lending ceiling
based on objective and subjective guidelines. As a result, our borrowing
capacity may be limited under certain circumstances, even if we have unused
lines of credit, due to borrowing by companies affiliated with shareholders that
are defined by the Controller of the Banks as our controlling shareholders. In
anticipation of such developments we are developing credit facilities that will
not be affected by the new regulations.

2003 CASH FLOW

         Our net cash flow generated from operating activities in 2003 was $91.4
million. Net cash flow used for investment activities in 2003 was $53.8 million,
which was used mainly for procurement of property, plant and equipment. The
investments were primarily in equipment for the Group's various manufacturing
plants and in buildings constructed at Elbit Systems' facility in Haifa, Israel
and El-Op's site in Rehovot, Israel. We expect to maintain this level of
investments in 2004, in order to increase our production facilities and to
invest in R&D laboratories, manufacturing and testing equipment.

         Net cash flow used for financing activities in 2003 was $37.7 million,
which was used mainly for reduction of long-term loans and dividends payable,
which were partially offset by proceeds from the exercise of share options. On
December 31, 2003, we had total borrowings in the amount of $77.4 million,
including $15.3 million in short-term loans. On December 31, 2003, we had a cash
balance amounting to $76.8 million. As of December 31, 2003, we had working
capital of $198.9 million, our current ratio was 1.52 and our ratio of equity to
total assets was 44%. For further information on the level and maturity of our
borrowings, see below - Item 18. Financial Statements - Note 10 (Short-Term Bank
Credit and Loans) and Note 13 (Long-Term Loans). We believe our working capital
is sufficient to support our current requirements.



                                       64
<PAGE>

MATERIAL COMMITMENTS FOR CAPITAL EXPENDITURES

         We believe that we have adequate sources of funds to meet our material
commitments for capital expenditures for the fiscal year ended December 31, 2003
and the subsequent fiscal year. See above "Financial Resources". Our specific
material commitments for capital expenditures as of December 31, 2003 and May
31, 2004 were approximately $12 million and $8 million respectively. These
commitments were mainly for the new building project in Haifa. See also below -
Item 18. Financial Statements - Consolidated Statements of Cash Flows and Note 8
(Property, Plant and Equipment, Net) to the Financial Statements.

2002 CASH FLOW

         Our net cash flow generated from operating activities in 2002 was
$116.0 million, resulting mainly from net income for the period, receipt of
advances from customers and collection of accounts receivables. The cash inflows
were partially offset, mainly by increase in inventories and payment of trade
payables.

         Net cash flow used for investment activities in 2002 was $51.0 million,
which was used mainly for procurement of property, plant and equipment, as well
as other assets. During 2002, we invested $22.1 million in equipment for our
various manufacturing plants, and $13.2 million in buildings, mainly those being
built at Elbit Systems' site in Haifa, Israel and El-Op's site in Rehovot,
Israel.

         Net cash flow used for financing activities in 2002 was $29.3 million,
which was used mainly for reduction of short and long-term borrowings and
payment of $12.7 million in dividends during 2002. On December 31, 2002, we had
total bank borrowings in the amount of $104.1 million, including $73.2 million
in long-term loans, and $374 million in guarantees issued on our behalf by
banks, mainly as advance payment and performance guarantees in the regular
course of business. On December 31, 2002, we had cash balances amounting to
$77.9 million. As of December 31, 2002, our working capital was $197.6 million,
and our current ratio was 1.54. Our ratio of equity to total assets was 44%.


IMPACT OF INFLATION AND EXCHANGE RATES

FUNCTIONAL CURRENCY

         Our functional currency is the U.S. dollar, which is the currency we
use for most of our consolidated operations. A majority of our sales are made
outside of Israel in non-Israeli currency, mainly U.S. dollars, as are a
majority of our purchases of materials and components. Transactions and balances
originally denominated in U.S. dollars are presented in their original amounts.
Transactions and balances in currencies other than the U.S. dollar are
remeasured in U.S. dollars according to the principles set forth in Statement
No. 52 of the Financial Accounting Standards Board. Exchange gains and losses
arising from remeasurement are reflected in the income statement. Balances
linked to the CPI are stated using the latest index published prior to the
balance sheet date.

MARKET RISKS AND VARIABLE INTEREST RATES

         Market risks relating to our operations result mainly from changes in
interest rates and exchange rates, and we use financial instruments to limit
exposure. We typically enter into forward contracts in connection with
transactions that are denominated in currencies other than U.S. dollars and NIS.
We also enter from time to time into forward contracts related to NIS.



                                       65
<PAGE>

         On December 31, 2003, our liquid assets were comprised of bank
deposits, and we had no investments in liquid equity securities that were
subject to market fluctuations. Our deposits and loans are based on variable
interest rates, and their value as of December 31, 2003 was therefore not
exposed to changes in interest rates. Should interest rates either increase or
decrease, such change may affect our results of operations due to changes in the
cost of our liabilities and the return on our assets that are based on variable
rates.

NIS/U.S. DOLLAR EXCHANGE RATES

         We attempt to manage our financial activities in order to reduce
material financial losses in U.S. dollar terms resulting from the impact of
inflation and exchange rate fluctuations on our non-U.S. dollar assets and
liabilities. Our income and expenses in Israeli currency are translated into
U.S. dollars at the prevailing exchange rates. Consequently, we are affected by
changes in the NIS/U.S. dollar exchange rates. On December 31, 2003, we had
exposure due to NIS denominated liabilities of $44 million in excess of NIS
denominated assets. These liabilities represent mostly provisions for wages and
trade payables. The amount of our exposure to the changes in the NIS/U.S. dollar
exchange rate may vary from time to time. In order to hedge against certain
expected NIS payments, we entered into forward contracts. On December 31, 2003,
we had hedging contracts covering NIS exposure in the amount of $25 million.

INFLATION AND DEVALUATION

         The U.S. dollar cost of our operations in Israel is influenced by any
increase in the rate of inflation in Israel that is not fully offset by the
devaluation of the NIS in relation to the U.S. dollar. Unless inflation in
Israel is offset by a devaluation of the NIS, it may have a negative effect on
the profitability of contracts where Elbit Systems or any of our Israeli
subsidiaries receives payment in U.S. dollars, NIS linked to U.S. dollars or
other foreign currencies, but incurs expenses in NIS linked to the CPI.
Inflation in Israel and currency fluctuations may also have a negative effect on
the profitability of fixed price contracts where we receive payments in NIS.

         In the past, our profitability was somewhat negatively affected when
inflation in Israel exceeded the devaluation of the NIS against the U.S. dollar
and at the same time we experienced corresponding increases in the U.S. dollar
cost of our operations in Israel. For example, in 1999 the rate of inflation was
approximately 1.3% and the rate of devaluation was -0.2%. In 2000, the rate of
inflation was approximately 0% and the devaluation rate was -2.7%. In 2001 the
inflation rate was approximately 1.4% and the devaluation rate was 9.3%. In
2002, the inflation rate was approximately 6.5% and the devaluation rate was
7.3%. In 2003, the inflation rate was approximately negative 1.9% and the
devaluation rate was negative 7.6%. There can be no assurance that we will not
be materially adversely affected in the future if inflation in Israel exceeds
the devaluation of the NIS against the U.S. dollar or if the timing of such
devaluation lags behind increases in inflation in Israel.

         A devaluation of the NIS in relation to the U.S. dollar also has the
effect of decreasing the dollar value of any of our assets that consist of NIS
or accounts receivable denominated in NIS, unless such accounts receivable are
linked to the U.S. dollar. Such a devaluation also has the effect of reducing
the U.S. dollar amount of any of our liabilities that are payable in NIS, unless
such payables are linked to the U.S. dollar. On the other hand, any increase in
the value of the NIS in relation to the U.S. dollar will have the effect of
increasing the U.S. dollar value of any unlinked NIS assets as well as the U.S.
dollar amount of any unlinked NIS liabilities and expenses.



                                       66
<PAGE>

FOREIGN CURRENCY EXPENSES

         While our functional currency is the U.S. dollar, we also have some
non-U.S. dollar or non-U.S. dollar linked currency exposure for currencies other
than NIS. These are mainly non-U.S. dollar customer debts, payments to suppliers
and subcontractors, obligations in other currencies, assets or undertakings.
Some subcontractors are paid in local currency under prime contracts where we
are paid in U.S. dollars. The exposure on these transactions has not been in
amounts that are material to Elbit Systems. However, when we view it necessary,
we seek to minimize our foreign currency exposure, by entering into hedging
arrangements, obtaining periodic payments upon the completion of milestones,
obtaining guarantees and security from customers and sharing currency risks with
subcontractors. Gains and losses on forward exchange contracts entered as hedges
are recognized currently.

         Most of our assets and liabilities that are denominated in currencies
other than the NIS and the U.S. dollar were covered as of December 31, 2003 by
financial instruments (mostly forward contracts). On December 31, 2003, we had
contracts for the sale and purchase of such foreign currencies totaling $26.5
million. The results of financial derivative activities were not material.

         We conduct activities in a number of the countries that have adopted
the European Monitory Unit (EURO). To date, the transition to the use of the
EURO in the relevant countries has not resulted in a material exposure to us.

CONTRACTUAL OBLIGATIONS

<TABLE>
<CAPTION>
                                                          PAYMENTS DUE BY PERIOD
                                                          ----------------------
                                                         (U.S. dollars in millions)

                                               LESS THAN                                     MORE THAN
                                                 1 YEAR        1-3 YEARS      3-5 YEARS       5 YEARS
<C>                                                 <C>           <C>            <C>              <C>
1.       Long-Term Debt                             $6.8          $58.8          $0.3             $2.9
2.       Capital Lease Obligations                    --             --            --               --
3.       Operating Leases                            8.5           11.7          10.9              5.4
4.       Purchase Obligations                      214.3          129.4           4.3              0.4
5.       Other Long-Term Liabilities
         Reflected on the Issuer's Balance            --             --            --               --
         Sheet Under GAAP*
         Total                                    $229.6         $199.9         $15.5             $8.7
                                                  ======         ======         =====             ====

</TABLE>
    * See above - Item 4. Information on the Company - Buy-Back.


OFF-BALANCE SHEET TRANSACTIONS

         See above "General - Off-Balance Sheet and Other Long-Term Arrangements
and Commitments." Also shareholders in one of our subsidiaries have a put
option. See above - Item 4. Information on the Company - Principal Subsidiaries
- Kinetics.



                                       67
<PAGE>



ITEM 6.     DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.


DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of Elbit Systems as of May 31,
2004 are as follows:

BOARD OF DIRECTORS

NAME                                          AGE           DIRECTOR SINCE
----                                          ---           --------------

Michael Federmann (Chairman)                  61            2000
Joseph Ackerman                               55            1996
Avraham Asheri                                66            2000
Rina Baum                                     59            2001
Aharon Beth-Halachmi                          68            2000
Doron Birger                                  53            2002
Ami Erel                                      57            1999
Avi Fischer                                   47            2003
Yaacov Lifshitz (External Director)           60            2003
Dov Ninveh                                    57            2000
Nathan Sharony (External Director)            69            2002


         The term of office of each director, other than the External Directors,
expires at the annual general shareholders meeting to be held during 2004. The
term of office for Natty Sharony as an External Director expires in March 2005
and for Yaacov Lifshitz as an External Director in July 2006.

EXECUTIVE OFFICERS

NAME                   AGE      POSITION

Joseph Ackerman        55       President, Chief Executive Officer and Director
David Block Temin      49       Corporate Vice President and General Counsel
Itzhak Dvir            56       Corporate Vice President and Chief Operating
                                Officer
Jacob Gadot            57       Corporate Vice President and Chief Technology
                                Officer
Ran Galli              55       Corporate Vice President - Major Campaigns
Joseph Gaspar          56       Corporate Vice President and Chief Financial
                                Officer
Zeev Gofer             52       Corporate Vice President - Business Development
                                and Marketing
Dalia Gonen            52       Vice President - Human Resources
Ran Hellerstein        53       Corporate Vice President and Co-General Manager
                                - Airborne and Helmet Systems


                                       68
<PAGE>

Haim Kellerman         50       Corporate Vice President and General Manager -
                                UAV Integrated Systems
Bezhalel Machlis       41       Corporate Vice President and General Manager
                                 - Land Systems and C4I
Ilan Pacholder         49       Corporate Secretary and Vice President - Finance
                                and Capital Markets
Marco Rosenthal        57       Corporate Vice President - Manufacturing and
                                Purchasing
Haim Rousso            58       Corporate  Vice  President and General Manager -
                                El-Op
Gideon Sheffer         55       Corporate Vice President - Strategic Planning
Yoram Shmuely          44       Corporate Vice President and Co-General Manager
                                - Airborne and Helmet Systems
Timothy Taylor         52       President and Chief Executive Officer - EFW

         MICHAEL FEDERMANN. Michael Federmann has served as Chairman of the
Board of Directors since the El-Op Merger in 2000. He served as Chairman of the
Board of Directors of El-Op from 1988 until the Merger. He has held managerial
positions in the Federmann Group since 1969, and since 2002 he has served as
Chairman and CEO of Federmann Enterprises Ltd. Currently, he also serves as
Chairman of the Board of Directors of Dan Hotels Corp. Ltd. (Dan Hotels). Mr.
Federmann is Deputy Chairman of the Board of Governors of the Hebrew University
in Jerusalem (the Hebrew University) and a member of the Board of Governors and
the Executive Committee of the Weizmann Institute of Science. Mr. Federmann
holds a bachelor's degree in economics and political science from the Hebrew
University.

         JOSEPH ACKERMAN. Joseph Ackerman was appointed as President and Chief
Executive Officer in 1996. From 1994 to 1996, he served as Senior Vice President
and General Manager of Elbit Ltd.'s Defense Systems Division (EDS). Mr. Ackerman
joined Elbit Ltd. in 1982 and held various management positions, including
General Manager - EFW, Senior Vice President - Operations Group, Vice President
- Operations and Vice President - Advanced Battlefield Systems. Mr. Ackerman
holds a bachelor of science degree in aeronautical engineering from the Israel
Institute of Technology (the Technion).

         AVRAHAM ASHERI. Avraham Asheri has served as an economic advisor and a
director of several companies since 1998. He currently serves on the boards of
directors of Elron Electronic Industries Ltd. (Elron), Discount Mortgage Bank
Ltd., Kardan Nadlan Ltd., Scitex Corporation Ltd. (Scitex), Africa Israel
Investment Ltd. and Meditor Pharmaceuticals Ltd. Mr. Asheri was President and
Chief Executive Officer of Israel Discount Bank from 1991 until 1998, and
Executive Vice President and member of its management committee from 1983. Prior
to that, he served for 23 years at the Israel Ministry of Industry and Trade and
at the Israel Ministry of Finance, including as Director General of the Israel
Ministry of Industry and Trade, Managing Director of the Israel Investment
Center and Trade Commissioner of Israel to the United States. Mr. Asheri holds a
bachelor's degree in economics and political science from the Hebrew University.

         RINA BAUM. Rina Baum is Vice President for Investments of Federmann
Enterprises and since 1986 has served as Director and General Manager of Unico
Investment Company Ltd. She serves as a director of Dan Hotels and Harel Mutual
Funds Ltd. During 1995 to 1996, she served as a director of Leumi Mortgage Bank
Ltd. Mrs. Baum holds an L.L.B. degree from the Hebrew University.



                                       69
<PAGE>

         AHARON BETH-HALACHMI. Aharon Beth-Halachmi has served as President of
Federmann Enterprises - Division of Industries and Technologies since 1985 and
as President of Eurofund L.P. - Venture Capital Fund since 1994. He served as a
director of El-Op from 1985 until 2000. From 1983 to 1985, he served as
President of Tahal Engineering Co. Ltd. From 1982 to 1983, he was Director
General of the IMOD. Prior to that he served in the IDF, including as head of
Defense Research and Development from 1977 to 1982. He retired with the rank of
Brigadier General. Mr. Beth-Halachmi holds a bachelor of science degree in
electronic engineering from the Technion and a master of science degree in
computer science from the Naval Postgraduate School in Monterey, California.

         DORON BIRGER. Doron Birger has served as Chief Executive Officer of
Elron since 2002 and as President of Elron since 2001. He joined Elron in 1994
as Vice President - Finance and served as Chief Financial Officer and Corporate
Secretary. Prior to that he served as Chief Financial Officer for a number of
companies including North Hills Electronics Ltd., Middle-East Pipes Ltd.,
Maquette Ltd., Bateman Engineering Ltd. and I.D.C. Industrial Development
Company Ltd. Mr. Birger is Chairman of Given Imaging Ltd. and ChipX Incorporated
and serves as a director in several other companies in the Elron group. Mr.
Birger holds bachelor and master of arts degrees in economics from the Hebrew
University.

         AMI EREL. Ami Erel has served as President and Chief Executive Officer
of DIC since 2001. In addition, he has served as Chairman of the Board of
Directors of Elron since 1999. From 1999 until 2001, he was Chief Executive
Officer of Elron. He served as Chairman of the Board of Directors of Elbit
Systems from 1999 until the Merger in 2000. From 1997 to 1999, he served as
President and Chief Executive Officer of Bezeq - The Israel Telecommunications
Corp. Ltd. and as Chairman of the Board of Directors of PelePhone Communications
Ltd. from 1997 to 1998. He is Chairman of the Board of Scitex, a director of
Property and Building Corporation Ltd. ,Super-Sol Ltd. and Ham-let (Israel
Canada) Ltd., as well as Chairman or a member of the boards of other companies
in the DIC group and the Elron group. From 2000 until January 2004, Mr. Erel
served as the Chairman of the Board of the Israel Association of Electronic and
Information Industries. Mr. Erel holds a bachelors of science degree in
electrical engineering from the Technion.

         AVI FISCHER. Avi Fischer has served as the Deputy Chairman of the
I.D.B. Group and as the Co-CEO of Clal Industries & Investments Ltd. (Clal)
since mid- 2003. Mr. Fischer is a co-founder of the Ganden Group and has served
as the Co-Chairman of Ganden Tourism and Aviation Ltd. and as the Vice Chairman
of Ganden Holding Ltd. since 1999. He has practiced law since 1983 and is a
Co-Managing Partner in the law firm of Fischer, Behar, Chen & Co. He currently
serves on the boards of directors of IDBH, DIC, Clal, Scitex, Elron, Vyyo Inc.,
Natour Ltd. and other companies. Mr. Fischer holds an L.L.B. degree from
Tel-Aviv University.

         YAACOV LIFSHITZ (EXTERNAL DIRECTOR). Mr. Lifshitz serves as a director
of several companies and as a lecturer in the fields of economics, public policy
and management. He currently is a lecturer at the Department of Economics and
the Department of Public Policy and Management of Ben-Gurion University and at
the Department of Economics and Management of the Tel-Aviv - Jaffa Academic
College. He also currently serves on the boards of directors of Israel Discount
Bank, DorGas Ltd., Kali - Insurance Agencies Ltd., Springs - Pension Fund
Management Ltd., Carmel Investments Ltd. and Tesnet Software Testing Ltd. During
the period from 1994 to 2002, Mr. Lifshitz served at various times as the
chairman of the boards of directors of Hamashbir Lazarchan Israel Ltd., Israel
Military Industries Ltd., Spectronix Ltd., Dor Chemicals Ltd., Dor Energy Ltd.,
DorGas Ltd. and the Israeli Foreign Trade Risk Insurance Corp. Ltd. He also
served from 1995 to 2002 as the Chairman of the Executive Board of the Israel
Management Center. Prior to that he held various senior positions in government,
banking and



                                       70
<PAGE>

industry, including Director General of the Israel Ministry of Finance, Chief
Economic Advisor to the Israel Ministry of Defense, Senior Vice President and
Chief Credit Officer of Israel Discount Bank and President and CEO of Electra
(Israel) Ltd. Mr. Lifshitz holds a bachelor's degree in economics and political
science and a master's degree in economics from the Hebrew University.

         DOV NINVEH. Dov Ninveh has served since 1994 as Chief Financial Officer
and a manager in Federmann Enterprises. He serves as a director of Dan Hotels
and Etanit Ltd. Mr. Ninveh served as a director of El-Op from 1996 until 2000.
From 1989 to 1994, he served as Deputy General Manager of Etanit Building
Products Ltd. Mr. Ninveh holds a bachelor's degree in economics and management
from the Technion.

         NATHAN SHARONY (EXTERNAL DIRECTOR). Nathan Sharony has served since
1997 as a director for several companies. He currently serves as a director for
Technorov Holdings (1993) Ltd. (Technorov), a high technology investment
company, Bituach Yashir Ltd., Union Bank, Ormat Industries Ltd., Genoa
Technologies Ltd. and Israel Bonds International Inc. From 1997 to 1999, he
served as Chairman of Technorov. From 1994 to 1997, he was employed with a U.S.
brokerage firm. Mr. Sharony served as the Director General of the Israel
Ministry of Industry and Trade from 1992 to 1994. Prior to that, Mr. Sharony
held a number of positions in industry and government including head of the
Israeli Government Economic Mission to the U.S., President and Chief Executive
Officer of El-Op and Vice President for Logistics of Tadiran Electronic Industry
Ltd. In 1982, Mr. Sharony completed 30 years of service in the IDF, retiring
with the rank of Major General. Mr. Sharony participated in the Field Artillery
Battle Officers Course in Fort Sill, Oklahoma, and studied military history at
the IDF's Staff and Command College.

         DAVID BLOCK TEMIN. David Block Temin was appointed Corporate Vice
President in 2000 and has served as General Counsel since 1996. From 1987 to
1996, he was a Legal Advisor to Elbit Ltd. Prior to that, Mr. Block Temin was an
attorney with law firms in New York City. Mr. Block Temin received a juris
doctor degree as well as a master of arts degree in international relations from
Stanford University and holds a bachelor of arts degree in political science
from the University of Maryland. He is admitted to the Israeli and New York
bars.

         ITZHAK DVIR. Itzhak Dvir was appointed as Chief Operating Officer in
June 2004, effective beginning in July 2004. He was appointed as a Corporate
Vice President in 2000. Mr. Dvir served as General Manager - UAV, Tactical and
Security Systems from January 2003 until his current appointment. From 2000
through 2002, he was General Manager - C4I and Battlefield Systems. From 1996
until 2000, he was Vice President and Division Manager - UAV and C3 Division.
Mr. Dvir joined Elbit Ltd. in 1989 and held various management positions,
including Vice President - UAV Division, Vice President - Advance Battlefield
Systems Division and Marketing Director - Battlefield Systems Division. Prior to
that he served as a career officer in the IAF, retiring with the rank of
Colonel. Mr. Dvir holds a bachelor of science degree in aeronautical engineering
from the Technion and a master of science degree in aeronautical engineering
from the U.S. Air Force Institute of Technology at Wright Patterson Air Force
Base.

