`
                       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, 2004

                           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:

                                40,561,126 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
<TABLE>
<CAPTION>
                                                                                                                 Page
<S>            <C>                                                                                               <C>
                     International Disclosures Standards..........................................................3
Item 1.        Identity of Directors, Senior Management and Advisors..............................................3
Item 2.        Offer Statistics and Expected Timetable............................................................3
Item 3.        Key Information....................................................................................3
                     Selected Financial Data......................................................................3
                     Forward Looking Statements...................................................................5
                     Risk Factors.................................................................................5
Item 4.       Information on the Company.........................................................................11
                     Business Overview...........................................................................11
                     Major Activities............................................................................13
                     Revenues....................................................................................14
                     Systems and Products........................................................................15
                     Principal Subsidiaries......................................................................20
                     Recent Acquisitions.........................................................................24
                     Current Business Operations.................................................................25
                          Airborne Systems.......................................................................25
                          Helmet Mounted Systems   ..............................................................31
                          UAV Systems............................................................................33
                          C4I and Government Information Systems.................................................35
                          Land Vehicle Systems...................................................................37
                          Electro-Optical and Countermeasures Systems............................................40
                          Naval Systems..........................................................................41
                          Homeland Security Systems..............................................................42
                          Technology Spin-Offs...................................................................43
                     Property, Plant and Equipment...............................................................44
                     Organizational Structure....................................................................45
                     Governmental Regulation.....................................................................45
                     Buy-Back....................................................................................46
                     Financing Terms.............................................................................47
                     Intellectual Property.......................................................................48
                     Research and Development....................................................................48
                     Manufacturing...............................................................................49
                     Purchasing..................................................................................50
                     Customer Satisfaction and Quality Assurance.................................................50
                     Service and Warranty........................................................................51
                     Marketing and Sales.........................................................................51
                     Competition.................................................................................52
                     Major Customers.............................................................................52
                     Conditions in Israel........................................................................53
Item 5.       Operating Financial Review and Prospects - Management's Discussion and Analysis....................55
                     General.....................................................................................55
</TABLE>

<PAGE>
<TABLE>
<S>                  <C>                                                                                         <C>
                     Trends......................................................................................62
                     Summary Financial Results...................................................................63
                     2004 Compared to 2003.......................................................................64
                     2003 Compared to 2002.......................................................................67
                     Conditions in Israel........................................................................69
                     Liquidity and Capital Resources.............................................................69
                     Impact of Inflation and Exchange Rates......................................................71
                     Contractual Obligations.....................................................................74
                     Off-Balance Sheet Transactions..............................................................74
Item 6.       Directors, Senior Management and Employees.........................................................75
                     Directors and Executive Officers............................................................75
                     Compensation of Directors and Officers......................................................82
                     Board Practices.............................................................................83
                     Employees...................................................................................84
                     Share Ownership.............................................................................84
Item 7.       Major Shareholders and Related Party Transactions..................................................86
                     Major Shareholders..........................................................................86
                     Related Party Transactions..................................................................89
Item 8.       Financial Information.............................................................................103
                     Consolidated Statements and Other Financial Information....................................103
                     Legal Proceedings..........................................................................103
                     Dividend Distributions.....................................................................103
Item 9.       Offer and Listing.................................................................................104
                     Share Listings and Trading Prices..........................................................104
Item 10.      Additional Information............................................................................106
                     General Provisions of Israeli Law and Related Provisions of Articles of Association........106
                     Approval of Certain Transactions...........................................................107
                     Insurance and Indemnification of Directors and Officers....................................108
                     Material Contracts.........................................................................111
                     Exchange Controls and Other Limitations Affecting Security Holders.........................111
                     Taxation...................................................................................111
                     Documents on Display.......................................................................115
Item 11.      Quantitative and Qualitative Disclosure of Market Risk............................................116
Item 12.      Description of Securities Other than Equity Securities............................................116
Item 13.      Defaults, Dividend Arrearages and Delinquencies...................................................116
Item 14.      Material Modifications to the Rights of Security Holders and Use of Proceeds......................116
Item 15.      Controls and Procedures...........................................................................117
Item 16.      16.A - Audit Committee Financial Expert...........................................................118
              16.B - Code of Ethics.............................................................................118
              16.C - Principal Accountant Fees and Services.....................................................118
              16.D - Exemptions from Listing Standards for Audit Committees.....................................119
              16.E - Purchases of Equity Securities by the Issuer and Affiliated Purchasers ....................119
Item 17.      Financial Statements..............................................................................120
Item 18.      Financial Statements..............................................................................120
Item 19.      Exhibits..........................................................................................120
</TABLE>

                                      (ii)
<PAGE>
                                     PART I

INTERNATIONAL DISCLOSURES STANDARDS

         Elbit Systems Ltd.'s (Elbit Systems) consolidated financial statements
are prepared based upon 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, 2000, 2001, 2002, 2003 and 2004 are derived from
our audited consolidated financial statements of which the financial statements
as of December 31, 2003 and 2004 and for each of the years ended December 31,
2002, 2003 and 2004, appear later in this Form 20-F. The audited financial
statements have been prepared in accordance with U.S. GAAP.



                                       3
<PAGE>

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31
                                                                ----------------------------------------------------------
                                                                2000        2001          2002          2003          2004
                                                                ----        ----          ----          ----          ----
                                                                                      (U.S. dollars in millions)
<S>                                                             <C>         <C>           <C>           <C>           <C>
INCOME STATEMENT DATA:

Revenues ...............................................        $591        $765          $827          $898          $940
Cost of revenues .......................................         433         554           605           673           690
Gross profit ...........................................         148         211           222           225           250
Research and development costs, net ....................          44          59            57            55            67
Marketing, selling, general and administrative expenses,
net ....................................................          65          98           107           116           118
Operating income (loss) ................................         (13)         54            58            54            66
Finance income (expense) ...............................          --         (3)           (3)           (5)           (6)
Income (loss) before taxes on income                             (13)         52            54            50            61

Taxes on income ........................................           6          11             9            11            15
Equity in net earnings of affiliated
companies and partnership ..............................          (1)          -             1             7             8

Net income (loss) ......................................        $(21)        $41           $45           $46           $53
Earnings (loss) per share:
Basic net income (loss) per share ......................      $(0.65)       $1.07         $1.17         $1.18         $1.33
Weighted average number of shares used in computation
(in thousands) .........................................      31,572      37,975        38,489        39,061        39,952

Diluted net income (loss) per share ....................      $(0.65)      $1.04         $1.13         $1.14         $1.29
Weighted average number of shares used in computation
(in thousands) .........................................      31,572      39,359        39,863        40,230        41,041
</TABLE>


<TABLE>
<CAPTION>
                                                                               DECEMBER 31
BALANCE SHEET DATA:                                         2000       2001      2002       2003       2004
                                                            ----       ----     ------     ------     ------
                                                                        (U.S. dollars in millions)
<S>                                                          <C>        <C>        <C>        <C>        <C>
Cash, cash equivalents and short-term cash
investments .........................................        $55        $42        $78        $77        $35
Long-term deposits and loans ........................          4          3          4          2          2
Working capital .....................................         74        121        206        199        173
Short-term debt .....................................         51         47         31         15         10
Long-term debt ......................................         58         69         73         62         86
Shareholders' equity ................................        341        378        411        452        435
Total assets ........................................       $827       $901     $1,000     $1,024     $1,039

Dividends paid per ordinary share with respect to the      $0.32      $0.32      $0.34      $0.40      $2.17*
applicable year
</TABLE>

*        including an extraordinary dividend of $1.80 declared in the second
         quarter of 2004.

                                       4
<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 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.

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.


                                       5
<PAGE>

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 or 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 periods. These periods 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 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, where estimated gross profit or loss from
long-term projects may change and such changes in estimated gross profit/loss
are recorded on a cumulative catch-up basis. See below - Item 5. Operating
Financial Review and Prospects - Management's Analysis and Review - Critical
Accounting Policies. 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


                                       6
<PAGE>

recognized. In addition, although we have extensive experience in these types of
programs, there is difficulty inforecasting 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. However,
in such cases 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. Customers typically have the right to draw down against
advance payment guarantees if we were to default under the applicable contract.
In addition, some customers require that the payment period under the contract
be extended for a number of years, sometimes beyond the period of contract
performance. See below - Item 4. Information on the Company - Financing Terms.
Also, we face exchange rate risks when our contracts call for payments in
currencies other than the U.S. dollar. See below "Risk Related to Our Israeli
Operations - Changes in the U.S. Dollar - New Israeli Shekel (NIS) Exchange
Rate" and Item 4. Operating Financial Review and Prospects - Management Review
and Analysis - Impact of Inflation and Exchange Rates.

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.

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 us 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.



                                       7
<PAGE>

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.

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. Our 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. We may also encounter anti-trust issues in certain areas as our
operations expand.



                                       8
<PAGE>

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. In
addition, there may be situations in which our management determines, based on
market conditions or other applicable considerations, to pursue an acquisition
without performing due diligence.

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, 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. Despite recent
Palestinian elections and discussion between the Israeli Government and the
Palestinian Authority, 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 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. Foreign government defense export
policies towards Israel could also make it more difficult for us to obtain the
export authorizations necessary for our activities. Also, over the past several
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 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. However, no assessment can be made as to the full impact of such
requirements on our workforce or business if conditions should change.




                                       9
<PAGE>

ISRAEL'S ECONOMY MAY BECOME 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, controls of wages, prices and
foreign currency exchange rates and regulations regarding the lending limits of
Israeli banks to companies considered to be in an affiliated group. The Israeli
Government has periodically changed its policies in all of these areas. Although
in recent years the stability of the Israeli economy has increased, and the
Israeli Government has liberalized many economic regulations, reoccurrence of
previous destabilizing factors could 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
exchange rate between the NIS and the U.S. dollar has fluctuated in recent
years, although it was relatively stable in 2004. 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 overall Israeli Government 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.

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 and Investment Center 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.
We focus on designing, developing, manufacturing and integrating command,
control, communication, computer, intelligence, surveillance and reconnaissance
(C4ISR) network centric 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) systems;

         o        C4I and government information systems;

         o        land vehicle systems and upgrades;

         o        electro-optic and countermeasures systems and products;

         o        naval systems;

         o        homeland security systems;

         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, we provide customers with
cost-effective solutions, and our customers are able to improve their
technological and operational capabilities within limited defense budgets.



                                       11
<PAGE>

         MARKET ENVIRONMENT

         The military actions in recent years 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 network centric 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 us 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

         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, land, naval and C4I
programs throughout the world, and Elbit Systems continues these activities.

         In 2000, Elbit Systems merged with Elop Electro-Optics Industries, Ltd.
(El-Op). Following the merger, El-Op became a wholly-owned subsidiary of Elbit
Systems. El-Op has more than 60 years of experience in the electro-optics area.
The merger enhanced our position as the largest non-government owned defense
company in Israel. This position was further enhanced by the agreement we signed
in December 2004 to purchase the major shareholder interest in Tadiran
Communications Ltd. and the completion of the first phase of that purchase in
April 2005. See below - Item 7. Major Shareholders and Related Party
Transactions - Related Party Transactions - Agreements Relating to the Tadiran
Acquisition.

         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.



                                       12
<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, laser and infrared seekers for guided munitions, mission planning and
mission debriefing systems, full mission simulators, tactical simulators and
virtual training systems. 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-10,
                  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, MI-8, 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 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 and the Skylark man-packed UAV. We also design and supply
command and control ground stations elements that can be adapted for various
types of UAVs, as well as training systems with capabilities to simulate payload
performance, malfunctions and ground control station operation.

         C4I AND GOVERNMENT INFORMATION SYSTEMS. We design, manufacture and
integrate C4I systems for ground forces and battlefield management and control
applications. These include artillery command and control systems, day-night
observation systems, C4I battlefield management systems for headquarters and
maneuvering forces as well as battle management systems for battalion combat
teams, tactical communications systems and radios that provide infrastructure
and connectivity for network centric architecture solutions, tactical ground
reconnaissance systems and tactical battle group trainers. This includes our
prime contractor role for the Israeli Digital Army Program. We also design and
manufacture governmental information technology systems and integrated
information gathering systems for border control and management systems, crime
prevention and other governmental applications.

         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, overhead remote
control weapon stations, battle management systems, FLIRs, gunner's and
commander's sights, lasers range finders, laser warning systems, displays, life
support systems and hydraulic systems for tanks, personnel carriers and other
combat vehicles. We develop and supply unmanned ground vehicles for a variety of
land based missions. 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, Pandur and LAV.

                                       13
<PAGE>

         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
flash lamp pumped and diode pumped technologies used in manned and unmanned
airborne vehicles and land and naval platforms. Our electro-optic solutions are
used for detection, identification and information 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 imagery 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.

         NAVAL SYSTEMS. Our naval systems include naval combat management
systems, shipboard combat system integration, naval electro-optic observation
systems, naval tactical trainers, submarine electronic support management
systems and shipboard decoy countermeasure launching systems.

         HOMELAND SECURITY SYSTEMS. We design, manufacture and integrate a range
of security systems and products for air, ground and sea homeland security and
homeland defense applications. These include maritime and coastal control and
surveillance systems, harbor protection systems, border control systems
automatic access gates for border control, C4I homeland security applications,
facility perimeter security products, remote suspect identification systems for
aviation security, electronic fences and electro-optic warning systems for
defense, police, border and coast guards and homeland security uses.

         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 our consolidated revenues for groups of major
areas of operations for the years ended December 31, 2002, 2003 and 2004:

<TABLE>
<CAPTION>
                                                              2002         2003       2004
                                                              ----         ----       ----
<S>                                                           <C>          <C>        <C>
 Airborne Systems:                                            $373         $374       $368
 Land Vehicle Systems:                                         136          200        199
C4ISR Systems:                                                 123          134        109
Electro-Optic Systems:                                         148          140        200
Other (mainly non-defense engineering and production):          48           50       __64
                                                              ----         ----       ----
Total:                                                        $828         $898       $940
                                                              ====         ====       ====
</TABLE>


                                       14
<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 network centric 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.

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

         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 SYSTEMS - for embedded training.

         MISSION PLANNING AND DEBRIEFING SYSTEMS - for planning and debriefing
         of fixed and rotary-wing aircraft missions.

         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.

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



                                       15
<PAGE>

         UAV 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.

         GROUND CONTROL STATIONS -designed with an open architecture concept
         that is adaptable to various types of UAVs.

         TRAINING SYSTEMS - for simulation of full UAV operation, payload data
         and malfunctions.

         C4I AND GOVERNMENT INFORMATION  SYSTEMS
         ------------------------------  -------

         DIGITAL ARMY "SYSTEM OF SYSTEMS" - advanced combat concepts geared to
         increase operational effectiveness and connectivity throughout all land
         force echelons, in all combat situations, under a unified operational
         concept, providing computerized systems down to the single soldier
         level to facilitate transmission of integrated, real-time situation
         pictures to and from all battlefield and command echelons.

         ARTILLERY C4I SYSTEMS - for C4I applications among field artillery
         units deployed from the platform to brigade levels, managing all
         aspects of artillery operations..

         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 AND FORCE MANEUVERING MANAGEMENT SYSTEMS - integrated
         command and control systems for maneuvering forces, providing updated
         situational awareness, command dissemination and decision support
         tools.

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

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

         ENHANCED TACTICAL COMPUTERS - tactical PCs for military field use.

         MILITARY WIRELESS LAN - immune wireless systems for wideband data
         transmission, with high survivability in dynamic and noisy military
         environments.



                                       16
<PAGE>

         TACTICAL BATTLE GROUP TRAINERS - for training commanders and staff from
         company level to battalion battle group and brigade-sized operations.

         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 SYSTEMS - for crime prevention, and other
         governmental applications.

         INTEGRATIVE COMPONENT-BASED EXPLOITATION (ICE) SYSTEM - fully
         integrative multi-sensor exploitation system providing an end-to-end
         solution for the entire operational cycle of satellite and airborne
         digital imagery.

         ANTI-MONEY LAUNDERING SYSTEMS - information technology systems for law
         enforcement anti-money laundering and combating of terrorist financing
         activities.

         BORDER CONTROL AND MANAGEMENT SYSTEMS - automatic systems that
         supervise and control all movements across borders.

         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.

         BATTLE MANAGEMENT SYSTEMS - for data processing and situational
         awareness of vehicle crews and commanders.

         OVERHEAD REMOTE WEAPON STATIONS - for transforming armored vehicles
         into armored fighting vehicles by providing the crew with the combat
         capabilities of a turreted vehicle.

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

         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(0) 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.

         UNMANNED GROUND VEHICLES (UGVS) - dedicated autonomous vehicles,
         equipped with sensory perception and artificial intelligence
         capabilities for various land based applications.

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



                                       17
<PAGE>

         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 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.

         NAVAL SYSTEMS
         -------------

         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 stabilized 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.

         UNMANNED NAVAL VEHICLES - unmanned naval systems for various maritime
         applications that adapt the capabilities and applications of UAVs.



                                       18
<PAGE>

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

         HOMELAND SECURITY SYSTEMS
         -------------------------

         BORDER AND COASTAL SURVEILLANCE AND CONTROL SYSTEMS - turn-key
         solutions including a wide variety of day and night electro-optical
         sensors with perimeter security, image processing, acoustic sensing
         technology, command and control and systems integration capabilities
         for monitoring and information gathering at border entry points and
         coastal areas.

         HARBOR PROTECTION SYSTEMS - for securing and monitoring access to
         harbors.

         FACILITY SECURITY SYSTEMS - for protecting unauthorized access and exit
         to and from sensitive facilities.

         AVIATION SECURITY APPLICATIONS - for protection of commercial aircraft,
         airports and air travelers, including remote suspect identification
         systems.

         AUTOMATIC BORDER ACCESS GATES - for controlling access of passengers,
         vehicles and carriages at border entry points.

         CRITICAL INFRASTRUCTURE SECURITY SYSTEMS - a wide range of
         electro-optical intruder detection sensors with advance day and night
         capabilities for monitoring and securing critical infrastructure
         facilities and assets, including integrated pipeline security system
         solutions based on acoustic detection fusion technology.

         ELECTRONIC AND ELECTRO-OPTICAL PERIMETER AND ACCESS CONTROL SYSTEMS -
         for night and day "smart" monitoring of perimeter fences and entry/exit
         points.



                                       19
<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. These include IMINT solutions, airborne
reconnaissance systems, spaceborne reconnaissance systems, observation and
surveillance stabilized payloads, laser systems, head-up displays, thermal
imaging systems, integrated sights for ground forces and electro-optical
homeland security and defense security systems. 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 - Electro-Optical and Countermeasures Systems - Naval Systems and -
Homeland Security Systems."

         EFW

         We conduct most of our business in the United States through our
wholly-owned subsidiary, EFW Inc. (EFW) and EFW's subsidiaries, collectively the
Elbit Systems of America group of companies. Elbit Systems holds its shares in
EFW through a Delaware holding company Elbit Systems U.S. Corp. (ESC). 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, JDAM munitions, 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 Group companies 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.

         KOLLSMAN. EFW acquired Kollsman, Inc. (Kollsman), a wholly-owned
Delaware subsidiary located in Merrimack, New Hampshire. Kollsman is 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. Kollsman has also recently begun activities in
the U.S. homeland security market. Kollsman through its wholly-owned subsidiary,
KMC Systems, Inc., is also involved in manufacturing medical instrumentation.

         IEI. EFW also acquired International Enterprises, Inc. (IEI), a
wholly-owned Alabama 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.



                                       20
<PAGE>

         HONEYWELL DISPLAY BUSINESS. Another acquisition of EFW was the purchase
of 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 facilities and at IEI's facilities in Alabama.

         EFW'S MAJOR CUSTOMERS. 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. and CMI - Cockerill Mechanical Industries
S.A.

         EFW'S RECENT CONTRACTS. 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, supply of displays for the
A-10 and semi-active laser seekers for JDAM munitions. See below "Current
Business Operations - Aircraft and Helicopter Systems - Helmet Mounted Systems
and - Land Vehicle Systems".

         FMF. EFW and its subsidiaries also act as prime contractors for U.S.
 Foreign Military Funding programs. See below "Governmental Regulations -
 Foreign Military Funding".

         ENGINEERING AND MANUFACTURING. EFW has extensive engineering and
manufacturing capabilities at its Fort Worth facilities as does Kollsman at its
facilities in New Hampshire. IEI's facilities in Alabama and EFW's facilities in
Georgia have significant maintenance and repair capabilities. See below
"Manufacturing" and "Customer Satisfaction and Quality Assurance".

         SSA. EFW, Elbit Systems, ESC 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 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 of EFW's board
of directors 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 the Elbit
Systems Group. EFW's board of directors also contains officers of EFW and up to
two inside directors, who have other affiliations with the Elbit Systems Group.
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 California 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.



                                       21
<PAGE>

         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 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 2003, Lockheed
Martin selected VSI as its team member to develop 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. Cyclone recently acquired the assets of IMI's
Aircraft Systems Division, which is involved in manufacturing weapons pylons and
external fuel tanks for fighter aircraft. See below - "Recent Acquisitions".
Both directly and through its affiliated company Snunit, 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 operates as an integral part of Elbit Systems'
UAV Systems business, which is located both in Nes Ziona and Haifa, Israel.
Silver Arrow develops and manufactures UAVs. UEL - UAV Engines Ltd., a
wholly-owned British subsidiary of Silver Arrow, manufactures engines for UAVs
and other applications. See below "Current Business Operations - UAV 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
defense security and surveillance systems and tactical products including day
and night vision instruments based on starlight amplification. It develops and
manufactures electro-optical systems for day and night use, counter-terrorism
systems, command and control, image processing and intruder detection, night
vision goggles, sniper vision systems and other defense and homeland security
systems including for border, perimeter and access control. See below "Current
Business Operations - Battlefield Management and Government Information Systems
and - Homeland Security Systems"

         EUROPEAN SUBSIDIARY. The European Subsidiary is a wholly-owned Belgium
subsidiary. It develops, manufactures and supports electro-optical products,
mainly for the defense and space markets.

         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". Elbit Systems has a "call" option to purchase the shares of the other
shareholders in Kinetics at a specific price. With regard to a "put" option of
other shareholders in Kinetics, see below - Item 5. Operating Financial Review
and Prospects - Management's Discussion and Analysis - General - Off-Balance
Sheet and Other Long-Term Arrangements and Commitments.



                                       22
<PAGE>

         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 8%, on a fully-diluted
basis, of 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."

         TADIRAN COMMUNICATIONS

         Tadiran Communications Ltd. (Tadiran Communications) is a publicly
traded Israeli investee company owned as of May 31, 2005, approximately 20% by
Elbit Systems and approximately 18% by Koor Industries Ltd. (Koor), with the
balance of the shares traded on the TASE. Located in Holon and Petach Tikva,
Israel, Tadiran Communications has over 40 years of experience in military
communications technologies, with internationally recognized expertise in the
fields of RF design and development in frequencies ranging from 1.5 MHz - 5 GHz
and 50 GHz to 60 GHz, spread spectrum techniques (e.g. frequency hopping and
direct sequence), crypto algorithms, wireless data transfer application modems,
error detection and correction adapted to radio channels, advanced
synchronization techniques, communications protocols, including radio over IP
(RoIP) and voice over IP (VoIP), and radio channel control.

         In addition to being the main supplier of communication equipment to
the IDF's Signal Corps, Tadiran Communications is active in the global military
and civilian communication markets. Tadiran Communications has a large worldwide
customer base for which it provides advanced communications technology,
equipment, systems and solutions. Over 90% of its 2004 revenues was derived from
its international exports. Tadiran Communications' wholly-owned subsidiary,
Talla-Com, Tallahassee Communications Industries Inc. (Talla-Com), and
Talla-Com's wholly-owned subsidiary, Tallahassee Technologies Inc., both based
in Tallahassee, Florida, serve as Tadiran Communications' U.S. development,
production and marketing arm and as a base for participation in FMS projects.
Tadiran Communications' 75%-owned Ulm, Germany-based subsidiary, Telefunken
RACOMS, is active in both military and civilian communications and serves as
Tadiran Communications' base for the German and European communications markets.

         For further information on Elbit Systems agreements regarding the
purchase of shares in Tadiran Communications see below - Item 7. Major
Shareholders and Related Party Transactions - Related Party Transactions -
Agreements Relating to the Tadiran Acquisition.

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



                                       23
<PAGE>

RECENT ACQUISITIONS

         During the past year we have expanded our capabilities through several
acquisitions as well as divested our shareholdings in one of our non-core
businesses.

         TADIRAN COMMUNICATIONS. In April 2005, Elbit Systems completed the
first stage of the acquisition of Koor's shares in Tadiran Communications,
acquiring from Koor approximately 13.7% of Tadiran Communications shares, for an
aggregate purchase price of approximately $62.5 million. Including shares
purchased by Elbit Systems on the stock market, as of May 31, 2005, we hold in
the aggregate approximately 20% of Tadiran Communications' shares. Subject to
the terms of agreements between Elbit Systems and Koor, Elbit Systems is to
purchase the balance of the Tadiran Communications' shares held by Koor
(approximately 18%). See above "Principal Subsidiaries - Tadiran Communications"
and below - Item 7. Major Shareholders and Related Party Transactions - Related
Party Transactions - Agreements Relating to the Tadiran Acquisition.

         IMI AIRCRAFT SYSTEMS DIVISION. In March 2005, Cyclone acquired the
assets of Israel Military Industries Ltd.'s (IMI) Aircraft Systems Division (the
Aircraft Division) located in Tirat Hacarmel, Israel, for a price of
approximately $7 million, subject to adjustments, a portion of which was paid in
cash and the balance through assumption of obligations of the Aircraft Division.
The transaction was made through a wholly-owned subsidiary of Cyclone. The
Aircraft Division manufactures weapon pylons and external fuel tanks for fighter
aircraft. The Aircraft Division's customers include the IMOD, the DOD, U.S.
aircraft manufacturers and other customers worldwide.

         CIC. In September 2004, Kollsman acquired the product line and assets
of Computer Instruments Company (CIC), located in Westbury New York, for
approximately $2.3 million. The CIC business line relates to the manufacture of
air data computers and modules and air data pressure probes for military and
commercial aircraft. Following the acquisition, the CIC business was relocated
to Kollsman's facilities in New Hampshire. The acquisition positions Kollsman as
a key supplier of air data probes for tactical missile and UAV programs and
enhances Kollsman's product line for commercial and military aircraft.