         JACOB GADOT. Jacob Gadot was appointed Corporate Vice President -
Mergers and Acquisitions in 2000 and Chief Technology Officer in 2001. He served
as Vice President - Mergers and Acquisitions from 1998 to 2000 and as Vice
President - Business Development from 1996 to 1998. Mr. Gadot joined Elbit Ltd.
in 1983 and held various positions in EDS, including Vice President -
International Marketing and head of the Airborne Division. Prior to that, he
worked for Motorola Israel, after serving for ten years as an officer in the
IAF. Mr. Gadot holds a bachelor of science degree in electrical engineering from
the Technion.



                                       71
<PAGE>

         RAN GALLI. Ran Galli was appointed Corporate Vice President - Major
Campaigns in November 2003. From 1999 until 2003 he served as Corporate Vice
President - Business Development and Marketing. Mr. Galli joined Elbit Systems
in 1997 as Vice President - Business Development. Prior to that, he served as
Corporate Vice President - Business Development and Marketing at Rafael, which
he joined in 1990, after retiring from the IAF with the rank of Colonel. In the
IAF he served as head of Research and Development, following numerous aircraft
program management positions. Mr. Galli holds bachelor and master of science
degrees in aeronautical engineering from the Technion.

         JOSEPH GASPAR. Joseph Gaspar was appointed Corporate Vice President and
Chief Financial Officer in 2001. He served as Corporate Vice President -
Strategy, Technology and Subsidiaries from the El-Op Merger in 2000 until 2001.
From 1996 until the Merger, he held the position of Corporate Vice President,
Marketing and Business Development of the El-Op Group. Mr. Gaspar joined El-Op
in 1975 and held several management positions, including Vice President and
General Manager of El-Op's Optronics Product Division and co-manager of an El-Op
subsidiary in the United States. Mr. Gaspar holds a bachelor of science degree
from the Technion in electronic engineering with advanced studies in digital
signal processing and communication.

         ZEEV GOFER. Zeev Gofer was appointed Corporate Vice President -
Business Development and Marketing in April 2003. He previously served as
Corporate Vice President and as Co-General Manager - Aircraft and Helicopter
Upgrades and Systems from 2000. From 1999 until 2000, he was Vice President -
Aircraft Upgrades and Airborne Systems Division, having served as Division
Manager since 1996. He joined Elbit Ltd. in 1982 and held various management
positions, including Director of EDS' Aircraft Upgrade Division, director of a
major aircraft upgrade program, director of avionics system engineering and
technical manager of the LAVI avionics program. Mr. Gofer holds bachelor and
master of science degrees in electronic engineering from the Technion and a
master of science of management degree from the Polytechnic University of New
York.

         DALIA GONEN. Dalia Gonen was appointed as Vice President - Human
Resources in 2000. She became Director of Human Resources in 1996. Ms. Gonen
joined Elbit Ltd. in 1971 and held various positions in the Human Resources
Department. Ms. Gonen holds a bachelor of arts degree in sociology from Haifa
University and a master of science of management degree from the Polytechnic
University of New York.

         RAN HELLERSTEIN. Ran Hellerstein was appointed Corporate Vice President
and Co-General Manager - Aircraft and Helicopter Upgrades and Systems in 2000
and became co-General Manager - Airborne and Helmet Systems in April 2003. From
1996 until 2000, he served as Vice President - Development and Engineering
Division, having served as Division Manager since 1993. Mr. Hellerstein joined
Elbit Ltd. in 1978 and served in various management positions, including
Director and Division Manager of EDS' Engineering Division, department manager,
technical manager and systems engineer. Mr. Hellerstein holds bachelor and
master of science degrees in electrical engineering from the Technion.

         HAIM KELLERMAN. Haim Kellerman was appointed Corporate Vice President
and General Manager - UAV Integrated Systems in June 2004, effective beginning
in July 2004. From 2002 until his current appointment, Mr. Kellerman was Vice
President - UAV Programs. Prior to that he held various senior program
management positions relating to UAV, C4I and airborne programs. He joined Elbit
Ltd. in 1978. Mr. Kellerman holds a bachelor of science degree in computer
science from the Technion.



                                       72
<PAGE>

         BEZHALEL MACHLIS. Bezhalel Machlis was appointed Corporate Vice
President and General Manager - Land Systems and C4I in January 2004. In 2003,
he served as Corporate Vice President and General Manager - Ground C4I and
Battlefield Systems. From 2000 until December 2002, he served as Vice President
- Battlefield and Information Systems. Mr. Machlis joined Elbit Systems in 1991
and held various management positions in the battlefield and information systems
area. Prior to that, he served as an Artillery Officer in the IDF, where he
holds the rank of Colonel (reserves). Mr. Machlis holds a bachelor of science
degree in mechanical engineering and a bachelor of arts degree in computer
science from the Technion and a MBA from Tel-Aviv University.

         ILAN PACHOLDER. Ilan Pacholder was appointed as Corporate Secretary and
Vice President - Finance and Capital Markets in August 2003. Mr. Pacholder
served as Vice President - Finance from 2001. Mr. Pacholder joined Elbit Ltd. in
1994 and held various senior positions in the Finance Department. Prior to that
he served as the Chief Financial Officer for Sanyo Industries in New York. Mr.
Pacholder worked for Bank Leumi in New York for 10 years and held the position
of Vice President in the international and domestic lending departments. Mr.
Pacholder holds a bachelor of arts degree in accounting and economics from
Queens College in New York and a MBA in finance and investments from Adelphi
University.

         MARCO ROSENTHAL. Marco Rosenthal was appointed Corporate Vice President
- Manufacturing and Purchasing in 2001, having previously served as Vice
President - Operations and General Manager of the Karmiel facility since 1999.
From 1996 to 1999, he served as Vice President - Material. Mr. Rosenthal joined
Elbit Ltd. in 1975 and held various management positions, including Vice
President - Material of EDS and Director of the Sales Department. Mr. Rosenthal
holds a degree in technical engineering from the Technion and a degree in
business management from Haifa University.

         HAIM ROUSSO. Haim Rousso was appointed Corporate Vice President and
General Manager of El-Op following the Merger in 2000. Prior to that, Mr. Rousso
held the position of Corporate Vice President of the El-Op Group and General
Manager of El-Op. He has held various managerial positions in El-Op since 1972.
Mr. Rousso holds bachelor and master of science degrees in electrical
engineering from the Technion.

         GIDEON SHEFFER. Gideon Sheffer joined Elbit Systems in 2001 as
Corporate Vice President - Strategic Planning. Prior to that he served as Acting
Head of Israel's National Security Council and as National Security Advisor to
former Prime Minister Ehud Barak. In 1998, he completed 32 years of service in
the IDF, retiring with the rank of Major General. From 1995 to 1998, he served
on the General Staff as Head of the IDF's Human Resources Branch. Prior to that,
he served as Deputy Commander of the IAF. Mr. Sheffer held a number of command
positions in the IAF after serving as a fighter aircraft and helicopter pilot.
He is a member of the board of directors of Blue Square Ltd. and Tzarfati and
Sons Ltd. Mr. Sheffer holds a bachelor's degree in Israel studies from Bar Ilan
University and is a graduate of Harvard University Business School's Advanced
Management Program.

         YORAM SHMUELY. Yoram Shmuely was appointed Corporate Vice President and
General Manager - Helmet Mounted Systems in 2000 and became Co-General Manager -
Airborne and Helmet Systems in April 2003. From 1998 until 2000, he was Vice
President - Helmet Mounted Systems Division. From its founding in 1996 until
1998, he served as President of VSI. Mr. Shmuely joined Elbit Ltd. in 1990 and
served as director of Elbit Ltd.'s Helmet Mounted Display group. He served as a
fighter aircraft pilot in the IAF. Mr. Shmuely holds a bachelor of science
degree in electronic engineering from the Technion.



                                       73
<PAGE>

         TIMOTHY TAYLOR. Timothy Taylor was appointed President and Chief
Executive Officer of EFW in 2000 after serving as EFW's President and General
Manager since 1997. He joined EFW in 1994 and held the positions of Executive
Vice President and General Manager, Vice President - Strategic Planning and
Business Development and Vice President - Aircraft Systems. A more than 30-year
veteran of the aerospace industry, he previously held various management and
strategic business development positions with Allied Signal Inc. (now Honeywell)
and GEC Marconi Avionics (now BAE Systems). A native of the United Kingdom, he
became a U.S. citizen shortly after joining EFW. Mr. Taylor received an
engineering degree in England


COMPENSATION OF DIRECTORS AND OFFICERS

          The following table sets forth the aggregate compensation paid to all
directors and officers of Elbit Systems as a group, other than the President,
and the President individually, for the fiscal year ended December 31, 2003:


<TABLE>
<CAPTION>
                                         Salaries, Directors' Fees              Pension, Retirement
                                         Commissions and Bonuses(1)             and Similar Benefits
                                         --------------------------             --------------------

<S>                                                   <C>                               <C>
All directors and officers
other than the President
(consisting of 26 persons)                            $3,572,129                        $577,681

President                                              $369,190                          $85,422

</TABLE>


-------------------------
(1)  Directors, besides Joseph Ackerman, are paid in accordance with standard
     fees paid to External Directors in Israel, which currently includes an
     annual fee of $9,920 and a per meeting fee of $381. Such payments are made
     either directly to the director or to his or her employing company. Mr.
     Ackerman does not receive director fees.



BOARD PRACTICES

         APPOINTMENT AND TERMINATION OF DIRECTORS.

         The current members of Elbit Systems' board of directors (Board), other
than Mr. Sharony, an External Director, were appointed at the annual general
meeting of shareholders held in August 2003. Mr. Sharony was appointed at a
general meeting of shareholders in March 2002.



                                       74
<PAGE>

         The employment contract of Elbit Systems' President and Chief Executive
Officer Joseph Ackerman, was originally approved by Elbit Systems' shareholders
in 2000, and an amendment was approved in April 2004. The agreement provides for
severance payments upon termination of his employment. Mr. Ackerman's employment
contract was extended through July 2006 in accordance with its terms. See below
- Item 7. Major Shareholder and Related Party Transactions - Related Party
Transactions - Agreements Relating to the Merger - Shareholders Agreement -
Corporate Governance - President. There are no other service contracts or
similar arrangements with any director that provide for benefits upon
termination of directorship. See below - Item 10. Additional Information -
General Provisions of Israeli Law and Related Provisions - Appointment of
Directors.

         For information on contractual arrangements for appointment of
directors resulting from the Merger, see below Item 7. Major Shareholders and
Related Party Transactions - Agreements Relating to the Merger.


         AUDIT COMMITTEE. Dov Ninveh (chairman), Avraham Asheri, Yaacov Lifshitz
and Nathan Sharony are currently members of the audit committee of the Board
(the Audit Committee). The Audit Committee operates in accordance with an Audit
Committee charter that provides the framework for their oversight functions
consistent with Israeli and U.S. legal and regulatory requirements. See below -
Item 10. Additional Information - General Provisions of Israeli Law and Related
Provisions - Internal Auditor and Audit Committee; Item 16A. Audit Committee -
Financial Expert and Item 16D. Exemptions from Listing Standards for Audit
Committees.


EMPLOYEES

         Most of our employees are based in Israel, and we have a significant
amount of employees in the United States. The total number of employees
worldwide and the number of employees in the U.S. at the end of 2003, 2002 and
2001 were as follows:


                         Total Employees                        U.S. Employees
                         ---------------                        --------------

2003                          5,504                                  1,110
2002                          5,342                                  1,077
2001                          5,040                                  1,040


         Most of our Israeli employees have individual employment contracts.
However, by law some employees receive rights under a number of general
collective bargaining agreements and under Israeli employment laws. See above -
Item 4. Information on the Company - Conditions in Israel - Israeli Labor Laws.
Approximately 500 of El-Op's employees are covered by a collective bargaining
agreement extending through the end of 2004. Union collective bargaining
agreements in effect through December 2004 apply to approximately 200 of
Cyclone's employees. Approximately 160 of EFW's employees in Fort Worth are
subject to union collective bargaining agreements expiring in November 2005. We
believe our overall relationship with our employees is satisfactory.




                                       75
<PAGE>

SHARE OWNERSHIP

ELBIT SYSTEMS' STOCK OPTION PLANS

         Elbit Systems adopted employee stock option plans in 1996 (the 1996
Plan) and following the Merger with El-Op in 2000 (the Post Merger Plan). Under
these Plans, stock options for our ordinary shares were granted to officers and
employees of Elbit Systems and wholly-owned subsidiaries. The Plans are designed
to enable us to attract and retain employees and to link their incentives to the
performance of our ordinary shares. The plans were approved by our Board and
shareholders and are described in prospectuses filed with the Israel Securities
Authority (the ISA), and summaries were filed with the U.S. Securities and
Exchange Commission (the SEC). Although the options themselves are not
transferable or registered for trading, the shares underlying the options
granted under the Plans were registered for trading with the SEC and the ISA.

POST MERGER PLAN

         OPTIONS GRANTED. Under the Post Merger Plan, 5,000,000 options were
authorized to be granted to approximately 800 key employees of Elbit Systems and
wholly-owned subsidiaries. Approximately 4,500,000 of these options were granted
to employees through a trustee in 2000. 400,000 of the options were granted to
Joseph Ackerman, Elbit Systems' President and CEO. No other directors were
granted options, but executive officers other than Mr. Ackerman were granted an
aggregate of 582,000 options under the Post Merger Plan. Approximately 500,000
of the options under the Post Merger Plan were issued to the Plan's trustee in
reserve for future grants to key employees, as determined from time to time by
Elbit Systems' President. As of May 31, 2004, 169,340 of these reserve options
were issued to employees. In addition, options that have lapsed or are canceled
before exercise may be added to the reserve and re-granted under the Post Merger
Plan. The general terms of these options are the same as those for other options
granted under the Post Merger Plan. Half of the options granted to any employee
under the Post Merger Plan are exercisable into one Elbit Systems ordinary share
per option in consideration for the employee's payment to Elbit Systems of the
exercise price.

         PHANTOM OPTIONS. The second half of the options granted to any employee
under the Post Merger Plan is "phantom" options, similar to share appreciation
rights. These options entitle the employee, on exercise of the phantom options,
to receive shares in an amount corresponding to the value of the difference
between the "deemed" option exercise price and the closing TASE trading price on
the date before the option exercise date. For phantom options the employee pays
only the par value of the shares actually received. For the impact of the
accounting treatment of the phantom options, see above - Item 5. Operating
Financial Review and Prospects - Management's Discussion and Analysis -
Operating Results - Impact of Phantom Options.

         OPTION EXERCISE PRICE. The exercise price for the options granted in
December 2000 is $12.32 per option. The exercise price was determined based upon
a discount of 15% from the average trading price of Elbit Systems' shares on the
TASE in July and August 2000. The exercise price for options granted under the
future reserve is 85% of the average price of Elbit Systems' shares on the TASE
for the 60 trading days prior to the specific option grant. The "deemed" option
exercise price for the phantom options is the same as the option exercise price
for the regular options granted at the same time under the Post Merger Plan.



                                       76
<PAGE>

         VESTING. The options vest at the rate of 25% per year following their
grant and must be exercised no later than six years after the date of grant.
Termination of employment for any reason, except in special circumstances
approved by Elbit Systems' President, will result in cancellation of the options
that have not vested before termination of employment. Following termination of
employment, unexercised options that have vested before the termination must be
exercised within 90 days of termination.

         SHARE RIGHTS AND TAX CONSEQUENCES. Shares issued to employees as a
result of exercise of the options, including phantom options, will bear rights
identical to our other ordinary shares. Employees will bear all tax consequences
to them resulting from the Post Merger Plan. The Israeli tax authorities have
approved the Post Merger Plan's qualification under Section 102 of the Israeli
Income Tax Ordinance (New Version). This enables employees who hold the options
at least for two years to be exempt from Israeli tax on the gains derived from
exercising the option. This also enables Elbit Systems to benefit from a
deductible tax expense that amounts to the employee's above-mentioned gain.

         1996 PLAN

         A total of 2,422,000 options were issued to employees under the 1996
Plan, as amended. Each option was exercisable into one ordinary share, and this
plan did not include phantom options. All of the options under the 1996 Plan
were vested and exercised in 2002.













                                       77
<PAGE>



ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

MAJOR SHAREHOLDERS

PERCENTAGES

         Elbit Systems had, as of May 31, 2004, 40,244,029 ordinary shares
outstanding. (This amount includes 408,921 shares held by us and our
subsidiaries as treasury shares). The following table sets forth specific
information as of May 31, 2004, to the best of our knowledge, concerning:

         o    beneficial ownership of more than 5% of our outstanding ordinary
              shares; and

         o    the number of ordinary shares beneficially owned by all of our
              officers and directors as a group.


Federmann Enterprises Ltd.                        12,100,000            30.06%
99 Hayarkon Street
Tel-Aviv, Israel(1)(4)

Heris Aktiengesellschaft                           3,836,458(2)          9.53%
c/o 99 Hayarkon Street
Tel-Aviv, Israel

Elron Electronic Industries Ltd.                   7,815,448            19.42%
3 Azrieli Center, 42nd Floor
Tel-Aviv, Israel(3)(4)

Bank Hapoalim Group                                2,247,604             5.58%
Tel-Aviv, Israel(5)

Bank Leumi Group
Tel-Aviv, Israel (5)                               2,190,827             5.44%

All officers and directors
as a group (27 persons)                              338,623 (6)         0.84%
----------------------------

(1)      Federmann Enterprises Ltd. (FEL) owns the shares of Elbit Systems
         directly and indirectly through Heris Aktiengesellschaft (Heris) which
         is controlled by FEL. FEL is controlled by Beit Federmann Ltd. (BFL).
         BFL is controlled by Beit Bella Ltd. (BBL) and Beit Yekutiel Ltd.
         (BYL). Michael Federmann is the controlling shareholder of BBL and BYL.
         He is also the Chairman of Elbit Systems' Board and the Chairman of the
         Board and the Chief Executive Officer of FEL. Therefore, Mr. Federmann
         controls, directly and indirectly, the vote of the shares owned by
         Heris and FEL.



                                       78
<PAGE>

(2)      The amount of shares owned by Heris is included in the amount of shares
         held by FEL as set forth in footnote (1) above.

(3)      Elron Electronic Industries Ltd. (Elron) is a multinational, high
         technology operational holding company whose business is conducted
         through a group of high technology operating companies. The principal
         shareholders of Elron are Discount Investment Corporation Ltd. (DIC),
         mutual and/or provident funds managed by Bank Leumi (the Bank Leumi
         Group), mutual and/or provident funds managed by Bank Hapoalim (the
         Bank Hapoalim Group) and the Insurance Fund headed by Clal Insurance
         Enterprises Holdings Limited (Clal). As of May 31, 2004, DIC held
         approximately 38.5% of the voting power of Elron, and the Bank Leumi
         Group, the Bank Hapoalim Group and Clal held approximately 8.3%, 6.4%
         and 2.4%, respectively, of the voting power of Elron.

         IDB Holding Corporation Ltd. (IDBH) is the parent of IDB Development
         Corporation Ltd. (IDBD), which, in turn, is the parent of DIC and Clal.
         IDBH, IDBD, DIC and Clal are public companies traded on the TASE.

         Approximately 51.7% of the outstanding share capital of IDBH is owned
         by a group comprised of: (i) Ganden Investments I.D.B. Ltd. (Ganden), a
         private Israeli company controlled by Nochi Dankner and his sister,
         Shelly Dankner-Bergman, which holds 31.02% of the equity of and voting
         power in IDBH; (ii) Manor Investments - IDB Ltd. (Manor), a private
         Israeli company controlled by Ruth Manor, which holds 10.34% of the
         equity of and voting power in IDBH; and (iii) Avraham Livnat
         Investments (2002) Ltd. (Livnat), a private Israeli company controlled
         by Avraham Livnat, which holds 10.34% of the equity of and voting power
         in IDBH. Ganden, Manor and Livnat, owning in the aggregate
         approximately 51.7% of the equity of and voting power in IDBH, entered
         into a shareholders agreement relating, among other things, to their
         joint control of IDBH, the term of which is until May 19, 2023. Shelly
         Dankner-Bergman holds approximately 4.9% of the equity and voting power
         in IDBH.

         Nochi Dankner is Chairman of IDBH, IDBD and DIC and a director of Clal.
         Shelly Dankner-Bergman and Zvi Livnat (the son of Avraham Livnat) are
         directors of each of IDBH, IDBD and DIC. Shai Livnat (the son of
         Avraham Livnat) is a director of IDBD and Clal. Isaac Manor (the
         husband of Ruth Manor) is a director of IDBH, IDBD, DIC and Clal, and
         Dori Manor (the son of Isaac and Ruth Manor) is a director of IDBH,
         IDBD, DIC and Elron.

         Doron Birger, a director of Elbit Systems, is the President and CEO of
         Elron. Ami Erel, Avraham Asheri and Avi Fischer, directors of Elbit
         Systems, are also directors of Elron.

(4)      FEL and Heris (collectively the Federmann Group) and Elron may be
         deemed for purposes of U.S. securities laws to be joint owners of the
         aggregate ordinary shares of Elbit Systems beneficially owned by them
         by virtue of a shareholders agreement dated December 19, 1999 between
         the members of the Federmann Group and Elron, which provides, among
         other things, for their coordinated voting at Elbit Systems'
         shareholder meetings and for their equal representation on Elbit
         Systems' Board of Directors.

(5)      The holdings in Elbit Systems' shares by the Bank Hapoalim Group and
         the Bank Leumi Group are divided among several entities, mainly mutual
         and/or provident funds.



                                       79
<PAGE>

(6)      This amount does not include any shares that may be deemed to be
         beneficially owned by Michael Federmann as described in footnote (1)
         above. The amount includes 81,508 shares underlying options that are
         currently exercisable or that will become exercisable within 60 days of
         May 31, 2004. A portion of the underlying options are "phantom options"
         that have been calculated based on Elbit Systems' May 31, 2004 share
         closing price of $18.72.


RIGHTS IN SHARES, SIGNIFICANT CHANGES IN SHAREHOLDERS AND CONTROLLING
SHAREHOLDERS

         Except to the extent provided in the Shareholders Agreement (the
Shareholders Agreement) described below in "Related Party Transactions -
Agreements Relating to the Merger", Elbit Systems' major shareholders have the
same rights as other holders of Elbit Systems' ordinary shares. The only
significant change in shareholdings by major shareholders in the last three
years was the change resulting from the Merger in the holdings of Elron and the
Federmann Group. As a result of the Merger in 2000, Elron's shareholding
percentage decreased from approximately 33% to approximately 23%, and the
Federmann Group received approximately 32% of Elbit Systems shares. In addition,
Elron sold 380,000 shares in 2001 and 380,000 shares in 2002.

         Elron and the Federmann Group may be considered under Israeli law as
controlling shareholders of Elbit Systems due to the Shareholders Agreement. We
are not aware of any other arrangement, including by way of a shareholder
agreement or registration rights agreement, that in the future may lead to a
change in control of Elbit Systems. Except as provided in the Shareholders
Agreement regarding appointment of directors, the Chairman of the Board and the
President, no appointment of the President or a director is made as a result of
a related party transaction. Also, there are no outstanding loans by Elbit
Systems or its subsidiaries to such persons.


RELATED PARTY TRANSACTIONS

         AGREEMENTS RELATING TO THE MERGER

         There are three main agreements relating to the Merger:

         -    A merger agreement dated December 19, 1999 (the Merger Agreement)
              among Elbit Systems, El-Op and the Federmann Group.

         -    The Shareholders Agreement dated December 19, 1999, between Elron
              and the Federmann Group.

         -    A registration rights agreement, effective on July 5, 2000, the
              closing date of the Merger (the Registration Rights Agreement)
              among Elbit Systems, Elron and the Federmann Group.

         The following is a summary of major provisions of those agreements.



                                       80
<PAGE>

         MERGER AGREEMENT

         NATURE OF THE MERGER AND CONSIDERATION. The Merger was accomplished
through a statutory merger under Israeli law of El-Op into Elbit Systems
followed immediately by a spin-off of part of the merged assets and liabilities
into a wholly-owned subsidiary of Elbit Systems, which assumed El-Op's name. In
consideration for the Merger, the Federmann Group, the principal shareholders of
El-Op before the Merger, was issued 12,100,000 new Elbit Systems ordinary
shares.

         REPRESENTATIONS AND ADJUSTMENTS TO THE MERGER CONSIDERATION. Elbit
Systems and El-Op made representations regarding their business and capital
structure. The Federmann Group made representations regarding ownership of its
shares in El-Op. If any of the representations were found to be incorrect, an
adjustment would be made to the number of Elbit Systems' shares issued to the
Federmann Group under the Merger. The time period for such adjustment expired in
March 2003, and no adjustments were made.

         TAXES AND EXPENSES. Each party bears any tax liability that may be
imposed on it relating to the Merger Agreement. Elbit Systems paid the Israeli
stamp tax payable for the issuance of ordinary shares. The parties share any
other Israeli stamp tax payable due to the Merger Agreement. The parties agreed
to comply with all the conditions for tax exemption in accordance with the
Israeli Income Tax Ordinance or as determined by the Israeli Income Tax
Commissioner. Among other things, Elbit Systems agreed not to issue new shares
if, as a result of the issuance, the Federmann Group or any of the units
comprising it, will be charged with tax. Under the Israeli Income Tax Ordinance,
subject to conditions imposed by applicable law and regulations, due to the tax
exemption granted for the Merger, Elbit Systems generally was restricted for a
period of two years following the Merger from issuing new shares in excess of
25% of the amount of its outstanding shares existing prior to the Merger.
However, this restriction did not apply to a public offering or shares issued
under a stock option plan. Each party to the Merger Agreement agreed to pay any
taxes and expenses that are imposed on it under any provisions of law and/or
that it incurs pursuant to the Merger Agreement.

         ARBITRATION. The parties agreed to submit to arbitration any dispute
that arises between them regarding the Merger Agreement.

SHAREHOLDERS AGREEMENT

           CORPORATE GOVERNANCE. Elron and the Federmann Group agreed that
following the Merger, so long as each holds at least 15% of Elbit Systems'
issued share capital, the following applies.

         BOARD MEMBERS

         The parties agreed to vote to cause Elbit Systems' Board to have 11
         members, consisting of four directors nominated by Elron, four
         directors nominated by the Federmann Group, the two External Directors
         and the President of Elbit Systems. In April 2004, Elbit Systems'
         shareholders approved an amendment to the Articles of Incorporation
         reducing the normal number of directors to ten and removing the
         requirement that the President be a director.

         All Board committees are represented equally by the Board nominees of
         Elron and the Federmann Group. Should the holdings of Elbit Systems'
         issued share capital of only one of the parties fall below 15%, but not
         below 5%, and provided the other party holds at least 15%, the number
         of directors that party will have the right to nominate to the Board
         will be reduced proportionally.



                                       81
<PAGE>

         The other party will have the right to nominate all other members of
         the Board and to appoint the Chairman of the Board and the President
         and the Chief Executive Officer.

         EXTERNAL DIRECTORS. The Federmann Group has the right to nominate a
         candidate to replace the first of the two External Directors who
         vacates his appointment. Elron has the right to nominate a candidate to
         replace the second of the two External Directors who vacates his
         appointment. This arrangement will continue as long as Elbit Systems is
         required to have External Directors.

         PRESIDENT AS A BOARD MEMBER. As described in "Board Members" above, in
         April 2004 our shareholders approved an amendment to our Articles of
         Incorporation, removing the requirement, established in the
         Shareholders' Agreement, that the President serve as director. The
         President is entitled to participate in all Board meetings.

         BOARD CHAIRMAN. The Chairman of the Board is elected by the
         shareholders from among the Board members. The Federmann Group
         nominates a candidate for the office of Chairman of the Board after it
         has consulted with Elron. Michael Federmann was elected as Chairman
         beginning on the Merger closing date.

         PRESIDENT. Joseph Ackerman continued as Elbit Systems' President and
         Chief Executive Officer for a period of three years from the Merger
         closing date, as specified in his employment agreement. The agreement
         was automatically extended for another three-year period according to
         its terms. Following termination of Mr. Ackerman's employment, Elron
         will nominate a candidate for the office of President and Chief
         Executive Officer, after consulting with the Federmann Group. The
         President and Chief Executive Officer will be elected by the Board, and
         his or her appointment is subject to shareholder approval.

         VOTES OF THE BOARD. Except as provided otherwise in our Articles of
         Association, resolutions of the Board are determined by a simple
         majority of the members participating in the vote. No member of the
         Board, including the Chairman, has more than one vote.

         VOTES AT SHAREHOLDERS MEETINGS. The parties coordinate in advance on
         how they will vote their shares at any of our shareholders meetings.
         Except as provided above, the parties will vote their shares against
         any proposed resolution at any shareholders meeting, unless they agree
         in writing in advance to vote in favor.

             RESTRICTIONS ON SALES AND PURCHASES OF ELBIT SYSTEMS SHARES

             Following the Merger, as long as one of the parties holds at least
15%, and the other party at least 5%, of Elbit Systems' issued share capital, no
transfer of Elbit Systems' shares by either party will be valid unless made in
accordance with the following:

             o    During the period beginning on January 1, 2003 and ending on
                  December 31, 2004, neither party will transfer shares of
                  Elbit Systems if, as a result of the transfer, the
                  transferring party's holdings fall below 15% of Elbit
                  Systems' issued share capital, unless:

                  -    shares constituting at least 15% of Elbit Systems'
                       issued share capital are transferred; and



                                       82
<PAGE>

                  -    all of the obligations and rights of the transferring
                       party under the Shareholders Agreement have been
                       assigned and transferred to the buyer, with the buyer's
                       assumption of all such obligations, and written notice
                       to this effect signed by both the transferor and the
                       buyer has been given to the other party before the
                       transfer.

             o    After January 1, 2005, no party will transfer, as part of a
                  single transaction, 15% or more of Elbit Systems' issued
                  share capital unless all of the obligations and rights of
                  the transferring party under the Shareholders Agreement have
                  been assigned and transferred to the buyer, with the buyer's
                  assumption of all such obligations, and written notice to
                  this effect signed by both the transferor and the buyer has
                  been given to the other party to the Shareholders Agreement
                  before the transfer.

             FIRST REFUSAL AND TAG ALONG RIGHTS

             The Shareholders Agreement provides for rights of first refusal if
a party wants to transfer Elbit Systems shares to a third party buyer. The party
intending to sell its Elbit Systems shares must first offer them to the other
party on the same terms offered by the buyer. The Shareholders Agreement also
provides for tag along rights if a party wants to transfer shares to a third
party buyer. The party wishing to sell its shares must enable the other party to
participate in the sale to a third party buyer, unless the selling party wishes
to:

             (a)  sell at least 15% of Elbit Systems' issued share capital,
                  and

             (b)  the third party buyer assumes the obligations of the selling
                  party under the Shareholders Agreement.

         The above provisions do not apply to any transfer by a party to a
person or entity that it controls or that controls such party or that is under
common control with such party. The right of first refusal and tag along rights
will also apply to any transfer of shares of Federmann Enterprises or Heris,
respectively, if Elbit Systems shares held by such entity at any time constitute
in excess of 90% of the total assets of that entity and as a result of such
transfer of shares, Federmann Enterprises or Heris, as applicable, ceases to be
under the control of the Federmann family.

         PARTICIPATION RIGHTS. The Shareholders Agreement also provides for
purchase participation rights. If a party purchases Elbit Systems shares, the
other party may participate in this purchase on the same terms as the first
party on a pro-rata basis, based on the number of Elbit Systems shares then held
by the parties. However, this participation right shall not apply to any
purchases made by Elron until Elron's share holdings in Elbit Systems equal
those of the Federmann Group.

         PERMITTED SALES. Despite the above restrictions on sales of Elbit
Systems shares, each party may sell shares on the TASE in quantities not more,
in any calendar quarter, than 1% of Elbit Systems' issued share capital.

         TERMINATION OF THE AGREEMENT. The Shareholders Agreement will remain in
effect until the earlier of:

          (a)  December 18, 2014; or



                                       83
<PAGE>

          (b)  the date any party's holdings fall below 5% of Elbit Systems'
               issued share capital, provided that all the rights and
               obligations of that party under the Shareholders Agreement have
               not been previously transferred or transferred concurrently with
               such reduction to a new party, in which case the Shareholders
               Agreement will not terminate but will bind the new party.

REGISTRATION RIGHTS AGREEMENT

         DEMAND REGISTRATION. Elron and the Federmann Group each may twice
require Elbit Systems to register their ordinary shares for sale in the United
States. No shareholder may demand registration of ordinary shares less than 180
days following the effective date of any registration statement previously filed
by Elbit Systems under a demand registration. Elbit Systems has the right to
delay filing of a registration statement in specific circumstances.

         PIGGYBACK REGISTRATION. Elron and the Federmann Group have an unlimited
number of "piggyback" registration rights. This means that any time Elbit
Systems proposes to file a registration statement in connection with any public
offering of any ordinary shares in the United States, whether for the account of
Elbit Systems or any Elbit Systems shareholder, Elron and the Federmann Group
each may require Elbit Systems to include its ordinary shares in that offering.

         TERMINATION OF REGISTRATION RIGHTS. The respective registration rights
of Elron and the Federmann Group terminate if such shareholder and its
affiliates collectively cease to own at least 5% of the then issued and
outstanding Elbit Systems ordinary shares or such shares of any successor
corporation.

         EXPENSES AND INDEMNITY. Other than fees and disbursements of counsel to
the shareholders, Elbit Systems agreed to pay all expenses that result from the
registration of ordinary shares under the Registration Rights Agreement, all
underwriting fees, commissions and discounts connected with the sale of any
ordinary shares and any transfer taxes incurred in such sale. Elbit Systems also
agreed to indemnify Elron and the Federmann Group against liabilities that may
result from misrepresentations or omissions in any registration statement filed
under the Registration Rights Agreement or any violation of U.S. federal or
state securities laws in connection with any such registration, other than those
liabilities caused by any act or omission of such shareholder.


TRANSACTIONS WITH ELRON AND AFFILIATED COMPANIES

         Elbit Systems and RDC, an affiliated company of Elron, are joint owners
of Starling. See above - Item 4. Information on the Company - Technology
Spin-Offs - Starling.

         DIC, a controlling shareholder of Elron, is a controlling shareholder
of Gav Yam Ltd. (Gav Yam), which in turn is a controlling shareholder of Matam -
Advanced Technology Center Ltd. (Matam). Elbit Systems entered into agreements
with both Gav Yam and Matam in connection with the construction of Elbit
Systems' new building in Haifa. See above - Item 4. Information on the Company -
Property, Plant and Equipment. These agreements were approved at a general
meeting of Elbit Systems' shareholders.



                                       84
<PAGE>

         Under a lease agreement entered into in 1996, Elbit Systems currently
leases from Elbit Ltd. approximately 170,000 square feet of office and
manufacturing space in Karmiel, Israel. Elbit Ltd. is a wholly-owned subsidiary
of Elron. The lease expires in October 2006 and may be terminated earlier by
Elbit Systems upon twelve months' prior written notice. The monthly rent is an
amount in NIS equal to approximately $0.598 per square foot linked to the U.S.
dollar and the U.S. CPI, payable quarterly at the beginning of each quarter. In
the event that the area leased is substantially reduced, the monthly rent will
be determined by the parties.

         In the ordinary course of business, some subsidiaries and affiliates of
Elbit Systems engage in business activities with each other on terms that we
believe are comparable to those negotiated between third parties on an
arms-length basis.

TRANSACTIONS WITH OFFICERS AND DIRECTORS

         Some members of Elbit Systems' Board are also directors of companies in
the Federmann Group or Elron. Therefore, in the event of an issue or transaction
between Elbit Systems and any of those companies, those individuals who are
affiliated with both of the applicable companies will be excluded from any
decisions concerning such issue or transaction. Transactions with officers,
directors, key employees and affiliates may require authorization in accordance
with the requirements of the Companies Law. See below - Item 10. Additional
Information - Approval of Certain Transactions.

         For information on the grant of options in Elbit Systems' shares to
officers and directors, see above - Item 6. Directors, Senior Management and
Employees - Share Ownership - Elbit Systems' Stock Option Plans.












                                       85
<PAGE>



ITEM 8.    FINANCIAL INFORMATION.

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

         See Consolidated Financial Statements attached to this Form 20-F.


LEGAL PROCEEDINGS

         Elbit Systems and our subsidiaries are involved in legal proceedings
from time to time. Based on the advice of our legal counsel, management believes
such current proceedings will not have a material adverse effect on the
financial position or results of operations of Elbit Systems.


DIVIDEND DISTRIBUTIONS

         Elbit Systems does not have a declared dividend policy. Our Articles of
Association provide that the Board may approve dividend payments to shareholders
out of surplus earnings as permitted by applicable law. To date we have
consistently paid a quarterly dividend to our shareholders.

         Our dividend payments for the last three full fiscal years were as
follows:

         2001                               $0.32 per share
         2002                               $0.34 per share
         2003                               $0.40 per share



















                                       86
<PAGE>



ITEM 9.           OFFER AND LISTING.

SHARE LISTINGS AND TRADING PRICES

         Elbit Systems' ordinary shares are quoted on Nasdaq under the symbol
"ESLT" and are also listed on the TASE.

         The high and low sale prices for our ordinary shares for the five most
recent full financial years are:

<TABLE>
<CAPTION>
                                     NASDAQ                                       TASE (1)
                            HIGH                LOW                       HIGH                LOW
                            ----                ---                       ----                ---
<C>                        <C>                 <C>                       <C>                 <C>
1999                       $18.47              $12.38                    $18.41              $12.17
2000                       $19.38              $11.28                    $19.18              $11.75
2001                       $19.37              $13.72                    $18.77              $15.53
2002                       $19.31              $14.98                    $18.92              $14.32
2003                       $20.00              $14.51                    $20.08              $14.99
</TABLE>


         The high and low quarterly sale prices for our ordinary shares for the
two most recent full financial years and the first two subsequent quarters are:

<TABLE>
<CAPTION>
                                                     NASDAQ                                         TASE(1)
                                                     ------                                         -------
                                                HIGH          LOW                             HIGH              LOW
                                                ----          ---                             ----              ---


<S>                                           <C>          <C>                              <C>              <C>
2002
First Quarter                                 $19.31       $17.30                           $18.28           $17.50
Second Quarter                                $17.79       $15.00                           $17.06           $15.20
Third Quarter                                 $17.11       $15.36                           $16.80           $15.08
Fourth Quarter                                $17.39       $14.69                           $17.24           $14.43



2003
First Quarter                                 $16.84       $14.51                           $17.00           $14.77
Second Quarter                                $20.00       $16.60                           $20.08           $16.39
Third Quarter                                 $19.53       $16.64                           $19.48           $16.43
Fourth Quarter                                $18.88       $15.36                           $18.72           $14.99


2004
First Quarter                                 $19.99       $17.85                           $20.55           $18.01
Second Quarter (through May 31, 2004)         $19.40       $17.88                           $19.47           $17.80
</TABLE>



                                       87
<PAGE>

         The monthly high and low sale prices of our ordinary shares for the
most recent six months are:

<TABLE>
<CAPTION>
                                               NASDAQ                                        TASE (1)
                                        HIGH                LOW                       HIGH                LOW
                                        ----                ---                       ----                ---
<S>                                   <C>                <C>                        <C>                <C>
December 2003                         $18.30             $15.36                     $18.06             $14.99
January 2004                          $19.97             $18.03                     $20.55             $18.01
February 2004                         $19.99             $18.17                     $19.98             $18.11
March 2004                            $19.25             $17.85                     $19.31             $17.62
April 2004                            $19.40             $18.14                     $19.47             $17.80
May 2004                              $19.21             $17.88                     $19.25             $18.05
</TABLE>
-------------
(1)      The closing prices of our ordinary shares on the TASE have been
         translated into U.S. dollars using the daily representative rate of
         exchange of the NIS to the U.S. dollar as published by the Bank of
         Israel.

         As of May 31, 2004, approximately 4.08% of our outstanding ordinary
shares was held in the United States by approximately 236 holders registered on
the books of our transfer agent.






                                       88
<PAGE>



ITEM 10.          ADDITIONAL INFORMATION.

GENERAL PROVISIONS OF ISRAELI LAW AND RELATED PROVISIONS OF ARTICLES OF
ASSOCIATION

         ISRAELI COMPANIES LAW AND REVISED ARTICLES OF ASSOCIATION. The Israel
Companies Law - 1999 (the Companies Law) became effective in 2000. It replaced
the Israeli Companies Ordinance as the basic corporation law governing Israeli
publicly and privately held companies. The Companies Law also mandates specific
provisions be included in an Israeli company's articles of association. In 2000,
following receipt of the required shareholder approval, Elbit Systems adopted
Restated Articles of Association (the Articles of Association), which
incorporate, among other provisions, revisions mandated by the Companies Law and
the agreements relating to the Merger. See above - Item 7. Major Shareholders
and Related Party Transactions - Related Party Transactions - Agreements
Relating to the Merger.

         APPOINTMENT OF DIRECTORS. Elbit Systems' directors are appointed by the
shareholders at the annual general shareholders meeting. They hold office until
the next annual general shareholders meeting, which is held at least once every
calendar year but not more than 15 months after the previous general
shareholders meeting. Between annual general shareholders meetings the Board may
appoint new directors to fill vacancies, however new External Directors must be
elected at a general shareholders meeting as described in "External Directors"
below. Appointment of directors is also subject to the terms of the Merger
Agreement and the Shareholders' Agreement relating to the Merger. See above -
Item 7. Major Shareholders and Related Party Transactions - Related Party
Transactions - Agreements Relating to the Merger. Under these agreements Elron
and the Federmann Group each appoints four members to the Board. The Chairman of
the Board is appointed from the Federmann Group nominees. The Articles of
Association authorizes a maximum of 17 and a minimum of five directors. However,
unless otherwise approved by the Board or a general shareholders meeting or
during an interim period following a director's resignation, there are 10
directors, including two External Directors as described in "External Directors"
below.

         SUBSTITUTE DIRECTORS. The Articles of Association provide that any
director may appoint another person to serve as a substitute director. A
substitute director must be qualified under the Companies Law to serve as a
substitute director. If his or her appointment is for more than one meeting it
will be subject to the approval of the Board. Such person may not act as a
substitute director for more than one director at the same time. The same rules,
including compensation, will apply to a substitute director as to the director
who appointed him or her, and the substitute director may participate in Board
and Board committee meetings in the same manner as the appointing director.
Subject to the Companies Law, a director who has appointed a substitute director
may revoke the appointment at any time. In addition, the office of a substitute
director will be vacated at any time that the office of the director who
appointed the substitute is vacated for any reason. Any appointment or
revocation of the appointment of a substitute director will be made by notice in
writing to the substitute director and Elbit Systems. The appointment or
revocation, as the case may be, will become effective on the later of the date
of receipt of the above notice or the date fixed in the notice.

         EXTERNAL DIRECTORS. Under the Companies Law publicly held Israeli
companies are required to appoint two "External Directors". Among other
requirements, External Directors must be unaffiliated



                                       89
<PAGE>

with Elbit Systems and our controlling shareholders. External Directors serve
for a three-year term that may be extended for an additional three-year term.
Any committee of the Board must include at least one External Director. Nathan
Sharony and Yaacov Lifshitz currently serve as an External Directors of Elbit
Systems, and their terms of office end in March 2005 and July 2006,
respectively.

         INTERNAL AUDITOR AND AUDIT COMMITTEE. Publicly held Israeli companies
are required to appoint an internal auditor. The main role of the internal
auditor is to examine whether the company's activities comply with the law,
integrity and orderly business procedure. Publicly held companies are also
required to establish an audit committee of the Board of Directors. The audit
committee must consist of at least three directors qualified under the Companies
Law, including all External Directors. The audit committee and the internal
auditor operate in accordance with an audit committee charter that provides the
framework for their functions. See above - Item 6. Directors, Senior Management
and Employees - Board Practices - Audit Committee.