         REDC. In November 2004, El-Op acquired the preferred shares of RedC
Optical Networks Inc. (RedC) held by MRV Communications Inc. for a purchase
price of $2 million, which together with the 36.5% of RedC's shares previously
held by El-Op, brought El-Op's shareholdings in RedC's voting shares to
approximately 72.5%. RedC is a Delaware corporation, which together with its
Israeli subsidiary, designs and manufactures optical amplifiers for dense
wave-length multiplexing optical networks for telecommunications.  In December
2004, El-Op entered into an agreement for the sale of its entire interest in
RedC in consideration for approximately $3.1 million. The closing conditions for
that sale were completed in January 2005. Approximately 90% of El-Op's equity
interest in RedC was sold to the Cedar Fund with the balance redeemed by RedC
itself.



                                       24
<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. We also supply a comprehensive line of aircraft simulator
and training systems.

         Aircraft and helicopter upgrade programs are a part of our 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

         IAR 99. In November 2004, Elbit Systems, in cooperation with the
Romanian aircraft manufacturer Avioane Craiova, was awarded a $43 million
contract from the Romanian Defense Ministry to supply eight IAR-99 lead-in
trainer aircraft. The project will be executed in cooperation with Romanian
industries over a period of approximately four years. This contract followed our
upgrade project of four IAR-99 aircraft which was announced in 2001. The first
program has been completed and the aircraft are currently used by the Romanian
Air Force.

         F-18 DISPLAYS. In April 2004, EFW was awarded a contract from Boeing
for the design and development of Upfront Control Display (UFCD) and
Multi-Purpose Color Display (MPCD) units for F/A-18E/F aircraft. Under the terms
of the contract, EFW will provide Form, Fit, Function and Interface (FFFI)
replacements of the existing aircraft configuration in support of the F/A-18E/F
Multi-Year II program, to take place from 2005 to 2009. The contract award
provides options for production units of up to 360 aircraft. The first of these
production options was awarded to EFW in October 2004. The development,
production and support contract for the full program is estimated to be at a
value of more than $45 million.

         AL-X BRAZIl. 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
we supply 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 our completion 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, we are supplying simulators,
planning mission stations and debriefing stations.


                                       25
<PAGE>

Maintenance and logistic support to the Brazilian Air Force are provided mainly
through Elbit Systems' Braziliansubsidiary 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".

         F-5 BRAZIL. 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. Ours 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.

         MIG-21 ROMANIA. 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. Following completion of aircraft deliveries, we are
supplying ACTS, an Advanced Combat Training System, which aids pilot training
and the transition to upgraded MiG-21 aircraft and other future fighters.

         SU-25 SCORPION. In 2003 and 2004, Elbit Systems was awarded contracts
to deliver to Georgia avionics for upgraded SU-25 Scorpion aircraft, with
deliveries scheduled for 2005 and 2006, respectively. This followed Elbit
Systems and TAM, the Georgian aircraft manufacturer, conduct of the maiden
flight of an upgraded SU-25 Scorpion aircraft in 2001.

         PAMPA. 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
between Lockheed Martin and the Argentinean Government the program was resumed
and roll-out of the first upgraded aircraft occurred in the third quarter of
2004. We anticipate completing deliveries by 2007.

         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.

         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.



                                       26
<PAGE>

         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.

         Since its March 2005 acquisition of IMI's Aviation Systems Division,
Cyclone manufacturers weapons for pylons and F-16 aircraft. See above "Recent
Acquisitions". Cyclone also 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, 2004, our overall F-16 related systems and
components backlog, which extends through 2008, 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-38C,
MiG-21, Mig-27, Mig-29, SU-25, SU-30, A-4, AL-X. AM-X, AT-63 Pampa, IAR-99,
Jaguar, KO-1, IDF, L-39, Mirage, MD-10/11 and Airbus 300/310.

         AIRCRAFT ELECTRO-OPTIC SYSTEMS. El-Op supplies laser range finders for
a range of airborne platforms. El-Op also has supplied laser designators for
other airborne applications such as the laser designator for the U.S. Kiowa
Warrior helicopter, the U.S. Navy's Nite Hawk pod and for pods of other
customers.

         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 2005.

         HELICOPTER UPGRADE PROGRAMS

         IAF MISSION MANAGEMENT SYSTEM. In February 2005, Elbit Systems was
awarded a contract to provide the Israeli Air Force with a command and control
mission management system for helicopter platforms. This advanced system
provides the combat forces with a real-time updated situational picture, which
enables them to share mission critical data based on data communication. The
system will allow all mission participants to benefit from an accurate tactical
picture for enhanced situational awareness, as well as effective synchronized
operation on the battlefield. The system enables support coordination,
identification of friendly forces and prevention of inadvertent gunfire.

         APACHE MISSION COMPUTER. 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.

         TURKISH S-70 BLACKHAWK. In 2003, Elbit Systems' contract with Turkish
Aerospace Industries became effective for the modernization of the Turkish Armed
Forces Command Sikorsky S-70 Blackhawk helicopters. we act 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.



                                       27
<PAGE>

         BLACK HAWK WEAPON MANAGEMENT SYSTEMS. 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
2005.

         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 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. During November 2004, EFW received
initial production orders for these second generation digital map and display
electronics for the V-22. Additional production orders were received in January
2005.

         DIGITAL MAPS AND DISPLAYS FOR EUROCOPTER. In 2003, we received an order
from Eurocopter S.A. (Eurocopter) to supply 120 smart displays for French search
and rescue helicopters. This followed earlier contracts from Eurocopter for
display development and supply of digital map systems and displays.

         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, which has successfully
completed its first flight test series. Performance of the contract is through
2006. In June 2005, El-Op's LORD system received Flight International's
Aerospace Industry Award in the Avionics and Electronics category. 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. Kollsman supplies the upgraded FLIR enhanced night targeting system
for the U.S. Marines' AH-IW Super Cobra helicopters. El-Op also supplies
electro-optic payloads for a variety of helicopters.

         PRECISION GUIDANCE SYSTEMS

         OPHER AND LIZARD. 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. 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 the Italian Air Force.

         JDAM. In July 2004, EFW was awarded an order from Boeing to modify a
Lizard Semi Active Laser (SAL) seeker to serve as the SAL seeker for Boeing's
JDAM munitions, adding the capability of laser terminal guidance against targets
of opportunity and moving targets. To date, two successful guidance tests have
been completed, one against a stationary target and the second against a moving
target. After completion of the design phase of this program, low rate initial
production and serial production orders are anticipated.

         VIPER STRIKE. In 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-tank (BAT) munitions - Viper Strike. Orders for
additional units were received in 2003, 2004 and 2005. These munitions are used
in connection with the Hunter UAV. New derivatives of this product are being
modified for use on other platforms.



                                       28
<PAGE>

         CIVIL AVIATION

         KOLLSMAN COMMERCIAL AVIONICS. Kollsman designs and manufactures a range
of altimeters, pressure monitors, other cockpit indicators and avionics test
equipment for commercial as well as military aircraft. Kollsman is also
supplying air data computers and air data pressure probes for commercial
aircraft following its acquisition in September 2004 of the assets of CIC.
Following the CIC acquisition, Kollsman obtained an FAA Technical Service Order
(TSO) for an RVSM-compliant air data computer that is designed to interface with
a wide variety of avionics systems and is currently being supplied for RVSM
upgrades for older corporate and commercial aircraft. See above "Recent
Acquisitions".

                                       29
<PAGE>

         EVS

         Kollsman designs and produces the Enhanced Vision System (EVS) for
commercial aircraft. The EVS 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 allows the pilot to detect
lights and ground features such as runways, aircraft and buildings at night and
in low visibility conditions. In 2001, the U.S. Federal Aviation Administration
(FAA) certified the installation of the EVS on General Dynamics' Gulfstream-550
business jet. EVS is installed as a baseline system on Gulfstream-550 aircraft
and is an option on Gulfstream-500 aircraft. In 2003, EVS also was installed and
became operational on the Gulfstream-400.

         In October 2004 and January 2005, Kollsman was awarded additional
follow-on orders for EVS by Gulfstream for all their large cabin aircraft
models. These additional orders bring the total EVS orders from Gulfstream to
approximately $70 million. The EVS will be installed on the top of the line
Gulfstream G450 and ultra long-range G550 as production standard items. The
system will also be available as optional equipment on the Gulfstream G200,
G350, G400 AND G500.

         During 2004, Kollsman was awarded the National Aeronautic Association's
2003 Collier Trophy for aviation safety technological advances as a team member
for the Gulfstream G550. Kollsman's EVS was a significant part of the basis for
the award and was sited as the G550's greatest safety feature.

         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.

         COMMERCIAL HUDS. In 2003, Kollsman entered into a contract with
Honeywell International Inc. to develop and supply, together with El-Op, head-up
display overhead projection units for the Federal Express (FedEx) fleet. The
contract calls for deliveries through 2012. In addition, Kollsman and El-Op are
currently working on a cost sharing research and development 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.

         CABIN PRESSURIZATION CONTROL SYSTEM. In December 2004, Kollsman was
awarded a contract by Raytheon Aircraft Company to provide the cabin
pressurization control system for the Hawker and Beechcraft King Air Series of
aircraft. Kollsman's next-generation autoschedule pressurization system, KAPS
II, will be incorporated into new production aircraft models, including the
Hawker 400XP and 800XP and Beechcraft King Air Models 350, B200 and C90

         STRUCTURAL PARTS, Cyclone manufactures structural parts for several
types of commercial aircraft.



                                       29
<PAGE>

         FLIGHT TRAINING SERVICES

         We provide aircraft flight training solutions. 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 Grob 120A 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 began in 2003.

         TRAINING AND SIMULATORS

         We provide training and simulation programs offering across-the-board
systems engineering and integration expertise applied to a comprehensive line of
training and simulation solutions for airborne platforms. These solutions range
from mission preparation, through execution, to post-mission debriefing and
analysis. Our total solution concept encompasses ground support systems,
including mission planning and debriefing for pre-and-post multi-mission
rehearsal and review.

         Our training systems include virtual training systems such as the
Advanced Combat Training System (ACTS) for fixed-wing aircraft and HeliACTS for
helicopter crew training. We also supply live, virtual and constructive (LVC)
training systems. In addition, we offer comprehensive simulator support services
such as contractor logistics support (CLS), training, manuals and spare parts.

         In 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".

         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. Kollsman maintains a U.S. Federal Aviation
Authority (FAA) certified repair facility in Wichita, Kansas for



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commercial avionics repairs. 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

         Our 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

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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.

         JHMCS

         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 2004, VSI was awarded a
contract from Boeing for the delivery of more than 400 additional Joint Helmet
Mounted Cueing Systems (JHMCS). Under the contract, valued at $62.2 million, VSI
will provide JHMCS systems, including spare parts, technical support and support
equipment for the LRIP 4 (Low Rate Initial Production) acquisition. This
procurement fills U.S. government domestic requirements for the U.S. Air Force
F-15, and F-16 and U.S. Navy F/A-18 aircraft as well as Foreign Military Sales
(FMS) production commitments including: Australia (F/A-18), Chile (F-16),
Finland 9F/A-18), and Poland (F-16). Additionally, this award fulfills
commercial commitments from Boeing for the F-15K program for South Korea.
Deliveries under LRIP 4 are currently in process and will continue through 2005.

         In August 2004, VSI was awarded a $75.6 million contract for over 3000
JHMCS systems from Boeing. This award is the first Full Rate Production (FRP) of
JHMCS following four LRIP lot deliveries. Under the contract, VSI will provide
JHMCS display systems, spare parts and support equipment for the FRP lot 1
acquisition. This procurement fills additional U.S. government domestic
requirements for the U.S. Air Force and Air National Guard F-15, F-16 and USN
F/A platforms as well as FMS production commitments for Australia (F/A-18),
Finland (F/A-18), Poland (F-16), Greece (F-16) and Switzerland (F/A-18).
Deliveries under FRP 1 are currently in process and continue through December
2006. This order brings VSI's total JHMCS production quantity to more than 1,000
systems with more than 500 systems delivered to date.

         IEI serves as the depot repair center for the JHMCS electronics unit.

         JSF. In 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.

         PNVG. In February 2005, VSI was awarded a contract to supply panoramic
night vision goggles (PNVG) for use by U.S. Navy tactical aircraft. The PNVG is
based on the "Quad Eye" (TM) product developed by Kollsman.



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         MLU. VSI also performs helmet mounted display programs for other
customers, including supply of the helmet mounted systems for Lockheed Martin's
F-16 Mid-Life Upgrade (MLU) Program for the Danish and Norwegian Air Forces.

         HELICOPTER HELMET MOUNTED SYSTEMS

         NVG/HUD. Our 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.

         IHADSS. 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. In March 2004, EFW
received a follow-on order to complete qualification and transition the new
system to full rate production.



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         UAV 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. In 2003, we acquired a majority interest in
AD&D, Advanced Design and Development Ltd., an Israeli company engaged in the
development of a variety of unmanned 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.

         We also develop and supply ground control stations for the operation of
UAVs. 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.

         We also provide training systems for UAV operations.

         UAV PROGRAMS

         WATCHKEEPER. In June 2004, a team consisting of Elbit Systems/Silver
Arrow and Thales Defence Ltd. (as prime contractor) was selected by the United
Kingdom Ministry of Defense (UK MOD) for the Watchkeeper Tactical UAV program.
The Watchkeeper Program commences with the Demonstration, Manufacture and
Initial Support Phase (DMIS) phase for the development, manufacture, and
in-service support program to meet the UK MOD requirement to provide accurate,
timely and high quality imagery and IMINT (Image Intelligence) to satisfy
commanders' critical information requirements. The solution proposed and
selected by the UK MOD is based on the Hermes 450 UAV in dual payload
configuration, e.g. SAR and E/O payloads. The Program calls for the Hermes 450
to be capable of flying in icing conditions and of performing automatic takeoff
and landing.

         IUP. In May 2005, IUP, a partnership equally owned by Elbit Systems and
IAI, was selected as the supplier of UAV systems for the Turkish TIHA Program.
IUP has signed a contract for performance of the program, which is anticipated
to enter into effect in the near future. Under the contract IUP will be
responsible for delivering UAV systems including advanced payloads. IUP will
subcontract 50% of the work to Elbit Systems to supply ground control stations,
data links and payloads. The expected contract to Elbit Systems is to be
performed over a three-year period and is anticipated to be in an amount
material to Elbit Systems.



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         SKYLARK IMOD. In 2004, the IMOD selected Elbit Systems to supply
several Skylark mini-UAVs for operational evaluation by the IDF ground forces.
The system deliveries were completed and the systems are now in operational
evaluation phase. Recently, we issued several international proposals for
Skylark, and orders for additional systems have been received from several
customers worldwide.

         ARIZONA BORDER CONTROL. In June 2004, EFW was awarded a contract to
provide through a lease arrangement to the U.S. Department of Homeland Security,
Customs and Border Protection (CBP) Elbit Systems' Hermes 450 Unmanned Air
Vehicles (UAV) along Arizona's southern border as part of the Arizona Border
Control Initiative (ABCI). The ABCI initiative is intended to provide improved
surveillance along the Mexican border for various homeland security
applications, including illegal immigration and drug smuggling. Under the CBP
lease contract, EFW and Elbit Systems provide UAV's, ground control stations,
operational crews and support personnel for UAV flight support of border patrol
operations. Following completion of this initial successful pilot program, which
was focused on the Arizona border with Mexico, it is anticipated that such
contractor operated lease activities for UAVs may be expanded.

         FALLON NAVAL AIR STATION. In 2003, EFW was awarded a contract to
operate Elbit Systems' Hermes-450 UAV system at Fallon Naval Air Station in
Nevada. The contract was in support of the DOD's Joint UAV test and evaluation
exercise and was completed in 2004.

         IMOD INTEGRATED 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 through 2004, we received additional orders.
As of December 31, 2004, we had a backlog for the program of approximately $67
million, to be performed mainly through 2006.

         AIRBORNE C4ISR. In November 2004, Elbit Systems was awarded a contract
in an amount of approximately US$300 million by the Israeli Ministry of Defense
to supply advanced systems. The contract will be performed over a multi-year
period, under which Elbit Systems will supply airborne systems and command and
control systems. The contract includes integration of various systems, part of
whose purpose includes providing advanced solutions in the area of homeland
security.



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         C4I AND GOVERNMENT INFORMATION SYSTEMS

         NATURE OF OUR C4I 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 a user-friendly format. We integrate
advanced software tools with general and special purpose hardware into full C4I
battlefield and information technology systems.

         LAND C4I AND BATTLEFIELD MANAGEMENT SYSTEMS

         Our land 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 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).

         ISRAEL DIGITAL ARMY PROGRAM. In December 2004, Elbit Systems was
awarded a contract by the IMOD for the Digital Army Program (DAP), in an amount
of approximately $200 million. The DAP, which will also include an additional
material amount of FMF funding, will be performed over a ten-year period. Elbit
Systems was selected approximately two years ago by the IMOD to be the prime
contractor for the DAP. Rafael and Tadiran Systems Ltd. will serve as our major
subcontractors. Within the framework of the program, all land forces operations
will be computerized (command, control, communications), integrated and
interfaced with new and advanced applications. Under the DAP, we will supply the
IDF with computerized systems down to the single soldier level. The systems will
facilitate transmission of integrated, real time situation pictures to and from
all battlefield and command echelons. The program calls for supply and support
of all hardware and software, including command and control stations, data
processing and distribution systems. It will enable force coordination at all
levels, access to updated situational pictures, improved overall operational
capabilities, including survivability and accuracy, and more efficient
utilization of personnel and other resources.

         TORC2H. The IDF has selected Elbit Systems' TORC2H border protection
command and control system. During 2004, Elbit Systems successfully deployed the
TORC2H to support border security activities in Israel. Further phases of TORC2H
are anticipated to be implemented under the scope of the DAP.

         WIRELESS LAN. In September 2004, Elbit Systems was awarded a contract
by the IMOD to develop a Wireless LAN solution for the IDF. This solution is
based on commercial standards which are adapted and tailored to the military
tactical needs and environments.

         NETHERLANDS BATTLE MANAGEMENT SYSTEM. In 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. The
initial contract was completed, and we received additional orders under the
project to be performed during 2005.



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         IDF BATTLE MANAGEMENT SYSTEM. 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, was
completed. Elbit Systems received additional orders under the scope of the
Battle Management Systems for Battalion Combat Teams, to be performed through
2006. In addition, Elbit Systems received a related order to develop and provide
a battle management solution for infantry to be performed through 2009.

         ETC. 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.

         SOLTAM, 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.

         GOVERNMENTAL INFORMATION TECHNOLOGY AND INFORMATION GATHERING SYSTEMS

         ELRON TELESOFT. 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.

         ANTI-MONEY LAUNDERING SYSTEM. In 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.

         ISRAELI BORDER CONTROL SYSTEM. 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 was completed during 2004.




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         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. We were 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.

         We develop overhead remote controlled weapon stations that transform
armored vehicles into armored fighting vehicles by providing the crew with
combat capabilities of a turreted vehicle - including guns, anti-tank missiles
and capabilities to perform in harsh battlefield conditions.

         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. We are the prime
contractor to the IMOD for all Merkava tank fire control systems. We also are
supplying the upgrade of 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, 2004, we had a total of
approximately $120 million in our backlog relating to Merkava orders, to be
supplied through 2007.



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         LAND VEHICLE MODERNIZATION PROGRAMS

         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 an approximately five-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. our 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
completed production deliveries in 2004 and is performing ongoing retrofit
activities. 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.

         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. In April 2005,
EFW was awarded additional orders for Bradley systems for the U.S. Army's
ongoing operations in Afghanistan and Iraq.

         LAV COMMAND AND CONTROL UPGRADE PROGRAM. In June 2005, EFW was awarded
a demonstration contract by Lockheed Martin as part of the Lockheed Martin team
for the development of an upgrade of the command and control variant of the U.S.
Marine Corps Light Armored Vehicle (LAV). The demonstration contract is to be
completed in 2006. EFW is to provide the mission equipment package for a new
vehicle intercommunication system. If, following completion of the demonstration
program, Lockheed Martin is selected by the U.S. Government to perform the
development phase of the program, EFW is anticipated to participate in that
phase as part of the Lockheed Martin team.

         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 was
approximately $43 million and performance was completed in 2004.



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         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 3,000
thermal imaging systems to other customers for different types of tanks. In
addition, El-Op has sold numerous hand-held thermal imagers and thermal imager
kits.

         TRAINING SYSTEMS AND SIMULATORS. 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. In addition, we supply
ground forces trainers to other customers worldwide including the Appended
Tactical Combat Trainer Systems, Tactical Battle Group Trainers, Artillery
Training Centers, and the Conduct of Fire Trainer. We also supply simulators
for, tank gunnery, snipers, sensors, command and control and missiles.

         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 unmanned ground vehicles (UGVs) 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.



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         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, IMINT
solutions 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, laser
range finders and designators and integrated sights for ground forces. These
products and systems are further described above in "Aircraft and Helicopter
Systems" and "Land Vehicle Systems" and below in "Naval Systems" and "Homeland
Security Systems".

         IMINT. El-Op was selected in January 2005 to supply advanced Imagery
Intelligence Systems (IMINT) to various customers at a total value of over $100
million. During 2004, 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.

         INFRARED DETECTORS. 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
a wide range of applications including for commercial aviation and homeland
security.

         SPACE SYSTEMS

         SPACE CAMERAS. 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-3 and Ofek-5, 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". In 2004,
El-Op completed delivery of an advanced electro-optic multi-spectral space
camera to the Korean Space Agency.

         TAUVEX II. In June 2004, El-Op was awarded a contract from the Ministry
of Science and Technology and the Israel Space Agency for the supply of "Tauvex
II" (Tel-Aviv University Ultra-Violet Explorer) scientific space camera. The
Tauvex II camera will be launched into space mounted on the Indian Satellite
GSAT-4, for the purpose of scientific research in exploration of the galaxies.
The camera will be supplied for integration into the GSAT-4 by the end of 2005.
The contract follows an agreement signed in 2003 between the Israel Space Agency
and ISRO, the Indian Space Research Organization, for scientific cooperation
between the two countries in the field of the astronomy in the "Ultra-Violet"
spectrum.

         HYPERSPECTRAL SYSTEMS. El-Op has been selected by the IMOD to be
Israel's hyperspectral systems development house. Currently, El-Op is involved
in an on-going hyperspectral system development program for the IMOD.

         SUBSIDIARIES. In 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. In May 2004, El-Op signed a cooperation agreement with OHB-System A.G.
(OHB) of Germany relating to space-related activities, and in March 2005, El-Op
and OHB established a jointly-owned (50% each) German subsidiary, OHB
Electro-Optics Gmbh.



                                       40
<PAGE>

         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.

         C4I SYSTEMS. 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.

         TRAINERS AND SIMULATORS. 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. Our naval training and simulator systems
include naval tactics and commander trainers, naval operational trainers,
electronic warfare trainers and anti-submarine trainers.

         ELECTRO-OPTIC SYSTEMS. El-Op supplies electro-optic products for naval
applications to several customers. In 2004, El-Op completed the supply to the
IMOD of upgraded electro-optics observation and surveillance systems for the
Israeli Navy. El-Op also supplies electro-optic shipboard payloads to several
navy and maritime forces for both observation and fire control applications.

         EW SYSTEMS. 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, and the first system was delivered in 2003 with two additional
systems delivered in 2004. An additional system was ordered in 2004, and
deliveries are anticipated to be completed during 2006.

         NIRIT NAVIGATION SYSTEM. Kollsman supplies navigation systems for the
Israel Navy's Nirit patrol boats.



                                       41
<PAGE>

         HOMELAND SECURITY SYSTEMS

         We are involved in the homeland security market that includes airports,
coastal authorities and other critical infrastructure 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. Kollsman has also established a
homeland security business unit to market, manufacture and distribute the
Group's homeland security products and technology in the U.S. market. Products
in this area include thermal imaging detection systems, remote controlled
surveillance systems, smart perimeter protection systems, automatic access gates
for border control and remote suspect identification systems for aviation
security. Customers in this field include the Israeli Police, the IMOD and
several international defense forces and security organizations.

         PERIMETER SECURITY. 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 two phases of the project have been
awarded and include construction of an electronic perimeter system and warning
system spanning 34 kilometers, with potential for expansion. During 2003 and
2004, Ortek was awarded additional contracts for a total of approximately 50
kilometers of electronic perimeter systems for military bases and
municipalities.

         GOVERNMENTAL MONETARY SYSTEMS. We also are supplying a border control
registration system and an anti-money laundering system to the Israeli
Government. See below - "C4I and Government Information Systems".

         MUSIC. 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. The Israeli Government is currently reviewing the system for use in
Israel's civil aviation protection plan.



                                       42
<PAGE>

         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 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.
During 2004, BSC made two follow-on investments in Mediguide in accordance with
the agreement, as well as a third follow-on investment in May 2005.

         In December 2004, Mediguide and Philips Medical Systems Nederland B.V.
entered into a set of three agreements. These agreements relate to development
and distribution of a Mediguide product integrated into a Philips product as
well as an equity investment of Philips in Mediguide, with a follow-on
investment option.

         As of May 31, 2005, Mediguide's shareholders other than Elbit Systems,
have invested approximately $43 million in Mediguide's equity. Following these
investments, as of May 31, 2005, Elbit Systems equity interest in MediGuide, on
a fully-diluted basis, was approximately 41%.

         STARLING - In 2001, Rafael and Elbit Systems established a joint
venture known as "Starling" Advanced Communications. In 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. (Elron). In October 2004, Starling signed an
agreement with Elron, according to which Elron agreed to purchase from Starling
preferred shares for an aggregate consideration of approximately $3 million,
based on a pre-money valuation of Starling of $7.2 million, calculated on a
fully-diluted basis. Following this investment, Elbit Systems equity interest in
Starling, on a fully-diluted basis, is approximately 30%.

         IMAGESAT - El-Op has an approximately 14% equity interest (11% on a
fully-diluted basis) and approximately 12.5% voting power (11.5% 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
electro-optical payload produced by El-Op.

         CYOPTICS - Our 50%-owned partnership SCD owns an approximately 8%
equity interest in CyOptics Inc. (CyOptics) on a fully-diluted basis. Through
its wholly-owned Israeli subsidiary, CyOptics is involved in the development of
wave-length domain multiplexing components for optical communicationS.



                                       43
<PAGE>

PROPERTY, PLANT AND EQUIPMENT

         Our executive offices and main research and development facilities are
located on approximately 595,000 square feet of property in the Advanced
Technology Center in Haifa, Israel, including the recently constructed building
described below. We own approximately 311,000 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 Elron Electronic Industries Ltd. (which
assumed the lease from Elbit Ltd.). We also lease approximately 50,400 square
feet in Petach Tikva, Israel and approximately 21,500 square feet in Rehovot,
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 building covers approximately 356,200 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 facility consolidates a large portion of our operations in the
Advanced Technology Center in Haifa. Total costs to Elbit Systems for the land
and construction of the new building were approximately $20 million.

         El-Op owns or has long-term leasehold rights to approximately 609,000
square feet of property and leases approximately 5,000 square feet of its
facilities in Rehovot, Israel. These facilities contain El-Op's headquarters,
offices, development facilities and manufacturing operations.

         EFW owns approximately 25 acres of property in Fort Worth, Texas. That
property includes an approximately 200,000 square foot facility containing EFW's
offices and manufacturing operations, which includes an approximately 20,000
square foot engineering and integration center that was added in 2004. Kollsman
owns property in Merrimack, New Hampshire covering a total of approximately 66
acres. This includes buildings containing offices and manufacturing operations
of approximately 352,000 square feet. Kollsman is currently in discussions to
lease approximately 44 unbuilt acres on the Merrimack property. 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 Nes
Ziona, 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. The European Subsidiary leases approximately 81,000 square feet in
Belgium.

         Over the last two years the average annual investment in our
facilities, including the building projects in Haifa and Rehovot, as well as
equipment, machinery and vehicles, amounted to approximately $57 million. We
believe that our current facilities are adequate for our operations as now
conducted.



                                       44
<PAGE>

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.

                                          Elbit Systems Ltd.
<TABLE>
<S>           <C>           <C>          <C>                <C>           <C>            <C>                  <C>
 ---------    ----------    -----------   --------------     --------     ----------     ----------------     ----------
 El-Op        Ortek         Cyclone            EFW           Silver       Kinetics        SCD (Israel)        Opgal
 (Israel)     (Israel)      (Israel)       (Delaware)        Arrow        (Israel)             50%            (Israel)
   100%         100%           100%           100%           (Israel)        51%                                50.1%
                                                              100%
 ---------    ----------    -----------   --------------     --------     ----------     ----------------     ----------
    |                                    |     |    |
    |                                    |     |    |
---------                        ---------     |    ----------                  ------------------
European                         Kollsman      |    IEI                              Tadiran
Subsidiary                       (Delaware)    |    (Alabama)                    Communications
(Belgium)                        100%          |    100%                            (Israel)
100%                             ---------     |    ----------                    20%
---------                                      |                                ------------------
                                         ------------
                                            VSI
                                         (California)
                                         50%
                                         ------------
</TABLE>

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 from Israel. In 2004, 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 export 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. Recently, the U.S. has
implemented enhanced scrutiny of its export control regulations, and the U.S.
Government may deny an export authorization 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.



                                       45
<PAGE>

         APPROVAL OF DEFENSE ACQUISITIONS. Many countries require governmental
approval of acquisitions of local defense companies or assets by foreign
entities. Mergers and acquisitions of defense related businesses in the U.S. are
subject to "Exon Florio" regulations that require review, and in some cases
approval, by the Committee on Foreign Investments in the United States (CFIUS).
Israel is in the process of adopting similar regulations.

         "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. The U.S. Government may authorize the IMOD to
utilize a portion of the FMF budget under the United States Subcontracting
Procurement (USSP) channel. In such cases, companies such as Elbit Systems or
El-Op, who are acting as the Israeli prime contractor to the IMOD under the NIS
funded portion of an a IMOD program, are authorized to negotiate and enter into
a subcontract directly with a U.S. supplier. However, payment of the funds under
a USSP channel subcontract is administered by the IMOD Purchasing Mission to the
U.S.

         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.

         CIVIL AVIATION REGULATIONS. Several of the products sold by Group
companies for commercial aviation applications are subject to flight safety and
airworthiness standards of the U.S. Federal Aviation Administration and similar
civil aviation authorities in Israel, Europe and other countries.

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.

         We are 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



                                       46
<PAGE>

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 the
majority of the 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. Our maximum aggregate
buy-back undertakings as of December 31, 2004 were approximately $673 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 or during
the course of the project, and sometimes we 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 for various periods of time. In some
cases we arrange or 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.

         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. As of December 31, 2004, the balance of customer advances that
were covered by guarantees amounted to approximately $286 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 performing in accordance with
the contract or the 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 $65 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 or failure to
perform in accordance with the contract requirements and liability for
subcontractors. 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.



                                       47
<PAGE>

         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
and applications in Israel, the United States and other countries relating to
approximately 110 different inventions. El-Op alone holds approximately 110
patents and applications on some 45 different products or applications. Our
technology spin-off companies often rely in part on our patented technology. We
also hold 25 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 35% of our revenues in 2004 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. There are relatively few cases where we manufacture under
license. In such cases, the licensor typically is entitled to royalties or other
types of compensation. 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.



                                       48
<PAGE>

         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. In
addition, our technology spin-offs perform R&D in their areas of operation.

         We employ more than 1,650 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.

         Our customers fund part of our R&D, and we also invest in our 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, 2002, 2003 and 2004:

                                      2002          2003        2004
                                      ----          ----        ----
                                          (U.S. dollars in millions)

Total Investment                     $62.6         $65.5         $86.4
Less Third Party Participation*        5.6          10.6          19.6
                                     -----         -----         -----
Net Investment                       $57.0         $54.9         $66.8
                                     =====         =====         =====
------------
*See above - "Government Rights in Data" and see below - "Conditions in Israel -
Chief Scientist and Investment Center 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 at Kollsman's
facilities in 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. At Kollsman, 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, AEL and the
European Subsidiary also perform manufacturing and assembly at their facilities.
IEI has 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.



                                       49
<PAGE>

PURCHASING

         Elbit Systems purchasing activities in Israel are based in our
facilities in Haifa and in Karmiel. El-Op, Cyclone and most of our other
operating subsidiaries also conduct purchasing activities. In the U.S.,
purchasing activities are based at the facilities of EFW, Kollsman and IEI . 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.

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

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
or services.

         Elbit Systems uses a project management method based on Theory of
Constraints (TOC) in most of our 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 providing 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
conduct acceptance testing of our products on their behalf. In addition, Elbit
Systems is certified for Software Compatibility Maturity Model (CMM) Level 3 of
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 and by the National Quality
Assurance (NQA) authority for AS9100.

         EFW, IEI and Kollsman are certified for ISO-9001:2000 and AS9100.
Kollsman also holds a European Aviation Safety Authority (EASA) certificate,
and. the quality systems of Kollsman and IEI comply with NATO AQAP requirements.



                                       50
<PAGE>

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. When required, support may be
provided by a local support team or by experts sent from our main facilities.

         We generally offer a one-year warranty for our systems and products
following delivery to, or installation by, the customer. We maintain reserves
for warranty obligations specifically determined for each project based on our
experience and engineering estimates. These reserves are intended to cover
post-delivery functionality and operating issues for which we are responsible
under the applicable contract.

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. Kollsman 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 our net revenues by geographic regions,
expressed as a percentage of total revenues for the periods indicated:

                                        Year Ended December 31
                                    -------------------------------
                                    2002         2003          2004
                                    ----         ----          ----
         Israel                     27%          29%           26%
         United States              32%          37%           37%
         Europe                     18%          12%           13%
         Others                     23%          22%           24%



                                       51
<PAGE>


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.

         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, L-3 Communications Holdings, Inc., 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 customers during the
last three years were the IMOD, that accounted for 20% of our revenues in 2002,
21% in 2003 and 17% in 2004 and the U.S. Government, that accounted for 10% of
our revenues in 2004.



                                       52
<PAGE>

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 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 AND INVESTMENT CENTER FUNDING

         The Government of Israel, through the OCS and the Israel Investment
Center (the Investment Center), 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.

         The Investment Center promotes Israeli export products and increased
industrialization of peripheral areas through investment in industrial
infrastructure. The Investment Center either provides grants for qualified
projects or provides tax benefits for qualified industrial investments by
Israeli companies. In 2005, the regulations relating to the tax benefit programs
of the Investment Center were revised to provide for review and approval of the
tax benefit by the Israel Tax Authority only after a company has made the
applicable investment.



                                       53
<PAGE>

         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 National Insurance
Institute are equal to approximately 16.3% 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.



                                       54
<PAGE>

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

         The following discussion and analysis should be read together with our
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 make
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 as described below.

         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) according to which revenues are recognized
on the percentage of completion basis.

         Sales under long-term fixed-price contracts which provide for a
substantial level of development efforts in relation to total contract efforts
are recorded using the cost-to-cost method of accounting as the basis to measure
progress toward completing the contract and recognizing revenues. According to
this method, sales and profits are recorded based on the ratio of costs incurred
to estimated total costs at completion. In certain circumstances, when measuring
progress toward completion, we consider other factors, such as achievement of
performance milestones.

         Sales and anticipated profit under long-term fixed-price production
type contracts are recorded on a percentage of completion basis, using the
units-of-delivery as the basis to measure progress toward completing the
contract and recognizing revenues.

         Sales and anticipated profit under long-term fixed-price contracts that
involve both development and production are recorded on a percentage of
completion basis, using the cost-to-cost method and units-of-delivery method, as
applicable. In addition, when measuring progress toward completion under the
development portion of a contract, we usually consider other factors, such as
achievement of performance milestones.

         Estimated contract profit is included in earnings in proportion to
recorded sales.

         The percentage-of-completion method of accounting requires management
to estimate the cost and gross profit margin for each individual contract.
Estimated gross profit or loss from long-term contracts may change due to
changes in estimates resulting from differences between actual performance and
original estimated 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. Anticipated losses on contracts are
charged to earnings when determined to be probable.


                                       55
<PAGE>

         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.

         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 of contracts are
considered in estimating sales and profit rates and are recorded when there is
sufficient information to assess anticipated contract performance.

         We believe that the use of the percentage of completion method is
appropriate since 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.

         In cases where the contract involves the delivery of products and
performance of services, we follow the guidelines specified in EITF 00-21,
"Revenue Arrangements with Multiple Deliveries" in order to allocate the
contract fees between the products accounted for under SOP 81-1 and the services
accounted for under SAB 104. The services are recognized throughout the service
period.

         Management reviews periodically the estimates of progress towards
completion and project costs. These estimates are determined based on
engineering estimates and past experience, by personnel having the appropriate
authority and expertise to make reasonable estimates of the related costs. Such
engineering estimates are reviewed periodically for each specific contract by
professional personnel from various disciplines within the organization. These
estimates take into consideration the probability of achievement of certain
milestones as well as other factors that might impact the contract's completion.

         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.

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 the fair value of reporting units
are the Income, Market and Cost approaches. Our reported units' fair market
value was estimated using two valuation methodologies: the Income Approach and
the Market Approach.

         These methodologies use estimates and assumptions which include, among
others, projected future cash flows, discount rate and terminal growth rate.
Using different assumptions could result in different results.

         As of December 31, 2004, our goodwill amounted to $32.8 million. We
tested our goodwill as of December 31, 2004 and concluded that no impairment of
value exists.



                                       56
<PAGE>

         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, 2004, our long-lived assets amounted to $307.4 million, including
$63.1 million in intangible assets, and we concluded that no impairment loss was
necessary. Our estimates of future cash flows to be derived from such evaluation
may differ from actual future cash flows.

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

         Intangible assets are amortized over their estimated useful lives.
Determining the useful life of intangible assets involves the use of estimates
and judgments. In determining the useful live we take into account various
factors such as the expected use of the asset, effects of obsolescence,
competition, demand and other economic factors. If our estimates change and the
useful lives of intangible assets increase or decrease, it will affect our
results of operations.

INVESTMENT IN AFFILIATES, PARTNERSHIP AND OTHER ENTITIES

         When relevant factors indicate an other than temporary decline in the
fair value of these investments in affiliates, partnerships and other entities
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 2004.

SARBANES-OXLEY ACT

         According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, Elbit
Systems is required to include in our annual report for the fiscal year ending
December 31, 2006 an assessment, as of the end of the fiscal year, of the
effectiveness of our internal controls over financial reporting. In March 2005,
the SEC extended the period for implementation of Section 404 by Foreign Private
Issuers such as Elbit Systems from 2005 until 2006.

         During 2004, we took steps to assure compliance of our documentation
and internal controls over financial reporting with the guidelines stipulated in
the Sarbanes-Oxley Act. We plan to continue with these steps during 2005 and
2006.

NEW ACCOUNTING STANDARDS

         The significant accounting policies applied in the preparation of our
financial statements for 2004 were identical to those applied in preparation of
the previous annual financial statements except as follows:

         In accordance with FASB Statement No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure", Elbit Systems adopted the fair-value
-based method of accounting for share-based payments as described in FASB
 Statement No. 123 "Accounting for Stock-Based Compensation", effective January
1, 2004 using the "modified prospective method" described in FASB Statement No.
148. This adoption did not have a material impact on our results of
operations or our financial position.



                                       57
<PAGE>

         Until December 31, 2003, Elbit Systems followed Accounting Principles
Board Opinion No. 25 (APB 25) "Accounting for Stock Issued to Employees" and
FASB Interpretation No. 44 (FIN 44) "Accounting for Certain Transactions
Involving Stock Compensation" in accounting for our employee stock option plans.
The change in Elbit Systems' share price affected our financial results due to
the impact of the employee stock option plan adopted in 2000. See below - Item
6. Directors, Senior Management and Employees - Share Ownership - Post Merger
Plan. The plan is 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. As such, compensation expense was
measured based on the intrinsic value of options at the end of each reporting
period. Consequently, changes in Elbit Systems share price affected our
earnings.

         As noted above, effective January 1, 2004, we adopted the fair value
recognition provision of SFAS No. 123. Elbit Systems uses the
Black-Scholes-Merton formula to estimate the fair value of stock options granted
to employees. Compensation cost is recorded over the vesting period on a
straight-line basis.

         Following the adoption of SFAS No. 123, the financial results will no
longer be materially affected by the impact of changes in Elbit Systems' share
price on employee stock-based compensation.

         The following pro forma information shows the impact of SFAS No. 123,
had it been in effect in 2002 and

2003:

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                       2004                 2003                2002
                                                                   --------------       --------------      --------------
<S>                                                                <C>                  <C>                 <C>
           Net income  as reported                                 $ 52,993             $ 45,945            $ 45,113
                                                                   ==============       ==============      ==============
           Pro forma net income                                    $ 52,993             $ 46,782            $ 41,416
                                                                   ==============       ==============      ==============

           Diluted net earnings per share as reported              $    1.29            $ 1.14              $ 1.13
                                                                   ==============       ==============      ==============
           Pro forma diluted net earnings per share                $    1.29            $ 1.16              $ 1.04
                                                                   ==============       ==============      ==============
</TABLE>




                                       58
<PAGE>

         As result of the adoption of SFAS No. 123 from January 1, 2004, the net
income and diluted net earnings per share of the first three quarters of 2004
were restated as follows:

<TABLE>
<CAPTION>
                                                Q1/04         Q2/04       Q3/04         TOTAL
                                             ----------     --------     --------     ----------
<S>                                            <C>          <C>          <C>            <C>
Net income  as reported on Form 6-K             $12,727      $11,311      $13,708        $37,746
                                             ==========     ========     ========     ==========
Net income as restated                          $12,251      $13,301      $13,316        $38,868
                                             ==========     ========     ========     ==========
Diluted net earnings per share as
reported on Form 6-K                              $0.31        $0.28        $0.33          $0.92
                                             ==========     ========     ========     ==========
Diluted net earnings per share as
restated                                          $0.30        $0.33        $0.32          $0.95
                                             ==========     ========     ========     ==========
</TABLE>

         The compensation expense for the fourth quarter of 2004 was reported in
accordance with the new method under SFAS No. 123. For a description of the
compensation expense recorded for each income statement period presented related
to the "phantom" options and the income statement caption where the expense was
recorded see below - Item 18. Financial Statements - Note 17E (Shareholder's
Equity).

         In December 2004, the Financial Accounting Standards Board (FASB)
issued FASB Statement No. 123 (revised 2004) (123(R)), "Share-Based Payment",
which is a revision of FASB Statement No. 123, "Accounting for Stock-Based
Compensation", Statement 123(R) supersedes APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and amends FASB Statement No. 95, "Statement of Cash
Flows". Generally, the approach in Statement 123(R) is similar to the approach
described in Statement 123. However, Statement 123(R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the income statement based on their fair values. Pro forma
disclosure is no longer an alternative. We do not anticipate that the adoption
of Statement 123(R) will have a material impact on our results of operations or
our financial position.

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

         BUY-BACK. 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 obligations to make or facilitate third parties making such
investments and purchases are subject to commercial conditions in the local
market, in the majority of cases without a specific financial penalty. The
maximum aggregate undertaking as of December 31, 2004 amounted to $673 million
to be performed over a period of up to 11 years. 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. See above -
Item 4. Information on the Company - Buy-Back.



                                       59
<PAGE>

         OCS. 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 and Investment Center
Funding. In addition, we also receive funding from other third parties that bear
royalty obligations.

         GOVERNMENT DATA RIGHTS. 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.

         LEASE COMMITMENTS. 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, 2004 are as follows: $6.7 million for
2005, $5.9 million for 2006, $4.5 million for 2007, $3 million for 2008 and
$13.1 million for 2009 and thereafter. See above - Item 4. Information on the
Company - Property, Plant and Equipment.

         KINETICS PUT OPTION. Three founding employees (the Founders), who
collectively hold approximately 32.3% of the outstanding shares of Kinetics, a
51%-owned Israeli subsidiary, have a put option to jointly sell all of their
shares in Kinetics to Elbit Systems. See above - Item 4. Information on the
Company - Principal Subsidiaries - Kinetics. Two private investors holding in
the aggregate approximately 16.7% of Kinetics' outstanding shares have "tag
along" rights in the event the Founders exercise the put option. The put option
is exercisable from January 1, 2005 until December 31, 2005 at a price equal to
the higher of:

         (a)  the Founder's pro-rata share (corresponding to the Founder's
              shareholding percentage) of the value of Kinetics as of the option
              exercise date as determined by a third party appraiser mutually
              acceptable to the Founders and to Elbit Systems, (the appraiser
              will value Kinetics as if Kinetics had distributed as dividends
              net profits accumulated up to the option exercise date), or

         (b)  $12,077,077, reduced by 3% per annum, or pro-rata part thereof,
              for the period beginning on July 1, 2003 and ending on the option
              exercise date.

         BANK GUARANTEES. We had, as of December 31, 2004, approximately $380
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.

         BANK COVENANTS. In connection with bank credits and loans, including
performance guarantees issued by banks and bank guarantees securing certain
advances from customers, Elbit Systems and some of our subsidiaries are
obligated to meet certain covenants. Such covenants include requirements for
shareholders' equity, current ratio, operating profit margin, tangible net
worth, EBITDA, interest coverage ratio and total leverage. As of December 31,
2004, we were in compliance with all covenants.



                                       60
<PAGE>

         PURCHASE COMMITMENTS. As of December 31, 2004 and 2003, we had purchase
commitments that amounted to approximately $345 and $348 million, respectively.
These purchase orders and subcontracts are typically in a standard format
proposed by us, with the subcontracts and purchase orders also reflecting
provisions from our applicable prime contract that are appropriate to flow down
to subcontractors and vendors. The terms typically included in these purchase
orders and subcontracts are consistent with Uniform Commercial Code provisions
in the United States for sales of goods, as well as with specific terms called
for by our customers in international contracts. These terms include our right
to terminate the purchase order or subcontract in the event of the vendors' or
subcontractors' default, as well as our right to terminate the order or
subcontract for our convenience (or if our prime contractor has so terminated
the prime contract). Such purchase orders and subcontracts typically are not
subject to variable price provisions.

ACQUISITIONS DURING 2004.

         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 depending on the particular contract. As of
December 31, 2004, we had a backlog of approximately $2,154 million, of which
66% was for orders outside Israel, as opposed to $1,752 million, of which 63%
was for orders outside of Israel, as of December 31, 2003. Approximately 74% of
our backlog as of December 31, 2004 is scheduled to be performed during 2005 and
2006. The majority of the 26% balance is scheduled to be performed in 2007 and
2008. Backlog information and any comparisons of backlog as of different dates
may not necessarily represent an indication of future sales.



                                       61
<PAGE>

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
network centric information systems, information 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.


                                       62
<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, 2004 and December 31, 2003.

<TABLE>
<CAPTION>
                                                                   For the year
                                                               ended on December 31
                                             --------------------------------------------------------
                                                       2004                            2003
                                             -------------------------      -------------------------
                                                $                  %           $                  %
                                             -------             -----      -------             -----
                                               (In thousands of U.S dollar expect for share data)
<S>                                          <C>                 <C>        <C>                 <C>
Total revenues                               939,925             100.0      897,980             100.0

Cost of revenues                             689,626              73.4      672,711              74.9
                                             -------             -----      -------             -----
Gross profit                                 250,299              26.6      225,269              25.1
                                             -------             -----      -------             -----

Research and development expenses, net        66,846               7.1       54,919               6.1

Marketing and selling expenses                69,912               7.4       69,943               7.8

General and administrative expenses           47,832               5.1       46,077               5.1
                                             -------             -----      -------             -----
                                             184,590              19.6      170,939              19.0
                                             -------             -----      -------             -----

Operating  profit                             65,709               7.0       54,330               6.1

Financing expenses, net                       (5,852)             (0.6)      (4,870)             (0.5)

Other income (expenses), net                     770               0.1           53               0.0
                                             -------             -----      -------             -----

Income before income taxes                    60,627               6.5       49,513               5.5

Provision for income taxes                    15,219               1.6       11,334               1.3
                                             -------             -----      -------             -----
                                              45,408               4.8       38,179               4.3

Minority interest                               (180)              0.0          557               0.1
Company's share of income of
     affiliated entities                       7,765               0.8        7,209               0.8
                                             -------             -----      -------             -----

Net income                                    52,993               5.6       45,945               5.1
                                             =======             =====      =======             =====
Diluted earnings per share                      1.29                          1.14
                                             =======                        =======
Weighted average number of shares
     used in computation                      41,041                        40,230
                                             =======                        =======
</TABLE>



                                       63
<PAGE>

2004 COMPARED TO 2003

         REVENUES

         Our consolidated revenues increased by 4.7%, from $898.0 million in
2003 to $939.9 million in 2004.

         Our revenues generated by groups of areas of operations in 2003 and
2004 were as follows:

<TABLE>
<CAPTION>
                                                           Year ended
                                              --------------------------------------
                                             December 31, 2004     December 31, 2003
                                              ----------------      ----------------
                                         $ millions          % $ millions          %
<S>                                           <C>         <C>       <C>         <C>
Airborne systems                              367.9       39.1      373.6       41.6
Land vehicle systems                          199.2       21.2      199.8       22.2
C4ISR systems                                 108.9       11.6      133.9       14.9
Electro-optics systems                        200.3       21.3      140.5       15.7
Other  (mainly non-defense engineering
    and production services)                   63.6        6.8       50.2        5.6
                                              -----      -----      -----      -----
Total                                         939.9      100.0      898.0      100.0
                                              =====      =====      =====      =====
</TABLE>

         C4ISR systems sales decreased by 19% from $133.9 million to $108.9
million. The decrease in revenues resulted mainly from the delay in the receipt
of certain orders for new projects, which were received but for which revenues
were not yet recognized. Electro-optics sales increased by 43% from $140.5
million to $200.3 million. The increase in revenues resulted from increased
sales of homeland security systems for international customers, night sights for
various customers, the Night Targeting System to the U.S. Marine Corps and other
customers, as well as sales of electro-optic products by a European subsidiary.
"Other" sales increased by 27% from $50.2 million to $63.6 million. The increase
in revenues was mainly from the manufacture of medical instrumentation by
Kollsman.

         The geographic breakdown of revenues in 2003 and 2004 was as follows:

<TABLE>
<CAPTION>
                                                                                Year ended
                                                             ----------------------------------------------------
                                                              December 31, 2004               December 31, 2003
                                                             -------------------            ---------------------
                                                        $ millions             %       $ millions               %
<S>                                                          <C>            <C>             <C>              <C>
Israel                                                       241.6          25.7            255.8            28.5
United States                                                348.5          37.1            332.3            37.0
Europe                                                       124.1          13.2            109.4            12.2
Other countries                                              225.7          24.0            200.5            22.3
                                                             -----          ----            -----            ----
Total                                                        939.9         100.0            898.0           100.0
                                                             =====         =====            =====           =====
</TABLE>

         Our sales are primarily to governmental entities and prime contractors
under government defense programs. Accordingly, the level of our revenues is
subject to governmental budgetary constraints.



                                       64
<PAGE>

         Revenues from customers in Europe increased by 13% from $109.4 million
to $124.1 million. The increase in revenues in Europe resulted mainly from the
inclusion of a European subsidiary's revenues, starting only in the third
quarter of 2003 and for the entire year in 2004. Revenues also increased in the
United States and in other countries, mainly in Latin America and Asia, while
revenues in Israel declined as deliveries under certain major programs entered
final phases.

         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 2004 was $250.3 million
(with gross profit margin of 26.6%), as compared to $225.3 million (gross profit
margin of 25.1%) in 2003. The increase in the gross profit percentage was caused
mainly by the sale of a mix of products and projects with improved
profitability.

         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 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.

         Gross R&D expenses in 2004 totaled $86.4 million (9.2% of revenues), as
compared with $65.5 million (7.3% of revenues) in 2003. Net R&D expenses (after
deduction of third party participation, including the IMOD and the OCS) in 2004
totaled $66.8 million (7.1% of revenues), as compared to $54.9 million (6.1% of
revenues) in 2003.

         During the second half of 2004, and especially during the fourth
quarter, we invested significant R&D efforts to support strategic business
opportunities by developing products and technologies for U.S. airborne programs
and additional efforts relating to the electro-optics systems. In support of
these activities and additional R&D projects, we were successful in obtaining
additional funding from external sources, to provide for the development of
advanced technologies and related products.

         MARKETING AND SELLING EXPENSES. We maintain our activities in
developing new markets and pursue various business opportunities according to
our plans. Marketing and selling expenses in 2004 were $69.9 million (7.4% of
revenues), as compared to a similar amount of $69.9 million (7.8% of revenues)
in 2003.

         GENERAL AND ADMINISTRATIVE (G&A) EXPENSES. G&A expenses in 2004 were
$47.8 million (5.1% of revenues), as compared to $46.1 million (5.1% of
revenues) in 2003. The increase in G&A expenses in 2004 compared to 2003 were
related to the cost of various exploratory merger and acquisition, legal, audit
and control activities, including expenses related to compliance with the
Sarbanes-Oxley Act.

         OPERATING PROFIT. As a result of all of the above, reported operating
income in 2004 was $65.7 million (7.0% of revenues), as compared to $54.3
million (6.1% of revenues) in 2003.



                                       65
<PAGE>

         FINANCING EXPENSES (NET). Net financing expenses in 2004 were $5.9
million, as compared to $4.9 million in 2003. The increase in the net finance
expense resulted mainly from a decrease in finance income as a result of a lower
level of cash and cash equivalents as well as costs incurred in hedging with
regards to Great Britain Pounds (GBP).