         OFFICE HOLDERS

         The Companies Law specifies the duty of care and fiduciary duties that
an "Office Holder" owes to a company. An Office Holder is defined as a director,
general manager, chief business manager, executive vice president, vice
president or any other person who fulfills these functions without regard to
that person's title or other manager directly under the general manager. Each
person listed above in Item 6. Directors and Executive Officers is an Office
Holder of Elbit Systems.

         Under the Companies Law, an Office Holder's fiduciary duty includes
avoiding any conflict of interest between the Officer Holder's position in the
company and his or her personal affairs. The fiduciary duty also includes
avoiding any competition with the company and avoiding exploiting any business
opportunity of the company in order to receive personal advantage for the Office
Holder or others. Also, the Office Holder is required to disclose to the company
any information or documents relating to the company's affairs that the Officer
Holder has received due to his or her position as an Office Holder. Under the
Companies Law voting agreements among directors are considered a breach of
fiduciary duty. In addition, all compensation arrangements between the company
and Office Holders who are not directors require approval of the Board.


APPROVAL OF CERTAIN TRANSACTIONS

         APPROVAL PROCEDURES. The Companies Law requires that certain
transactions, actions and arrangements, mainly with related parties, be approved
as provided for in the Companies Law and in a company's articles of association
and in some cases by the audit committee and by the board of directors.
Sometimes shareholder approval is also required.

         PERSONAL INTEREST AND EXTRAORDINARY TRANSACTIONS. The Companies Law
requires that an Office Holder or a controlling shareholder of a company
immediately disclose (and no later than the first board meeting the transaction
is discussed) any "Personal Interest" that he or she may have and all related
material information known to him or her, in connection with any existing or
proposed transaction by the company. An Office Holder with a personal interest
in any such matter that is brought for approval of the audit committee or board
of directors may not be present at the meeting where the matter is being
approved and may not vote on the matter. "Personal Interest" also includes any
interest held by the Office Holder's spouse, siblings, parents, grandparents,
descendants, spouse's descendants and the spouses of any



                                       90
<PAGE>

of them. It also includes an interest by any corporation in which the Office
Holder or his or her relative is a 5% or greater shareholder, director or
general manager or in which he or she has the right to appoint at least one
director or the general manager. An "extraordinary transaction" is other than in
the ordinary course of business, other than on market terms, or is likely to
have a material impact on the company's profitability, assets or liabilities.

         APPROVAL OF TRANSACTIONS

         The Companies Law requires approval by both the Audit Committee and the
Board for the following transactions:

         (1)   extraordinary transactions with an Office Holder or in which an
               Office Holder has a Personal Interest;

         (2)   material actions or arrangements that may otherwise be considered
               a breach of fiduciary duty of an Office Holder;

         (3)   terms of service of directors, including the grant of
               indemnification, exemption or insurance and terms of employment
               of directors in other roles; or

         (4)   exemption from insurance and indemnification of Office Holders.

         Matters referred to in (3) may also require shareholder approval,
including, where applicable, a specified percentage of non-interested
shareholders.

         Extraordinary transactions with controlling shareholders or
extraordinary transactions with another person in which the controlling
shareholder has a personal interest require approval by the audit committee,
board of directors and general meeting of shareholders by a special majority as
provided in the Companies Law.


INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

         INSURANCE AND INDEMNIFICATION UNDER THE COMPANIES LAW

         The Companies Law permits a company to obtain an insurance policy
covering liabilities of Office Holders resulting from a breach of the Office
Holder's duty of care to the company or to another person. This includes
liabilities from the breach of his or her fiduciary duty to the company, to the
extent that the Office Holder acted in good faith and had reasonable cause to
believe that the act would not prejudice the interests of the company. It also
covers monetary liabilities charged against an Office Holder while serving the
company.

         The Companies Law also allows a company to indemnify an Office Holder,
in advance or retroactively, in connection with his or her activities as an
Office Holder. This includes indemnification for monetary liability incurred
under a judgment, including a settlement or arbitration decision approved by a
court, in an action brought against the Office Holder by a third party. It also
includes reasonable litigation expenses, including attorneys' fees, incurred in
an action brought against him or her by, or on



                                       91
<PAGE>

behalf of, the company or others, or as a result of a criminal charge of which
he or she was acquitted or for a criminal charge for which he or she may be
found guilty but that does not involve criminal intent.

         A company may not indemnify an Office Holder or enter into an insurance
contract that would provide coverage for any monetary liability incurred as a
result of the following:

         (1)   a breach of fiduciary duty, except for a breach of a fiduciary
               duty to the company while acting in good faith and having
               reasonable cause to assume that such act would not prejudice the
               interests of the company;

         (2)   a willful breach of the duty of care or reckless disregard for
               the circumstances or to the consequences of a breach of the duty
               of care;

         (3)   an act done with the intent to unlawfully realize a personal
               gain; or

         (4)   a fine or monetary penalty imposed for an offense.

         INSURANCE AND INDEMNIFICATION UNDER THE ARTICLES OF ASSOCIATION

         Elbit Systems' Articles of Association allows for directors and
officers liability insurance, subject to the provisions of the Companies Law.
This insurance may cover:

         (1)   a breach of his or her duty of care to Elbit Systems or to
               another person;

         (2)   a breach of his or her fiduciary duty to Elbit Systems, provided
               that the director or officer acted in good faith and had
               reasonable cause to assume that his or her act would not harm the
               interests of Elbit Systems; or

         (3)   any other event for which insurance of a director or officer is
               permitted.

         In addition, Elbit Systems' Articles of Association permit
indemnification, retroactively or in advance, of a director or officer against:

         (1)   a monetary liability imposed on the director of officer in favor
               of a third party under a judgment, including a judgment by way of
               compromise or a judgment of an arbitrator approved by a court;

         (2)   reasonable expenses of the proceedings, including lawyers fees,
               expended by the director or officer or imposed on him or her by
               the court for:

               (a)  proceedings issued against him or her by or on Elbit
                    Systems' behalf or by a third party;

               (b)  criminal proceedings from which the director or officer was
                    acquitted; or

               (c)  criminal proceedings in which he or she was convicted but
                    that do not require proof of criminal intent; or



                                       92
<PAGE>

         (3)   any other liability or expense for which it is or may be
               permissible to indemnify a director or an officer.

         However, any indemnification so granted by Elbit Systems may not exceed
25% of Elbit Systems' consolidated equity as reflected in our last consolidated
annual financial statements published prior to the payment of such
indemnification.

         The Articles of Association permit the grant of similar indemnification
to any person acting as a director or officer of another company in which Elbit
Systems is directly or indirectly a shareholder or has any interest.

         Elbit Systems' shareholders approved the grant to members of our Board
of indemnification letters reflecting the above conditions and limitations.
Similar letters were also approved by the Board for grant to officers of Elbit
Systems.

         In April 2004, a general meeting of Elbit Systems' shareholders
approved a framework resolution that allows Elbit Systems to purchase directors
and officers (D&O) liability insurance that meets the framework resolution's
terms. The framework resolution covers a five-year period beginning at the end
of the term of the current D&O insurance policy in August 2004, and allows for
an aggregate increase of insurance coverage of up to $45,000,000 (from the
current level of $30,000,000) for any year covered by the policy. The framework
resolution also allows for an increase of up to 25% per year in the D&O
insurance premium up to a maximum aggregate of 125% of the current annual
premium ($660,000). The Audit Committee and the Board must approve that any
purchase of D&O insurance falls within the terms of the framework resolution.



MATERIAL CONTRACTS

         Elbit Systems has not entered into material contracts since June 1,
2002, other than in the ordinary course of business.



EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS

         Non-residents of Israel may freely hold and trade our ordinary shares
under general and specific permits issued under the Israeli Currency Control
Law, 1978. Our Memorandum of Association and Articles of Association do not
restrict the ownership of ordinary shares by non-residents of Israel. Neither
the Memorandum of Association and Articles of Association nor Israeli law
restrict the voting rights of non-residents.

         Under the general permit given through the Israeli Currency Control
Law, 1978, non-residents of Israel who buy our ordinary shares inside or outside
of Israel with any foreign currency are able to receive a number of types of
distributions in freely repatriable U.S. dollars or specified other currencies.
These distributions include dividends, proceeds from the sale of shares and any
amounts payable on the dissolution, liquidation or winding-up of Elbit Systems.



                                       93
<PAGE>

         In the last several years, the Government of Israel liberalized its
policies regarding exchange controls and investments in Israel and abroad.


TAXATION


         GENERAL


         The following is a summary of some aspects of the current tax law
applicable to companies in Israel, with special reference to its effect on Elbit
Systems and our Israeli subsidiaries. The following also contains a discussion
of specified Israeli tax consequences to our shareholders and government
programs from which we and some of our Israeli subsidiaries benefit. To the
extent that the discussion is based on tax legislation that has not been subject
to judicial or administrative interpretation, there can be no assurance that the
views expressed in the discussion will be accepted by the tax authorities in
question.

         In 2002, the Israeli Parliament approved a law enacting extensive
changes to Israel's tax law (the Tax Reform Legislation) generally effective
January 1, 2003. Among the key provisions of the Tax Reform Legislation are:

     (i)  changes which may result in the imposition of taxes on dividends and
          interest received by an Israeli company from its foreign subsidiaries;
          and

     (ii) the introduction of the "controlled foreign corporation" concept
          according to which an Israeli company may become subject to Israeli
          taxes on certain income of a non-Israeli subsidiary if the
          subsidiary's primary source of income is passive income (such as
          interest, dividends, royalties, rental income or capital gains).

         An Israeli company that is subject to Israeli taxes on the income of
its non-Israeli subsidiaries will receive a credit for income taxes paid or
withheld or that will be paid or withheld by the subsidiary in its country of
residence according to the conditions determined in the Israeli Tax Ordinance.


         The discussion is not intended, and should not be construed, as legal
or professional tax advice and is not exhaustive of all possible tax
considerations.


         EFFECTIVE CORPORATE TAX RATE. Generally, Israeli corporations are
subject to a 36% "Company Tax" (which rate maybe reduced to 35% in 2004). Elbit
Systems' income tax liability in Israel is based on our unconsolidated earnings
and such earnings of our Israeli-based subsidiaries. It is determined in NIS and
not in U.S. dollars. Tax liability of non-Israeli subsidiaries is determined
according to the law of their countries of residence. As a result, the tax
provision in Elbit Systems' consolidated financial statements does not directly
relate to income reported on these statements. A portion of Elbit Systems'
Israeli operations have been granted "Approved Enterprise" status, as described
under "Investment Law" below. These operations are subject to taxation at
reduced rates applicable to those types of enterprises. In addition, they are
permitted special adjustments in computing taxable income under the Income Tax
Law (Inflationary Adjustments), 1985.

         INDUSTRY ENCOURAGEMENT. Under the Law for the Encouragement of Industry
(Taxes), 1969, a company qualifies as an "Industrial Company" if it is resident
in Israel and at least 90% of its income in a given tax year, with some
exceptions, comes from "Industrial Enterprises" owned by that company. An


                                       94
<PAGE>

Industrial Enterprise is defined as an enterprise whose primary activity in a
particular tax year is industrial manufacturing activity. We believe Elbit
Systems qualifies as an Industrial Company. The principal benefits of this
status are amortization of the cost of know-how and patents, under certain
interpretations, deduction of expenses incurred in connection with a public
issuance of securities over a three-year period and an election under certain
conditions to file a consolidated tax return with additional related Israeli
Industrial Companies.

         INVESTMENT LAW

         The Israeli Law for the Encouragement of Capital Investments, 1959
provides that a capital investment in eligible facilities approved by the Israel
Investment Center may be designated as an "Approved Enterprise". Each approval
for an Approved Enterprise relates to a specific investment program. The
approvals specify both the program's financial scope, including its capital
resources, and its physical characteristics, such as the equipment to be
purchased and used under the program.

         An Approved Enterprise is entitled to several benefits, including
Israeli Government cash grants and tax benefits. The applicable tax benefits
relate only to taxable profits attributable to the specific Approved Enterprise.
As of December 31, 2003, Elbit Systems had four and El-Op had four active
approved programs eligible for tax benefits. These programs will expire during
the years 2004 to 2012.

         CAPITAL GAINS TO A COMPANY

         Israeli law imposes a capital gains tax on the sale of capital assets.
The law distinguishes between the real capital gain and the inflationary
surplus. The inflationary surplus accumulated until December 31, 1993 is taxed
at a rate of 10%. Inflationary surplus accumulated from and after December 31,
1993 is exempt from any capital gains tax. The real capital gain was taxed until
December 31, 2002 at a rate of 36% for corporations.

         Effective January 1, 2003, the real capital gains tax rate imposed on
the sale of capital assets acquired after that date has been reduced to 25%.
Capital gains accrued from assets acquired before that date are subject to a
blended tax rate based on the relative periods of time before and after the date
that the asset was held as well as accumulated depreciation.

         CAPITAL GAINS TO A SHAREHOLDER

         Effective January 1, 2003, so long as our ordinary shares are listed on
a stock exchange the sale of these shares is subject to a blended tax in which
the portion of the gain accrued until December 31, 2002 is exempt from Israeli
capital gains tax, and the portion of the real gain accrued from January 1, 2003
until the date of sale is subject to a 15% tax. The real gain is based on the
difference between the adjusted average value of the shares during the last
three trading days before January 1, 2003 (or the adjusted original cost if it
is higher than the adjusted average value) and the value of the shares at the
date of sale. In the later case, the capital loss that might be set off is the
difference between the adjusted average value and the value of the shares at the
date of sale. In addition, since Elbit Systems ordinary shares are traded on the
TASE and Nasdaq, gains on the sale of ordinary shares held by non-Israeli
resident investors for tax purposes will generally be exempt from Israeli
capital gains tax subject to the provisions of the Israeli tax legislation.



                                       95
<PAGE>

         However, dealers in securities in Israel and companies taxed under the
Inflationary Adjustment Law are taxed at regular tax rates applicable to
business income.

          INFLATIONARY ADJUSTMENTS. The Income Tax (Inflationary Adjustments)
Law, 1985 attempts to overcome some of the problems of a tax system effected by
an economy experiencing rapid inflation. This was the case in Israel at the time
the law was enacted. Generally, this law provides significant tax deductions and
adjustments to depreciation methods, finance income and expenses and tax loss
carry forwards to compensate for loss of value resulting from an inflationary
economy. Elbit Systems' taxable income is determined under this law. However,
due to low inflation during 2000 portions of this law were temporarily
suspended. In 2001, the provisions of the law were re-implemented since the
inflation during the year exceeded 3%. In 2002 inflation during the year
exceeded 6%. In 2003 the inflation rate was a negative 1.9%.

         INCOME TAX FOR NON-RESIDENTS OF ISRAEL. Non-residents of Israel are
subject to a graduated income tax on income from sources in Israel. On
distributions of dividends other than bonus shares (stock dividends), the paying
company withholds at source income tax at the rate of 25%, unless a lower rate
is applicable under a double taxation treaty. Generally, dividends distributed
from taxable income accrued during the period of benefit of an Approved
Enterprise are taxable at the rate of 15% if the dividend is distributed during
the tax benefit period under the Investment Law or within 12 years after the
period. (This limitation does not apply if the company qualifies as a foreign
investors' company according to the Investment Law.) These rates are the final
tax on dividends for individual and corporate non-residents and for individual
Israeli residents. Foreign residents who have Israeli derived income for which
tax was withheld at the source are generally exempt from the duty to file tax
returns in Israel for such income. This includes income from Israeli derived
interest, dividends and royalties.

         ISRAELI TAX ON UNITED STATES SHAREHOLDERS

         Dividends paid by Elbit Systems to a shareholder resident in the United
States are generally subject to withholding tax deducted at source in Israel.
Israel and the United States are parties to a tax treaty. Under the treaty, the
withholding tax rate on a dividend is normally 25% of the dividend amount, or
15% in connection with an Approved Enterprise.

         A U.S. corporation would have a reduced withholding rate on dividends
if it were to own 10% or more of Elbit Systems' voting shares under specified
conditions. The reduced withholding tax rate on the dividend would be 12.5%. The
U.S. corporation must own at least 10% of the voting shares during the portion
of Elbit Systems' tax year before the payment of the dividend and during the
entire prior tax year. The reduced rate is also subject to two other conditions.
First, not more than 25% of Elbit Systems' gross income for the prior tax year
could consist of interest, other than interest received from banking, financing
or similar businesses or from certain subsidiaries. Second, the dividend cannot
be derived from income during any period for which Elbit Systems is entitled to
the reduced tax rate applicable to an Approved Enterprise. In this case the
withholding tax rate would be 15%.

         Under the terms of the tax treaty, Israel may tax, subject to any
exemptions under Israeli law, any capital gain realized by a shareholder
resident in the United States on a sale of Elbit Systems' shares if the
shareholder owned, directly or indirectly, 10% or more of Elbit Systems' voting
shares at any time during the 12-month period before the sale or the above
shareholder is an individual and was present in Israel for more than 183 days
during the relevant taxable year. However, according to a new amendment in the
Israeli Tax Ordinance, effective January 1, 2003, since Elbit Systems ordinary
shares are traded on the TASE and on Nasdaq, gains on the sale of ordinary
shares held by non-Israeli resident investors for tax purposes will generally be
exempt from Israeli capital gains tax, subject to the provisions of the Israeli
tax legislation.



                                       96
<PAGE>

         With some limitations, any Israeli tax withheld or paid for dividends
on ordinary shares generally will be eligible for credit against a U.S.
shareholder's U.S. federal income tax liability. Such limitations include
separate computation rules limiting foreign tax credits allowable for specific
classes of foreign source income. The tax credits are limited to the
corresponding U.S. federal income taxes otherwise payable for each such class of
income. Alternatively, a U.S. shareholder may elect to claim a U.S. tax
deduction for such Israeli tax, but only for a year in which the U.S.
shareholder elects to do so for all foreign income taxes.

         This summary of taxation is based on existing treaties, laws,
regulations and judicial and administrative interpretations. There can be no
assurance that any of these may not be amended or repealed, possibly with
retroactive effect, or that a tax authority may take a contrary position. Also,
this summary does not address the tax consequences that may be applicable to
specific persons based on their individual circumstances. It also does not
address any state, local or other foreign tax consequences. A shareholder should
consult his or her own tax advisor as to the specific tax consequences of
purchasing, holding or transferring shares of Elbit Systems.


DOCUMENTS ON DISPLAY

         Elbit Systems is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. In accordance with these
requirements, Elbit Systems files reports and other information with the SEC.
These materials, including this Annual Report and its exhibits, may be inspected
and copied at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the SEC's regional office at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the materials may be
obtained from the Public Reference Room of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The public may obtain information on
the operation of the Commission's Public Reference Room by calling the SEC in
the United States at 1-800-SEC-0330.




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<PAGE>






ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK.

     While our functional currency is the U.S. dollar, we also have some
non-U.S. dollar or non-U.S. dollar linked currency exposure from time to time.
See above - Item 5. Operating Financial Review and Prospects - Management's
Discussion and Analysis - Impact of Inflation and Exchange Rates - Foreign
Currency Expenses.

         Except when we view it necessary, we do not invest in derivative
financial instruments or other market risk sensitive instruments. Therefore, we
do not believe that we are exposed to any material market risk with regard to
market risk sensitive instruments.


ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.

         Not applicable.


ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES.

         Not applicable.


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

         Not applicable.



ITEM 15.    CONTROLS AND PROCEDURES

         We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in our periodic filings with the SEC is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. These controls and procedures also provide that
such information is accumulated and communicated to our management, including
our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as
appropriate, to allow timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. Also, management necessarily was required to use its judgment in
evaluating the cost to benefit relationship of possible disclosure controls and
procedures. Within 90 days prior to the date of this report, we performed an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures. The evaluation was performed with the participation of
senior management of major business areas and key corporate functions, and under
the supervision of the CEO and CFO. Based on the evaluation, our management,
including the CEO and CFO, concluded that our disclosure controls and procedures
were effective. There have been no significant changes in our internal controls
or in other factors that could significantly affect internal controls after the
date we completed the evaluation.



                                       98
<PAGE>


ITEM 16.


ITEM 16.A  - AUDIT COMMITTEE FINANCIAL EXPERT

         Yaacov Lifshitz, a member of our Audit Committee, meets the criteria of
an "Audit Committee Financial Expert" under the applicable rules and regulations
of the SEC, and his designation as the Audit Committee's Financial Expert has
been ratified by the Board. Mr. Lifshitz is "independent", as that term is
defined in the Nasdaq listing standards.


ITEM 16.B - CODE OF ETHICS

         We have adopted a code of business conduct and ethics that is
applicable to all our directors, officers and employees including our principal
executive, financial and accounting officers and persons performing similar
functions. The code of ethics was approved by our Board and covers areas of
professional and business conduct. It is intended to promote honest and ethical
behavior, including fair dealing and the ethical handling of conflicts of
interest. The code of ethics includes a "whistleblower" process to encourage
reports of violations. Our code of ethics is posted on our website:
www.elbitsystems.com .


ITEM 16.C - PRINCIPAL ACCOUNTANT FEES AND SERVICES

         In the annual general shareholders meeting held in August 2003, our
shareholders reappointed Kost Forer Gabbay & Kasierer (Kost), a member of Ernst
& Young Global (E&Y), to serve as our independent auditors. We paid to Kost and
other E&Y affiliates the following fees for professional services in each of the
last two fiscal years:



                                Year Ended December 31
                              2003                  2002
                              ----                  ----
                              (U.S. dollars in thousands)

Audit Fees                    $616                  $556
Audit-Related Fees             $40                   $46
Tax Fees                      $398                  $159
All Other Fees                 $54                   $67
                           -------                 -----
Total                       $1,108                  $828




                                       99
<PAGE>




         "Audit Fees" are the aggregate fees billed for the audit of our annual
financial statements. This category also includes services generally provided by
the independent auditor, such as statutory audits required by the Office of the
Chief Scientist and other Israeli government entities, consents and assistance
with and review of documents filed with the SEC. "Audit Related Fees" are the
aggregate fees billed for assurance and related services that are reasonably
related to the performance of the audit and are not reported under Audit Fees.
These fees include mainly accounting consultations regarding the accounting
treatment of matters that occur in the regular course of business, implications
of new accounting pronouncements and other accounting issues that occur from
time to time. "Tax Fees" are the aggregate fees billed for professional services
rendered for tax compliance and tax advice, other than in connection with the
audit. Tax compliance involves preparation of original and amended tax returns,
tax planning and tax advice. "Other Fees" relate to permissible services
provided by the independent auditors that do not fall into the three
above-mentioned categories.