         TAXES ON INCOME. Our tax rate represents a weighted average of the tax
rates to which the various companies in the Group are subject. Provision for
taxes in 2004 was $15.2 million (effective tax rate of 25.1%), as compared to a
provision for taxes of $11.3 million (effective tax rate of 22.9%) in 2003. The
change in the effective tax rate is attributable to the mix of the tax rates in
the various tax jurisdictions in which the Group's companies generating the
taxable income operate.

         SHARE IN EARNINGS OF AFFILIATED ENTITIES. In 2004, we had net income of
$7.8 million from our share in earnings of affiliated entities, as compared to
$7.2 million in 2003. The companies and partnerships, in which Elbit Systems
holds 50% or less in shares or voting rights and are therefore not consolidated
in our financial statements, operate in complementary areas to our core business
activities, including electro-optics and airborne systems. We believe that our
affiliates will continue to contribute significantly to our earnings.

         NET EARNINGS AND EARNINGS PER SHARE (EPS)

         Net earnings in 2004 were $53 million (5.6% of revenues), as compared
to net earnings of $45.9 million (5.1% of revenues) in 2003. Fully diluted EPS
was $1.29 in 2004, as compared to $1.14 in 2003.

         The number of shares used for computation of diluted EPS in the year
ended December 31, 2004 was 41,041 thousand shares, as compared to 40,230
thousand shares in the year ended December 31, 2003. The increase in the number
of shares used for computation of diluted EPS was due mainly to exercise of
options by employees during 2003 and 2004, and the change in Elbit Systems'
share price.



                                       66
<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 were 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>

         Revenues are generated mainly from sales to the United States, Israel
and countries in Europe, Latin America and Asia. 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 20% of our revenues in 2002 and 21% in 2003
and was the only customer to exceed 10% of our revenues in those years.



                                       67
<PAGE>

         GROSS PROFIT

         Reported gross profit in 2003 was $225.3 million (with a gross profit
margin of 25.1%) 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.

         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.

         R&D. 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.

         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. 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.

         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. In the
second half of 2003, our G&A expenses consolidated for the first time the
expenses related to newly acquired companies (European Subsidiary and AD&D).
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 $54.3 million (6.1% 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.

         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.



                                       68
<PAGE>

         TAXES ON INCOME. 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 EPS

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

       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.

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.

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW

         Our cash flow is affected 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, as well as the timing of payments made by us in connection with the
performance of the project. The receipt of payments usually relates 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.



                                       69
<PAGE>

FINANCIAL RESOURCES

         The financial resources available to us include profits, collection of
accounts receivable, advances from customers and Government of Israel and other
third parties' 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 securities 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. Such covenants include requirements such as for shareholders'
equity, current ratio, operating profit margin, tangible net worth, EBITDA,
interest coverage ratio and total leverage. As of May 31, 2005, each of the
companies subject to financial covenants was in compliance with the applicable
covenants.

         On December 31, 2004, we had total borrowings in the amount of $96.5
million, including $86.2 million in long-term loans, and $380 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. On
December 31, 2004, we had a cash balance amounting to $34.1 million.

         As of December 31, 2004, we had working capital of $172.6 million, and
our current ratio was 1.46. Our ratio of equity to total assets was 41.8%.

         In 2003, the Controller of the Banks in Israel instituted 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. As a result we developed credit
facilities that will not be affected by these regulations.

         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.

2004 CASH FLOW

         Our net cash flow generated from operating activities in 2004 was $81.5
million, resulting mainly from net income for the period and increase of
accounts payable, which was partly offset by a decrease in advances from
customers.

         Net cash flows used for investment activities in the year ended
December 31, 2004 were $70.9 million, which were used mainly for procurement of
property, plant and equipment and investment in Tadiran Communications' shares.
The investments in fixed assets were made primarily in equipment for the Group's
various manufacturing plants and in a building constructed at Elbit Systems'
facility in Haifa, Israel.

         Net cash flow used for financing activities in 2004 was $52.6 million,
which were used mainly for paying dividends.



                                       70
<PAGE>

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.

         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 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%.

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, 2004
and the subsequent fiscal year. See above "Financial Resources". Our specific
material commitments for capital expenditures as of December 31, 2004 and May
31, 2005 were approximately $3 million and $2 million respectively. See also
below - Item 18. Financial Statements - Consolidated Statements of Cash Flows
and Note 8 (Property, Plant and Equipment, Net) to the Financial Statements.


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.

MARKET RISKS AND VARIABLE INTEREST RATES

         Market risks relating to our operations result mainly from changes in
interest rates and exchange rates. We typically use financial instruments to
limit exposure to changes in exchange rates. We also typically enter into
forward contracts in connection with transactions where the contract has been
signed and that are denominated in currencies other than U.S. dollars and NIS.
We also enter from time to time into forward contracts and other hedging
instruments related to NIS based on marked conditions.



                                       71
<PAGE>

         On December 31, 2004, our liquid assets were comprised of bank
deposits. Our deposits and loans are based on variable 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 and 2004, we
had exposure due to NIS denominated liabilities of $44 million and $57 million,
respectively, 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, 2004, we had no hedging contracts covering NIS
exposure.

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 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%. In 2004, the inflation rate was approximately 1.2%, the
devaluation rate was negative 1.6%. 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.



                                       72
<PAGE>

FOREIGN CURRENCY EXPENSES, DERIVATIVES AND HEDGING

         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.

         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, 2004 by
forward contracts and options. On December 31, 2004, we had forward contracts
and options for the sale and purchase of Euro, GBP and various other
currencies). All of the forward contracts and options, as of December 31, 2004,
are expected to mature during 2005.

         The table below presents (in millions) the balance of the hedging
acquired in derivative instruments in order to limit the exposure to exchange
rate fluctuations as of December 31, 2004 and is presented in U.S. dollar
equivalent terms.

                                                                FAIR VALUE
         FORWARD                           NOTIONAL AMOUNT     OF DERIVATIVE
         -------                           ---------------     -------------
         Buy US$ and Sell:
         ----------------
         Euro                                   9.1              (0.1)
         GBP                                    5.1              (0.4)
         Other various currencies               3.9              (0.3)
                                                ---               ---

                                                                FAIR VALUE
         FORWARD                           NOTIONAL AMOUNT     OF DERIVATIVE
         -------                           ---------------     -------------
         Buy US$ and Sell:
         ----------------
         Euro                                  11.8               0.3
         GBP                                    0.3               0
         Other various currencies               0.7               0
                                                ---               ---

                                                                FAIR VALUE
         OPTIONS                           NOTIONAL AMOUNT     OF DERIVATIVE
         -------                           ---------------     -------------
         Buy US$ and Sell:
         ----------------
         GBP                                    154                0
                                                ===                =



                                       73
<PAGE>


CONTRACTUAL OBLIGATIONS

                             PAYMENTS DUE BY PERIOD
                             ----------------------
                           (U.S. dollars in millions)

<TABLE>
<CAPTION>
                                                 LESS THAN                                      MORE THAN
                                                  1 YEAR        1-3 YEARS        3-5 YEARS       5 YEARS
<S>                                                 <C>           <C>               <C>           <C>
1.       Long-Term Debt                             $1.7          $83.1             $0.3          $2.8
2.       Capital Lease Obligations                    --             --               --            --
3.       Operating Leases                            6.7           10.5              6.1          10.0
4.       Purchase Obligations*                     270.1           67.2              5.2           2.5
5.       Other Long-Term Liabilities
         Reflected on the Issuer's Balance
         Balance Sheet Under GAAP**                   --             --               --            --
                                                  ------         ------            -----         -----
         Total                                    $278.5         $160.8            $11.3         $15.3
                                                  ======         ======            =====         =====
</TABLE>

*        For further description of the Purchase Obligations see above
         "Off-Balance Sheet and Other Long-Term Arrangements and Commitments -
         Purchase Commitments" and see below - Item 18. Financial Statements -
         Note 16H (Commitments and Contingent Liabilities - Contractual
         Obligations).

**       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."



                                       74
<PAGE>

ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES.

DIRECTORS AND EXECUTIVE OFFICERS

         The directors and executive officers of Elbit Systems as of May 31,
2005 are as follows:

BOARD OF DIRECTORS

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

Michael Federmann (Chairman)                  62            2000
Moshe Arad                                    70            2005
Avraham Asheri                                67            2000
Rina Baum                                     60            2001
Aharon Beth-Halachmi                          69            2000
Jonathan Kolber                               43            2005
Yigal Ne'eman                                 63            2004
Yaacov Lifshitz (External Director)           61            2003
Dov Ninveh                                    58            2000
Nathan Sharony (External Director)            70            2002


         The term of office of each director, other than the External Directors,
expires at the annual general shareholders meeting to be held during 2005. The
term of office for Nathan Sharony as an External Director expires in March 2008
and for Yaacov Lifshitz as an External Director in July 2006.







                                       75
<PAGE>


EXECUTIVE OFFICERS
<TABLE>
<CAPTION>

NAME                    AGE      POSITION
----                    ---      --------

<S>                     <C>      <C>
Joseph Ackerman         56       President, Chief Executive Officer and Director
David Block Temin       50       Corporate Vice President and General Counsel
Guy Brill               53       Corporate Vice President and Co-General Manager -
                                 Technologies and Operations
Itzhak Dvir             57       Corporate Vice President and Chief Operating Officer
Jacob Gadot             58       Corporate Vice President - Mergers and Acquisitions
Ran Galli               56       Corporate Vice President - Major Campaigns
Joseph Gaspar           57       Corporate Vice President and Chief Financial Officer
Zeev Gofer              53       Corporate Vice President - Business Development and
                                 Marketing
Dalia Gonen             53       Vice President - Human Resources
Ran Hellerstein         54       Corporate Vice President and Co-General Manager - Airborne
                                 and Helmet Systems
Haim Kellerman          51       Corporate Vice President and General Manager - UAV Systems
Bezhalel Machlis        42       Corporate Vice President and General Manager - Land Systems
                                 and C4I
Ilan Pacholder          50       Corporate Secretary and Vice President - Finance and
                                 Capital Markets
Marco Rosenthal         58       Corporate Vice President and Co-General Manager -
                                 Technologies and Operations
Haim Rousso             59       Corporate  Vice  President and General Manager - El-Op
Gideon Sheffer          56       Corporate Vice President - Strategic Planning
Yoram Shmuely           45       Corporate Vice President and Co-General Manager - Airborne
                                 and Helmet Systems
Timothy Taylor          53       President and Chief Executive Officer - EFW

</TABLE>

         MICHAEL FEDERMANN. Michael Federmann has served as Chairman of the
Board of Directors since the merger with El-Op 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. (FEL). 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.




                                       76
<PAGE>

         MOSHE ARAD. Moshe Arad served as Vice President for External Relations
of the Hebrew University from 1994 to 2004. He currently serves on the board of
directors of Discount Investment Corporation Ltd. From 1994 to 1999, he was
member of the board of directors of Elbit Ltd. During 1992 and 1993, Mr. Arad
served as Director General of the Israel Ministry of Communications. From 1990
to 1992, he was a member of the Tel-Aviv law firm of Herzog, Fox, Ne'eman. Mr.
Arad served as Israel's Ambassador to the United States from 1987 to 1990 and as
Israel's Ambassador to Mexico from 1983 to 1987. Ambassador Arad holds a
bachelor's degree in political science and international relations and a L.L.B.
degree from the Hebrew University.

         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., Discount Mortgage Bank Ltd.,
Kardan Nadlan Ltd., Scitex Corporation Ltd. (Scitex) and Africa Israel
Investment 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. and other managerial positions within the Federmann
Group She serves as a director of Dan Hotels, Etanit Building Products Ltd. and
Harel Mutual Funds Ltd. Mrs. Baum holds an L.L.B. degree from the Hebrew
University.

         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 Israel Institute of Technology (the Technion)
and a master of science degree in computer science from the Naval Postgraduate
School in Monterey, California.

         JONATHAN B. KOLBER. Jonathan Kolber has served as Chief Executive
Officer of Koor Industries Ltd. (Koor) since 1998. Mr. Kolber served as the Vice
Chairman of the Board of Directors of Koor from 1997 to 2003. He served as
President of Claridge Israel Ltd. from 1989 to 2001 and as Vice President of
Claridge Inc. from 1986 to 1990. Mr. Kolber was associated with Cemp Investments
from 1985 to 1987. He serves as a director of several Israeli companies,
including ECI Telecom Ltd., Makhteshim-Agan Industries Ltd., Telrad Networks
Ltd., Sheraton-Moriah Israel Ltd. and Knafaim - Arkia Holdings Ltd. Mr. Kolber
holds a bachelor's degree in near eastern languages and civilizations from
Harvard University and a certificate on advanced Arabic from the American
University of Cairo.



                                       77
<PAGE>

         YAACOV LIFSHITZ (EXTERNAL DIRECTOR). Yaacov 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 Political Sciences of the Tel-Aviv
University. He also currently serves on the boards of directors of Israel
Discount Bank, 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 industry, including Director General of the Israel Ministry of Finance,
Chief Economic Advisor to the IMOD, 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.

         YIGAL NE'EMAN. Yigal Ne'eman has served since 1994 as the Chairman and
President of the Israel College. From 1989 to 1993, he served as Chairman and as
a shareholder of several industrial, commercial and service companies. Mr.
Ne'eman served as the President and CEO of Tadiran Electronic Industry Ltd.
(Tadiran) from 1981 to 1989. Prior to that he held a number of management
positions in the control and finance departments of Tadiran. Mr. Ne'eman is a
certified public accountant and holds an accounting degree 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 Chief Executive
Officer of Israel Bonds, a U.S. brokerage. 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
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
Battery Officers Course in Fort Sill, Oklahoma.



                                       78
<PAGE>

         JOSEPH ACKERMAN. Joseph Ackerman was appointed as President and Chief
Executive Officer in 1996. From 1996 to November 2004, he served as a member of
the board of directors of the Company. 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. He serves as a director for Tadiran Communications. Mr. Ackerman holds
a bachelor of science degree in aeronautical engineering from the Technion.

         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.

         GUY BRILL. Guy Brill was appointed as Corporate Vice President and
Co-General Manager - Technologies and Operations Division in March 2005. From
2001 until his current appointment, he served as Corporate Vice President -
Business Synergy of Elbit Systems U.S. Corp., a U.S. subsidiary of the Company.
Prior to that he held various management positions including Elbit Systems'
Chief Operating Officer, Co-Manager of the C(3) and Battlefield Information
Systems Strategic Business Unit, Vice President for Processes Improvement and
Quality and Vice President and Division Manager of the Command and Control
Systems Division of EDS. Mr. Brill joined Elbit Ltd. in 1985. Prior to that, Mr.
Brill served in the IDF in the R&D branch of the Ground Forces, and as an
artillery officer, where he holds the rank of Colonel (reserve). Mr. Brill holds
a bachelor of science degree in electronic engineering from the Technion and a
master of science of management degree from the Polytechnic University of New
York. He is also a graduate of the Harvard University Business School's Advanced
Management Program.

         ITZHAK DVIR. Itzhak Dvir was appointed as Chief Operating Officer 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 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 C(3) 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. He served as Chief Technology Officer from
2001 until March 2004. Mr. Gadot held the position of Vice President - Mergers
and Acquisitions from 1998 to 2000 and 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. He serves as a director for
Tadiran Communications. Mr. Gadot holds a bachelor of science degree in
electrical engineering from the Technion.



                                       79
<PAGE>

         RAN GALLI. Ran Galli was appointed Corporate Vice President - Major
Campaigns in 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. He serves as a director for Tadiran
Communications. 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 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 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 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 Systems 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.



                                       80
<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 2002, he served as Vice President -
Battlefield and Information Systems. Mr. Machlis joined Elbit Ltd. 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 2003. From 2001 until his
current appointment, Mr. Pacholder served as Vice President - Finance. Mr.
Pacholder joined Elbit Ltd. in 1994 and held various senior positions in the
Finance Department. Prior to joining Elbit Ltd. he served as the Chief Financial
Officer for Sanyo Industries in New York. Before that 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
- Co-General Manager Technologies and Operations in March 2005. He served as
Corporate Vice President - Manufacturing and Purchasing from 2001 until his
current appointment, having served from 1999 - 2001 as Vice President -
Operations and General Manager of the Karmiel facility. 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. Before 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.
Mr. Sheffer holds a bachelor's degree in Israel studies from Bar Ilan University
and is a graduate of the 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 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.



                                       81
<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, 2004:

<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 [28] persons)           $5,110,301                 $562,040

President                              $1,290,840                  $95,503
</TABLE>

----------
(1) Elbit Systems' shareholders at the annual general shareholders meeting held
in November 2004 approved payment to directors in accordance with maximum
regulatory rates payable to External Directors under Israeli law for companies
similarly classified based on their shareholding equity. This amount currently
includes an annual fee $10,015 and a per meeting fee of $388. Such payments are
made either directly to the director or to his or her employing company.

Joseph Ackerman, Elbit Systems' President and Chief Executive Officer, served as
a director until November 2004, however, he did not receive any compensation for
service as a director other than his
salary as President. Mr. Ackerman's employment contract was originally approved
by Elbit Systems' shareholders in 2000, and an amendment was approved in April
2004, when the agreement was extended through July 2006 in accordance with its
terms. In April 2005, Elbit Systems' board of directors approved an amendment to
Mr. Ackerman's employment agreement increasing his severance benefits to an
amount equal to 71 times rather than 48 times his last monthly salary.


                                       82
<PAGE>

BOARD PRACTICES

         APPOINTMENT AND TERMINATION OF DIRECTORS.

         The current External Directors on Elbit Systems' board of directors
were each appointed to three-year terms at a general meeting of shareholders,
held in August 2003 with respect to Mr. Lifshitz and in March 2005 with respect
to Mr. Sharony. Six of the other eight current directors were appointed at the
annual general meeting of shareholders held in November 2004. The other two
current directors, Jonathan Kolber and Moshe Arad, were appointed by the board
of directors in April 2005 and May 2005, respectively.

         There are no 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. With respect to the employment agreement
of Joseph Ackerman, Elbit Systems' President and Chief Executive Officer, who
served as a member of the board of directors until November 2004, see above
"Compensation of Directors and Officers".

         Nasdaq's director independence and related rules applicable to the
board of directors will take effect with respect to Elbit Systems as of July 31,
2005. Under these regulations, unless more than 50% of Elbit Systems shares are
held by a single shareholder or affiliated group of shareholders (which is not
currently the case) Elbit Systems would not meet the definition of a "controlled
company". If it is not a "controlled company", then as of July 31, 2005 the
majority of Elbit Systems Ltd.'s board of directors would need to meet the
Nasdaq rules director independence criteria. Certain other rules will also
become applicable regarding independent directors serving on a director
nomination committee and approving the compensation to Elbit Systems' Chief
Executive Officer.

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

         AUDIT COMMITTEE. Dov Ninveh (chairman), Avraham Asheri, Yaacov
Lifshitz, Yigal Ne'eman 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. Nasdaq's director independence requirements for audit committee
members will take effect with respect to Elbit Systems as of July 31, 2005. 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.





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<PAGE>

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 2004, 2003 and
2002 were as follows:

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

2004                           5,782                   1,150
2003                           5,449                   1,110
2002                           5,187                   1,077


         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 520 of El-Op's employees are covered by a collective bargaining
agreement extending through the end of 2004, and El-Op has notified the union of
its desire to conduct negotiations regarding the terms of the agreement. Union
collective bargaining agreements in effect through December 2004 apply to
approximately 175 of Cyclone's employees. Each of El-Op's and Cyclone's
collective bargaining agreements continues in effect until a new agreement is
reached. Approximately 165 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.

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 were
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 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. All options granted under the 1996 Plan have fully vested and expired.



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<PAGE>

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 635,000 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 subsequent grants to key employees, as determined from time to time
by Elbit Systems' President. As of May 31, 2005, 269,340 of these reserve
options were issued to employees. In addition, options that lapsed or were
canceled before exercise could 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 consisted of "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.

         OPTION EXERCISE PRICE. The exercise price for the options granted in
December 2000 was $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.

         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. As of May 31, 2005, options exercisable
into approximately 111,430 ordinary shares, based on the shares' May 31, 2005
closing price on Nasdaq of $24.38, remain unvested under the Post Merger Plan.

         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 bear all tax consequences to
them resulting from the Post Merger Plan. The Israeli tax authorities 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.



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ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.

MAJOR SHAREHOLDERS

PERCENTAGES

         Elbit Systems had, as of May 31, 2005, 40,736,047 ordinary shares (1).
The following table sets forth specific information as of May 31, 2005, 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.
99 Hayarkon Street
Tel-Aviv, Israel(2)                         17,755,448              43.58%

Heris Aktiengesellschaft
c/o 99 Hayarkon Street
Tel-Aviv, Israel                             3,836,458(3)            9.41%

Bank Leumi Group
Tel-Aviv, Israel(4)                          2,364,920               5.80%

Bank Hapoalim Group
Tel-Aviv, Israel(4)                          2,255,467               5.53%

Koor Industries Ltd.
14 Hamelacha Street
Rosh Ha'ayin, Israel(5) (6)                  2,160,000               5.30%

All officers and directors
as a group (28 persons)                        406,648(7)            0.99%

----------

(1)      The total number of ordinary shares includes 23,091 ordinary shares
         held by a subsidiary of Elbit Systems but excludes 385,000 ordinary
         shares held by Elbit Systems as treasury shares.

(2)      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. As of May 31, 2005, 5,655,448 Elbit Systems ordinary
         shares held by



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<PAGE>

         FEL were pledged to Bank Leumi Le-Israel BM to guarantee loans provided
         to FEL in connection with FEL's purchase in July 2004 of the Elbit
         Systems shares held by Elron.

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

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

(5)      Koor Industries Ltd. (Koor) is an Israeli multi-industry holding
         company engaged through its direct and indirect wholly and partially
         owned subsidiaries and affiliates in the following core businesses:
         telecommunications, defense electronics, agrochemicals and investments
         in start-ups in the fields of telecommunications and life science. Koor
         is also involved in tourism, real estate and international trade
         businesses. The Elbit Systems shares held by Koor have been pledged in
         favor of Bank Hapoalim as a guarantee for a loan provided by Bank
         Hapoalim to Koor. The principal shareholders of Koor are Claridge
         Israel LLC (Claridge Israel), Esarbee Investments Limited (Esarbee) and
         IDB Development Corporation Ltd. (IDBD). As of May 31, 2005, Claridge
         Israel held approximately 14.7%, Esarbee held approximately 14.1% and
         IDBD held approximately 9.7% of Koor's outstanding ordinary shares.

         Claridge Israel is a Delaware limited liability company, mainly owned
         (99%) by The Charles Bronfman Trust. The Charles Bronfman Trust is a
         trust established under U.S. law primarily for the benefit of Ellen J.
         Bronfman Hauptman and her issue. Mr. Andrew Hauptman, one of Koor's
         directors is the husband of Mrs. Ellen J. Bronfman Hauptman, the
         daughter of Charles R. Bronfman, Koor's Chairman of the Board. The
         holdings of the Claridge Israel in Koor's shares were pledged in favor
         of Bank Hapoalim as a guarantee for a loan that was given to Claridge
         Israel by Bank Hapoalim.

         Esarbee, a company registered in Canada, is owned by The Charles Rosner
         Bronfman Family Trust. The Charles Rosner Bronfman Family Trust is a
         trust established under the laws of Canada primarily for the benefit of
         Stephen R. Bronfman and his issue. Mr. Stephen R. Bronfman is the son
         of Charles R. Bronfman. The holdings of the Esarbee in Koor's shares
         were pledged in favor of Bank Hapoalim as a guarantee for a loan that
         was given to Esarbee.

         IDBD is controlled (64%) by IDB Holding Corporation Ltd. (IDBH). IDBD
         and IDBH are public companies traded on the TASE. Approximately 51.7%
         of the outstanding share capital of IDBH are owned by a group comprised
         of: (i) Ganden Investments I.D.B. Ltd.(Ganden Investments), a private
         Israeli company controlled by Nochi Dankner and his sister, Shelly
         Bergman, which holds 31.02% of the equity of and voting power in IDBH;
         (ii) Manor Investments-IDB Ltd. (Manor Investments), 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 Investments), a private Israeli company controlled by
         Avraham Livnat which holds 10.34% of the equity of and voting power in
         IDBH. Ganden Investments, Manor Investments and Livnat Investments,
         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. In addition, Shelly Bergman holds approximately
         4.9% of the equity of and voting power in IDBH.



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<PAGE>

(6)      FEL and Heris (collectively the Federmann Group) and Koor 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 27, 2004 between
         FEL and Koor, which provides, among other things, for Koor to vote at
         general shareholders meetings of Elbit Systems in accordance with FEL's
         instructions with certain exceptions. See below "Related Party
         Transactions - Agreements Related to the Tadiran Acquisition - FEL -
         Koor Shareholder Agreement". FEL and Koor have each disclaimed
         beneficial ownership of the other's shares in Elbit Systems.

(7)      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 239,844 shares underlying options that are
         currently exercisable or that will become exercisable within 60 days of
         May 31, 2005. A portion of the underlying options are "phantom options"
         that have been calculated based on Elbit Systems' May 31, 2005 share
         closing price on TASE of $24.38.

RIGHTS IN SHARES, SIGNIFICANT CHANGES IN SHAREHOLDERS AND CONTROLLING
SHAREHOLDERS

         Except to the extent provided in the Shareholders Agreement entered
into on December 27, 2004 between FEL and Koor (the Koor - FEL Shareholders
Agreement) described below in "Related Party Transactions - Agreements Relating
to the Tadiran Acquisition", Elbit Systems' major shareholders have the same
rights as other holders of Elbit Systems' ordinary shares. The only significant
changes in shareholdings by major shareholders in the last three years were:

         o        In July 2004, FEL purchased approximately 19.6% of Elbit
                  Systems ordinary shares from Elron, resulting in FEL's
                  shareholdings increasing from approximately 30.2% to
                  approximately 49.8%.

         o        In April 2005, Koor purchased 2,160,000 ordinary shares from
                  FEL, resulting in FEL's shareholding percentage decreasing
                  from approximately 48.9% to approximately 43.6%. (The 0.9%
                  dilution in FEL's percentage of shareholdings from July 2004
                  to April 2005 was a result of exercise of options by Elbit
                  Systems' employees under the stock option plan.)

         FEL and Koor may be considered under Israeli law as controlling
shareholders of Elbit Systems due to the FEL - Koor Shareholders Agreement. See
below "Related Party Transactions - Agreement Relating to the Tadiran
Acquisition". 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 FEL -
Koor Shareholders Agreement regarding appointment of directors and the Chairman
of the Board, no appointment of 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.



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<PAGE>

RELATED PARTY TRANSACTIONS

         AGREEMENTS RELATING TO THE EL-OP MERGER

         SHAREHOLDERS AGREEMENT. A shareholders agreement was entered into in
1999 between Elron and the Federmann Group in connection with the merger between
Elbit Systems and El-Op. That shareholders agreement terminated in July 2004
upon the sale of all of Elron's shares in Elbit Systems to FEL.

         REGISTRATION RIGHTS AGREEMENT.

         Also in connection with the merger with El-Op, in 2000 Elbit Systems,
the Federmann Group and Elron entered into a Registration Rights Agreement (the
Registration Rights Agreement). Elron's rights under the Registration Rights
Agreements ceased upon its sale in July 2004 of Elbit Systems' shares to FEL.
Under the FEL - Koor Shareholders Agreement (see below - "Agreements Relating to
the Tadiran Acquisition"), so long as Koor holds 5% or more of Elbit Systems'
issued share capital, the Federmann Group agreed to support granting to Koor one
demand right on similar conditions as available to the Federmann Group under the
Registration Rights Agreement.

         The principal terms of the Registration Rights Agreement which remain
applicable to the Federmann Group, are as follows:

         DEMAND REGISTRATION. The Federmann Group may twice require Elbit
         Systems to register the Federmann Group's ordinary shares for sale in
         the United States. It may not 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. The Federmann Group has an unlimited number of
         "piggyback" registration rights. This means that, subject to certain
         limitations, any time Elbit Systems proposes to file a registration
         statement in connection with any public offering of our ordinary shares
         in the United States, whether for the account of Elbit Systems or our
         shareholders, the Federmann Group may require us to include its
         ordinary shares in that offering.

         TERMINATION OF REGISTRATION RIGHTS. The registration rights of the
         Federmann Group terminate if it 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 share 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 the Federmann Group
         against liabilities that any 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 the Federmann Group.



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<PAGE>

         AGREEMENTS RELATED TO THE TADIRAN ACQUISITION

         OVERVIEW OF THE TRANSACTIONS

         In December 2004, Elbit Systems and Koor entered into agreements for
Elbit Systems to purchase all of Koor's approximately 32% holdings in Tadiran
Communications for a total consideration of approximately $146 million,
representing a price of approximately $37 per share (the Tadiran Acquisition).
These agreements were entered into concurrently with agreements between FEL and
Koor for Koor to purchase approximately 9.8% of Elbit Systems' shares from FEL
for a total consideration of approximately $99 million, representing a price of
approximately $24.70 per share (the FEL - Koor Transaction). (The Tadiran
Acquisition and the FEL - Koor Transaction are collectively referred to as the
"Transactions"). The Transactions are executed in two stages - A and B, as
described below. The agreements between Elbit Systems and Koor relating to the
Tadiran Acquisition were approved by Elbit Systems' Audit Committee and Board in
January 2005 and by Elbit Systems shareholders at a general shareholders meeting
in February 2005.

         Stage A of the Transactions was completed in April 2005, following
receipt of all applicable approvals for that Stage. In Stage A, Elbit Systems
purchased from Koor approximately 13.7% of Tadiran Communications' shares, and
Koor purchased from FEL approximately 5.3% of Elbit Systems' shares. Prior to
that purchase Elbit Systems already held approximately 6% of Tadiran
Communications' shares acquired through prior purchases on the market, and
therefore, following completion of the first stage Elbit Systems owned
approximately 20% of Tadiran Communications' shares.

         Following completion of the Stage A, three Elbit Systems' nominees were
appointed to Tadiran Communications' board of directors, and Jonathan Kolber, a
Koor nominee, was appointed to Elbit Systems' Board.

         The IMOD conditioned its approval of the Tadiran Acquisition on Elbit
Systems agreeing to maintain various Israeli security safeguards at Tadiran
Communications and on the requirement for IMOD approval in the future in the
event Elbit Systems desires to sell a significant part of the shares we hold in
Tadiran Communications.

         In June 2005, we reported that we were considering together with Koor,
the possibility of Elbit Systems purchasing directly Koor's interest in Elisra
Electronic Systems Ltd. (Elisra), however no agreement has yet been reached by
the parties on this subject. We also reported that the process is progressing
for completing the Stage B of the purchase of Koor's shares in Tadiran
Communications.

         SUMMARY OF APPLICABLE AGREEMENTS

         The four agreements entered into relating to the Transactions, each
entered into on December 27, 2004, are as follows:

(1)      The Share Transfer Deed between Elbit Systems and Koor (the Tadiran
         Deed);

(2)      The Shareholders Agreement between Elbit Systems and Koor (the Tadiran
         Shareholders Agreement);

(3)      The Share Transfer Deed between FEL and Koor (the FEL - Koor Deed); and



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<PAGE>

(4)      The Shareholders Agreement between FEL and Koor (the FEL - Koor
         Shareholders Agreement).

         The following is a summary of the principal provisions of these
agreements as they relate to the yet completed Stage B of the Transactions as
well as the applicable terms of the respective shareholders agreements.

         PRINCIPAL APPLICABLE TERMS OF THE TADIRAN DEED

         REPRESENTATIONS. Elbit Systems is purchasing the Tadiran Communications
shares under the Tadiran Deed (the Transaction Shares) on the basis that the
condition of Tadiran Communications and its assets are "as is". However, Koor
undertook that upon the completion of each stage of the Tadiran Acquisition the
Transaction Shares that will be purchased at the relevant stage will be
transferred to Elbit Systems free and clear of any third party rights. Koor also
warranted that from the time the Transaction Shares were acquired by Koor until
the time of signing the Tadiran Deed, Tadiran Communications had not brought to
Koor's attention nor given any report to the public that any material agreement
to which Tadiran Communications is a party had been terminated or modified or
that there was any intent to terminate or modify any material agreement to which
Tadiran Communications is a party.

         STAGE B OF THE TADIRAN ACQUISITION
         ----------------------------------

         TIMING. The completion deadline for Stage B of the Tadiran Acquisition
is October 31, 2005. However, if all the Stage B conditions precedent (see
below) have not been fulfilled by October 31, 2005, the Stage B completion
deadline will automatically be deferred until January 31, 2005. Moreover, if by
January 31, 2005, all the Stage B conditions precedent have been fulfilled,
except for the completion of the Elisra Acquisition, Koor will be entitled to
provide written notice to Elbit Systems of deferral of the Stage B completion
deadline until August 31, 2006 or such later date as may be determined by the
parties.

         SHARE PURCHASE AND CONSIDERATION. In Stage B, Elbit Systems will
purchase from Koor 2,244,276 ordinary shares of Tadiran Communications, which
currently constitute approximately 18% of Tadiran Communications' outstanding
share capital without deduction of treasury shares, for a consideration of $37
per share, totalling $83,038,212. Such amount accrues interest from April 1,
2005 until the time of actual payment, at the interest rate of three-month LIBOR
at Bank Leumi Le-Israel BM, plus annual interest at the rate of 1.5% compounded
quarterly.

         BOARD NOMINEES. Subject to the completion of Stage B, Koor will act to
support the appointment or election to Tadiran Communications' board of
directors of such number of directors as are nominated by Elbit Systems, and who
meet the board member qualification conditions, such that after their
appointment or election, the number of directors nominated by Elbit Systems will
constitute more than 50% of the total directors of Tadiran Communications at
that time.

         CONDITIONS PRECEDENT

         Stage B of the Tadiran Deed and Stage B of the FEL - Koor Deed (see
below) are to be completed concurrently. Therefore obtaining all the consents
and approvals necessary for the fulfilment of the FEL - Koor



                                       91
<PAGE>

Deed Stage B conditions precedent and the completion of Stage B of the FEL -
Koor Deed is a condition precedent for the completion of Stage B of the Tadiran
Deed. Nevertheless, this condition may not apply if the completion deadline for
Stage B of the FEL - Koor Deed will not be extended concurrently with the
extension of Stage B of the Tadiran Deed, under the circumstances described
below regarding the timing of Stage B under the FEL - Koor Deed.

         The other remaining conditions precedent for the performance of Stage B
are:

         (1)  the completion of the Elisra Acquisition. See below "Voting for
              the Elisra Acquisition";

         (2)  insofar as necessary, obtaining applicable regulatory approvals in
              Israel and outside Israel; and

         (3)  insofar as necessary, obtaining applicable approvals from certain
              banks or other financial institutions.

         The parties agreed to use their best efforts to cause such conditions
precedent to be fulfilled.

         LOCK-UP PERIOD
         --------------

         Elbit Systems and Koor agreed to a lock-up period from the signing of
the Tadiran Deed until August 31, 2006 during which each of them will not
conduct any transaction in Tadiran Communications' shares. This obligation will
continue in force even if the Tadiran Deed is cancelled for any reason, except
for termination due to its breach by Koor and except if Elbit Systems exercises
its walk-away rights under the terms of the Tadiran Deed as described below.
Nevertheless, during the lock-up period either party may purchase up to 350,000
shares of Tadiran Communications. To the extent one of the parties does not
exercise its right to purchase such a quantity of shares, the other party may
exercise the right in the first party's place, subject to certain notice
provisions. During the lock-up period through May 31, 2005, Elbit Systems
purchased 315,405 shares of Tadiran Communications.

         VOTING FOR THE ELISRA ACQUISITION
         ---------------------------------

         During the period that the Tadiran Deed is in effect and binding on
Elbit Systems, Elbit Systems has agreed to vote all of the shares in Tadiran
Communications then held by Elbit Systems at a general shareholders meeting of
Tadiran Communications' shareholders in favor of approving Tadiran
Communications' purchase from Koor of Koor's at least 70% equity interest in
Elisra (the Elisra Acquisition). This obligation will apply whether or not any
or all of the transactions contemplated by the Tadiran Deed are actually
implemented, provided that:

         (1)  the Elisra Acquisition consideration to be paid by Tadiran
              Communications is established in reliance on an evaluation by an
              outside independent appraiser obtained by Tadiran Communications
              for the purpose of the Elisra Acquisition, and the consideration
              and terms and conditions of the Elisra Acquisition have been duly
              approved by Tadiran Communications' audit committee and board of
              directors and by any independent committee of Tadiran
              Communications that is or may be established for the purpose of
              considering the Elisra Acquisition, and Tadiran Communications'
              audit committee and board of directors have determined that the
              Elisra Acquisition is not contrary to the interests of Tadiran
              Communications;

         (2)  the consideration for the Elisra Acquisition, as payable by
              Tadiran Communications, reflects a company value for Elisra of not
              more than $225 million; and



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<PAGE>

         (3)  the Elisra Acquisition is approved by a general shareholders
              meeting of Tadiran Communications' shareholders by August 31,
              2006.

         FURTHER UNDERTAKINGS BY KOOR
         ----------------------------

         Koor has undertaken that, from the date of the signature of the Tadiran
Deed and until the earlier of:

         (1)  the Stage B completion deadline, if the Stage B conditions
              precedent have not been fulfilled by that time; or

         (2)  the "Second Closing Date", as defined in the Tadiran Deed;

         Koor and/or its subsidiaries and/or the controlling shareholders and/or
officers of Koor and/or companies under the control of any of them will not
enter into an extraordinary transaction with Tadiran Communications in which any
of them has a "personal interest", other than the Elisra Acquisition. In
addition, Koor has undertaken that it will oppose and vote against certain
shareholder resolutions of Tadiran Communications, in relation to certain events
as specified in the Tadiran Deed.

         "WALK-AWAY" PROVISIONS. Elbit Systems may rescind the Tadiran Deed with
respect to Stage B before Stage B has been completed and performed in the event
of the occurrence of one or more of events such as: liquidation, insolvency or
similar proceedings of Tadiran Communications; merger proceedings of Tadiran
Communications; alterations to Tadiran Communications' incorporation documents;
private placements that vest a right to more than 1,500,000 shares of Tadiran
Communications (with certain exclusions); certain new transactions of Tadiran
Communications that are not in the ordinary course of business or that involve
the sale or purchase of assets or equity, if their aggregate amount exceeds $35
million, except for the Elisra Acquisition; distributions of dividends in an
aggregate amount exceeding NIS 2.5 per share of Tadiran Communications in any
calendar quarter; or completion of the Elisra Acquisition for consideration paid
by Tadiran Communications reflecting a company value for Elisra in excess of
$225 million.

         RELATION TO KOOR - FEL DEED. Contemporaneously with the signing of the
Tadiran Deed, the FEL - Koor Deed was also signed. Elbit Systems is not a party
to the Koor - FEL Deed, and the provisions of the Koor - FEL Deed do not impose
any obligation, that is not expressly provided in the Tadiran Deed, on Koor to
Elbit Systems or on Elbit Systems to Koor.

         PRINCIPAL APPLICABLE TERMS OF THE TADIRAN SHAREHOLDERS AGREEMENT.

         EFFECTIVE DATE AND DURATION. The Tadiran Shareholders Agreement signed
between Elbit Systems and Koor became effective upon the completion of Stage A
of the Tadiran Acquisition, and it will remain in force so long as the parties
cumulatively hold shares entitling them to at least 15% of the voting rights in
Tadiran Communications and provided that each party holds shares of Tadiran
Communications.



                                       93
<PAGE>

         NOMINATION OF DIRECTORS FOLLOWING THE COMPLETION OF STAGE A

         Following completion of Stage A of the Tadiran Acquisition, Koor and
Elbit Systems agreed to support the appointment or election of directors
nominated by Elbit Systems to Tadiran Communications' board, constituting at
least 20% of the directors on the Tadiran board. Subject to applicable law, Koor
and


                                       91
<PAGE>

Elbit Systems will act so that there will serve at least one director nominated
by Elbit Systems on every board of directors' committee of Tadiran
Communications, other than the audit committee. The parties also will act so
that a director of Tadiran Communications, who has been nominated by Elbit
Systems, will serve as chairperson nominees of the finance committee of Tadiran
Communications' board.

         If Koor exercises its right under the Tadiran Deed to defer the Stage B
completion deadline from January 31, 2006 until August 31, 2006 (the "Additional
Period"), on commencement of the Additional Period Koor will support the
appointment or election of an additional director nominated by Elbit Systems to
Tadiran Communications' board, so that there will be a total of twelve directors
on Tadiran Communications' board of directors, four of whom will have been
nominated by Elbit Systems. Also, during the Additional Period, Koor will act to
support that on every board of directors' committee, at least one-third of the
committee members will be directors who were nominated by Elbit Systems.

         ARRANGEMENTS FOLLOWING COMPLETION OF STAGE B
         --------------------------------------------

         VOTING AT SHAREHOLDERS MEETINGS. After and subject to completion of
Stage B of the Tadiran Acquisition, if and to the extent that at that time Koor
continues to be a shareholder of Tadiran Communications, Koor has undertaken to
participate in every general shareholders meeting of Tadiran Communications and
vote in respect of all the Tadiran Communications shares held by it on every
matter and/or decision that is referred for a resolution of Tadiran
Communications' shareholders in accordance with instructions that are given to
it by Elbit Systems. However, Koor will not be so obligated with respect to
shareholders' resolutions concerning the approval of transactions of Tadiran
Communications in which Elbit Systems, or Elbit Systems' controlling
shareholders or officers, has a "personal interest", if such voting by Koor as
instructed by Elbit Systems would cause Koor to breach any obligations imposed
on Koor by law.

         ELBIT SYSTEMS OPTION TO PURCHASE KOOR'S ADDITIONAL SHARES IN TADIRAN
         COMMUNICATIONS

       Subject to the completion of Stage B of the Tadiran Acquisition, Koor
grants Elbit Systems the option to purchase from Koor any or all of the shares
of Tadiran Communications that may be issued to or vested in Koor by Tadiran
Communications after the signature of the Tadiran Deed (the Additional Shares).
Said option will apply as follows:

      (1)     to all of the Additional Shares for a period of 90 days after the
              completion of Stage B;
s
      (2)     to one-half of the Additional Shares for a period commencing at
              the end of 90 days from the completion of Stage B and ending 180
              days after said completion, provided these shares were not
              purchased by Elbit Systems in accordance with the sub-section (1)
              above; and

      (3)     to one-quarter of the Additional Shares for a period commencing at
              the end of 180 days from the completion of Stage B and ending 365
              days after said completion, provided these shares were not
              purchased by Elbit Systems in accordance with sub-sections (1) or
              (2) above.



                                       94
<PAGE>

         The Additional Shares will be purchased for consideration per
Additional Share equal to the average of: (a) the price per share at which the
Additional Shares were issued to Koor by Tadiran Communications or vested in
Koor by Tadiran Communications, less any dividends distributed for each share by
Tadiran Communications, commencing from the date on which Koor was issued or
vested in the share, and (b) the price per share of Tadiran Communications on
the TASE. For this purpose, the stock exchange price per share of Tadiran
Communications will be the average price of the share at the end of each of the
ten stock exchange trading days preceding the date on which notice is provided
by Elbit Systems in respect of the option's exercise.

         ARRANGEMENTS IF STAGE B IS NOT COMPLETED
         ----------------------------------------

         If after the Stage B completion deadline, including any extension of
that date in accordance with the Tadiran Deed, Stage B is not completed the
following arrangements will apply between Koor and Elbit Systems in respect of
their cumulative holdings in Tadiran Communications:

         BOARD OF DIRECTORS

         (1)      So long as the holdings of each of the parties are not less
                  than 12% of Tadiran Communications' issued share capital, the
                  parties will act and vote by virtue of all their cumulative
                  holdings so that:

                  (a)      There will be 12 directors of Tadiran Communications,
                           including five who are nominated by Elbit Systems,
                           five who are nominated by Koor and two External
                           Directors.

                  (b)      On all board of directors' committees there will be
                           equal representation of the directors who are
                           nominated by each party.

                  (c)      When the term of office of the first of the two
                           External Directors serving on Tadiran Communications'
                           board comes to an end, Elbit Systems will be entitled
                           to nominate a candidate for the office of External
                           Director. When the term of office of the other of the
                           two External Directors comes to an end, Koor will be
                           entitled to nominate a candidate for the office of
                           External Director.

                  (d)      Until December 31, 2006, the chairperson of Tadiran
                           Communications' board will be a director recommended
                           to that office by Koor. For the next 24 months, the
                           office will be held by a director recommended to the
                           office by Elbit Systems, and thereafter the right to
                           recommend the chairperson will so alternate every 24
                           months.

         (2)      Should the holdings of either of the parties fall below 12% of
                  Tadiran Communications' issued share capital, but so long as
                  such party's holdings are not less than 9% of Tadiran
                  Communications' issued share capital, that party will be
                  entitled (under the above mentioned arrangements) to a number
                  of directors equal to its percentage holdings in Tadiran
                  Communications divided by the total cumulative holdings of the
                  parties multiplied by the number of directors then serving on
                  the Tadiran Communications' board (rounded to the nearest
                  whole number), provided that the number of directors who are
                  appointed or elected on the recommendation of that party will
                  not be less than 20% of the total number of directors (rounded
                  up to a whole number).



                                       95
<PAGE>

         (3)      Should the holdings of either of the parties fall below 9% of
                  the issued share capital of Tadiran Communications, but so
                  long as they have not fallen below 5% of Tadiran
                  Communications' issued share capital, that party will be
                  entitled (under the above mentioned arrangements) to a number
                  of directors equal to its percentage holdings in Tadiran
                  Communications divided by the total cumulative holdings of the
                  parties multiplied by the number of directors then serving on
                  the Tadiran Communications' board (rounded to the nearest
                  whole number).

         (4)      Should the holdings of either of the parties fall below 5% of
                  the issued share capital of Tadiran Communications, that party
                  will not be entitled (under the above mentioned arrangements)
                  to representation on Tadiran Communications' board.

         VOTING AT SHAREHOLDERS' MEETINGS
         --------------------------------

         (1)      The parties will coordinate between them in advance the manner
                  in which they will vote on every resolution at a general
                  shareholders meeting of Tadiran Communications. The parties
                  will act and vote by virtue of their cumulative holdings
                  against any proposed resolution in a general shareholders
                  meeting unless it is first agreed in writing between them to
                  vote in its favor.

         (2)      Should the holdings of a party fall below 12% of Tadiran
                  Communications' issued share capital, but so long as they have
                  not fallen below 9% of the issued share capital, the
                  provisions regarding coordination in advance of voting at
                  general shareholders meetings will not apply between the
                  parties.

         (3)      If the holdings of a party fall below 9% of Tadiran
                  Communications' issued share capital, that party undertakes to
                  vote with all its shares in Tadiran Communications at every
                  general shareholders meeting in accordance with the other
                  party's instructions, except in connection with a
                  shareholders' resolution concerning the approval of a
                  transaction in which the other party or its controlling
                  shareholders or officers has a "personal interest," if so
                  voting would cause the first party to breach duties imposed on
                  it by law.

         RESTRICTIONS ON TRANSFER OF SHARES
         ----------------------------------

         (1)      A transfer by either Elbit Systems or Koor of any of the
                  4,462,764 shares of Tadiran Communications, constituting all
                  the shares held by Koor or by Elbit Systems as of December 27,
                  2004, and any shares which may be issued or vested with
                  respect to these shares, (the Core Shares), will be subject
                  to a right of first refusal of the other party, excluding a
                  sale by a party of Core Shares on the stock exchange, provided
                  that such sale meets both of the following conditions: (a) a
                  party will not sell more than 3% of Tadiran Communications'
                  issued share capital during a 12-month period; and (b) a party
                  will not sell more than 1.5% of Tadiran Communications issued
                  share capital in the course of one transaction or one act.

         (2)      If a party's total holdings in Tadiran Communications' shares
                  fall below 5% of the issued share capital of Tadiran
                  Communications, that party may sell the shares in the course
                  of trading on the stock exchange without the application the
                  above mentioned right of first refusal provisions or the
                  conditions for sale on the stock exchange.



                                       96
<PAGE>

         (3)      Koor granted Elbit Systems options to purchase from Koor
                  shares that are not part of the Core Shares, which may be
                  issued to Koor by Tadiran Communications or vested in Koor by
                  Tadiran Communications after signature of the Tadiran Deed, at
                  the times and on the terms described above under "Arrangements
                  following Completion of Stage B".


         PRINCIPAL APPLICABLE TERMS OF THE FEL - KOOR DEED

         REPRESENTATIONS. Under the FEL - Koor Deed, Koor is purchasing from FEL
in two stages 4,000,000 of Elbit Systems' ordinary shares (the Transaction
Shares) on an "as is" basis and on the basis that the condition of Elbit Systems
and its assets are "as is". However, FEL undertook that upon the completion of
each Stage of the FEL - Koor Transaction the Transaction Shares to be purchased
at the relevant stage, would be free and clear of any third party rights.

         STAGE B
         -------

         TIMING. The completion deadline for Stage B of the FEL - Koor
Transaction is October 31, 2005. However, subject to FEL's rights as provided
below not to approve a deferment, if all the Stage B conditions precedent have
not been fulfilled by October 31, 2005, the Stage B completion deadline will be
automatically deferred until January 31, 2006. The Stage B completion deadline
will be further deferred until August 31, 2006 if and to the extent the Stage B
completion deadline for the Tadiran Acquisition is deferred, unless FEL informs
Koor that FEL is unwilling to defer the Stage B completion deadline. If FEL so
informs Koor, Koor may elect to complete Stage B of the FEL - Koor Transaction
even if Stage B of the Tadiran Acquisition has not been completed, if all other
conditions precedent for Stage B of the FEL - Koor Transaction have been met
other than the completion of the Elisra Acquisition and the conditions precedent
specified in the Tadiran Deed for Stage B of the Tadiran Acquisition.

         SHARE PURCHASE AND CONSIDERATION. Pursuant to Stage B of the FEL - Koor
Transaction, Koor will purchase from FEL 1,840,000 ordinary shares of Elbit
Systems, which currently constitute approximately 4.5% of Elbit Systems' issued
share capital, for a consideration of $24.70 per share, totalling $45,448,000.
Such amount accrues interest from April 1, 2005 until the time of actual payment
at the same rate interest as applicable to Elbit Systems under the Tadiran Deed.
Also, the amount of the consideration and the quantity of Transaction Shares are
subject to modification if certain changes in the capital or equity of Elbit
Systems occur, such as distribution of dividends, distribution of bonus shares,
rights offerings, consolidations, sub-divisions or similar events.

         BOARD NOMINEES. Subject to the completion of Stage B of the FEL - Koor
Transaction, FEL will support the appointment or election to Elbit Systems'
Board of such number of directors as are nominated by Koor, who meet the
applicable qualification conditions, including any applicable independence
criteria, so that after their appointment or election, the number of directors
nominated by Koor will be the greater of:

         (1)      two directors; or

         (2)      a number of directors equal to 20% of the number of Elbit
                  Systems' directors (including External Directors and the
                  director or directors appointed or elected pursuant to Koor's
                  nomination as provided above), rounded up to the nearest whole
                  number. (If required to


                                       97
<PAGE>

                  meet applicable "director independence" requirements, Koor's
                  nominees will comply with the applicable independence
                  criteria.)

         CONDITIONS PRECEDENT

         Stage B of the FEL - Koor Deed and Stage B of the Tadiran Deed will be
completed together. Therefore obtaining all the consents and approvals necessary
for the fulfillment of the Tadiran Deed Stage B conditions precedent and the
completion of Stage B of the FEL - Koor Deed is a condition precedent for the
completion of Stage B of the FEL - Koor Deed. Nevertheless, this condition may
not apply if the completion deadline for Stage B of the FEL - Koor Deed is not
extended contemporaneously with Stage B of the Tadiran Deed, as described above.

         Other conditions precedent for the performance of Stage B of the FEL -
Koor Transaction are:

         (1)      the completion of the Elisra Acquisition; and

         (2)      insofar as necessary, obtaining applicable regulatory
                  approvals in Israel.

         Koor will be entitled to waive fulfillment of part of the conditions
precedent for the completion of Stage B of the FEL - Koor Transaction as
described in the FEL - Koor Deed, and in this case, Stage B will be completed
notwithstanding non-fulfillment of such conditions precedent.

         The parties agreed to use their best efforts to cause the conditions
precedent to be fulfilled.

         TRANSACTIONS WITH INTERESTED PARTIES
         ------------------------------------

         From the date of signing the FEL - Koor Deed until the earlier of:

         (1)      the Stage B completion deadline, if the Stage B conditions
                  precedent have not been fulfilled by that time; or

         (2)      the Second Closing Date;

         FEL and/or its subsidiaries and/or the controlling shareholders and/or
officers of FEL and/or companies under the control of any of them, will not
enter into an extraordinary transaction with Elbit Systems in which any of them
has a "personal interest", other than the transactions contemplated by the FEL -
Koor Deed and the Tadiran Deed. In addition, FEL has undertaken that it will
oppose and vote against certain resolutions of Elbit Systems' shareholders in
relation to certain events as described in the FEL - Koor Deed.