         Our Audit Committee has adopted a pre-approval policy for the
engagement of our independent accountant to perform permitted audit and
non-audit services. Under this policy, which is designed to assure that such
engagements do not impair the independence of our auditors, the Audit Committee
pre-approves annually a range of specific audit and non-audit services in the
categories of Audit Service, Audit-Related Services, Tax Services and other
services that may be performed by our independent accountants, and the maximum
pre-approved fees that may be paid as compensation for each pre-approved service
in those categories. Any proposed services exceeding the maximum pre-approved
fees require specific approval by the Audit Committee.


ITEMS 16.D - EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

         Not yet applicable to Registrant.


ITEMS 16.E - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
             PURCHASERS

         Neither Elbit Systems nor any affiliated purchaser purchased any of
Elbit Systems' equity securities during 2003.







                                      100
<PAGE>



ITEM 17.    FINANCIAL STATEMENTS.

         Not applicable.



ITEM 18.    FINANCIAL STATEMENTS.

         See Financial Statements attached.


ITEM 19.    EXHIBITS.

         (a)      Index to Financial Statements

                                                                         Page
                                                                         ----
         Independent Auditors' Reports                                    F-2
         Consolidated Balance Sheets at December 31, 2002 and 2003        F-5
         Consolidated Statements of Income                                F-7
         Consolidated Statements of Shareholders' Equity                  F-8
         Consolidated Statements of Cash Flows                            F-10
         Notes to Consolidated Financial Statements                       F-12
         Schedule II - Valuation and Qualifying Accounts                  S-1

         (b)      Exhibits

           1.1      Elbit Systems' Memorandum of Association *
           1.2      Elbit Systems' Restated Articles of Association
           4.1      Spin-off Agreement among Elbit Ltd., Elbit Medical Imaging
                    Ltd. and Elbit Systems **
           4.2      Technology Assignment and Cross License Agreement among
                    Elbit Ltd., Elbit Medical Imaging Ltd.
                    and Elbit Systems **
           4.3      Lease Agreement with Elbit Ltd. **
           4.4      Merger Agreement between Elbit Systems and Elop Electro-
                    Optics Industries Ltd. ***
           4.5      Shareholders Agreement between Elron Electronic Industries
                    Ltd. and the Federmann Group ***
           4.6      Form of Registration Rights Agreement among Elbit Systems,
                    Elron and the Federmann Group ***
           4.7      Elbit Systems' Post Merger Stock Option Plan (Summary in
                    English) *
           8.1      List of material subsidiaries and jurisdictions of
                    incorporation
          10.1      Consent of Kost Forer Gabbay & Kasierer
          31.1      Certification of Chief Executive Officer of the Registrant
                    pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.


                                      101
<PAGE>

          31.2      Certification of Chief Financial Officer of the Registrant
                    pursuant to Section 302 of
                    the Sarbanes-Oxley Act of 2002.
          32.1      Certification of Chief Executive Officer of the Registrant
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
          32.2      Certification of Chief Financial Officer of the Registrant
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
-------------------------------
*        Filed as an exhibit to Elbit Systems' Annual Report on Form 20-F (File
         No. 0-28998) for the year ended December 31, 2000, which was filed with
         the Securities and Exchange Commission on April 5, 2001, and
         incorporated herein by reference.
**       Filed as an exhibit to Elbit Systems' Registration Statement on Form
         20-F (File No. 0-28998), which was filed with the Securities and
         Exchange Commission on November 22, 1996, and incorporated herein by
         reference.
***      Filed as an exhibit to Elbit Systems' Report on Form 6-K for February
         2000, which was filed by Elbit Systems with the Securities and Exchange
         Commission on March 6, 2000, and incorporated herein by reference.




                                      102
<PAGE>


                                   SIGNATURES


         Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized.


Dated:  June 14, 2004


                               ELBIT SYSTEMS LTD.


                               By:  /s/ Joseph Ackerman
                                   -------------------------------------
                                   Name: Joseph Ackerman
                                   Title: President and Chief Executive Officer




                                      103
<PAGE>



                       ELBIT SYSTEMS LTD. AND SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                         (In thousands of U.S. dollars)

<TABLE>
<CAPTION>
                                           COLUMN A       COLUMN B        COLUMN C       COLUMN D        COLUMN E
                                                            Additions     Charged to
                                           Balance at      Charged to          Other                     Balance at
              DESCRIPTION                   Beginning       Costs and       Accounts     Deductions          End of
              -----------                   of Period        Expenses     (Describe)     (Describe)          Period
                                            ---------        --------     ----------     ----------          ------

<S>                                             <C>               <C>                           <C>           <C>
YEAR ENDED DECEMBER 31, 2003:

Deducted from Assets Accounts:
Allowance for Doubtful Accounts......           3,411             908                           458           3,861
Provisions for Additional Work on
Systems and Products Delivered,
Warranties and Expected Losses.......          57,395          20,361                        24,452          53,304

YEAR ENDED DECEMBER 31, 2002:

Deducted from Assets Accounts:
Allowance for Doubtful Accounts......           3,200             459                           248           3,411
Provisions for Additional Work on
Systems and Products Delivered,
Warranties and Expected Losses.......          51,132          34,541                        28,278          57,395

YEAR ENDED DECEMBER 31, 2001:

Deducted from Assets Accounts:
Allowance for Doubtful Accounts......           2,957             270             --             27           3,200
Provisions for Additional Work on
Systems and Products Delivered,
Warranties and Expected Losses.......          44,019          31,345         345(1)         24,577          51,132
</TABLE>
--------------------
(1)      Acquisition of subsidiaries





                                      S-1
<PAGE>


                                  EXHIBIT INDEX

           1.1      Elbit Systems' Memorandum of Association *
           1.2      Elbit Systems' Restated Articles of Association
           4.1      Spin-off Agreement among Elbit Ltd., Elbit Medical Imaging
                    Ltd. and Elbit Systems **
           4.2      Technology Assignment and Cross License Agreement among
                    Elbit Ltd., Elbit Medical Imaging Ltd.
                    and Elbit Systems **
           4.3      Lease Agreement with Elbit Ltd. **
           4.4      Merger Agreement between Elbit Systems and Elop Electro-
                    Optics Industries Ltd. ***
           4.5      Shareholders Agreement between Elron Electronic Industries
                    Ltd. and the Federmann Group ***
           4.6      Form of Registration Rights Agreement among Elbit Systems,
                    Elron and the Federmann Group ***
           4.7      Elbit Systems' Post Merger Stock Option Plan (Summary in
                    English) *
           8.1      List of material subsidiaries and jurisdictions of
                    incorporation
          10.1      Consent of Kost Forer Gabbay & Kasierer
          31.1      Certification of Chief Executive Officer of the Registrant
                    pursuant to Section 302 of
                    the Sarbanes-Oxley Act of 2002.
          31.2      Certification of Chief Financial Officer of the Registrant
                    pursuant to Section 302 of
                    the Sarbanes-Oxley Act of 2002.
          32.1      Certification of Chief Executive Officer of the Registrant
                    pursuant to Section 906 of
                    the Sarbanes-Oxley Act of 2002.
          32.2      Certification of Chief Financial Officer of the Registrant
                    pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

-------------------------------
*        Filed as an exhibit to Elbit Systems' Annual Report on Form 20-F (File
         No. 0-28998) for the year ended December 31, 2000, which was filed with
         the Securities and Exchange Commission on April 5, 2001, and
         incorporated herein by reference.
**       Filed as an exhibit to Elbit Systems' Registration Statement on Form
         20-F (File No. 0-28998), which was filed with the Securities and
         Exchange Commission on November 22, 1996, and incorporated herein by
         reference.
***      Filed as an exhibit to Elbit Systems' Report on Form 6-K for February
         2000, which was filed by Elbit Systems with the Securities and Exchange
         Commission on March 6, 2000, and incorporated herein by reference.





<PAGE>


                    ---------------------------------------
                    ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
                    ---------------------------------------




                        CONSOLIDATED FINANCIAL STATEMENTS
                             as of December 31, 2003
                             -----------------------
                                (In U.S. dollars)





<PAGE>

                    ---------------------------------------
                    ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
                    ---------------------------------------

                        CONSOLIDATED FINANCIAL STATEMENTS
                             as of December 31, 2003
                                (In U.S. dollars)


                                 C O N T E N T S


                                                                       Page
                                                                       ----

REPORT OF INDEPENDENT AUDITORS                                        2 - 4

CONSOLIDATED FINANCIAL STATEMENTS

  Consolidated Balance Sheets                                         5 - 6

  Consolidated Statements of Income                                     7

  Statements of Changes in Shareholders' Equity                       8 - 9

  Consolidated Statements of Cash Flows                              10 - 11

  Notes to the Consolidated Financial Statements                     12 - 58










                                  # # # # # # #


<PAGE>


[ERNST & YOUNG LOGO]



                         REPORT OF INDEPENDENT AUDITORS

To the Shareholders of Elbit Systems Ltd.

We have audited the  accompanying  consolidated  balance  sheet of Elbit Systems
Ltd.  (the  "Company")  and its  subsidiaries  as of December 31, 2003,  and the
related consolidated  statements of income,  changes in shareholders' equity and
cash flows for the year ended  December 31, 2003.  Our audits also  included the
financial  statement  schedule  listed in the Index at Item 19a. These financial
statements and schedule are the responsibility of the Company's management.  Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedule based on our audit.

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

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material  respects,  the consolidated  financial  position of the
Company and its  subsidiaries  as of December  31,  2003,  and the  consolidated
results of their operations and cash flows for the year ended December 31, 2003,
in  conformity  with  accounting  principles  generally  accepted  in the United
States.  Also, in our opinion,  the related financial statement  schedule,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
presents fairly in all material respects the information set forth therein.

As  discussed  in Note 2 to the  consolidated  financial  statements,  effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible assets".


                                              Kost Forer Gabbay & Kasierer
                                          A member of Ernst & Young Global

Haifa, Israel
March 9, 2004



                                      -2-
<PAGE>

[ERNST & YOUNG LOGO]

REPORT OF INDEPENDENT AUDITORS


To the Shareholders of Elbit Systems Ltd.

We have audited the  accompanying  consolidated  balance  sheet of Elbit Systems
Ltd.  (the  "Company")  and its  subsidiaries  as of December 31, 2002,  and the
related consolidated  statements of operations,  changes in shareholders' equity
and cash  flows for the year then  ended.  These  financial  statements  are the
responsibility of the Company's management.  Our responsibility is to express an
opinion  on these  financial  statements  based  on our  audits.  The  financial
statements  of Elbit  Systems Ltd. As of December 31, 2001 and for the year then
ended were  audited by other  auditors who have ceased  operations  as a foreign
associated firm of the Securities and Exchange  Commission  Practice  Section of
the American  Institute of Certified  Public  Accountants and whose report dated
March 24, 2002, expressed an unqualified opinion on those statements.

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

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

As discussed in Note 2 to the  consolidated  financial  statements,  the Company
adopted the provisions of Statement of Financial  Accounting  Standards No. 141,
Business  Combinations,  and No.  142,  Goodwill  and Other  Intangible  Assets,
effective January 1, 2002.

                                               LUBOSHITZ KASIERER
                              AN AFFILIATE MEMBER OF ERNST & YOUNG INTERNATIONAL



Haifa, Israel
March 10, 2003



                                      -3-
<PAGE>


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

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of

ELBIT SYSTEMS LTD.


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

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

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

                                                 Luboshitz Kasierer
                                                  Arthur Andersen

Haifa, Israel
March 24, 2002


                                      -4-
<PAGE>

<TABLE>

                                                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
----------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)

<CAPTION>

                                                                                        December 31,
                                                                               --------------------------------
                                                                   Note            2003              2002
                                                                -----------    --------------    --------------
<S>                                                                <C>               <C>               <C>
CURRENT ASSETS:
Cash and cash equivalents                                                      $      76,156     $      76,280
Short-term bank deposits                                                                 690             1,650
Trade receivables, net                                             (3)               203,281           225,773
Other receivables and prepaid expenses                             (4)                48,363            42,698
Inventories, net of advances                                       (5)               249,225           220,399
                                                                               --------------    --------------
Total current assets                                                                 577,715           566,800
                                                                               --------------    --------------

INVESTMENTS AND LONG-TERM RECEIVABLES:
Investments in affiliated companies and
    partnership                                                    (6A)               26,478            21,947
Investments in other companies                                     (6B)               11,745            11,104
Long-term trade receivables                                                              393            20,859
Long-term bank deposits and loan                                   (7)                 1,954             3,686
Severance pay fund                                                 (2N)               76,218            67,024
                                                                               --------------    --------------
                                                                                     116,788           124,620
                                                                               --------------    --------------

PROPERTY, PLANT AND EQUIPMENT,
  NET                                                              (8)               229,221           202,961
                                                                               --------------    --------------



OTHER ASSETS, NET:                                                 (9)
Goodwill                                                                              32,576            32,162
Know-how and other intangible assets, net                                             67,436            73,607
                                                                               --------------    --------------
                                                                                     100,012           105,769
                                                                               --------------    --------------
                                                                               $   1,023,736     $   1,000,150
                                                                               ==============    ==============


              The accompanying notes are an integral part of the consolidated financial statements
</TABLE>


                                                      -5-
<PAGE>
<TABLE>


                                                                            ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)

                                                                                         December 31,
                                                                               ---------------------------------
                                                                   Note            2003               2002
                                                                -----------    --------------    ---------------
<S>                                                                <C>                <C>              <C>
CURRENT LIABILITIES:
Short-term bank credit and loans                                   (10)        $       8,509     $      24,302
Current maturities of long-term loans                              (13)                6,818             6,613
Trade payables                                                                       107,545            82,094
Other payables and accrued expenses                                (11)              156,527           141,304
Customers advances and amounts in excess of
  costs incurred on contracts in progress                          (12)               99,618           106,467
                                                                               --------------    ---------------
Total current liabilities                                                            379,017           360,780
                                                                               --------------    ---------------

LONG-TERM LIABILITIES:
Long-term loans                                                    (13)               62,038            73,173
Advances from customers                                            (12)                7,592            40,411
Deferred income taxes                                             (15E)               24,916            24,735
Accrued severance pay                                            (14,2N)              93,979            84,973
                                                                               --------------    ---------------
                                                                                     188,525           223,292
                                                                               --------------    ---------------
COMMITMENTS  AND CONTINGENT
  LIABILITIES                                                      (16)

MINORITY INTERESTS                                                                     4,115             4,717
                                                                               --------------    ---------------

SHAREHOLDERS' EQUITY                                               (17)
Share capital

Ordinary shares of New Israeli Shekels (NIS)
  1 par value;
Authorized -  80,000,000   shares as of
  December 31, 2003 and 2002;
Issued - 39,746,125 and 39,212,328 shares as
  of December 31, 2003 and 2002, respectively;
Outstanding - 39,337,304 and 38,803,507
  shares as of December 31, 2003 and 2002,
  respectively                                                                        11,273            11,154
Additional paid-in capital                                                           259,033           248,387
Accumulated other comprehensive loss                                                  (3,992)           (2,882)
Retained earnings                                                                    190,086           159,023
Treasury shares - 408,821 shares as of
  December 31, 2003 and 2002                                                          (4,321)           (4,321)
                                                                               --------------    ---------------
                                                                                     452,079           411,361
                                                                               --------------    ---------------

                                                                               $   1,023,736     $   1,000,150
                                                                               ==============    ===============

              The accompanying notes are an integral part of the consolidated financial statements
</TABLE>


                                                      -6-
<PAGE>
<TABLE>

                                                                             ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)

                                                                                   Year ended December 31,
                                                                Note         2003           2002           2001
                                                                ----         ----           ----           ----
<S>                                                             <C>          <C>            <C>         <C>
Revenues                                                        (18)         $897,980       $827,456      $764,501
Cost of revenues                                                              673,561        605,313       553,957
                                                                             --------       --------      --------
  Gross profit                                                                224,419        222,143       210,544
                                                                             --------       --------      --------

Research and development costs, net                             (19)           54,919         57,010        58,759
Marketing and selling expenses                                                 69,943         65,691        54,876
General and administrative expenses                                            46,077         41,651        43,216
                                                                             --------       --------      --------
                                                                              170,939        164,352       156,851
                                                                             --------       --------      --------

  Operating income                                                             53,480         57,791        53,693

Financial expenses, net                                         (20)           (4,870)        (3,035)       (2,617)
Other income (expenses), net                                    (21)              903           (462)          774
                                                                             --------       --------      --------
Income before taxes on income                                                  49,513         54,294        51,850
Taxes on income                                                 (15)           11,334          9,348        11,003
                                                                             --------       --------      --------
                                                                               38,179         44,946        40,847
Equity in net earnings (losses) of affiliated companies and
  partnership                                                                   7,209            675          (598)
Minority interests in losses (earnings) of
  subsidiaries                                                                    557           (508)          547
                                                                             --------       --------      --------
  Net income                                                                 $ 45,945        $45,113       $40,796
                                                                             ========       ========      ========

Earnings per share                                              (17G)
Basic net earnings per share                                                 $   1.18       $   1.17      $   1.07
                                                                             ========       ========      ========
Diluted net earnings per share                                               $   1.14       $   1.13      $   1.04


                The accompanying notes are an integral part of the consolidated financial statements
</TABLE>


                                                        -7-
<PAGE>
<TABLE>


                                                                          ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
-----------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)
<CAPTION>

                                                                                                  Accumulated
                                          Number of                            Additional            other
                                         outstanding           Share             paid-in          comprehensive
                                            shares            capital            capital               loss
                                         -------------      ------------       ------------      ----------------
<S>                                       <C>                <C>               <C>                <C>
Balance as of January 1, 2001             37,811,398         $    10,916        $   235,462        $          -
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 based
  compensation                                     -                   -              8,512                   -
Purchase of treasury shares                  (66,986)                  -                  -                   -
Dividends paid                                     -                   -                  -                   -
Net income                                         -                   -                  -                   -
                                          ----------         -----------        -----------         -----------

Balance as of  December 31, 2001          38,330,272              11,054            244,625                   -
Exercise of options                          473,235                 100              4,040                   -
Tax benefit in respect of options
  exercised                                        -                   -                648                   -
Amortization of stock based
  compensation                                     -                   -               (926)                  -
Dividends paid                                     -                   -                  -                   -
Comprehensive income (loss):
Minimum pension liability                          -                   -                  -              (2,882)
Net income                                         -                   -                  -                   -
                                          ----------         -----------        -----------         -----------
  Total comprehensive income

Balance as of December 31, 2002           38,803,507         $    11,154        $   248,387         $    (2,882)
                                          ==========         ===========        ===========         ===========

<CAPTION>

                                                                                  Total           Total other
                                             Retained         Treasury        shareholders'      comprehensive
                                             earnings          shares            equity             income
                                            ------------    -------------    --------------    ----------------
<S>                                       <C>                <C>                <C>                <C>
Balance as of January 1, 2001             $  97,963          $  (3,613)         $ 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 based
  compensation                                    -                  -              8,512
Purchase of treasury shares                       -               (708)              (708)
Dividends paid                              (12,132)                 -            (12,132)
Net income                                   40,796                  -             40,796          $  40,796
                                          ---------          ---------          ---------          ---------
  Total comprehensive income                                                                       $  40,796
                                                                                                   =========

Balance as of  December 31, 2001            126,627             (4,321)           377,985
Exercise of options                               -                  -              4,140
Tax benefit in respect of options
  exercised                                       -                  -                648
Amortization of stock based
  compensation                                    -                  -               (926)
Dividends paid                              (12,717)                 -            (12,717)
Comprehensive income (loss):
Minimum pension liability                         -                  -             (2,882)         $  (2,882)
Net income                                   45,113                  -             45,113             45,113
                                          ---------          ---------          ---------          ---------
  Total comprehensive income                                                                       $  42,231
                                                                                                   =========
Balance as of December 31, 2002           $ 159,023          $  (4,321)         $ 411,361
                                          =========          =========          =========

             The accompanying notes are an integral part of the consolidated financial statements
</TABLE>

                                                      -8-
<PAGE>

<TABLE>

                                                                           ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands, except per share data)

<CAPTION>
                                                                                                               Accumulated
                                                            Number of                       Additional            other
                                                           outstanding         Share          paid-in         comprehensive
                                                              shares          capital         capital             loss
                                                           -------------    ------------    ------------    ----------------
<S>                                                        <C>             <C>              <C>              <C>
Balance as of December 31, 2002                            38,803,507      $     11,154     $    248,387     $     (2,882)
Exercise of options                                           533,797               119            5,147                -
Tax benefit in respect of
  options exercised                                                 -                 -              758                -
Amortization of stock based
  compensation                                                      -                 -            4,741                -
Dividends paid                                                      -                 -                -                -
Comprehensive income (loss):
Unrealized gains on derivative
  instruments                                                       -                 -                -             (578)
Foreign currency translation differences                            -                 -                -              340
Minimum pension liability                                           -                 -                -             (872)
Net income                                                          -                 -                -                -
                                                         ------------      ------------     ------------     ------------
Total comprehensive income


Balance as of December 31, 2003                            39,337,304      $     11,273     $    259,033     $     (3,992)
                                                         ============      ============     ============     ============

Accumulated other comprehensive loss
------------------------------------
Accumulated gains on derivative instruments                                                                  $       (578)
Accumulated foreign currency translation differences                                                                  340
Accumulated minimum pension liability                                                                              (3,754)
                                                                                                             ------------
Accumulated other comprehensive loss
  as of December 31, 2003                                                                                    $     (3,992)
                                                                                                             ============

<CAPTION>

                                                                                        Total           Total other
                                               Retained           Treasury          shareholders'      comprehensive
                                               earnings            shares              equity             income
                                              ------------      -------------      --------------    ----------------

<S>                                            <C>                <C>                <C>                  <C>
Balance as of December 31, 2002                $ 159,023          $  (4,321)         $ 411,361
Exercise of options                                    -                  -              5,266
Tax benefit in respect of
  options exercised                                    -                  -                758
Amortization of stock based
  compensation                                         -                  -              4,741
Dividends paid                                   (14,882)                 -            (14,882)
Comprehensive income (loss):
Unrealized gains on derivative
  instruments                                          -                  -               (578)           $    (578)
Foreign currency translation differences               -                  -                340                  340
Minimum pension liability                              -                  -               (872)                (872)
Net income                                        45,945                  -             45,945               45,945
                                               ---------          ---------          ---------            ---------
Total comprehensive income                                                                                $  44,835
                                                                                                          =========
Balance as of December 31, 2003                $ 190,086          $  (4,321)         $ 452,079
                                               =========          =========          =========