         "WALK-AWAY" PROVISIONS. Koor may rescind the FEL - Koor Deed before
Stage B has been completed upon the occurrence of one or more of certain events
such as: liquidation, insolvency or similar proceedings of Elbit Systems or
merger proceedings of Elbit Systems.




                                       98
<PAGE>

         PRINCIPAL APPLICABLE TERMS OF THE FEL - KOOR SHAREHOLDERS AGREEMENT

         EFFECTIVE DATE AND DURATION
         ---------------------------

         The FEL - Koor Shareholders Agreement entered into effect upon
completion of Stage A of the FEL - Koor Transaction. The FEL - Koor Shareholders
Agreement will remain in effect for a period of 15 years from its effective date
or until such time as FEL's (or a "Transferor Party" as defined in the FEL -
Koor Shareholders Agreement) holdings in the FEL Shares together with Koor's (or
a Transferor Party) holdings in the "Koor Shares" (as defined in the FEL - Koor
Shareholders Agreement) fall below 25% of Elbit Systems' issued and outstanding
share capital, whichever is earlier.

         In addition, after April 1, 2009, Koor may elect to bring to an end its
rights and obligations under the FEL - Koor Shareholders Agreement, with the
exception of certain sales of a limited amount of Elbit Systems' shares by Koor
on a stock exchange, and except for Koor's obligation to vote its shares in
accordance with FEL's instructions.

         BOARD MEMBERS
         -------------

         After the completion of Stage A of the FEL - Koor Transaction and until
the completion of Stage B of the FEL - Koor Transaction, and if Stage B of the
FEL - Koor Transaction does not occur, then until such time as Koor's holdings
of the Koor Shares fall below 4.32% of Elbit Systems' share capital, or below
2,050,000 shares, whichever is sooner, FEL will vote all its holdings of Elbit
Systems' shares in favor of the election of one director nominated by Koor.

         Commencing from the time of completion of Stage B of the FEL - Koor
Transaction, FEL will support the appointment or vote for the election of
directors to Elbit Systems' Board who are nominated by Koor, in a number equal
to the higher of either: (a) two or (b) 20% of the number of Elbit Systems'
directors (including External Directors and the director(s) appointed or elected
pursuant to Koor's nomination), rounded up to the nearest whole number.

         After the completion of Stage B of the FEL - Koor Transaction, from
such time as Koor's holdings of the Koor Shares fall below 6.45% of Elbit
Systems' share capital, or below 3,050,000 shares, whichever is sooner, and
until Koor's holdings in the Koor Shares fall below 4.32% of Elbit Systems'
share capital or 2,050,000 shares, whichever is earlier, FEL will vote all its
holdings in Elbit Systems' shares in favor of the election of one director
nominated by Koor.

         Koor has undertaken to vote for the election of all the candidates
nominated by FEL for the offices of the other directors of Elbit Systems
(including External Directors). Koor also has undertaken to support the
appointment of the candidate nominated by FEL as chairperson of Elbit Systems'
Board.

         If required to meet applicable "director independence" requirements,
Koor's nominees will comply with the applicable independence criteria.

         VOTING AT SHAREHOLDERS MEETINGS.
         --------------------------------

         Koor has undertaken to vote, in every matter and proposed resolution
that will be submitted for approval to a general shareholders meeting of Elbit
Systems' shareholders, in accordance with instructions that will be given to it
by FEL, subject to certain exceptions.



                                       99
<PAGE>

         RESTRICTIONS ON TRANSFER OF ELBIT SYSTEMS' SHARES
         -------------------------------------------------

         Both Koor and FEL are subject under the FEL - Koor Shareholders
Agreement, to certain limitations and rights regarding the transfer of their
respective shares in Elbit Systems. Accordingly, under the conditions described
in the FEL - Koor Shareholders Agreement:

         (1)      Koor has been granted a right to tag along to FEL's sale of
                  shares in Elbit Systems in the event FEL wishes to transfer to
                  a third party more than half of FEL's shares in Elbit Systems;

         (2)      FEL has been granted a right of first refusal if Koor wishes
                  to transfer to a third party any of the Koor Shares;


         (3)      If Koor elects to withdraw from the "Controlling Interest" in
                  Elbit Systems (according to the provisions of the FEL - Koor
                  Shareholders Agreement) FEL will have a right of first offer
                  to acquire Koor's shares in Elbit Systems;

         (4)      The parties have been granted a mutual right to jointly
                  participate in the acquisition of shares from a single third
                  party if the proposed acquisition will exceed a total
                  consideration of $25 million;

         (5)      Koor will not transfer any of the Koor Shares during the
                  period commencing on the date of signing the FEL - Koor
                  Shareholders Agreement and ending on the later of the
                  following:

                  (a)      12 months after completion of Stage A of the FEL -
                           Koor Transaction (April 17, 2006); or

                  (b)      if Stage B of the FEL - Koor Transaction has been
                           completed - then nine months after the Second Closing
                           Date.

         (6)      A transfer to a third party of: (1) Koor Shares that are
                  subject to FEL's right of first refusal, or (2) "Federmann
                  Shares" (as defined in the FEL - Koor Deed) that are subject
                  to Koor's tag along rights, will be subject to the third party
                  transferee's undertaking to assume the transferor's
                  undertakings according to the FEL - Koor Shareholders
                  Agreement.

         The above mentioned limitations and rights on transfer of C Elbit
Systems shares apply only to the Federmann Shares and the Koor Shares and not to
any other Elbit Systems shares that may be held by FEL or Koor, as the case may
be.



                                      100
<PAGE>

         ADDITIONAL NON-TRANSFERABLE RIGHTS GRANTED TO KOOR

         After the completion of Stage B of the FEL - Koor Transaction, Koor
will be granted, subject to applicable law, certain non-transferable rights, as
specified below, which will expire if Koor's holdings fall below 6.45% of Elbit
Systems' share capital, or below 3,050,000 ordinary shares, whichever is
earlier. In addition, FEL will have the right to terminate such non-transferable
rights if members of the Charles Bronfman family, or trusts for their benefit,
cease to own a controlling interest in Koor.

         (1)      The appointment of one of the directors nominated by Koor to
                  the position of Vice Chairperson of the Elbit Systems' Board,
                  and the appointment of one director nominated by Koor to each
                  of the Elbit Systems Board's committees. Such right may be
                  terminated by FEL in the event of a change of control of Koor
                  as specified in the FEL - Koor Shareholders Agreement.

         (2)      Establishment of a Elbit Systems' Board Committee for
                  Strategic Planning, in which at least one member will be a
                  director nominated by Koor, having the authority to assist and
                  recommend on strategic issues;

         (3)      In the event of a change of the current Elbit Systems'
                  President and Chief Executive Officer (Joseph Ackerman), a
                  search committee having the authority to recommend will be
                  appointed to attempt to identify a suitable candidate for such
                  office. If the search committee does not succeed in
                  unanimously so recommending a candidate, Elbit Systems' Board
                  will appoint a Chief Executive Officer by a majority vote of
                  its members.

         (4)      FEL will support, if so requested by Koor, granting
                  registration rights to Koor. (See above "Agreements Relating
                  to the El-Op Merger - Registration Rights Agreement".)

         (5)      In the event that an officer or any of the holders of control
                  in FEL serves as a director in a subsidiary of Elbit Systems,
                  Koor will be entitled, subject to applicable law, to appoint
                  as a director in that subsidiary one of the directors of Elbit
                  Systems nominated by Koor. (Currently officers or holders of
                  control in FEL do not serve as directors in any of Elbit
                  Systems' subsidiaries.)



                                      101
<PAGE>

TRANSACTIONS WITH AFFILIATED COMPANIES

         In the ordinary course of business, some subsidiaries and affiliates of
Elbit Systems engage in business activities with each other. The purchases among
our related parties are made at prices and on terms equivalent to those used in
transacting business with unrelated parties under similar conditions. The sales
among our related parties in respect to government defense contracts are made on
the basis of costs incurred.

TRANSACTIONS WITH OFFICERS AND DIRECTORS

         Some members of Elbit Systems' Board are also directors of FEL Group or
Koor or companies controlled by either FEL or Koor, including Tadiran
Communications and Elisra. 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.







                                      102
<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:

         2002        $0.34 per share
         2003        $0.40 per share
         2004        $2.17 per share (including an extraordinary dividend of
                     $1.80 per share declared in the second quarter of 2004)




                                      103
<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:

                       NASDAQ                             TASE (1)

                 HIGH          LOW              HIGH                LOW
                 ----          ---              ----                ---
2000            $19.37        $11.00           $19.18              $11.75
2001            $19.60        $12.81           $19.24              $12.81
2002            $19.31        $14.68           $18.92              $14.32
2003            $20.00        $14.51           $20.08              $14.99
2004            $26.40        $17.85           $26.29              $17.73


         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>
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                          $20.51       $17.88             $20.50           $17.73
Third Quarter                           $22.50       $19.78             $21.23           $18.80
Fourth Quarter                          $26.40       $19.78             $26.29           $19.55

2005
First Quarter                           $26.85       $22.97             $27.07           $22.45
Second Quarter (through May 31, 2005)   $25.35       $23.07             $25.11           $23.10
</TABLE>



                                      104
<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 2004                           $26.40       $22.20             $26.29           $22.17
January 2005                            $26.85       $23.26             $27.07           $23.29
February 2005                           $25.63       $23.37             $25.39           $23.85
March 2005                              $25.26       $22.97             $25.09           $22.45
April 2005                              $25.35       $23.07             $24.59           $23.10
May 2005                                $25.21       $24.17             $25.11           $24.42
</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, 2005, approximately 4.1% of our outstanding ordinary
shares was held in the United States by approximately 232 holders registered on
the books of our transfer agent.




                                      105
<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) is the basic corporation law governing
Israeli publicly and privately held companies. The Companies Law mandates
specific provisions be included in an Israeli company's articles of association,
which are included in Elbit Systems Restated Articles of Association (the
Articles of Association).

         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 FEL - Koor
Shareholders' Agreement. See above - Item 7. Major Shareholders and Related
Party Transactions - Related Party Transactions - Agreements Relating to the
Tadiran Acquisition. Under that agreement FEL and Koor agreed to support each
other's appointments/nominees to the Board, with Koor being entitled to nominate
up to two directors and FEL the balance of the directors, other than the
External Directors. The Chairman of the Board is appointed from the FEL
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. In addition, a
board committee member may not substitute for another board committee member in
committee meetings. 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 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



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External Director. Nathan Sharony and Yaacov Lifshitz currently serve as an
External Directors of Elbit Systems, and their terms of office end in March 2008
and July 2006, respectively. Under a recent amendment to the Companies Law, at
least one of the External Directors is required to have "financial and
accounting expertise" and the other External Director(s) are required to have
"professional expertise". These requirements are subject to regulations to be
promulgated in which the terms "financial and accounting expertise" and
"professional expertise" will be defined. This amendment does not apply to
External Directors who were appointed prior to March 17, 2005 (such as our
External Directors). A substitute for an External Director who has "financial
and accounting expertise" or "professional expertise" must have similar
expertise.

         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, consistent with applicable Israeli and U.S. laws
and regulations. 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



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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 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 the board of directors for
transactions that are not extraordinary with an Office Holder or in which an
Office Holder has a Personal Interest.

         The Companies Law requires approval by both the audit committee and the
board of directors for the following transactions:

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

         (2)      the grant of indemnification, exemption or insurance to Office
                  Holders;

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

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

         Matters referred to in (4) 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, including terms of service of controlling
shareholders or their immediate relatives who serve as employees or directors of
the applicable company require approval by the audit committee, the board of
directors and a general meeting of shareholders by a special majority as
provided in the Companies Law.

EXEMPTION, INSURANCE AND INDEMNIFICATION OF DIRECTORS AND OFFICERS

         EXEMPTION, INSURANCE AND INDEMNIFICATION UNDER THE COMPANIES LAW

         Under the Companies Law, an Israeli company may not exempt an Office
Holder from liability with respect to a breach of his or her duty of loyalty,
but may exempt in advance an Office Holder from his or her liability to the
company, in whole or in part, with respect to a breach of his or her duty of
care. However, a company may not exempt in advance a director from his or her
liability to the company with respect to a breach of duty of care in connection
with a distribution made by the company.



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         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.

         Under the Companies Law, a company may indemnify an Office Holder
against any monetary liability incurred in his or her capacity as an Office
Holder whether imposed on him or her in favor of another person pursuant to a
judgment, a settlement or an arbitrator's award approved by court. A company
also can indemnify an Office Holder against reasonable litigation expenses
including attorneys' fees, incurred by him or her in his or her capacity as an
Office Holder, in a proceeding instituted against him or her by the company, on
its behalf or by a third party, in connection with criminal proceedings in which
the Office Holder was acquitted, or as a result of a conviction for a crime that
does not require proof of criminal intent, or in which an indictment was not
brought against the Office Holder.

         Under the Companies Law, a company may indemnify an Office Holder in
respect of certain liabilities, either in advance of an event or following an
event. If a company undertakes to indemnify an Office Holder in advance of an
event, the indemnification, other than litigation expenses, must be limited to
foreseeable types of events in light of the company's actual activities at the
time the company undertook such indemnification and also limited to reasonable
amounts or standards, as determined by the board of directors.

         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 other than mere negligence;

         (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.



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         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

         (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 in August
2004, and allows for an aggregate increase of insurance coverage of up to
$45,000,000 (from the then current level of $30,000,000) for any year covered by
the policy. As of May 31, 2005, the level of D&O insurance coverage was
$35,000,000. 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.



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MATERIAL CONTRACTS

         Elbit Systems has not entered into material contracts since June 1,
2003, other than in the ordinary course of business and other than the
agreements related to the Tadiran Communications' acquisition. See above - Item
7. Major Shareholders and Related Party Transactions - Related Party
Transactions - Agreements Relating to the Tadiran Acquisition.

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.

         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.

         The Israeli Parliament approved a law enacting extensive changes to
Israel's tax law (the Tax Reform Legislation) generally effective as of January
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).



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         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 were subject to a 35% "Company Tax" 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 our 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.

         In September 2004, the Israeli Parliament approved the Amendment to the
Income Tax Ordinance (No. 140 and Temporary Provision) (the Amendment) that
reduces the corporate tax rate from 36% to 35% in 2004, 34% in 2005, 32% in 2006
and 30% in 2007. The Amendment was signed and published in July 2004 and is
therefore considered enacted in July 2004. The adoption of the Amendment did not
have a significant effect on our financial statements.

         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
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, 2004, Elbit Systems had four and El-Op had four active
approved programs eligible for tax benefits. These programs will expire during
the years 2005 to 2012.

         In March 2005, the Israeli Parliament passed an amendment to Investment
Law, which revamps the Israeli tax incentives for future industrial and other
investments (the 2005 Amendment). A tax



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holiday package can now be elected for up to 15 years for a "Privileged
Enterprise" if certain conditions are met, without needing to obtain approval.
The 2005 Amendment became effective on April 1, 2005. Taxpayers may claim
Privileged Enterprise status for new and expanded enterprises with a year of
election of 2004 or thereafter, unless the Investment Center granted Approved
Enterprise status by December 31, 2004. Various alternative tax-only benefit
packages can now be elected for investments in a "Privileged Enterprise", if
certain conditions are met without needing to obtain approval. Israeli
industrial companies can choose between the following two tax packages:

         o        Tax holiday package - for a "Privileged Enterprise": Tax
                  exemption applies to undistributed profits for 2-15 years
                  depending on location and foreign ownership. Low company tax
                  rates (10% - 25%) apply to distributed and subsequent profits.
                  The total period of tax benefits is 7 - 15 years;

         o        Grant / low tax package - for an "Approved Enterprise": Fixed
                  asset grants (20% to 32%) for enterprises in a "Development
                  Area" and low company tax rates (0% to 25%) for 7 to 15 years.

         Dividend withholding tax applies at a rate of 4% or 15% depending on
the package selected.

         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 through 1993 was taxed at a rate
of 10%. Inflationary surplus accumulated from and after 1993 is exempt from any
capital gains tax. The real capital gain was taxed through 2002 at a rate of 36%
for corporations.

         Effective as of 2003, the real capital gains tax rate imposed on the
sale of capital assets acquired after that date were 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 as of 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 through 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.

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




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          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. In 2002
inflation during the year exceeded 6%. In 2003 the inflation rate was a negative
1.9%. In 2004 the inflation rate was 1.2%.

         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 an amendment in the
Israeli Tax Ordinance, which became effective in 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.

         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



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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

         We are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements, we file
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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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.






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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.




                                      117
<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 November 2004, 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
                                 2004      2003
                                 ----      ----
                           (U.S. dollars in thousands)

Audit Fees                       $730      $656

Audit-Related Fees                 --        --

Tax Fees                         $499      $398

All Other Fees                   $121       $54
                               ------    ------
Total                          $1,350    $1,108
                               ======    ======




                                      118
<PAGE>

         "Audit Fees" are the aggregate fees 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.

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

         Not yet applicable to Registrant.

ITEM 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 2004, other than Elbit Systems purchase
of shares of Tadiran Communications that were purchased prior to signing the
agreements with Koor. See above - Item 7. Major Shareholders and Related Party
Transactions - Related Party Transactions - Agreements Relating to the Tadiran
Acquisition.







                                      119
<PAGE>


ITEM 17.   FINANCIAL STATEMENTS.

         Not applicable.

ITEM 18.   FINANCIAL STATEMENTS.

         See Financial Statements attached.

ITEM 19.   EXHIBITS.

         (a) Index to Financial Statements


                                                                            Page

         Report of Independent Registered Public Accounting Firm             F-2
         Consolidated Balance Sheets at December 31, 2003 and 2004           F-4
         Consolidated Statements of Income                                   F-6
         Consolidated Statements of Shareholders' Equity                     F-7
         Consolidated Statements of Cash Flows                               F-9
         Notes to Consolidated Financial Statements                         F-11
         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      Tadiran Share Transfer Deed between Elbit Systems
                  and Koor *****
         4.4      Tadiran Shareholders Agreement between Elbit Systems
                  and Koor *****
         4.5      FEL - Koor Share Transfer Deed *****
         4.6      FEL - Koor Shareholders Agreement *****
         8        Elbit Systems' Post Merger Stock Option Plan (Summary in
                  English) *
         8.1      Principal Operating Subsidiaries of Elbit Systems




                                      120
<PAGE>


         10.1     Consent of Kost Forer Gabbay & Kasierer
         10.2     Consent of Luboshitz 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.

****     Filed as an exhibit to Elbit Systems Report on Form 6-K for October
         2004, which was filed by Elbit Systems with the Securities and Exchange
         Commission on October 20, 2005 and incorporated herein by reference

*****    Filed as an exhibit to Elbit Systems Report on Form 6-K for February
         2005, which was filed by Elbit Systems with the Securities and Exchange
         Commission on February 7, 2005 and incorporated herein by reference.




                                      121
<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 28,  2005

                                              ELBIT SYSTEMS LTD.


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







                                      122
<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

                                                                         Deductions
                                                          Additions      (Write-Offs
                                            Balance at    (Charged to    and Actual
                                            Beginning     Costs and      Losses          Balance at
             DESCRIPTION                    of Period     Expenses)      Incurred)       End of Period
             -----------                    ---------     ----------     --------        -------------
<S>                                          <C>            <C>           <C>               <C>
YEAR ENDED DECEMBER 31, 2004:

Provisions for Losses on Long- Term
Contracts (*)                                13,016         5,516         8,181             10,351
Provisions for Claims and Potential
Contractual Penalties and Others              4,882         1,058         3,403              2,537
Allowance for Doubtful Accounts               3,861            33           830              3,064
Valuation Allowance on Deferred
Taxes                                         3,879             -           434              3,445


YEAR ENDED DECEMBER 31, 2003:

Provisions for Losses on Long- Term
Contracts (*)                                13,607         5,032         5,623             13,016
Provisions for Claims and Potential
Contractual Penalties and Others              5,988         1,492         2,598              4,882
Allowance for Doubtful Accounts               3,411           908           458              3,861
Valuation Allowance on Deferred Taxes         2,362         1,553             -              3,879


YEAR ENDED DECEMBER 31, 2002:

Provisions for Losses on Long- Term
Contracts (*)                                14,418         6,077         6,888             13,607
Provisions for Claims and Potential
Contractual Penalties and Others              3,507         5,612         3,131              5,988
Allowance for Doubtful Accounts               3,200           459           248              3,411
Valuation Allowance on Deferred
Taxes                                         2,202           124             -              2,326
</TABLE>

* An amount of $11,016, $12,263 and $7,636 as of December 31, 2002, 2003 and
2004, respectively, is presented as a deduction from inventories, and an amount
of $2,591, $753 and $2,715 as of December 31, 2002, 2003 and 2004, respectively,
is presented as part of other accrued expenses.



                                       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      Tadiran Share Transfer Deed between Elbit Systems
                  and Koor *****
         4.4      Tadiran Shareholders Agreement between Elbit Systems
                  and Koor *****
         4.5      FEL - Koor Share Transfer Deed *****
         4.6      FEL - Koor Shareholders Agreement *****
         8        Elbit Systems' Post Merger Stock Option Plan (Summary in
                  English) *
         8.1      Principal Operating Subsidiaries of Elbit Systems
         10.1     Consent of Kost Forer Gabbay & Kasierer
         10.2     Consent of Luboshitz 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.

****     Filed as an exhibit to Elbit Systems Report on Form 6-K for October
         2004, which was filed by Elbit Systems with the Securities and Exchange
         Commission on October 20, 2005 and incorporated herein by reference

*****    Filed as an exhibit to Elbit Systems Report on Form 6-K for February
         2005, which was filed by Elbit Systems with the Securities and Exchange
         Commission on February 7, 2005 and incorporated herein by reference.




<PAGE>

FINANCIAL STATEMENTS














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



                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2004
                             -----------------------
                                (IN U.S. DOLLARS)








<PAGE>





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

                        CONSOLIDATED FINANCIAL STATEMENTS
                             AS OF DECEMBER 31, 2004
                                 IN U.S. DOLLARS


                                 C O N T E N T S
                                 ---------------




                                                                         PAGE
                                                                       ---------


       REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM            2 - 3

       CONSOLIDATED FINANCIAL STATEMENTS:

         Consolidated Balance Sheets                                      4 - 5

         Consolidated Statements of Income                                  6

         Statements of Changes in Shareholders' Equity                    7 - 8

         Consolidated Statements of Cash Flows                            9 - 10

         Notes to the Consolidated Financial Statements                  11 - 56









                                  # # # # # # #







                                       1
<PAGE>




[OBJECT OMITTED]ERNST & YOUNG


TO THE SHAREHOLDERS OF
ELBIT SYSTEMS LTD.

Haifa, Israel


            REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited the  accompanying  consolidated  balance sheets of Elbit Systems
Ltd. (the  "Company") and its  subsidiaries as of December 31, 2004 and 2003 and
the related consolidated  statements of income,  changes in shareholders' equity
and cash flows for each of the two years in the period ended  December 31, 2004.
Our audits also include the financial  statement schedule listed in the Index at
Item  19a.  These  consolidated   financial  statements  and  schedule  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  and schedule based on our
audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration of
internal  control  over  financial  reporting  as a basis  for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the  effectiveness  of the Company's  internal  control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above, present
fairly, in all material  respects,  the consolidated  financial  position of the
Company  and  its  subsidiaries  as of  December  31,  2004  and  2003  and  the
consolidated  results of their  operations  and their cash flows for each of the
two  years in the  period  ended  December  31,  2004 in  conformity  with  U.S.
generally  accepted  accounting  principles.  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(X) to the consolidated  financial statements,  on January
1,  2004  the  Company   adopted  SFAS  No.  123   "Accounting  for  Stock-Based
Compensation."



                                    /s/ Kost Forer Gabbay & Kasierer
                                        KOST FORER GABBAY & KASIERER
                                      A MEMBER OF ERNST & YOUNG GLOBAL


Haifa, Israel
March 14, 2005



                                       2
<PAGE>





[OBJECT OMITTED]ERNST & YOUNG



                         REPORT OF INDEPENDENT AUDITORS



To the Shareholders of Elbit Systems Ltd.


We have audited the accompanying consolidated statements of operations,  changes
in  shareholders'   equity  and  cash  flows  of  Elbit  Systems  Ltd.  And  its
subsidiaries  for the year ended December 31, 2002.  These financial  statements
are the  responsibility of the Company's  management.  Our  responsibility is to
express an opinion on these financial statements based on our 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  results of the Company and
its  subsidiaries'  operations  and their cash flows for the year ended December
31,  2002  in  conformity  with  United  States  generally  accepted  accounting
principles.





                                            /s/ Luboshitz Kasierer
                                                LUBOSHITZ KASIERER
                              AN AFFILIATE MEMBER OF ERNST & YOUNG INTERNATIONAL



Haifa, Israel
March 24, 2003




                                       3
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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


<TABLE>
<CAPTION>

                                                                                               DECEMBER 31,
                                                                                      --------------------------------
                                                                          NOTE            2004              2003
                                                                       -----------    --------------    --------------
<S>                                                                       <C>                <C>               <C>
CURRENT ASSETS:
Cash and cash equivalents                                                              $     34,109       $    76,156
Short-term bank deposits                                                                        738               690
Trade receivables, (net of allowance for doubtful
    accounts in the amount of $3,064 and $3,861 as of December
    31, 2004 and 2003, respectively)                                      (3)               214,816           203,281
Other receivables and prepaid expenses                                    (4)                52,335            48,363
Inventories, net of advances                                              (5)               249,041           249,225
                                                                                      --------------    --------------
Total current assets                                                                        551,039           577,715
                                                                                      --------------    --------------

INVESTMENTS AND LONG-TERM RECEIVABLES:
Investments in affiliated companies and a partnership                     (6A)               33,124            26,478
Available for sale securities                                             (1G)               18,017                 -
Investments in other companies                                            (6B)               11,745            11,745
Long-term bank deposits and trade receivables                             (7)                 2,102             2,347
Severance pay fund                                                        (2P)               82,998            76,218
                                                                                      --------------    --------------
                                                                                            147,986           116,788
                                                                                      --------------    --------------

PROPERTY, PLANT AND EQUIPMENT,  NET                                       (8)               244,288           229,221
                                                                                      --------------    --------------



INTANGIBLE ASSETS:                                                        (9)
Goodwill                                                                                     32,847            32,576
Other intangible assets, net                                                                 63,140            67,436
                                                                                      --------------    --------------
                                                                                             95,987           100,012
                                                                                      --------------    --------------

                                                                                        $ 1,039,300        $1,023,736
                                                                                      ==============    ==============

</TABLE>















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


                                       4
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                               DECEMBER 31,
                                                                                      --------------------------------
                                                                          NOTE            2004              2003
                                                                       -----------    --------------    --------------
<S>                                                                       <C>         <C>                <C>
CURRENT LIABILITIES:
Short-term bank credit and loans                                          (10)        $       8,592      $      8,509
Current maturities of long-term loans                                     (13)                1,656             6,532
Trade payables                                                                              118,391           106,252
Other payables and accrued expenses                                       (11)              169,702           157,820
Customers advances and amounts in excess of
    costs incurred on contracts in progress                               (12)               80,109            99,618
                                                                                      --------------    --------------
Total current liabilities                                                                   378,450           378,731
                                                                                      --------------    --------------

LONG-TERM LIABILITIES:
Long-term loans                                                           (13)               86,234            62,324
Advances from customers                                                   (12)               10,320             7,592
Deferred income taxes                                                     (15)               24,516            24,916
Accrued termination liability                                           (14,2P)             100,740            93,979
                                                                                      --------------    --------------
                                                                                            221,810           188,811
                                                                                      --------------    --------------

COMMITMENTS  AND CONTINGENT  LIABILITIES                                  (16)

MINORITY INTERESTS                                                                            4,340             4,115
                                                                                      --------------    --------------

SHAREHOLDERS' EQUITY:                                                     (17)
Share capital
Ordinary shares of New Israeli Shekels (NIS) 1 par value;
    Authorized -  80,000,000 shares as of
    December 31, 2004 and 2003;
    Issued - 40,969,947 and 39,746,125 shares as
    of December 31, 2004 and 2003, respectively;
    Outstanding - 40,561,126 and 39,337,304 shares
    as of December 31, 2004 and 2003,  respectively                                          11,548            11,273
Additional paid-in capital                                                                  274,432           259,033
Accumulated other comprehensive loss                                                         (3,346)           (3,992)
Retained earnings                                                                           156,387           190,086
Treasury shares - 408,821 shares as of
   December 31, 2004 and 2003                                                                (4,321)           (4,321)
                                                                                      --------------    --------------
                                                                                            434,700           452,079
                                                                                      --------------    --------------
                                                                                        $ 1,039,300        $1,023,736
                                                                                      ==============    ==============

</TABLE>


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

                                       5
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                   YEAR ENDED DECEMBER 31,
                                                                          ------------------------------------------
                                                                NOTE         2004           2003           2002
                                                               -------    ------------   ------------   ------------

<S>                                                             <C>       <C>            <C>            <C>
Revenues                                                        (18)      $   939,925    $   897,980    $   827,456
Cost of revenues                                                              689,626        672,711        605,313
                                                                          ------------   ------------   ------------
           Gross profit                                                       250,299        225,269        222,143
                                                                          ------------   ------------   ------------

Research and development costs, net                             (19)           66,846         54,919         57,010
Marketing and selling expenses                                                 69,912         69,943         65,691
General and administrative expenses                                            47,832         46,077         41,651
                                                                          ------------   ------------   ------------

                                                                              184,590        170,939        164,352
                                                                          ------------   ------------   ------------

      Operating income                                                         65,709         54,330         57,791

Financial expenses, net                                         (20)           (5,852)        (4,870)        (3,035)
Other income (expenses), net                                                      770             53           (462)
                                                                          ------------   ------------   ------------
      Income before taxes on income                                            60,627         49,513         54,294
Taxes on income                                                 (15)           15,219         11,334          9,348
                                                                          ------------   ------------   ------------
                                                                               45,408         38,179         44,946
Equity in net earnings of affiliated companies and
   partnership                                                                  7,765          7,209            675
Minority interests in losses (earnings) of
   subsidiaries                                                                  (180)           557           (508)
                                                                          ------------   ------------   ------------
      Net income                                                          $    52,993    $    45,945    $    45,113
                                                                          ============   ============   ============

Earnings per share                                              (17G)
   Basic net earnings per share                                           $      1.33    $      1.18    $      1.17
                                                                          ============   ============   ============

   Diluted net earnings per share                                         $      1.29    $      1.14    $      1.13
                                                                          ============   ============   ============
   Number of share used in computation of basic net
   earnings per share                                                          39,952         39,061         38,489
                                                                          ============   ============   ============

   Number of share used in computation of diluted net
   earnings per share                                                          41,041        40,230          39,863
                                                                          ============   ============   ============
</TABLE>




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

                                        6
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)
<TABLE>
<CAPTION>
                                                                                                ACCUMULATED
                                             NUMBER OF                       ADDITIONAL            OTHER
                                            OUTSTANDING         SHARE          PAID-IN         COMPREHENSIVE      RETAINED
                                               SHARES          CAPITAL         CAPITAL         INCOME (LOSS)      EARNINGS
                                            -------------    ------------    ------------    ----------------    ------------
<S>                                          <C>              <C>             <C>           <C>                  <C>
BALANCE AS OF  JANUARY 1, 2002                38,330,272       $   11,054      $  244,625    $          -         $ 126,627
                                                                                                        -
Exercise of options                              473,235              100           4,040               -                 -
Tax benefit in respect of options
   exercised                                           -                -             648               -                 -
Stock based
  compensation                                         -                -            (926)              -                 -
Dividends paid                                         -                -               -               -           (12,717)
Other comprehensive income (loss):
  Minimum pension liability                            -                -               -          (2,882)                -
Net income                                             -                -               -               -            45,113
                                            -------------    ------------    ------------    ----------------    ------------
 Total comprehensive income

BALANCE AS OF DECEMBER 31, 2002               38,803,507     $    11,154       $  248,387    $     (2,882)        $ 159,023

  Exercise of options                           533,797              119           5,147                -                 -
  Tax benefit in respect of options
    exercised                                         -              758               -                -                 -
                                                      -
  Stock based compensation                            -                -           4,741                -                 -
 Dividends paid                                       -                -               -                -           (14,882)
 Other comprehensive income (loss):
   Unrealized loss on derivative
    instruments                                       -                -               -             (578)                -
   Foreign currency translation differences           -                -               -              340                 -
   Minimum pension liability                          -                -               -             (872)                -
 Net income                                           -                -               -                -            45,945
                                            -------------    ------------    ------------    ----------------    ------------
Total comprehensive income

BALANCE AS OF DECEMBER 31, 2003              39,337,304      $    11,273       $ 259,033     $     (3,992)        $ 190,086
                                            =============    ============    ============    ================     ===========
<CAPTION>
                                                                      TOTAL           TOTAL OTHER
                                                  TREASURY        SHAREHOLDERS'      COMPREHENSIVE
                                                   SHARES            EQUITY             INCOME
                                                -------------    --------------    ----------------
<S>                                              <C>              <C>              <C>
BALANCE AS OF  JANUARY 1, 2002                   $    (4,321)     $   377,985

Exercise of options                                        -            4,140
Tax benefit in respect of options
   exercised                                               -              648
Stock based
  compensation                                             -             (926)
Dividends paid                                             -          (12,717)
Other comprehensive income (loss):
  Minimum pension liability                                -           (2,882)        $  (2,882)
Net income                                                 -           45,113            45,113
                                                -------------    --------------    ----------------
 Total comprehensive income                                                            $ 42,231
                                                                                   ================
BALANCE AS OF DECEMBER 31, 2002                 $     (4,321)     $   411,361

  Exercise of options                                      -            5,266
  Tax benefit in respect of options
    exercised                                            758

  Stock based compensation                                 -            4,741
 Dividends paid                                            -          (14,882)
 Other comprehensive income (loss):
   Unrealized loss on derivative
    instruments                                            -             (578)      $      (578)
   Foreign currency translation differences                -              340               340
   Minimum pension liability                               -             (872)             (872)
 Net income                                                -           45,945            45,945
                                                -------------    --------------    ----------------
Total comprehensive income                                                          $    44,835
                                                                                   ================
BALANCE AS OF DECEMBER 31, 2003                  $    (4,321)     $   452,079
                                                =============    ==============

          The accompanying notes are an integral part of the consolidated financial statements
</TABLE>
                                       7
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

<TABLE>
<CAPTION>
                                                                                                ACCUMULATED
                                             NUMBER OF                       ADDITIONAL            OTHER
                                            OUTSTANDING         SHARE          PAID-IN         COMPREHENSIVE      RETAINED
                                               SHARES          CAPITAL         CAPITAL             LOSS           EARNINGS
                                            -------------    ------------    ------------    ----------------    ------------
<S>                                          <C>              <C>             <C>           <C>                  <C>
BALANCE AS OF JANUARY 1, 2004                 39,337,304       $   11,273      $  259,033    $     (3,992)        $ 190,086
Cumulative effect of first time adoption
 of the fair value based method for stock
 based compensation expense                            -                -            (152)              -                 -
Exercise of options                            1,223,822              275          10,985               -                 -
Tax benefit in respect of options
 exercised                                             -                -                               -                 -
                                                                              1,179
Stock based compensation                               -                -           3,387               -                 -
Dividends paid                                         -                -               -               -           (86,692)
Other comprehensive income (loss):
  Unrealized loss on derivative
     instruments                                       -                -               -            (299)                -
  Foreign currency translation differences             -                -               -             450                 -
  Unrealized gains on available for sale
          securities, net                                                                           1,396
  Minimum pension liability                            -                -               -            (901)                -
Net income                                             -                -               -               -            52,993
                                            -------------    ------------    ------------    ----------------    ------------
Total comprehensive income


BALANCE AS OF DECEMBER 31, 2004               40,561,126      $    11,548      $  274,432    $     (3,346)        $ 156,387
                                            =============    ============    ============    ================    ============

<CAPTION>
                                                                     TOTAL           TOTAL OTHER
                                                 TREASURY        SHAREHOLDERS'      COMPREHENSIVE
                                                  SHARES            EQUITY             INCOME
                                               -------------    --------------    ----------------
<S>                                             <C>              <C>              <C>
BALANCE AS OF JANUARY 1, 2004                   $ (4,321)        $   452,079
Cumulative effect of first time adoption
 of the fair value based method for stock
 based compensation expense                             -               (152)
Exercise of options                                     -             11,260
Tax benefit in respect of options
 exercised                                              -              1,179

Stock based compensation                                -              3,387
Dividends paid                                          -            (86,692)
Other comprehensive income (loss):
  Unrealized loss on derivative
     instruments                                        -               (299)             (299)
  Foreign currency translation differences              -                450               450
  Unrealized gains on available for sale
          securities, net                                              1,396             1,396
  Minimum pension liability                             -               (901)             (901)
Net income                                              -             52,993            52,993
                                               -------------    --------------    ----------------
Total comprehensive income                                                        $     53,639
                                                                                  ================
BALANCE AS OF DECEMBER 31, 2004                 $     (4,321)    $   434,700
                                               =============    ==============

ACCUMULATED OTHER COMPREHENSIVE LOSS (NET OF TAXES)
---------------------------------------------------
                                                                                                      DECEMBER 31,
                                                                                                      ------------
                                                                                                  2004             2003
                                                                                             ---------------    ------------
Accumulated gains on derivative instruments                                                  $     (877)        $    (578)
Accumulated foreign currency translation differences                                                790               340
Accumulated gains on available for sale securities                                                1,396                 -
Accumulated minimum pension liability                                                            (4,655)           (3,754)
                                                                                             ---------------    ------------
Accumulated other comprehensive loss                                                         $   (3,346)        $  (3,992)
                                                                                             ===============    ============
</TABLE>

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

                                       8
<PAGE>
                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
 U. S. dollars (In thousands)
<TABLE>
<CAPTION>
                                                                                                      YEAR ENDED DECEMBER 31,
                                                                                                -----------------------------------
                                                                                                   2004         2003        2002
                                                                                                ----------   ----------   ---------
<S>                                                                                             <C>          <C>          <C>
    CASH FLOWS FROM OPERATING ACTIVITIES
    Net income                                                                                  $ 52,993     $  45,945    $ 45,113
    Adjustments required to reconcile net income to net cash provided by
        operating activities:
    Depreciation and amortization                                                                  42,261       37,890      32,937
    Stock based compensation                                                                        3,387        4,741        (926)
    Deferred income taxes, net                                                                        153           35      (5,620)
    Accrued severance pay, net                                                                     (2,304)      (1,240)      6,260
    Gain (loss) on sale of property, plant and equipment                                              143         (915)        743
    Tax benefit in respect of options exercised                                                     1,179          758         648
    Minority interests in earnings (losses) of subsidiaries                                           180         (557)        508
    Equity in net losses (earnings) of affiliated companies and partnership, net of
          dividend received (*)                                                                       385       (4,995)       (675)
    Changes in operating assets and liabilities:
    Decrease (increase) in short and long-term trade receivables, other
       receivables and prepaid expenses                                                           (16,871)      45,297      58,554
    Decrease (increase) in inventories                                                              2,932      (38,651)    (55,106)
    Increase (decrease) in trade payables, other payables and accrued expenses                     20,522       32,147     (19,321)
    Increase (decrease) in advances received from customers                                       (18,535)     (27,855)     42,999
    Settlement of royalties with the Office of the Chief Scientist                                 (3,714)      (1,581)      9,197
    Other adjustments                                                                              (1,228)         337         683
                                                                                                ----------   ----------   ---------
    Net cash provided by operating activities                                                      81,483       91,356     115,994
                                                                                                ----------   ----------   ---------

    CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of property, plant and equipment                                                     (53,008)     (61,287)    (46,003)
    Investment grants received for property, plant and equipment                                        -            -         119
    Acquisition of subsidiaries and businesses  (Schedule A)                                       (2,315)      (2,458)     (5,280)
    Investments in affiliated companies and subsidiaries                                           (2,522)      (1,049)     (1,681)
    Proceeds from sale of property, plant and equipment                                             2,560        5,815         956
    Grant of long-term loan                                                                             -            -        (714)
    Collection of long-term loan                                                                        -        2,400           -
    Collection of short-term loan                                                                       -            -       1,371
    Investment in long-term bank deposits                                                          (1,203)      (1,750)     (1,228)
    Proceeds from sale of long-term bank deposits                                                   1,507        3,568       1,689
    Short-term bank deposits, net                                                                     (48)         960        (204)
    Investment in available for sale securities                                                   (15,869)           -           -
                                                                                                ----------   ----------   ---------
    Net cash used in investing activities                                                         (70,898)     (53,801)    (50,975)
                                                                                                ----------   ----------   ---------

    CASH FLOWS FROM FINANCING ACTIVITIES
    Proceeds from exercise of options                                                              11,260        5,266       4,140
    Repayment of long-term bank loans                                                             (35,826)     (27,066)     (3,249)
    Receipt of long-term bank loans                                                                58,410       10,000       2,233
    Dividends paid                                                                                (86,692)     (14,882)    (12,717)
    Change in short-term bank credit and  loans, net                                                  216      (10,997)    (19,729)
    Net cash used in financing activities                                                         (52,632)     (37,679)    (29,322)
    NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                                          (42,047)        (124)     35,697
    CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR                                         76,156       76,280      40,583
    CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                            $  34,109    $  76,156    $ 76,280
                                                                                                ==========   ==========   =========
    (*) Dividend received                                                                       $   8,150    $   2,214    $      -
                                                                                                ==========   ==========   =========
</TABLE>
                   The accompanying notes are an integral part
                   of the consolidated financial statements.

                                       9
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

<TABLE>
<CAPTION>
                                                                                          YEAR ENDED DECEMBER 31,
                                                                               -----------------------------------------
                                                                                   2004           2003           2002
                                                                               ------------    ---------      ----------
<S>                                                                            <C>             <C>             <C>
SUPPLEMENTAL CASH FLOW INFORMATION:

Cash paid during the year for:
Income taxes                                                                   $    13,305     $ 14,666        $ 21,730
                                                                               ============    =========      =========
Interest                                                                       $     3,122     $  4,034        $  2,947
                                                                               ============    =========      =========

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 (surplus) deficiency (excluding cash and cash equivalents)     $      (707)    $    657        $     -
Property, plant and equipment                                                          (10)        (249)          (275)
Goodwill and other intangible assets                                                (1,598)      (1,334)        (5,078)
Deferred income taxes                                                                    -       (1,765)             -
Long-term liabilities                                                                    -          198              -
Minority interest                                                                        -           35              -
                                                                                    (2,315)      (2,458)        (5,353)
Less short-term debt incurred on acquisition                                             -            -             73
                                                                               ------------    ---------      ---------

                                                                               $    (2,315)    $ (2,458)      $ (5,280)
                                                                               ============    =========      =========
</TABLE>


(*)         Defense Systems  Division of Elron Telesoft in 2002 (see Note 1(C)).
            In 2003 a  European  subsidiary  (see Note  1(D)) and AD&D (see Note
            1(E)). In 2004 the assets of Computer  Instruments  Corporation Inc.
            (see Note 1(F))










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





                                       10
<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, 49%
               owned by the Federmann  Group. On July 28, 2004, Elron Electronic
               Industries Ltd.  completed the sale of all of its holdings in the
               Company,   constituting   approximately   19%  of  the  Company's
               outstanding  share  capital,  to Federmann  Enterprises  Ltd. 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  are derived  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 major  customers
               refer to Note 18(C).

          C.   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 year 2002.

          D.   In June 2003,  the Company  (through  El-Op)  acquired all of the
               outstanding ordinary shares of a European  subsidiary,  a company
               registered in Belgium,  in consideration  for $1,846 in cash. The
               acquisition   was  accounted  for  by  the  purchase   method  of
               accounting.

               This    subsidiary    develops,    manufactures    and   supports
               electro-optical  products,  mainly  for  the  defense  and  space
               markets.

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

                                       11
<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  this
               subsidiary.  were not material in relation to total  consolidated
               revenues and net income for the years 2002 and 2003.

          E.   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  excess  of the  purchase  price  over the fair  value of net
               tangible  assets acquired in the amount of  approximately  $1,334
               was  allocated  to  technology  ($1,000) to be  amortized  by the
               straight-line  method over a period of 10 years and to technology
               goodwill ($334).

               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 2002 and 2003.

          F.   In  August  2004,  the  Company  (through  a  subsidiary  of EFW)
               acquired a business from Computer  Instruments  Corporation  Inc.
               ("CIC") of Westbury,  New York in consideration for approximately
               $2,315 in cash.  The  acquired  assets  relate to the  design and
               manufacture of aviation pressure transducers, air data probes and
               air data computers.

               The  following  table  summarizes  the fair  value of the  assets
               acquired and  liabilities  assumed at the date of  acquisition as
               estimated  by  the  Company,  with  the  support  of an  external
               appraisal:  Current  Assets  $  994  Property  and  equipment  10
               Technology 1,327 Goodwill 271 Total assets acquired 2,602 Current
               liabilities assumed (287) Net assets acquired $ 2,315


                   Current Assets                       $     994
                   Property and equipment                      10
                   Technology                               1,327
                   Goodwill                                   271
                                                        ----------
                       Total assets acquired                2,602
                   Current liabilities assumed               (287)
                                                        ----------
                   Net assets acquired                  $   2,315
                                                        ==========

               The  technology  acquired will be amortized by the  straight-line
               method  over  a  period  of  5-7  years.  The  results  of  CIC'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 CIC were not
               material  in  relation  to total  consolidated  revenues  and net
               income for the years 2003 and 2004.



                                       12
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

NOTE 1  - GENERAL (CONT.)

          G.   On December 27, 2004, the Company  reached an agreement with Koor
               Industries ("Koor") to purchase all of Koor's holdings in Tadiran
               Communications Ltd. ("Tadiran"), which represents approximately a
               32% interest in Tadiran.  This  purchase will be made in parallel
               to Koor's purchase of approximately  9.8% of the Company's shares
               from Federmann Enterprises Ltd. ("Federmann") based on agreements
               reached  between  Federmann  and Koor.  The  transaction  will be
               executed in two stages as described below.

               In  the  first  stage,   the  Company  will  purchase  from  Koor
               approximately  13.8% of Tadiran's shares,  and Koor will purchase
               from Federmann  approximately 5.3% of the Company's shares. As of
               March 1, 2005,  the Company  held  approximately  6% of Tadiran's
               shares acquired through  purchases on the market,  and therefore,
               following  completion  of the first  stage the  Company  will own
               approximately 20% of Tadiran's shares. On completion of the first
               stage, Koor will support the Company's appointment of the greater
               of 3  members  or  20%  of  Tadiran's  board  of  directors,  and
               Federmann  will  support  Koor's  appointment  of a member to the
               Company's board of directors.

               In the second  stage,  the Company  will  purchase the balance of
               Koor's  holdings in  Tadiran.  Koor will  purchase an  additional
               approximately  4.5% of the Company's  shares from Federmann,  and
               Federmann will support Koor's appointment of an additional member
               to the Company's  board of directors,  including the board's Vice
               Chairman. The second stage is subject to Koor completing the sale
               to Tadiran of Koor's 70%  holdings in Elisra  Electronic  Systems
               Ltd. ("Elisra") on agreed upon terms.  Subject to those terms the
               Company  agreed to support the  purchase of the Elisra  shares by
               Tadiran at Tadiran's general  shareholders  meeting. In the event
               that the sale of the  Elisra  shares  to  Tadiran  is not made by
               April  2006,   then  Koor  and  the   Company   will  have  equal
               representation on Tadiran's board of directors,  and an agreement
               regarding joint control of Tadiran will enter into effect between
               the Company and Koor.

               The Company will purchase from Koor the 32% of the Tadiran shares
               at a price of $37 per share,  resulting in a total purchase price
               of approximately  $146,000. Koor will purchase from Federmann the
               9.8% of the shares in the Company at a price of $24.70 per share,
               resulting in a total purchase price of approximately $99,000.

               Under  the  Koor-Federmann  shareholders  agreement,  which  will
               became  effective  upon the  completion of the first stage of the
               Koor-Federmann  transaction,  Koor will obtain  certain tag along
               rights in the event of Federmann's sale of shares in the Company,
               and Koor will be subject to certain  restrictions on the transfer
               of its shares in the  Company.  Also,  Koor has agreed to vote at
               general  shareholders  meetings of the Company in accordance with
               Federmann's instructions,  with certain exceptions, and Koor will
               receive certain additional non-transferable rights.

               On January 5, 2005,  the Company's  Audit  Committee and board of
               directors  approved  the  agreements  with Koor  relating  to the
               Company's purchase of Koor's shares in Tadiran.




                                       13
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

NOTE 1  - GENERAL (CONT.)

               On  February  28,  2005,   the  Company's   shareholders   at  an
               extraordinary   general   shareholders   meeting   approved   the
               agreements with Koor relating to the Company's purchase of Koor's
               shares in Tadiran.  As of March 1, 2005,  the parties were in the
               process of obtaining  the  remaining  approvals  required for the
               transaction.

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 22.

          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  gains 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.

          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.



                                       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 (CONT.)

          C.   PRINCIPLES OF CONSOLIDATION (CONT.)

               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.   MARKETABLE SECURITIES

               Investments in a marketable  securities are designed as available
               for sale according to Statement of Financial  Accounting Standard
               No. 115  "Accounting  for Certain  Investments in Debt and Equity
               Securities",  ("SFAS No. 115"). Accordingly, these securities are
               stated at fair value,  with unrealized  gains and losses,  net of
               taxes, reported in accumulated other comprehensive income (loss),
               a separate component of the shareholders equity.

          G.   INVENTORIES

               Inventories  are  stated at the  lower of cost or net  realizable
               value. Inventory write-offs are provided for slow-moving items or
               technological   obsolescence  for  which  recoverability  is  not
               probable.

               Cost is determined as follows:

               o Raw materials  using the average cost method.

               o Costs  incurred on  long-term  contracts  in  progress  include
               direct labor costs, material costs, subcontractors,  other direct
               costs and  overheads.  These costs  represent  recoverable  costs
               incurred for production,  allocable  operating overhead cost and,
               where appropriate,  research and development costs (refer to Note
               2(T)).

               o Labor overhead is generally  included in our hourly rate and is
               allocated  to each  project  according  to the  amount  of  hours
               invested. Material overhead is allocated to each project based on
               the value of direct material that is charged to the project.

               Advances from customers are allocated to the applicable  contract
               inventories  and are  reflected as an offset  against the related
               inventory balances.



                                       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.)

          H.   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 cost.

               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.

               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.

               A change in the Company's  proportionate  share of a subsidiary's
               or investee's  equity,  resulting  from issuance of shares by the
               subsidiary or investee to third parties, is recorded as a gain or
               loss in the consolidated income statements. If the realization is
               not assured,  such as when the issuing  company is a  development
               stage  company,  the gain from  issuance is  accounted  for as an
               equity transaction  pursuant to SAB 51 "Accounting Sales of Stock
               by a Subsidiary".

               Management   evaluates   investments   in  affiliates  and  other
               companies for evidence of other than temporary declines in value.
               When relevant  factors  indicate a decline in value that is other
               than  temporary,  the Company records a provision for the decline
               in value.  A  judgmental  aspect of  accounting  for  investments
               involves determining whether an  other-than-temporary  decline in
               value of the investment has been  sustained.  Such  evaluation is
               dependent on the specific facts and  circumstances.  Accordingly,
               management   evaluates   financial   information  (e.g.  budgets,
               business  plans,  financial  statements,   etc.)  in  determining
               whether an other-than-temporary  decline in value exists. Factors
               indicative of an  other-than-temporary  decline include recurring
               operating  losses,  credit  defaults  and  subsequent  rounds  of
               financings  at an amount below the cost basis of the  investment.
               This  list  is  not  all  inclusive  and  management  weighs  all
               quantitative  and  qualitative   factors  in  determining  if  an
               other-than-temporary  decline  in  value  of  an  investment  has
               occurred.

          I.   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).



                                       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.)

          J.   LONG-TERM BANK DEPOSITS

               Long-term bank deposits are deposits with maturities of more than
               one  year.   These  deposits  are  presented  at  cost  including
               accumulated interest.

          K.   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.

          L.   INVESTMENT GRANTS

               As a governmental  incentive for industrial  companies in Israel,
               the "Investment Center", which is a branch of the Israel Ministry
               of Industry and Trade,  permits industrial  companies to submit a
               request to  qualify  as an  "Approved  Enterprise".  An  Approved
               Enterprise is entitled to certain  benefits in respect of capital
               investments. The benefits may be in the form of reduced tax rates
               and of capital grants received as a percentage of the investments
               of the  Approved  Enterprise.  The  amount of a capital  grant is
               determined as a percentage of the Approved Enterprise  investment
               in property,  plant and equipment. As a condition to the granting
               of these  benefits,  the  Approved  Enterprise  is  obligated  to
               perform the applicable industrial plan as detailed in the request
               to the  Investment  Center (see Note  15(A)(3) and 16(J)).  These
               capital grants are non-royalty bearing and are not conditioned on
               the results of  operations.  As the  capital  grants are a direct
               participation in the cost of the acquisition,  of property, plant
               and  equipment  they  are  offset  against  property,  plant  and
               equipment   and   amortized   over  the  period  of  the  related
               investments.