                   The accompanying notes are an integral part of the consolidated statements.
</TABLE>

                                                       -9-
<PAGE>
<TABLE>

                                                                                             ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
------------------------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)

                                                                                                         Year ended December 31,
                                                                                                         -----------------------
                                                                                                     2003        2002          2001
                                                                                                     ----        ----          ----
<S>                                                                                            <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES
  Net income                                                                                   $  45,945    $  45,113    $  40,796
  Adjustments required to reconcile net income to net cash provided by
   operating activities:
  Depreciation and amortization                                                                   37,890       32,937       32,865
   Amortization of deferred stock based compensation                                               4,741         (926)       8,512
  Deferred income taxes, net                                                                          35       (5,620)      (2,694)
  Accrued severance pay, net                                                                      (1,240)       6,260         (633)
  Gain (loss) on sale of property, plant and equipment                                              (915)         743         (327)
  Tax benefit in respect of options exercised                                                        758          648        1,363
  Minority interests in earnings (losses) of subsidiaries                                           (557)         508         (547)
  Equity in net losses (earnings)  of affiliated companies and partnership, net of
   dividend received (*)                                                                          (4,995)        (675)         598
Changes in operating assets and liabilities:
  Decrease (increase) in short and long-term receivables and prepaid expenses                     45,297       58,554       (9,963)
  Increase in inventories                                                                        (38,651)     (55,106)     (72,165)
  Increase (decrease) in trade payable, other payables and accrued expenses                       32,147      (19,321)      37,004
  Increase (decrease) in advances received from customers                                        (27,855)      42,999        6,489
  Settlement of royalties with the Office of the Chief Scientist                                  (1,581)       9,197            -
  Other adjustments                                                                                  337          683         (117)
                                                                                               ---------    ---------    ---------
  Net cash provided by operating activities                                                       91,356      115,994       41,181
                                                                                               ---------    ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES
  Purchase of property, plant and equipment                                                      (61,287)     (46,003)     (45,244)
  Investment grants received for property, plant and equipment                                         -          119        1,334
  Acquisition of subsidiaries and businesses  (Schedule A)                                        (2,458)      (5,280)      (3,344)
  Investments in affiliated companies and subsidiaries                                            (1,049)      (1,681)        (801)
  Proceeds from sale of property, plant and equipment                                              5,815          956        3,010
  Grant of long-term loan                                                                              -         (714)           -
  Repayment of long-term loan                                                                      2,400            -            -
  Repayment of short-term loan                                                                         -        1,371            -
  Investment in long-term bank deposits                                                           (1,750)      (1,228)      (1,872)
  Proceeds from sale of long-term bank deposits                                                    3,568        1,689        2,322
  Short-term bank deposits, net                                                                      960         (204)         (57)
                                                                                               ---------    ---------    ---------
  Net cash used in investing activities                                                          (53,801)     (50,975)     (44,652)
                                                                                               ---------    ---------    ---------

CASH FLOWS FROM FINANCING ACTIVITIES
  Proceeds from exercise of options                                                                5,266        4,140        3,300
  Repayment of long-term credit for purchase of a building                                             -            -       (3,000)
  Purchase of treasury  shares                                                                         -            -         (708)
  Repayment of long-term bank loans                                                              (27,066)      (3,249)     (13,049)
  Proceeds from long-term bank loans                                                              10,000        2,233       25,444
  Dividends paid                                                                                 (14,882)     (12,717)     (12,132)
  Change in short-term bank credit and  loans, net                                               (10,997)     (19,729)      (6,517)
                                                                                               ---------    ---------    ---------
  Net cash used in financing activities                                                          (37,679)     (29,322)      (6,662)
                                                                                               ---------    ---------    ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                                (124)      35,697      (10,133)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR                                            76,280       40,583       50,716
                                                                                               ---------    ---------    ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                               $  76,156    $  76,280    $  40,583
                                                                                               =========    =========    =========
(*) Dividend received                                                                          $   2,214    $       -    $       -
                                                                                               =========    =========    =========

                       The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                                -10-
<PAGE>
<TABLE>

                                                                                        ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
-------------------------------------------------------------------------------------------------------------------------------
U. S. dollars (In thousands)
<CAPTION>

                                                                                                Year ended December 31,
                                                                                                -----------------------
                                                                                          2003            2002            2001
                                                                                          ----            ----            ----
<S>                                                                                    <C>            <C>              <C>
SUPPLEMENTAL CASH FLOWS INFORMATION:
     Cash paid during the year for:
     Income taxes                                                                      $ 14,666        $ 21,730        $  9,469
                                                                                       ========        ========        ========
     Interest                                                                          $  4,034        $  2,947        $  6,649
                                                                                       ========        ========        ========

SCHEDULE A:
Subsidiaries and businesses acquired (*)

Estimated net fair value of assets acquired and liabilities  assumed at the date
of acquisition was as follows:
     Working capital deficiency (excluding cash and cash equivalents)                  $    657       $       -        $    888
     Property, plant and equipment                                                         (249)           (275)         (1,886)
     Goodwill, know-how and other intangible assets                                      (1,334)         (5,078)         (3,800)
     Deferred income taxes                                                               (1,765)              -               -
     Long-term liabilities                                                                  198               -           1,454
     Minority interest                                                                       35               -               -
                                                                                       --------        --------        --------
                                                                                         (2,458)         (5,353)         (3,344)
     Less short-term debt incurred on acquisition                                             -              73               -
                                                                                       --------        --------        --------
                                                                                       $ (2,458)       $ (5,280)       $ (3,344)
                                                                                       ========        ========        ========


    (*)  AEL in 2001 (see Note 1C).  Defense systems  division of Elron Telesoft
         in 2002  (see  Note  1D).  In 2003 OIP (see Note 1E) and AD&D (see Note
         1F).

                     The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>

                                                              -11-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 1   -    GENERAL

              A.    Elbit   Systems   Ltd.   (the   "Company")   is  an  Israeli
                    corporation,  30% 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  Elop
                    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.  As for a major  customer
                    refer to Note 18C.

              C.    In  2001,   the  Company   acquired  a  62.5%   interest  in
                    Aeroeletronica  - Industria de  Componentes  Avionicos  S.A.
                    ("AEL"),  a Brazilian  company located in Porto Alegre,  for
                    approximately  $3,450 in cash.  In July  2002,  the  Company
                    acquired the remaining 37.5% interest for an additional $900
                    in  cash.  The  consideration  paid  included  approximately
                    $1,200 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 the fair value of net  liabilities  acquired 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.

                    The results of AEL's  operations  have been  included in the
                    consolidated   financial   statements   from   the  date  of
                    acquisition.

                    Pro  forma  information  in  accordance  with  Statement  of
                    Financial    Accounting    Standards   No.   141   "Business
                    Combinations" ("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 for
                    the year 2001.

                                      -12-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 1   -    GENERAL (Cont.)

              D.    In January 2002,  the Company  acquired from Elron  Telesoft
                    Inc. and its subsidiaries  ("Elron Telesoft") the assets and
                    the  business  of the  Defense  Systems  Division  of  Elron
                    Telesoft ("the Government  Division") in  consideration  for
                    $5,700 in cash.  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 a weighted  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 for the years 2001 and
                    2002.

              E.    In June 2003, the Company  (through  El-Op)  acquired all of
                    the outstanding  Ordinary shares of Optronics  Instruments &
                    Products N.V. (O.I.P.),  a company registered in Belgium, in
                    consideration  for  $1,846  in  cash.  The  acquisition  was
                    accounted for by the purchase method of accounting.

                    O.I.P. develops,  manufactures and supports  electro-optical
                    products, mainly for the defense and space markets.

                    The following table summarizes the fair values of the assets
                    acquired and liabilities  assumed at the date of acquisition
                    as estimated by the Company:

                    Current assets                          $  6,896
                    Property and equipment                       168
                    Deferred tax assets                        1,700
                                                            --------
                       Total assets acquired                   8,764

                    Current liabilities                       (6,918)
                                                            --------
                    Net assets acquired                     $  1,846
                                                            ========

                    The results of O.I.P.'s operations have been included in the
                    consolidated   financial   statements   from   the  date  of
                    acquisition.

                                      -13-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 1   -    GENERAL (Cont.)

                    Pro forma  information  in accordance  with SFAS No. 141 has
                    not been  provided,  since the  revenues  and net  income of
                    O.I.P.  were not material in relation to total  consolidated
                    revenues and net income for the years 2001, 2002 and 2003.

              F.    In July 2003, the Company acquired  approximately 54% of the
                    outstanding  shares of Aero Design Development Ltd. ("AD&D")
                    an Israeli company in consideration  for $1,406 in cash. The
                    acquisition  was  accounted  for by the  purchase  method of
                    accounting.

                    AD&D develops,  manufactures  and builds airborne models and
                    other engineered products.

                    The  purchase  price  over  the fair  value of net  tangible
                    assets  acquired in the amount of  approximately  $1,334 was
                    allocated  to  know-how  ($1,000)  to be  amortized  by  the
                    straight-line  method  over  a  period  of 10  years  and to
                    goodwill ($334).

                    The following table summarizes the fair values of the assets
                    acquired and liabilities  assumed at the date of acquisition
                    as estimated by the Company:

                    Current assets                          $     604
                    Property and equipment                         81
                    Know-how and goodwill                       1,334
                    Deferred tax assets                            65
                                                            ---------
                       Total assets acquired                    2,084

                    Current liabilities                          (445)
                    Long-term liabilities                        (198)
                    Minority interest                             (35)
                                                            ---------
                    Net assets acquired                     $   1,406
                                                            =========

                    The results of AD&D.'s  operations have been included in the
                    consolidated   financial   statements   from   the  date  of
                    acquisition.

                    Pro forma  information  in accordance  with SFAS No. 141 has
                    not been provided, since the revenues and net income of AD&D
                    were not material in relation to total consolidated revenues
                    and net income for the years 2001, 2002 and 2003.

                                      -14-
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES

              The  consolidated  financial  statements  have  been  prepared  in
              accordance with generally  accepted  accounting  principles in the
              United States  ("U.S.  GAAP").  As applicable to the  consolidated
              financial   statements   of  the  Group,   such   principles   are
              substantially   identical  to  accounting   principles   generally
              accepted in Israel, except as described in Note 23.

              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's revenues are generated mainly in U.S. dollars.
                    In  addition,  most of the  Company's  costs are incurred in
                    U.S.  dollars.  The 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 "Foreign Currency Translation". All exchange gain and
                    losses from the remeasurement  mentioned above are reflected
                    in the statement of income in financial income or expenses.

                    For those foreign subsidiaries whose functional currency has
                    been determined to be other than the U.S. dollar, assets and
                    liabilities  are  translated at year-end  exchange rates and
                    statement of income items are translated at average exchange
                    rates   prevailing   during  the  year.   Such   translation
                    adjustments   are  recorded  as  a  separate   component  of
                    accumulated  other  comprehensive  income  in  shareholders'
                    equity.

                                      -15-
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              C.    PRINCIPLES OF CONSOLIDATION

                    The consolidated  financial  statements include the accounts
                    of  the   Company   and  its   wholly   and   majority-owned
                    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 EQUIVALENTS

                    Cash equivalents,  are short-term highly liquid  investments
                    that are  readily  convertible  to cash with  maturities  of
                    three months or less at the date of acquisition.

              E.    SHORT-TERM BANK DEPOSITS

                    Short-term  bank  deposits are deposits  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:

                    -    Raw materials using the average cost method.

                    -    Costs  incurred  on  long-term  contracts  in  progress
                         represent  recoverable  costs incurred for  production,
                         allocable  operating  overhead and, where  appropriate,
                         research and development costs (refer to Note 2Q).

                    Advances  from  customers  are  allocated to the  applicable
                    contract  inventories and are reflected as an offset against
                    the related inventory balances.


                                      -16-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

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.  Profits on  intercompany  sales,  not  realized
                    outside the Group, were eliminated.  The Group  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.

                    Certain investments are accounted for under the hypothetical
                    liquidation method. For these investments, the Group applies
                    Emerging Issues Task Force ("EITF 99-10"),  "Percentage Used
                    to Determine the Amount of Equity Method Losses",  according
                    to which the Group recognizes  equity method losses based on
                    the ownership level of the particular  investee  security or
                    loan held by the Group to which the equity method losses are
                    being applied.

                    The Group's  investments  in  affiliates  are  reviewed  for
                    impairment  whenever  events  or  changes  in  circumstances
                    indicate that the carrying  amount of an investment  may not
                    be   recoverable.   As  of  December  31,  2003,   based  on
                    management's most recent analyses, no impairment losses have
                    been identified.

              H.    LONG-TERM TRADE RECEIVABLES

                    Long-term trade receivables from extended payment agreements
                    are recorded at their estimated  present values  (determined
                    based on the original rates of interest).

              I.    LONG-TERM BANK DEPOSITS

                    Bank  deposits  with  maturities  of more  than one year are
                    presented at cost including accumulated interest.

                                      -17-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              J.    PROPERTY, PLANT AND EQUIPMENT

                    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 the  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                           15-20  (mainly 15%)

                    Land rights and  leasehold  improvements  - over the term of
                    the lease.

              K.    IMPAIRMENT OF LONG-LIVED ASSETS

                    The  Group'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  determined to
                    be impaired,  the impairment to be recognized is measured by
                    the amount by which the carrying amount of the asset exceeds
                    its fair  value.  As of December  31,  2003,  no  impairment
                    losses have been identified.

              L.    OTHER ASSETS

                    Intangible   assets  subject  to  amortization   arose  from
                    acquisitions prior to July 1, 2001, are being amortized on a
                    straight-line  basis over their  useful  life in  accordance
                    with APB Opinion No. 17, "Intangible Assets" ("APB No. 17").

                                      -18-
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              L.    OTHER ASSETS (CONT.)

                    Intangible  assets  acquired in a business  combination  for
                    which date is on or after July 1, 2001, are being  amortized
                    over their useful life using a method of  amortization  that
                    reflects the pattern in which the  economic  benefits of the
                    intangible  assets are  consumed  or  otherwise  used up, in
                    accordance with Statements of Financial Accounting Standards
                    No. 142 "Goodwill and Other Intangible  Assets",  ("SFAS No.
                    142").

              M.    GOODWILL

                    Goodwill  represents excess of the cost of acquired entities
                    over  the  net  fair  values  of  the  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,  such  goodwill  shall no longer be  amortized
                    effective  as of  January 1, 2002.  Goodwill  acquired  in a
                    business  combination  on or  after  July  1,  2001  is  not
                    amortized.

                    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,  future  short-term and long-term  growth
                    rates and  weighted  average cost of capital for each of the
                    reporting  units.  As of December  31, 2003,  no  impairment
                    losses have been identified.

                    The  adoption  of  SFAS  142 did not  affect  the  financial
                    position  and  results  of  operations  of the  Group  as of
                    January 1, 2002.


                                      -19-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              N.    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,
                    2003,  2002 and 2001,  amounted  to  approximately  $11,491,
                    $10,138 and $8,097, respectively.

              O.    REVENUE RECOGNITION

                    The  Group  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 Statement
                    of   Position   81-1    "Accounting   for   Performance   of
                    Construction-Type  and Certain  Production - Type Contracts"
                    ("SOP 81-1") 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  Group  achieves  certain  milestones.   As  for
                    research and  development  costs  accounted  for as contract
                    costs refer to Note 2Q.


                                      -20-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              O.    REVENUE RECOGNITION (CONT.)

                    Sales under long-term fixed-price development and production
                    type  contracts  are recorded on a percentage  of completion
                    basis  using  cost-to-cost  method  and  units  of  delivery
                    method, as applicable.

                    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.

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

                    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.


                                      -21-
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              P.    WARRANTY

                    The Group 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  Group  does
                    business. Factors that affect the Group's warranty liability
                    include the number of delivered units, engineering estimates
                    and  anticipated   rates  of  warranty  claims.   The  Group
                    periodically  assesses the adequacy of its recorded warranty
                    liability and adjusts the amount as necessary.

                    Changes in the Group's  provision  for  warranty  during the
                    year are as follows:

                    Balance, at January 1, 2003                  $ 8,541
                    Warranties issued during the year              4,491
                    Warranties forfeited or exercised
                      during the year                             (3,340)
                                                                 -------

                    Balance, at December 31, 2003                $ 9,692
                                                                 =======

              Q.    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  grants  (mainly
                    royalty-bearing)  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.


                                      -22-
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              R.    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.

              S.    CONCENTRATION OF CREDIT RISKS

                    Financial  instruments that potentially subject the Group to
                    concentrations  of credit risk consist  principally  of cash
                    and cash equivalents and trade receivables.

                    The  majority of the Group's cash and cash  equivalents  and
                    deposits are 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.


                                      -23-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              T.    DERIVATIVE FINANCIAL INSTRUMENTS

                    Financial  Accounting  Standards  Board  Statement  No. 133,
                    Accounting for Derivative Instruments and Hedging Activities
                    ("SFAS No. 133"), requires companies to recognize all of its
                    derivative  instruments  as either assets or  liabilities in
                    the  statement  of  financial  position at fair  value.  The
                    accounting  for  changes  in the fair value  (i.e.  gains or
                    losses) of a derivative instrument depends on whether it has
                    been   designated   and  qualifies  as  part  of  a  hedging
                    relationship   and   further,   on  the   type  of   hedging
                    relationship.  For  those  derivative  instruments  that are
                    designated  and  qualify as hedging  instruments,  a company
                    must  designate  the  hedging  instrument,  based  upon  the
                    exposure  being  hedged,  as a fair value  hedge,  cash flow
                    hedge  or  a  hedge  of  a  net   investment  in  a  foreign
                    operations.

                    For derivative  instruments  that are designated and qualify
                    as a fair value hedge (i.e., hedging the exposure to changes
                    in  the  fair  value  of  an  asset  or a  liability  or  an
                    identified   portion  thereof  that  is  attributable  to  a
                    particular  risk),  the  gain  and  loss  on the  derivative
                    instrument  as  well as the  offsetting  loss or gain on the
                    hedged item  attributable  to the hedged risk are recognized
                    in the same line item  associated  with the  hedged  item in
                    current  earnings  during  the  period of the change in fair
                    values.  For derivative  instruments that are designated and
                    qualify as a cash flow hedge (i.e.  hedging the  exposure to
                    variability   in   expected   future   cash  flows  that  is
                    attributable to a particular risk), the effective portion of
                    the gain or loss on the derivative instrument is reported as
                    a component of other  comprehensive  income and reclassified
                    into  earnings  in the same  line item  associated  with the
                    forecasted  transaction in the same period or periods during
                    which the hedged transaction affects earnings.

                    The remaining gain or loss on the  derivative  instrument in
                    excess  of the  cumulative  change in the  present  value of
                    future cash flows of the hedged item,  if any, is recognized
                    in other  income/expense  in  current  earnings  during  the
                    period of change.

                    For  derivative   instruments   not  designated  as  hedging
                    instruments,  the  gain  or  loss  is  recognized  in  other
                    income/expense  in  current  earnings  during  the period of
                    change.

                                      -24-
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              T.    DERIVATIVE FINANCIAL INSTRUMENTS (CONT.)

                    As part of its fair value hedging  strategy the Group enters
                    into  forward  exchange  contracts  to  hedge  certain  firm
                    commitments  denominated in foreign currencies.  The purpose
                    of the Group's  foreign  currency  hedging  activities is to
                    protect  the Group 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 part of its cash flows hedging  strategy the Group enters
                    into forward exchange  contracts to hedge forecasted  salary
                    expenses denominated in currency other than the U.S. dollar.

                    As of December  31,  2003,  the Group had forward  contracts
                    with notional value of approximately $27,500 to purchase and
                    sell foreign currencies. The Group also had options to hedge
                    future  cash flow in the  amount  of  $24,000.  The  forward
                    contracts and the options mature in 2004.

                    The  fair  value of the  foreign  exchange  contracts  as of
                    December 31, 2003 amounted to $1,113.  The fair value of the
                    options as of December 31, 2003 is minimal.

              U.    STOCK-BASED COMPENSATION

                    The  Company  has  elected to follow  Accounting  Principles
                    Board  Opinion No. 25 ("APB No. 25")  "Accounting  for Stock
                    Issued to Employees"  and FASB  Interpretation  No. 44 ("FIN
                    No.  44")  "Accounting  for Certain  Transactions  Involving
                    Stock  Compensation"  in accounting  for its employee  stock
                    option  plans.  Under APB No.  25,  compensation  expense is
                    recognized  based on the  intrinsic  value  method  where by
                    compensation  expense  is equal 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  recognizes  the
                    expense over the vesting period of the award.

                    In respect of phantom  share  options,  the Company  applies
                    variable stock compensation accounting (See Note 17C).


                                      -25-
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              U.    STOCK-BASED COMPENSATION (CONT.)

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

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

                    The fair value for options granted in 2003, 2002 and 2001 is
                    amortized  over their  vesting  period and  estimated at the
                    date of grant using a  Black-Scholes  options  pricing model
                    with the following weighted average assumptions:

                                                 2003       2002        2001
                                                 ----       ----        ----
                    Divided yield               2.19%       1.99%       2.03%
                    Expected volatility        19.03%      21.90%      33.80%
                    Risk-free interest          1.20%       1.34%       2.00%
                    Expected life of up to    6 years     6 years     6 years


                                      -26-
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              U.    STOCK-BASED COMPENSATION (CONT.)

                    Pro forma information under SFAS No.123 is as follows:
<TABLE>
<CAPTION>

                                                                             Year ended December 31,
                                                                      2003            2002             2001
                                                                  -------------    ------------    -------------
<S>                                                                 <C>              <C>             <C>
              Net income  as reported                               $ 45,945         $ 45,113         $   40,796
               Add - Stock based compensation
                         expense (income), net of related
                         tax effects as reported (intrinsic
                         method)                                       3,793             (741)             6,810
               Deduct - Stock based compensation
                         expense under fair value based
                         method of  SFAS 123 net of
                         related tax effects                         (2,956)          (2,956)            (2,932)
                                                                    --------         --------         ----------
               Pro forma net income                                 $ 46,782         $ 41,416         $   44,674
                                                                    ========         ========         ==========

              Net earnings per share:
               Basic net earnings per share as reported             $   1.18         $   1.17         $     1.07
                                                                    ========         ========         ==========

              Diluted net earnings per share as reported            $   1.14         $   1.13         $     1.04
                                                                    ========         ========         ==========

              Pro forma basic net earnings per share                $   1.20         $   1.08         $     1.18
                                                                    ========         ========         ==========

              Pro forma diluted net earnings per share              $   1.16         $   1.04         $     1.14
                                                                    ========         ========         ==========
</TABLE>

              V.    FAIR VALUE FINANCIAL INSTRUMENTS

                    The carrying  amount  reported in the balance sheet for cash
                    and  cash  equivalents,   short-term  bank  deposits,  trade
                    receivables,  short-term  bank  credit  and  loans and trade
                    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.


                                      -27-
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              V.    FAIR VALUE FINANCIAL INSTRUMENTS (CONT.)

                    It was not  practicable  to  estimate  the fair value of the
                    Group's  investments in shares of non-public  companies that
                    are accounted for under the cost method  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 $11,104 and
                    $11,745 as of December 31, 2002 and 2003, respectively,  and
                    represent the original cost of acquisition.

              W.    BASIC AND DILUTED NET EARNINGS PER SHARE

                    Basic  net  earnings  per  share  is  computed  based on the
                    weighted  average  number  of  Ordinary  shares  outstanding
                    during each year. Diluted net earnings per share is computed
                    based on the  weighted  average  number of  Ordinary  shares
                    outstanding   during  each  year,  plus  dilutive  potential
                    Ordinary shares  considered  outstanding  during the year in
                    accordance   with  SFAS  No.  128   "Earnings   Per  Share".
                    Outstanding  stock options are excluded from the calculation
                    of the diluted net  earnings  per  Ordinary  share when such
                    securities are anti-dilutive.  In all the years presented no
                    stock options were excluded.

              X.    IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

                    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


                                      -28-
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              X.    IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)

                    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 adoption of FIN No. 45 did not
                    have a material  impact on the Group's results of operations
                    or financial position.

                    In November  2002, the EITF reached a consensus on Issue No.
                    00-21,  "Revenue  Arrangements with Multiple  Deliverables."
                    EITF Issue No. 00-21 provides guidance on how to account for
                    arrangements  that  involve the delivery or  performance  of
                    multiple products, services and/or rights to use assets. The
                    provisions  of EITF  Issue  No.  00-21  applied  to  revenue
                    arrangements  entered into in fiscal periods beginning after
                    June 15, 2003. Additionally,  companies will be permitted to
                    apply the  consensus  guidance in this issue to all existing
                    arrangements  as  the  cumulative  effect  of  a  change  in
                    accounting  principle in accordance with APB Opinion No. 20,
                    "Accounting  Changes".  The adoption of EITF Issue No. 00-21
                    did  not  have  a  material   impact   upon  the   Company's
                    consolidated  financial  position,  cash flows or results of
                    operations.

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

                    In  2003,  the  FASB  issued  FASB  Interpretation  No.  46,
                    Consolidation   of   Variable    Interest    Entities,    an
                    interpretation of Accounting  Research Bulletin No. 51 ("FIN
                    46").  In  December  2003,  the FASB  revised FIN 46 to make
                    certain   technical    corrections   and   address   certain
                    implementation issues that had arisen. FIN 46 provides a new
                    framework  for  identifying   Variable   Interest   Entities
                    ("VIE's") and determining  when a company should include the
                    assets,  liabilities,  non-controlling interests and results
                    of  activities  of  a  VIE  in  its  consolidated  financial
                    statements.


                                      -29-
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 2   -    SIGNIFICANT ACCOUNTING POLICIES (CONT.)

              X.    IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)

                    In  general,  a VIE is an  entity  that  either  (1)  has an
                    insufficient  amount of  equity  to carry out its  principal
                    activities,   without  additional   subordinated   financial
                    support, (2) has a group of equity owners that are unable to
                    make significant decisions about the entity's activities, or
                    (3) has a group  of  equity  owners  that  do not  have  the
                    obligation  to absorb  the  entity's  losses or the right to
                    receive returns generated by its operations. FIN 46 requires
                    the consolidation of a VIE by the primary  beneficiary.  The
                    primary beneficiary is the entity that absorbs a majority of
                    the  entity's  expected  losses,  receives a majority of the
                    entity's expected residual returns,  or both, as a result of
                    ownership,  contractual or other financial  interests in the
                    entity.

                    The  Group  is  currently  evaluating  the  effects  of this
                    interpretation in respect of its investments. It is possible
                    that some of its unconsolidated  investees may be considered
                    as VIEs in accordance with the interpretation.  Accordingly,
                    if  it  is   determined   that  the  Group  is  the  primary
                    beneficiary  of  a  VIE,  the  Group  will  be  required  to
                    consolidate  the  financial  statements of such VIE with its
                    own financial statements  commencing in the first quarter of
                    2004.

              Y.    RECLASSIFICATIONS

                    Certain  financial  statement  data for prior years has been
                    reclassified   to  conform  with   current  year   financial
                    statement presentation.


                                      -30-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 3   -    TRADE RECEIVABLES, NET

              Trade receivables

                                                              December 31,
                                                         ---------------------
                                                          2003          2002
                                                          ----          ----
              Open accounts (*)                          $170,287     $185,997
              Unbilled receivables                         36,855       43,187
              Less - allowance for doubtful accounts       (3,861)      (3,411)
                                                         --------     --------
                                                         $203,281     $225,773
                                                         ========     ========
              (*)  Includes affiliated companies         $  6,668     $  9,647
                                                         ========     ========

Note 4   - OTHER RECEIVABLES AND PREPAID EXPENSES

                                                              December 31,
                                                         ---------------------
                                                          2003          2002
                                                          ----          ----
              Prepaid expenses                           $ 14,310     $ 12,244
              Government departments                        5,826        5,915
              Employees                                       513        1,029
              Deferred income taxes                        21,908       19,997
              Others                                        5,806        3,513
                                                         --------     --------
                                                         $ 48,363     $ 42,698
                                                         ========     ========

Note 5   - INVENTORIES, NET OF ADVANCES
<TABLE>
<CAPTION>

                                                                                December 31,
                                                                       ------------------------------
                                                                            2003             2002
                                                                            ----             ----
<S>                                                                       <C>            <C>
              Cost incurred on long-term contracts in progress            $253,663       $  210,418
              Raw materials                                                 78,504           75,579
              Advances to suppliers and subcontractors                      20,137           25,047
                                                                          --------       ----------
                                                                           352,304          311,044
              Less -
              Cost incurred on contracts in progress deducted
                from customer advances                                      14,581           10,658
                                                                          --------       ----------
                                                                           337,723          300,386
              Less -
                Advances received from customers                            77,482           67,624
                Provision for losses                                        11,016           12,363
                                                                          --------       ----------
                                                                          $249,225        $ 220,399
                                                                          ========       ==========
</TABLE>


              The Company has transferred  legal title of inventories to certain
              customers as collateral for advances received.



                                      -31-
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 6   -    INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
              COMPANIES

              A.    Investments  in  companies  accounted  for under the  equity
                    method:

                                                         December 31,
                                                  --------------------------
                                                    2003              2002
                                                    ----              ----
                    SCD (1)                       $ 17,347          $ 15,713
                    VSI (2)                          6,149             3,893
                    Opgal (3)                        2,390             2,028
                    Others (4)                         592               313
                                                  --------          --------
                                                  $ 26,478          $ 21,947
                                                  ========          ========

                    (1)  Semi Conductor Devices ("SCD"), an Israeli 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.  SCD is jointly  controlled
                         and  therefore  is not  consolidated  in the  Company's
                         financial statements.

                    (2)  Vision Systems  International  LLC ("VSI") based in San
                         Jose, is a California limited liability company that is
                         held  50%  by  EFW.  VSI  is  jointly   controlled  and
                         therefore  is  not   consolidated   in  the   Company's
                         financial  statements.  VSI  operates  in the  area  of
                         helmet mounted  display systems for fixed wing military
                         and paramilitary  aircraft.  VSI is jointly  controlled
                         and  therefore  is not  consolidated  in the  Company's
                         financial statements.

                    (3)  Opgal Optronics Industries Ltd. ("Opgal") 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.


                                      -32-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 6   -    INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
              COMPANIES (CONT.)

              A.    Investments  in  companies  accounted  for under the  equity
                    method (cont.)

                    (4)  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 2001-2003, Mediguide
                         issued   Preferred   shares  to  other   investors   in
                         consideration for approximately  $16,000. 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 does not  consolidate  Mediguide.  The carrying
                         value of the investment in Mediguide is zero.

                         RedC Optical  Networks Inc.  ("RedC") is engaged in the
                         multi-focal  optic  communications  sector  and is held
                         36.5% by El-Op. RedC designs,  develops and manufacture
                         optical  amplifiers for dense wave-length  multiplexing
                         (DWDM) optical networks for telecommunication  renders.
                         Based on analysis  performed,  the  Company  recorded a
                         provision for loss on its  investment in RedC of $2,500
                         during the year ended December 31, 2002. This provision
                         has been  presented  under  "Equity in net  earnings of
                         affiliated companies and partnership".

                    (5)  See Note 16(E) for guarantees.


                                      -33-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 6   -    INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
              COMPANIES (CONT.)

              B.    Investments in companies accounted for under the cost method

                                                         December 31
                                                  --------------------------
                                                    2003              2002
                                                    ----              ----
                       Sultam (1)                 $  3,500          $  3,500
                       ISI (2)                       7,230             7,230
                       Aero Astro (3)                1,000                 -
                       Others                           15               374
                                                  --------          --------
                                                  $ 11,745          $ 11,104
                                                  ========          ========

                    (1)  Sultam Systems Ltd. ("Sultam"), held 10%, is an Israeli
                         company 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),  is engaged in the operation of
                         satellite   photography   formations   and   commercial
                         delivery of satellite photography for civil purposes.

                    (3)  AeroAstro Inc. - In October 2003, the Company purchased
                         Common  stock of  AeroAstro  Inc.,  ("AAI") a  Delaware
                         corporation,    representing   8.33%   of   the   total
                         outstanding  Common  stock  of AAI on a  fully  diluted
                         basis, in consideration  for $1,000.  AAI is engaged in
                         innovative micro and nanospacecraft  applications.  AAI
                         manufactures low-cost satellite systems and components,
                         used  in  its  own   spacecraft   and  for   spacecraft
                         development in and outside the U.S.

Note 7   -    LONG -TERM BANK DEPOSITS AND LOAN

                                                        December 31,
                                                  ---------------------------
                                                    2003              2002
                                                    ----              ----
              Deposits with bank for loans
               granted to employees (*)           $ 1,901           $ 2,037
              Other deposits with bank                 53               935
              Long-term loan                            -               714
                                                  -------           -------
                                                  $ 1,954           $ 3,686
                                                  =======           =======

              (*)    The  deposits  are linked to the Israeli  CPI,  bear annual
                     interest of 4% and are presented net of current  maturities
                     of $633 (2002 - $680).




                                      -34-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 8   -    PROPERTY, PLANT AND EQUIPMENT, NET

<TABLE>
<CAPTION>

                                                                              December 31,
                                                                     ----------------------------
                                                                        2003             2002
                                                                        ----             ----
<S>                                                                  <C>                <C>
              Land, buildings and leasehold improvements (2)         $ 143,223          $ 128,456
              Instruments, machinery and equipment (3)                 194,129            169,467
              Office furniture and other                                24,943             21,904
              Motor vehicles                                            29,776             24,393
                                                                     ---------          ---------
                                                                       392,071            344,220
              Accumulated depreciation                                (162,850)          (141,259)
                                                                     ---------          ---------
              Depreciated cost                                       $ 229,221          $ 202,961
                                                                     =========          =========
</TABLE>

              Depreciation  expenses for the years ended December 31, 2003, 2002
              and 2001 amounted to $30,775, $26,525 and $24,517, respectively.

                    (1)  Net  of   investment   grants   received   (mainly  for
                         instruments, machinery and equipment) in the amounts of
                         approximately  $30,700 and  $30,800 as of December  31,
                         2003 and 2002, respectively.

                    (2)  Includes,  rights in approximately  9,225 square meters
                         of land in, Tirat Hacarmel,  Israel. The land is leased
                         from the  Israel  Land  Administration  until the years
                         2014 to  2024  with a  renewal  option  for  additional
                         periods of 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
                         a renewal  option  for  additional  periods of 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 $10,498  and $5,517 as of December
                         31, 2003 and 2002, respectively.

                    (4)  As for pledges of assets - see Note 16(H).


                                      -35-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 9  -     OTHER ASSETS, NET

              A.
<TABLE>
<CAPTION>

                                                        Weighted-average                 December 31,
                                                           number of                ------------------------
                                                             years                    2003             2002
                                                         -----------------            ----             ----
<S>                                                          <C>                  <C>               <C>
                 Original cost:
                   Know-how and technology (1)               12.5                 $  82,449         $  81,398
                   Trade marks (2)                            17                      8,000             8,000
                   Goodwill (3)                                                      37,613            37,199
                                                                                  ---------         ---------
                                                                                    128,062           126,597
                                                                                  ---------         ---------

                 Accumulated amortization:

                   Know-how and technology                                           21,555            14,666
                   Trade marks                                                        1,458             1,125
                   Goodwill                                                           5,037             5,037
                                                                                  ---------         ---------
                                                                                     28,050            20,828
                                                                                  ---------         ---------
                 Amortized cost                                                   $ 100,012         $ 105,769
                                                                                  =========         =========
</TABLE>


                    (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).

                    (2)  Includes trade marks acquired in the merger with El-Op.

                    (3)  Includes  mainly  goodwill  acquired in the merger with
                         El-Op  ($34,200) and goodwill  acquired from  Honeywell
                         Inc.  ($1,800).  Until  January 1, 2002,  goodwill  was
                         amortized at an annual rate of 5% - 10%.

              B.    Amortization  expenses amounted to $7,222, $6,412 and $8,348
                    for the  years  ended  December  31,  2003,  2002 and  2001,
                    respectively.

              C.    The  annual  amortization  expense  relating  to  intangible
                    assets existing as of December 31, 2003 for each of the five
                    years in the period ending December 31, 2008 is estimated to
                    be approximately $6,000.


                                      -36-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 9  -     OTHER ASSETS, NET (CONT.)

              The following  information  is presented to reflect net income and
              net earnings per share for all prior  periods  adjusted to exclude
              amortization of goodwill.

                                                                    Year ended
                                                                   December 31,
                                                                   ------------
                                                                       2001
                                                                   ------------

              Reported net income                                     $ 40,796
              Goodwill amortization                                      2,760
                                                                      --------
              Adjusted net income                                     $ 43,556
                                                                      ========

              Net earnings per share
              Reported basic net earnings per share                   $   1.07
              Goodwill amortization                                       0.08
                                                                      --------
              Adjusted basic net earnings per share                   $   1.15
                                                                      ========

              Reported diluted net earnings per share                 $   1.04
              Goodwill amortization                                       0.07
                                                                      --------
              Adjusted diluted net earnings per share                 $   1.11
                                                                      ========


Note 10  -    SHORT-TERM BANK CREDIT AND LOANS
<TABLE>
<CAPTION>

                                                                 December 31,
                                                 ----------------------------------------
                                                 2003        2002        2003        2002
                                                 ----        ----        ----        ----
                                                 Interest rate %
                                               ------------------
<S>                                            <C>             <C>    <C>         <C>
            Short-term bank loans:
              In U.S. dollars                  3.3-4.75        3-5    $    533    $  13,512
              In EURO                              3.5           -       1,927            -
                                                                      ---------   ---------
                                                                         2,460       13,512
                                                                      ---------   ---------
            Short-term bank credit:
              In NIS unlinked                      7.2    9.6-10.9       4,684        5,241
              In U.S. dollars                      2.6     2.8-3.6       1,365        5,549
                                                                      ---------   ---------
                                                                         6,049       10,790
                                                                      ---------   ---------
                                                                      $  8,509    $  24,302
                                                                      =========   =========
</TABLE>

              The subsidiary in the U.S.  maintains standby lines of credit with
              various  banks.  The sum of the  lines  equals  $66,000  of  which
              $15,900 was available as of December 31, 2003.

              As for liens - see Note 16F.



                                      -37-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 11  -    OTHER PAYABLES AND ACCRUED EXEPNSES

                                                             December 31,
                                                        ---------------------
                                                        2003             2002
                                                        ----             ----
              Payroll and related expenses          $   33,382        $   27,912
              Provision for vacation pay                25,280            20,492
              Government departments                    25,243            22,443
              Provision for warranty                     9,692             8,541
              Cost provisions and others                62,930            61,916
                                                    ----------        ----------
                                                    $  156,527        $  141,304
                                                    ==========        ==========


Note 12  -    CUSTOMERS ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED ON
              CONTRACTS IN PROGRESS

<TABLE>
<CAPTION>

                                                                     December 31,
                                                                 ---------------------
                                                                 2003             2002
                                                                 ----             ----
<S>                                                            <C>              <C>
              Advances received                                $199,273         $225,160
              Less -
               Advances presented under long-term
                 liabilities                                      7,592           40,411
               Advances deducted from inventories                77,482           67,624
                                                               --------         --------
                                                                114,199          117,125

              Less -
               Costs incurred on contracts in progress           14,581           10,658
                                                               --------         --------
                                                               $ 99,618         $106,467
                                                               ========         ========
              As for guarantees see Note 16G
</TABLE>


                                      -38-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 13  -    LONG-TERM LOANS
<TABLE>
<CAPTION>

                                                                                                    December 31,
                                                           Interest             Years of         -----------------
                                           Linkage             %                maturity         2003         2002
                                           -------         --------             --------         ----         ----
<S>                                      <C>                <C>               <C>               <C>         <C>
              Banks                      U.S. dollars       Libor +           2004 - 2005       $57,574     $67,206
                                                            0.75%-1.85%
              Banks                      NIS-unlinked       Israeli
                                                            Prime             2004 - 2022         3,599       3,383
              Office of chief            NIS-linked to
               scientist                 the Israeli-CPI    5.2%              2004 - 2008         7,683       9,197
                                                                                                -------     -------
                                                                                                 68,856      79,786
              Less-current maturities                                                             6,818       6,613
                                                                                                -------     -------
                                                                                                $62,038     $73,173
                                                                                                =======     =======
</TABLE>


              The Libor rate as of  December  31,  2003 was 1.12%.  The  Israeli
              Prime rate as of December  31, 2003 was 6.3%.  The  maturities  of
              these loans after December 31, 2003 are as follows:

              2004 - current maturities            $    6,818
              2005                                     56,136
              2006                                      2,693
              2007                                        139
              2008                                        148
              2009 and thereafter                       2,922
                                                   ----------
                                                   $   68,856
                                                   ==========


              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.

               As for charges see Note 16H.


                                      -39-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 14  -    BENEFIT PLANS

              The  subsidiary  in the U.S. has adopted for its  employees in the
              U.S. benefits plans as follows:

              Defined Benefit Retirement Plan

              The subsidiary in the U.S. has two defined  benefit  pension plans
              (the  Plans)  covering  substantially  its  employees  in the U.S.
              Monthly  benefits are based on years of benefit service and annual
              compensation.  Annual  contributions  to the Plans are  determined
              using the unit  credit  actuarial  cost method and are equal to or
              exceed the  minimum  required by law.  Pension  fund assets of the
              Plans  are  invested  primarily  in  stock,  bonds  and  cash by a
              financial  institution,  as the  investment  manager of the Plans'
              assets.

              The following  table  reconciles  the benefit  obligations,  Plans
              assets, funded status and net asset (liability) information of the
              Plans:
<TABLE>
<CAPTION>

                                                                       December 31,
                                                                ------------------------
                                                                2003                2002
                                                                ----                ----
<S>                                                           <C>                <C>
              Benefit obligation at beginning of year         $ 28,439           $ 22,358
              Service cost                                       2,480              2,067
              Interest cost                                      1,921              1,678
              Actuarial losses                                   2,825              2,955
              Benefits repaid                                     (700)              (619)
                                                              --------           --------
              Benefit obligation at end of year                 34,965             28,439
                                                              --------           --------

              Plans assets at beginning of year                 15,558             16,167
              Actual return on Plan assets                       2,689             (1,560)
              Contributions by employer                          3,649              1,571
              Benefits repaid                                     (700)              (619)
                                                              --------           --------
              Plans assets at end of year                       21,196             15,559
                                                              --------           --------
              Funded status of Plans (underfunded)             (13,769)           (12,880)
              Unrecognized prior service cost                     (195)               234
              Unrecognized net actuarial loss                    9,395              7,582
                                                              --------           --------
              Net amount recognized                             (4,569)            (5,064)
                                                              ========           ========
              Net asset (liability) consists of:
              Accrued benefit liability                        (11,011)           (10,298)
              Intangible asset                                      51                234
              Accumulated other comprehensive income             6,391              5,000
                                                              --------           --------
              Net amount recognized                             (4,569)          $ (5,064)
                                                              ========           ========
              Weighted average assumptions :
                 Discount rate as of December 31,                 6.25%              6.75%
                 Expected long-term rate of return on
                   Plans assets                                   9.00%              9.00%

                 Rate of compensation increase                    3.00%              3.00%
</TABLE>


                                      -40-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 14  -    BENEFIT PLANS (Cont.)
<TABLE>
<CAPTION>

                                                                          Year ended December 31,
                                                                      ------------------------------
                                                                      2003         2002         2001
                                                                      ----         ----         ----
<S>                                                                  <C>          <C>         <C>
              Components of net periodic pension cost:
                 Service cost                                        $ 2,480      $  2,067     $ 1,766
                 Interest cost                                         1,921         1,678       1,461
                 Expected return on Plan assets                       (1,573)       (1,597)     (1,666)
                Amortization of prior service cost                       (15)           28          24
                Recognized of net actuarial gain                         339             -         (38)
                One-time FAS 88 charge for 2001 SRP                        -             -         177
                                                                     -------      --------     -------
                 Net periodic pension cost                           $ 3,152      $  2,176     $ 1,724
                                                                     =======      ========     =======
</TABLE>

              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.  Subsidiary's
              employees  may elect to  contribute a  percentage  of their annual
              gross  compensation  to the 401(k) plan.  The U.S.  subsidiary may
              make  discretionary  matching  contributions  as determined by the
              subsidiary. Total expense under the 401(k) plan amounted to $1,629
              for the year ended December 31, 2003 (2002 - $1,369).



                                      -41-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

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 for the Company and certain of
                         its Israeli  subsidiaries 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.

                         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 in Israel (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 deduct
                         public issuance expenses for tax purposes.

                    (3)  Tax benefits under  Israel's Law for the  Encouragement
                         of Capital Investments, 1969:

                         Several  expansion  programs of the Company and certain
                         of its Israeli subsidiaries ("the companies") have been
                         granted "Approved Enterprise" status under Israel's Law
                         for the Encouragement of Capital Investments, 1959. For
                         some expansion programs, the companies have elected the
                         grants  track  and for  others  they have  elected  the
                         alternative  tax  benefits  track,  waiving  grants  in
                         return for tax exemptions.

                                      -42-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 15  -    TAXES ON INCOME

              A.    APPLICABLE TAX LAWS (CONT.)

                    (3)  Tax benefits under  Israel's Law for the  Encouragement
                         of Capital Investments, 1959 (cont.):

                         Accordingly,  certain income of the companies,  derived
                         from the "Approved  Enterprise"  expansion  programs is
                         tax exempt for two-year to ten-year  period and subject
                         to  reduced  tax  rates  of  25%  for  a  five-year  to
                         eight-year  period  commencing in the year in which the
                         companies had 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, 2003, the tax benefits for these expansion
                         programs will expire between 2004 to 2010.

                         The entitlement to the above benefits is subject to the
                         companies  fulfilling the  conditions  specified in the
                         above referred 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,  2003,   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,  2003,  retained  earnings  included  approximately
                         $96,000 in tax-exempt  profits earned by the companies'
                         "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 $ 23,940 as of December 31, 2003.


                                      -43-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 15  -    TAXES ON INCOME

              A.    APPLICABLE TAX LAWS

                    (3)  Tax benefits under  Israel's Law for the  Encouragement
                         of Capital Investments, 1959:

                         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
                         Companyies "Approved Enterprise".

                         In Israel, income from sources other than the "Approved
                         Enterprise"  during the benefit  period will be subject
                         to tax at the regular corporate tax rate of 36%.

                         Since the companies  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.    NON - ISRAELI SUBSIDIARIES

                    Non-Israeli  subsidiaries  are  taxed  based  on tax laws in
                    their countries of residence (mainly in the U.S.).


                                      -44-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 15  -    INCOME TAXES (CONT.)

              C.    INCOME BEFORE TAXES ON INCOME
<TABLE>
<CAPTION>

                                                                         Year ended December 31,
                                                                     ----------------------------
                                                                     2003        2002        2001
                                                                     ----        ----        ----
<S>                                                                <C>         <C>         <C>
                     Income before taxes on income:
                        Domestic                                   $ 38,423    $ 42,317    $ 44,212
                        Foreign                                      11,090      11,977       7,638
                                                                   --------    --------    --------
                                                                   $ 49,513    $ 54,294    $ 51,850
                                                                   ========    ========    ========


              D.    TAXES ON INCOME

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

                     Taxes on income:
                     Current taxes:
                        Domestic                                   $ 12,346    $ 11,654    $  9,385
                        Foreign                                         718       6,114       3,048
                                                                   --------    --------    --------
                                                                   $ 13,064      17,768      12,433
                                                                   ========    ========    ========

                     Deferred income taxes:

                        Domestic                                     (4,672)     (3,561)       (839)
                        Foreign                                       2,942      (2,059)       (591)
                                                                   --------    --------    --------
                                                                     (1,730)     (5,620)     (1,430)
                                                                   --------    --------    --------
                     Taxes in respect of prior years                      -   (*)(2,800)          -
                                                                   --------    --------    --------
                                                                   $ 11,334    $  9,348    $ 11,003
                                                                   ========    ========    ========
</TABLE>


              (*)    A reduction of tax expenses due to adjustments of estimated
                     tax  provision  pursuant to the  completion of prior years'
                     tax assessments in respect of various Group companies.


                                      -45-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 15  -    INCOME TAXES (CONT.)

              E.    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:
<TABLE>
<CAPTION>

                                                                                               Deferred
                                                                                       tax asset (liability)(1)
                                                                                    -------------------------------
                                                                     Total             Current        Noncurrent
                                                                     -----             -------        ----------
<S>                                                                <C>                <C>                <C>
                    As of December 31, 2003

                    Deferred tax assets:
                      Reserve and allowances                       $ 13,884           $ 13,922           $    (38)
                      Inventory                                       7,547              7,547                  -
                      Net operating loss carryforwards                6,606                439              6,167
                                                                   --------           --------           --------
                                                                     28,037             21,908              6,129
                      Valuation allowance (2)                        (3,879)                 -             (3,879)
                                                                   --------           --------           --------
                      Net deferred tax assets                        24,158             21,908              2,250
                                                                   --------           --------           --------

                    Deferred tax liabilities:
                    Property, plant and equipment                   (12,769)                 -            (12,769)
                    Other assets                                    (14,397)                 -            (14,397)
                                                                   --------           --------           --------
                                                                    (27,166)                 -            (27,166)
                                                                   --------           --------           --------
                    Net deferred tax assets (liabilities)          $ (3,008)          $ 21,908           $(24,916)
                                                                   ========           ========           ========

                    As of December 31, 2002

                    Deferred tax assets:
                      Reserve and allowances                       $ 10,510           $ 10,859           $   (349)
                      Inventory                                       9,138              9,138                  -
                      Net operating loss carryforwards                2,326                  -              2,326
                                                                   --------           --------           --------
                                                                     21,974             19,997              1,977
                      Valuation allowance (2)                        (2,326)                 -             (2,326)
                                                                   --------           --------           --------
                      Net deferred tax assets                        19,648             19,997               (349)
                                                                   --------           --------           --------

                    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)          $ 19,997           $(24,735)
                                                                   ========           ========           ========
</TABLE>


                                      -46-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 15  -    INCOME TAXES (CONT.)

              E.    DEFERRED INCOME TAXES (CONT.)

                    (1)  Current  tax asset is  included  in other  receivables.
                         Noncurrent  tax  liability  is  included as a long-term
                         liability.

                    (2)  During  2003,   the  Group   increased   the  valuation
                         allowance due to an increase in  accumulated  operating
                         loss  carryforwards that more likely than not, will not
                         be utilized.

              F.    The  Group's  Israeli   subsidiaries  have  estimated  total
                    available  carryforward tax losses of approximately  $12,000
                    as  of  December   31,   2003.   The   Group's   non-Israeli
                    subsidiaries  have  estimated  available   carryforward  tax
                    losses of  approximately  $8,500 as of December  31, 2003 to
                    offset  against  future  taxable  profits for an  indefinite
                    period.   Deferred  tax  assets  in  respect  of  the  above
                    carryforward  losses  amount  to  approximately   $6,600  in
                    respect of which a valuation  allowance has been recorded in
                    the amount of approximately $3,900.

              G.    Reconciliation of the theoretical tax expense,  assuming all
                    income is taxed at the statutory  rate  applicable to income
                    of the Group,  and the actual tax expense as reported in the
                    statements of operations, is as follows:
<TABLE>
<CAPTION>

                                                                                               Year ended December 31,
                                                                                   ----------------------------------------------
                                                                                   2003                 2002                2001
                                                                                   ----                 ----                ----
<S>                                                                              <C>                 <C>                 <C>
                    Income  before taxes as reported in the
                       consolidated statements of operations                     $ 49,513            $ 54,294            $ 51,850
                    Statutory tax rate                                                 36%                 36%                 36%
                                                                                 ========            ========            ========
                    Theoretical tax expense                                      $ 17,825            $ 19,546            $ 18,666
                    Tax benefit arising from reduced rate as an
                       "Approved Enterprise" and other tax                         (8,391)             (9,054)             (7,697)
                       benefits
                    Tax adjustment in respect of different tax rate for
                       foreign subsidiaries                                           279                (461)               (952)
                    Operating carryforward losses for which
                        valuation allowance was provided                              126               2,189                 101
                    Increase (decrease) in taxes resulting from
                       nondeductible expenses                                         993                (263)                571
                    Difference in basis of measurement for
                      financial reporting and tax return purposes                     846                 458                 832
                    Taxes in respect of prior years                                     -              (2,800)                  -
                    Other differences, net                                           (344)               (267)               (518)
                                                                                 --------            --------            --------
                    Actual tax expenses                                          $ 11,334            $  9,348            $ 11,003
                                                                                 ========            ========            ========
                    Effective tax rate                                               22.9%               17.2%               21.2%
                                                                                 ========            ========            ========
</TABLE>


                                      -47-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 16  -    COMMITMENTS  AND CONTINGENT LIABILITIES

              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 in 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%
                         - 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  and  other
                         applicable  law. 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  expensed  or  accrued  amounted  to  $7,812,
                         $14,741   and   $8,252   in  2003,   2002   and   2001,
                         respectively.

                    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.


                                      -48-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 16  -    COMMITMENTS  AND CONTINGENT LIABILITIES (CONT.)

              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 a liability for an absolute amount of royalties.

                    In  May  2002,   El-Op's  Board  of  Directors  approved  an
                    arrangement,  proposed by the OCS,  according to which El-Op
                    pays  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 in the amount of $9,801  included in Cost
                    of Revenues.

              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 their
                    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,  2003
                    amounted to $630,000 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.


                                      -49-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 16  -    COMMITMENTS  AND CONTINGENT LIABILITIES (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  that the  financial  impact for the  settlement 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, 2003:

                             2004                            $  8,520
                             2005                               6,145
                             2006                               5,557
                             2007                               5,453
                             2008 and there after               5,451
                                                             --------
                                                             $ 31,126
                                                             ========

                    Rent  expenses for the years ended  December 31, 2003,  2002
                    and  2001   amounted   to  $9,177,   $9,215,   and   $7,978,
                    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 $13,900
                    (2002-  $10,600),  of which $13,400 (2002 - $10,200) relates
                    to a owned 50% foreign  investee.  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.

              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 $800 (see Note 15 A (3) above ).


                                      -50-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 16  -    COMMITMENTS  AND CONTINGENT LIABILITIES (CONT.)

              G.    Guarantees  in the  amount of  approximately  $399,200  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 equity
                    upon liquidation of the Company.

              B.    2000 EMPLOYEE STOCK OPTION PLAN

                    In 2000,  the Company  adopted an 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 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, 2003, 479,217 options of the Company were still
                    available for future grants.

              C.    "PHANTOM" SHARE OPTIONS

                    The  phantom  share  options  are  considered  as  part of a
                    variable plan as defined in APB No. 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.

                                      -51-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 17  -    SHAREHOLDER'S EQUITY (CONT.)

              D.    A summary of the Company's  share option  activity under the
                    plans is as follows:
<TABLE>
<CAPTION>

                                                                              December 31,
                                   ----------------------------------------------------------------------------------------------
                                              2003                             2002                              2001
                                   ---------------------------    ------------------------------   ------------------------------
                                                      Weighted                          Weighted                        Weighted
                                                      average                           average                         average
                                   Number of          exercise         Number of        exercise        Number of       exercise
                                    options            price            options          price           options         price
                                   ---------         ---------    --------------      ----------       -----------  ---------------
<S>                                <C>               <C>           <C>                <C>              <C>          <C>
Outstanding-beginning of
 the year                          4,511,724         $  12.26      5,107,634          $  11.93         5,671,918    $   11.26
  Granted                             13,000            14.91         27,000             14.92            98,840        12.91
  Exercised                         (757,947)           12.13       (558,901)             9.45          (598,348)       11.93
  Forfeited                          (31,175)           12.29        (64,009)            11.33           (64,776)       12.50
                                   ---------         --------      ---------          --------         ---------    ---------
  Outstanding - end of the
    year                           3,735,602         $  12.30       4,511,724         $  12.26         5,107,634    $   11.93
                                   =========         ========      =========          ========         =========    =========
Options exercisable at
   the end of the year             2,547,196         $  12.23       2,287,790         $  12.18           373,138    $    7.56
                                   =========         ========      =========          ========         =========    =========
</TABLE>

              E.    The options  outstanding as of December 31, 2003,  have been
                    separated into ranges of exercise price, as follows:
<TABLE>
<CAPTION>

                                       Options outstanding                       Options exercisable
                          -----------------------------------------------   -----------------------------
                             Number         Weighted                                            Weighted
                          outstanding        average         Weighted           Number           average
                             as of          remaining        average        outstanding as      exercise
                          December 31,     contractual       exercise       of December 31,     price per
    Exercise price            2003        life (years)    price per share        2003             share
    --------------        ------------    ------------    ---------------   ---------------     ---------
<S>                         <C>                <C>            <C>               <C>              <C>
 $10.61-$12.16              158,935            0.42           $10.69            158,935          $10.69
 $12.18-$15.64            1,786,193            2.93            12.37          1,190,240           12.34
 $12.18-$15.64(*)         1,790,474            2.94            12.37          1,198,021           12.33
                          ---------            ----           ------          ---------          ------
                          3,735,602            2.83           $12.30          2,547,196          $12.23
                          =========            ====           ======          =========          ======
</TABLE>

  (*) Phantom share options.



                                      -52-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 17  -    SHAREHOLDER'S EQUITY (CONT.)

              E.    (Cont.)

                    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 $4,741,  $(926) and $8,512
                    were  recognized  during the years ended  December 31, 2003,
                    2002 and 2001, respectively.

              F.    The  weighted  average  exercise  price  and  fair  value of
                    options  granted  during the years ended  December 31, 2003,
                    2002 and 2001 were:

                                          Less than market price
                                    --------------------------------------
                                             Year ended December 31,
                                    --------------------------------------
                                    2003              2002            2001
                                    ----              ----            ----
Weighted-average
exercise price                    $  14.91         $  14.92       $  12.91
Weighted-average
  fair values on
  grant date                      $   4.63         $   4.31       $   5.14


              G.    Computation of basic and diluted net earnings per share:

<TABLE>
<CAPTION>

                                 Year ended                            Year ended                              Year ended
                              December 31, 2003                      December 31, 2002                      December 31, 2001
                   -------------------------------------- ------------------------------------ -------------------------------------
                                                           Net income
                    Net income to  Weighted                    to        Weighted               Net income to   Weighted
                    shareholders   averaged       Per      shareholders  averaged       Per      shareholders   averaged      Per
                    of Ordinary   number of      share     of Ordinary   number of     share     of Ordinary    number of    share
                       shares      shares (*)    amount       shares     shares (*)    amount       shares      shares (*)   amount
                   -------------------------------------- ------------------------------------ -------------------------------------
<S>                    <C>            <C>         <C>        <C>          <C>         <C>         <C>            <C>          <C>
Basic net earnings   $   45,945     39,061        $1.18      $45,113      38,489        $1.17       $40,796      37,975       $1.07

Effect of dilutive
 securities:
 Employee stock
 options                     -       1,169                         -       1,374                          -       1,384
                     ----------     ------                   -------      ------                    -------      ------
 Diluted net
 earnings            $   45,945     40,230        $1.14      $45,113      39,863        $1.13       $40,796      39,359       $1.04
                     ==========     ======        =====      =======      ======        =====       =======      ======       =====
</TABLE>

* In thousands

                                      -53-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 17  -    SHAREHOLDER'S EQUITY (CONT.)

              H.    TREASURY SHARES

                    The  Company's  shares held by the Company are  presented at
                    cost and deducted from shareholder's equity.

              I.    DIVIDEND POLICY

                    Dividends  declared  by the  Company  are  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.

Note 18  -    MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION

              The Group adopted Statement of Financial  Accounting Standards No.
              131,  "Disclosures  About  Segments of an  Enterprise  and Related
              Information",   ("SFAS  No.  131").  The  Group  operates  in  one
              reportable  segment  (see  Note 1 for a brief  description  of the
              Group's business).

              A.    Revenues  are  attributed  to  geographic   areas  based  on
                    location of the end customers as follows:

                                                    Year ended December 31,
                                             -----------------------------------
                                             2003            2002           2001
                                             ----            ----           ----
                     Europe                 $109,409       $144,862    $179,560
                     U.S.                    332,323        267,686     206,627
                     Israel                  255,742        225,674     226,650
                     Others                  200,506        189,234     151,664
                                            --------       --------    --------
                                            $897,980       $827,456    $764,501
                                            ========       ========    ========

              B.    Revenues are generated by the following product lines:
<TABLE>
<CAPTION>

                                                                              Year ended December 31,
                                                                       -----------------------------------
                                                                       2003            2002           2001
                                                                       ----            ----           ----
<S>                                                                  <C>             <C>            <C>
                    Airborne systems                                 $373,580        $372,756       $334,201
                    Armored vehicles systems                          199,800         135,700        126,300
                    Command, control, communications,
                     computers and intelligence systems (C4I)         133,900         122,700        105,800

                    Electro-optical systems                           140,500         148,200        162,700
                    Others                                             50,200          48,100         35,500
                                                                     --------        --------       --------
                                                                     $897,980        $827,456       $764,501
                                                                     ========        ========       ========

              C.    Revenues  from single  customer,  which  exceed 10% of total
                    revenues in the reported years:
<CAPTION>

                                                                              Year ended December 31,
                                                                       -----------------------------------
                                                                       2003            2002           2001
                                                                       ----            ----           ----
<S>                                                                     <C>             <C>            <C>
                    Customer A                                          21%             18%            20%
</TABLE>


                                      -54-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 18  -    MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION (CONT.)

              D.    Long-lived assets by geographic areas:

                                                  December 31,
                                     ----------------------------------
                                     2003            2002          2001
                                     ----            ----          ----
                    Israel        $229,396        $211,256        $ 84,864
                    U.S             81,261          83,814         194,690
                    Others          18,093          13,660          10,451
                                  --------        --------        --------
                                  $328,750        $308,730        $290,005
                                  ========        ========        ========


Note 19  -    RESEARCH AND DEVELOPMENT COSTS, NET
<TABLE>
<CAPTION>

                                                      Year ended December 31,
                                              --------------------------------------
                                              2003             2002             2001
                                              ----             ----             ----
<S>                                        <C>              <C>              <C>
              Total expenses               $ 65,487         $ 62,560         $ 67,871
              Less - participations         (10,568)          (5,550)          (9,112)
                                           --------         --------         --------
                                           $ 54,919         $ 57,010         $ 58,759
                                           ========         ========         ========

Note 20  -    FINANCIAL EXPENSES, NET
<CAPTION>

                                                                  Year ended December 31,
                                                            ----------------------------------
                                                            2003           2002           2001
                                                            ----           ----           ----
<S>                                                       <C>            <C>            <C>
              Expenses:
               On long-term bank debt                     $ 2,719        $ 2,026        $ 3,033
               On short-term bank credit and loans          2,838          3,415          3,806
               Others                                       5,600          1,214            798
                                                          -------        -------        -------
                                                           11,157          6,655          7,637
                                                          -------        -------        -------

              Income:
              Interest on cash, cash equivalents
               and bank deposits                              309          1,547          2,179
              Others                                        5,978          2,073          2,841
                                                          -------        -------        -------
                                                            6,287          3,620          5,020
                                                          -------        -------        -------
                                                          $ 4,870        $ 3,035        $ 2,617
                                                          =======        =======        =======
</TABLE>

                                      -55-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 21 -     OTHER INCOME (EXPENSES), NET
<TABLE>

                                                                  Year ended December 31,
                                                             --------------------------------
                                                             2003          2002          2001
                                                             ----          ----          ----
<S>                                                         <C>           <C>           <C>
              Gain (loss) on sale of property
               plant and equipment                          $ 915         $(743)        $ 327
              Others, net                                     (12)          281           447
                                                            -----         -----         -----
                                                            $ 903         $(462)        $ 774
                                                            =====         =====         =====

Note 22  -    RELATED PARTIES TRANSACTIONS AND BALANCES
<CAPTION>

                                                            Year ended December 31,
                                                      ---------------------------------
                                                      2003          2002           2001
                                                      ----          ----           ----
<S>                                                 <C>            <C>            <C>
              Income -
               Sales (*)                            $34,674        $37,924        $28,675
               Expenses charged                     $ 1,773        $   902        $   633

              Cost and expenses -

               Supplies and services                $21,606        $10,457        $11,125
               Participation in expenses (*)        $ 1,751        $ 1,498        $ 1,632
               Financial expenses                   $    23        $   110        $   193
</TABLE>


                                                             December 31,
                                                         ------------------
                                                         2003          2002
                                                         ----          ----
               Trade receivables (*)                   $  6,668      $  9,647
               Trade payables                          $  4,975      $  4,006


               (*) The amounts relate mainly to transactions with VSI.

Note 23 -     RECONCILIATION TO ISRAELI GAAP

              As  described  in Note  2,  the  Company  prepares  its  financial
              statements  in  accordance  with U.S.  GAAP.  The  effects  of the
              differences  between U.S.  GAAP and Israeli GAAP on the  Company's
              financial statements are detailed below.

              Differences between U.S. GAAP and Israeli GAAP:


                                      -56-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 23 -     RECONCILIATION TO ISRAELI GAAP (CONT.)

              A building purchased from Elbit Ltd.
              ------------------------------------

              According to generally  accepted  accounting  principles in Israel
              ("Israeli  GAAP"),  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 U.S.  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 U.S.  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
              U.S. 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.


                                      -57-
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
-------------------------------------------------------------------------------
U. S. dollars (In thousands)

Note 23 -     RECONCILIATION TO ISRAELI GAAP

                    1.   Effect on net income and earnings per share
<TABLE>
<CAPTION>

                                                                       Year ended December 31
                                                              --------------------------------------
                                                              2003             2002             2001
                                                              ----             ----             ----
<S>                                                         <C>             <C>              <C>
              Net income as reported according to
                    U.S. GAAP                               $ 45,945        $ 45,113         $ 40,796
              Adjustments to Israeli GAAP                        595          (4,227)           1,767
                                                            --------        --------         --------
                Net income according to Israeli GAAP        $ 46,540        $ 40,886         $ 42,563
                                                            ========        ========         ========

                    2.   Effect on shareholders' equity

                                                                                              As per
                                                          As reported      Adjustments     Israeli GAAP
                                                          -----------      -----------     ------------
              As of December 31, 2003
                Shareholders' equity                        $452,079        $(10,367)        $441,712
                                                            ========        ========         ========

              As of December 31, 2002
                Shareholders' equity                        $411,361        $(11,076)        $400,285
                                                            ========        ========         ========
</TABLE>



                                 # # # # # # # #


                                      -58-