                                       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.)

          M.   IMPAIRMENT OF LONG-LIVED ASSETS

               The Group's long-lived assets and 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, 2004, no
               impairment losses have been identified.

          N.   INTANGIBLE ASSETS

               Intangible   assets  are  stated  at  cost  net  of   accumulated
               amortization.  Intangible  assets are being  amortized over their
               useful life using the straight-line method.

          O.   GOODWILL

               Goodwill represents the excess of the cost of acquired businesses
               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,  effective  as of
               January 1, 2002, goodwill is no longer amortized,  but is instead
               tested for  impairment at least  annually (or more  frequently if
               impairments indicators arise).

               SFAS 142 prescribes a two phase process for impairment testing of
               goodwill.  The first  phase  screens  for  impairment,  while the
               second phase (if necessary) measures impairment.

               In the first phase of impairment testing,  goodwill  attributable
               to each of the  reporting  units  is  tested  for  impairment  by
               comparing the fair value of each reporting unit with its carrying
               value.  If the carrying  value of the reporting  unit exceeds its
               fair value, the second phase is then performed.  The second phase
               of the goodwill  impairment  test compares the implied fair value
               of the reporting unit's goodwill with the carrying amount of that
               goodwill. If the carrying amount of the reporting unit's goodwill
               exceeds the implied fair value of that  goodwill,  an  impairment
               loss is recognized in an amount equal to that excess.

               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,  2004,  no  impairment   losses  have  been
               identified.



                                       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.)

          P.   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/her  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 values 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, 2004,
               2003 and 2002,  amounted  to  approximately  $15,574,  $11,491and
               $10,138, respectively.

          Q.   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")   according  to  which  revenues  are  recognized  on  the
               percentage of completion basis.

               Sales under long-term  fixed-price  contracts which provide for a
               substantial  level of  development  efforts in  relation to total
               contract  efforts are recorded using the  cost-to-cost  method of
               accounting as the basis to measure progress toward completing the
               contract  and  recognizing  revenues.  According  to this method,
               sales  and  profits  are  recorded  based  on the  ratio of costs
               incurred  to  estimated  total  costs at  completion.  In certain
               circumstances,  when measuring  progress toward  completion,  the
               Company   considers   other  factors,   such  as  achievement  of
               performance milestones.

               Sales  and  anticipated   profit  under   long-term   fixed-price
               production  type  contracts  are  recorded  on  a  percentage  of
               completion  basis,  using the  units-of-delivery  as the basis to
               measure  progress toward  completing the contract and recognizing
               revenues.

               Sales  and  anticipated   profit  under   long-term   fixed-price
               contracts  that  involve  both  development  and  production  are
               recorded  on  a  percentage  of  completion   basis,   using  the
               cost-to-cost method and  units-of-delivery  method as applicable.
               In  certain   circumstances,   when  measuring   progress  toward
               completion  under the  development  portion of the contract,  the
               Company   considers   other  factors,   such  as  achievement  of
               performance milestones.



                                       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.)

          Q.   REVENUE RECOGNITION (CONT.)

               Estimated  contract  profit is included in earnings in proportion
               to recorded sales.

               The   percentage-of-completion   method  of  accounting  requires
               management  to estimate the cost and gross profit margin for each
               individual   contract.   Estimated  gross  profit  or  loss  from
               long-term  contracts  may  change  due to  changes  in  estimates
               resulting  from  differences   between  actual   performance  and
               original  estimated  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.  Anticipated  losses on contracts  are charged to earnings
               when determined to be probable.

               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.

               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.

               In cases where the contract involves the delivery of products and
               performance  of  services,   the  Group  follows  the  guidelines
               specified  in EITF 00-21,  "Revenue  Arrangements  with  Multiple
               Deliverables"  in order to allocate the contract fees between the
               products  accounted for under SOP 81-1 and the services accounted
               for under SAB 104.  The services are  recognized  throughout  the
               service period.

               In certain  circumstances,  sales  under  short-term  fixed-price
               production  type  contracts are accounted for in accordance  with
               SAB No. 104, "Revenue Recognition in Financial  Statements" ("SAB
               104"),  and  recognized  when  the  following  criteria  are met:
               persuasive  evidence  of  an  arrangement  exists,  delivery  has
               occurred,   the   seller's   price  to  the  buyer  is  fixed  or
               determinable,  no further obligation exists and collectability is
               reasonably assured.

               As for research and  development  costs accounted for as contract
               costs refer to Note 2(T) .



                                       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.)

          R.   PRE-CONTRACT COSTS

               Pre-contract  costs are deferred and included in inventory,  only
               when  such  costs  can be  directly  associated  with a  specific
               anticipated   contract  and  if  their  recoverability  from  the
               specific contract is probable  according to the guidelines of SOP
               81-1.

          S.   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  as part of  contract
               costs. The specific terms and conditions of those warranties vary
               depending  upon the product sold,  the country in which the Group
               does business,  etc. In addition, the Company estimates the costs
               to be  incurred  in  connection  with  basic  design  and  system
               operating   difficulties   arising  subsequent  to  delivery  and
               acceptance  by the  customers  and records a  liability  for such
               costs as part of contract costs.  Factors that affect the Group's
               warranty liability include the number of delivered products,  the
               warranty period,  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:

                                                         2004           2003
                                                         ----           ----
               Balance, at January 1                 $    36,653     $   37,800
               Warranties issued during the year          17,907         13,301
               Warranties forfeited or exercised
                 during the year                         (20,527)       (14,448)
                                                     ------------    -----------
               Balance, at December 31               $    34,033     $   36,653
                                                     ============    ===========

          T.   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  participates 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 part of the 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 as a deduction
               from research and  development  costs at the time the  applicable
               company is entitled  to such grants on the basis of the  research
               and development costs incurred.



                                       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.)

          U.   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.

          V.   CONCENTRATION OF CREDIT RISKS

               Financial  instruments  that  potentially  subject  the  Group to
               concentrations  of credit risk  consist  principally  of cash and
               cash  equivalents,   short  and  long-term   deposits  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 stable  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.

          W.   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 operation.




                                       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.)

          W.   DERIVATIVE FINANCIAL INSTRUMENTS (CONT.)

               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  as a financial
               expense in current earnings during the period of change.

               For derivative instruments not designated as hedging instruments,
               the gain or loss is recognized as a financial  expense in current
               earnings during the period of change.

               As part of its hedging  strategy,  the Group  enters into forward
               exchange  contracts  in order to protect  the Group from the 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.

               As part of its cash flow  hedging  strategy the Group enters into
               forward exchange  contracts to hedge  forecasted  salary expenses
               denominated in a currency other than the U.S. dollar.

               As of December 31, 2004,  the Group had forward  contracts with a
               notional  amount of  approximately  $30,900 to purchase  and sell
               foreign  currencies  ($20,800  in Euro,  $5,400 in Great  Britain
               Pounds  ("GBP") and $4,800 in other  currencies).  The Group also
               had options to hedge future cash flow  denominated  in GBP in the
               amount of $154,000.  The forward contracts and the options mature
               in 2005.

               The fair value of the foreign exchange  contracts and the options
               as of December 31, 2004 is minimal.



                                       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.)

          X.   STOCK-BASED COMPENSATION

               Up  until  January  1,  2004,  the  Company   elected  to  follow
               Accounting Principles Board Opinion No. 25 ("APB 25") "Accounting
               for Stock Issued to  Employees"  and FASB  Interpretation  No. 44
               ("FIN 44") "Accounting for Certain  Transactions  Involving Stock
               Compensation"  in accounting for its employee stock option plans.
               Under APB 25, the Company accounted for stock option grants using
               the intrinsic value method whereby  compensation expense is equal
               to the excess,  if any, of the quoted  market  price of the stock
               over the  exercise  price at the  grant  date of the  award or if
               applicable  at  a  subsequent   measurement   date.  The  Company
               recognized  the expense over the vesting period of the award on a
               straight-line  basis.  Phantom  options  were  accounted  for  as
               variable  awards  and  accordingly,  compensation  expenses  were
               measured at the end of each reporting  period and amortized on an
               accelerated  basis over the remaining  vesting period.  (See Note
               17).

               Effective  January 1, 2004,  the  Company  adopted the fair value
               recognition  provisions  of SFAS  No.  123.  Under  the  modified
               prospective  method of adoption selected by the Company under the
               provisions  of SFAS  No.  148,  the  recognition  provisions  are
               applied to all  employee  awards  granted,  modified,  or settled
               after January 1, 2004, and to previously granted awards that were
               not fully  vested on the date of adoption.  Compensation  cost is
               recorded over the vesting period on a straight-line basis.

               The  cumulative  effect on the deferred  taxes  relating to stock
               based  compensation  resulting  from the adoption of SFAS No. 123
               amounted  to a reduction  of $152 and was  recorded as a one time
               adjustment to additional paid-in capital.











                                       24
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)

NOTE 2  - SIGNIFICANT ACCOUNTING POLICIES (CONT.)

          X.   STOCK-BASED COMPENSATION (CONT.)

               If the Company  had  elected to adopt the fair value  recognition
               provisions of SFAS No. 123 as of its original effective date, pro
               forma net income and pro forma basic diluted net income per share
               for the  years  ended  December  31,  2002 and  2003  would be as
               follows:

<TABLE>
<CAPTION>
                                                                         YEAR ENDED DECEMBER 31,
                                                                   2004            2003            2002
                                                               -------------    ------------    ------------
<S>                                                            <C>              <C>              <C>
               Net income  as reported                         $   52,993       $   45,945       $  45,113
               Add - Stock based compensation
                 expense (income), net of
                 related tax effects as reported
                 (intrinsic method in 2003 and 2002)                2,710            3,793            (741)
               Deduct - Stock  based  compensation  expense
                 under fair value based method of SFAS 123
                 net of related of tax effects                     (2,710)          (2,956)         (2,956)
                                                               -------------    ------------    ------------
               Pro forma net income                             $  52,993       $   46,782       $  41,416
                                                               =============    ============    ============

               Net earnings per share:
               Basic net earnings per share as
                 reported                                      $     1.33       $     1.18       $    1.17
                                                               =============    ============    ============
               Diluted net earnings per share as
                 reported                                      $     1.29       $     1.14       $    1.13
                                                               =============    ============    ============

               Pro forma basic net earnings per share          $     1.33       $     1.20       $    1.08
                                                               =============    ============    ============

               Pro forma diluted net earnings per share        $     1.29       $     1.16       $    1.04
                                                               =============    ============    ============
</TABLE>

               The  fair  value  for  these  options  was   estimated   using  a
               Black-Scholes  option  pricing model with the following  weighted
               average assumptions:

<TABLE>
<CAPTION>
                                                    2004               2003               2002
                                                -------------     --------------      ------------
<S>                                                  <C>               <C>               <C>
               Divided yield                         2.20%             2.19%             1.99%
               Expected volatility                  26.7%             19.03%              21.9%
               Risk-free interest rate               4%                1.20%             1.34%
               Expected life                         4 years           6 years           6 years

</TABLE>



                                       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.)

          Y.   FAIR VALUE OF 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.

               The  carrying   amount  of  the  available  for  sale  marketable
               securities  is recorded  according to its fair market  value,  as
               determined by quoted market prices on stock exchange.

               Long-term  loans are  estimated  by  discounting  the future cash
               flows using current interest rates for loans of similar terms and
               maturities.   The  carrying   amount  of  the   long-term   loans
               approximates their fair value.

               The fair value of foreign  currency  contracts  (used for hedging
               purposes)  is  estimated   by  obtaining   current   quotes  from
               investment bankers.

               It was not  practicable to estimate the fair value of the Group's
               investments in shares of non-public  companies that are accounted
               for under the cost and  equity  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 as of December 31, 2003 and 2004 were $38,223
               and $44,869,  respectively,  and  represent  the original cost of
               acquisition,  and in the case of  affiliates  also the  Company's
               equity in the  earnings/losses of the affiliates and its share in
               the  changes  of  the  affiliates'  equity  since  the  dates  of
               acquisition.

          Z.   BASIC AND DILUTED NET EARNINGS PER SHARE

               Basic net earnings  per share are 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.  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.




                                       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.)

          AA.  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

               (1). In February 2004, the FASB issued EITF Issue No. 03-1,  "The
                    Meaning   of   Other-Than-Temporary   Impairment   and   Its
                    Application to Certain Investments" ("EITF 03-1"). This EITF
                    was issued to determine the meaning of  other-than-temporary
                    impairment  and its  application  to investments in debt and
                    equity  securities  within the scope of SFAS 115.  EITF 03-1
                    also applies to  investments in equity  securities  that are
                    both outside SFAS 115's scope and are not  accounted  for by
                    the  equity  method,  which  are  defined  as  "cost  method
                    investments".  The impairment  measurement  and  recognition
                    guidance  prescribed in EITF 03-1 is delayed until the final
                    issuance of FSP EITF 03-01-a.  The  disclosure  requirements
                    for  investments  accounted for under SFAS 115 are effective
                    for annual reporting  periods ending after June 15, 2003 and
                    for costs method  investments for annual  reporting  periods
                    ending after June 15, 2004. The Company does not expect that
                    the  adoption  of the  provisions  of EITF  03-1 will have a
                    material  effect on its  financial  position  or  results of
                    operations.

               (2). In November  2004,  the FASB issued  Statement  of Financial
                    Accounting  Standard No. 151, "Inventory Costs, an amendment
                    of ARB No. 43,  Chapter  4." ("SFAS  151").  SFAS 151 amends
                    Accounting  Research  Bulletin ("ARB") No. 43, Chapter 4, to
                    clarify  that  abnormal  amounts of idle  facility  expense,
                    freight  handling  costs  and  wasted  materials  (spoilage)
                    should be recognized as current-period charges. In addition,
                    SFAS  151  requires  that  allocation  of  fixed  production
                    overheads  to the  costs of  conversion  be based on  normal
                    capacity of the production facilities. SFAS 151 is effective
                    for inventory  costs incurred  during fiscal years beginning
                    after June 15,  2005.  The Company  does not expect that the
                    adoption  of SFAS 151 will  have a  material  effect  on its
                    financial position or results of operations.

               (3). On December 16, 2004,  the  Financial  Accounting  Standards
                    Board (FASB) issued FASB  Statement  No. 123 (revised  2004)
                    ("123(R)"),  "Share-Based  Payment",  which is a revision of
                    FASB  Statement  No.  123,   "Accounting   for   Stock-Based
                    Compensation".  Statement 123(R)  supersedes APB Opinion No.
                    25,  "Accounting for Stock Issued to Employees",  and amends
                    FASB Statement No. 95, "Statement of Cash Flows". Generally,
                    the approach in Statement  123(R) is similar to the approach
                    described  in  Statement  123.  However,   Statement  123(R)
                    requires all  share-based  payments to employees,  including
                    grants of employee  stock  options,  to be recognized in the
                    income  statement  based on their  fair  values.  Pro  forma
                    disclosure  is no longer an  alternative.  Statement  123(R)
                    must be adopted no later than July 1, 2005.  Early  adoption
                    will be permitted in periods in which  financial  statements
                    have not yet  been  issued.  The  Company  expects  to adopt
                    Statement  123(R) on July 1, 2005.  Since,  as noted in Note
                    2(AA) below, the Company adopted, effective January 1, 2004,
                    the  fair-value-based  method of accounting for  share-based
                    payments,  the adoption of Statement  123(R) is not expected
                    to  have a  material  impact  on the  Company's  results  of
                    operation or its financial position.




                                       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.)

          AA.  IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (CONT.)

               Statement   123(R)   permits   public   companies  to  adopt  its
               requirements using one of two methods:

               o    A "modified  prospective"  method in which compensation cost
                    is recognized beginning with the effective date (a) based on
                    the  requirements  of Statement  123(R) for all  share-based
                    payments  granted after the effective  date and (b) based on
                    the  requirements of Statement 123(R) for all awards granted
                    to employees prior to the effective date of Statement 123(R)
                    that remains  unvested on the effective  date.
               o    A  "modified   retrospective"   method  which  includes  the
                    requirements of the modified  prospective  method  described
                    above,  but also  permits  entities to restate  based on the
                    amounts  previously   recognized  under  Statement  123  for
                    purposes  of pro  forma  disclosures  either  (a) all  prior
                    periods  presented or (b) prior interim  periods of the year
                    of adoption.

               The  Company  plans to  adopt  Statement  No.  123(R)  using  the
               modified prospective method.

               The Company adopted the fair-value-based method of accounting for
               share-based   payments   effective  January  1,  2004  using  the
               "modified  prospective  method"  described in FASB  Statement No.
               148,  "Accounting for  Stock-Based  Compensation - Transition and
               Disclosure". Currently, the Company uses the Black-Scholes-Merton
               formula  to  estimate  the  value of  stock  options  granted  to
               employees and expects to continue to use this  acceptable  option
               valuation model upon the required adoption of Statement 123(R) on
               July 1, 2005.  The Company does not  anticipate  that adoption of
               Statement  123(R)  will have a material  impact on its results of
               operations or its financial position.  However,  Statement 123(R)
               also  requires  that the benefits of tax  deductions in excess of
               recognized  compensation  cost be reported  as a  financing  cash
               flow,  rather than as an  operating  cash flow as required  under
               current  literature.  This  requirement will reduce net operating
               cash flows and increase net financing cash flows in periods after
               the effective date.  While the Company cannot estimate what those
               amounts  will be in the future  (because  they  depend on,  among
               other things, when employees exercise stock options),  the amount
               of  operating  cash flows  recognized  in prior  periods for such
               excess tax  deductions was $1,179,  $758, and $648 in 2004,  2003
               and 2002, respectively.

          AB.  RECLASSIFICATIONS

               Certain  financial  statement  data  for  prior  years  has  been
               reclassified  to  conform  to current  year  financial  statement
               presentation.



                                       28
<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
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                              -------------------------------
                                                                   2004             2003
                                                              ---------------- --------------
<S>                      <C>                                    <C>            <C>
           Open accounts (*)                                    $    181,995   $    170,287
           Unbilled receivables                                       35,885         36,855
           Less - allowance for doubtful accounts                     (3,064)        (3,861)
                                                              ---------------- --------------
                                                                $    214,816   $    203,281
                                                              ================ ==============
           (*)     Includes affiliated companies                $     10,823   $      6,668
                                                              ================ ==============
</TABLE>
NOTE 4  - OTHER RECEIVABLES AND PREPAID EXPENSES
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                              ---------------------------------
                                                                   2004             2003
                                                              ---------------- ----------------
<S>                                                            <C>             <C>
           Deferred income taxes                               $      20,603   $       21,908
           Prepaid expenses                                           17,914           14,310
           Government institutions                                     5,719            5,826
           Employees                                                   1,204              513
           Others                                                      6,895            5,806
                                                              ---------------- ----------------
                                                               $      52,335   $       48,363
                                                              ================ ================
</TABLE>
NOTE 5  - INVENTORIES, NET OF ADVANCES
<TABLE>
<CAPTION>
                                                                        DECEMBER 31,
                                                              ---------------------------------
                                                                   2004             2003
                                                              ---------------- ----------------
<S>                                                             <C>            <C>
           Cost incurred on long-term contracts in progress     $    254,009   $      254,910
           Raw materials                                              71,813           78,504
           Advances to suppliers and subcontractors                   21,164           20,137
                                                              ---------------- ----------------
                                                                     346,986          353,551
           Less -
           Cost incurred on contracts in progress deducted
              from customer advances                                  14,533           14,581
                                                              ---------------- ----------------
                                                                     332,453          338,970
           Less -
            Advances received from customers (*)                      75,776           77,482
            Provision for losses                                       7,636           12,263
                                                              ---------------- ----------------
                                                                $    249,041   $      249,225
                                                              ================ ================
</TABLE>
          The Company has  transferred  legal  title of  inventories  to certain
          customers as collateral for advances received.

          (*)  Advances  are  allocated  to  the  relevant   inventories   on  a
          per-project  basis.  In cases  (projects)  where the  advances  are in
          excess of the inventories, the net amount is presented as a liability.
          In cases where the inventories are in excess of advances received, the
          net amount is presented as an asset.

                                       29
<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,
                                                --------------------------------
                                                     2004             2003
                                                ---------------- ---------------
               SCD (1)                           $      19,186   $       17,347
               VSI (2)                                   6,966            6,149
               RedC (5)                                  3,100                -
               Opgal (3)                                 2,873            2,390
               Others (4)                                  999              592
                                                ---------------- ---------------
                                                 $      33,124   $       26,478
                                                ================ ===============

               (1)  Semi Conductor  Devices  ("SCD") is 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 and 50% by a subsidiary of Rockwell  Collins Inc. 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.

               (4)  Mediguide  Inc.  ("Mediguide")  and its Israeli  subsidiary,
                    Mediguide Ltd., were  established in 2000 as a spin-off from
                    the  Company.  The share  capital of  Mediguide  consists of
                    Common shares and Preferred A, B, C and D shares. The Common
                    shares and the Preferred  shares,  both have voting  rights.
                    The  Company  holds all of the  Common  shares of  Mediguide
                    which constitute  approximately  55% (43% on a fully diluted
                    basis) of the  voting  rights of  Mediguide.  During  2001 -
                    2004,  Mediguide  issued Preferred shares to other investors
                    in consideration  for approximately  $34,355.  The Preferred
                    shares  issued  entitle the other  investors  to  preference
                    rights  senior to all  other  classes  of shares  previously
                    issued by Mediguide in a liquidation or a deemed 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.



                                       30
<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.)

               (5)  RedC Optical Networks Inc. ("RedC"), a company registered in
                    Delaware, is engaged in the multi-focal optic communications
                    sector and as of December  31, 2003 was held 36.5% by El-Op.
                    RedC designs  develops and manufactures  optical  amplifiers
                    for dense  wave-length  multiplexing  optical  networks  for
                    telecommunications. In the year ended December 31, 2002, the
                    Company  recorded a provision for loss on its  investment in
                    RedC of $2,500.  This  provision  has been  presented in the
                    Consolidated  Statements  of  Income  under  "Equity  in net
                    earnings of affiliated companies and partnership".

                    In November  2004,  El-Op  acquired  all of the  outstanding
                    voting  Preferred  A shares of RedC from MRV  Communications
                    Inc.  for a  consideration  of $2,000,  in  accordance  with
                    El-Op's  right of first  refusal  based on the  Preferred  A
                    shares investment agreement. Prior to the acquisition, El-Op
                    held 57% of the  Ordinary  shares  of RedC  which  reflected
                    36.5% of its voting rights. Following the acquisition, El-Op
                    held 57% of the Ordinary  shares and 100% of the Preferred A
                    shares, which reflected 72.5% of RedC's voting rights.

                    In December  2004,  El-Op  signed a Transfer  Agreement  for
                    selling all of it's holdings in RedC, including the Ordinary
                    shares and Preferred A shares,  in consideration for $3,100,
                    which was paid in cash on the closing date in January  2005.
                    The closing was  subject to certain  conditions,  which were
                    all met by January 21, 2005.

                    El-Op  allocated the purchase price to the fair value of the
                    assets acquired and liabilities assumed.

                    Such allocation  resulted in negative goodwill  amounting to
                    approximately  to  $1,100.  Since  RedC had no assets  which
                    could be reduced by the negative goodwill,  according to the
                    provisions  of FAS 141,  this goodwill was recorded as other
                    income in the financial statements.




                                       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
         (CONT.)

          A.   INVESTMENTS  IN COMPANIES  ACCOUNTED  FOR UNDER THE EQUITY METHOD
               (CONT.)

               (6)  The summarized aggregate financial  information of companies
                    accounted for under the equity method is as follows:

                    Balance Sheet Information:

<TABLE>
<CAPTION>
                                                                      DECEMBER 31,
                                                          -------------------------------------
                                                                 2004               2003
                                                          -------------------------------------
<S>                                                       <C>                  <C>
                     Current assets                       $        124,352     $   105,457
                     Non-current assets                             21,646          15,799
                                                          -------------------------------------
                     Total assets                                   145,998        121,256
                                                          =====================================

                     Current liabilities                             68,655         59,076
                     Non-current liabilities                          3,868          4,584
                     Shareholders' equity                            73,475         57,596
                                                          -------------------------------------
                                                          $         145,998    $   121,256
                                                          =====================================

                    Income Statement Information:

                                                                         YEAR ENDED DECEMBER 31,
                                                        ----------------------------------------------------------
                                                               2004                 2003               2002
                                                        -------------------  -------------------- ----------------

                     Revenues                           $     213,680        $        183,426     $ 138,493
                     Gross profit                              55,285                  45,616        36,278
                     Net income                                15,195                  13,976         6,904

</TABLE>


               (7)  See Note 16(F) for guarantees.




                                       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.)

          B.   INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE COST METHOD

                                                         DECEMBER 31,
                                               ---------------------------------
                                                    2004             2003
                                               ---------------- ----------------
               Sultam (1)                      $        3,500   $        3,500
               ISI (2)                                  7,230            7,230
               AAI (3)                                  1,000            1,000
               Others                                      15               15
                                               ---------------- ----------------
                                               $       11,745   $       11,745
                                               ================ ================

               (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.  ("AAI")  - In  January  2003,  the  Company
                    purchased  8.33% (on a fully  diluted  basis) of the  common
                    stock of AAI, a Delaware  corporation 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 TRADE RECEIVABLES

<TABLE>
<CAPTION>
                                                                                     DECEMBER 31,
                                                                           ---------------------------------
                                                                                2004             2003
                                                                           ---------------- ----------------

<S>                                                                        <C>              <C>
          Deposits with banks for loans granted to employees (*)           $        1,603   $        1,901
          Long-term trade receivables                                                 452              393
          Other deposits with banks                                                    47               53
                                                                           ---------------- ----------------
                                                                           $        2,102   $        2,347
                                                                           ================ ================
</TABLE>

          (*)  The deposits are linked to the Israeli CPI, bear annual  interest
               of 4% and are presented net of current maturities of $534 (2003 -
               $633).




                                       33
<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,
                                                                           --------------------------------
                                                                               2004             2003
                                                                           --------------- ----------------
<S>                                                                        <C>              <C>
          Cost (1):
          Land, buildings and leasehold improvements (2)                   $    151,285    $     140,812
          Instruments, machinery and equipment (3)                              222,153          196,229
          Office furniture and other                                             26,828           25,254
          Motor vehicles                                                         37,308           29,776
                                                                           --------------- ----------------
                                                                                437,574          392,071
          Accumulated depreciation                                             (193,286)        (162,850)
                                                                           --------------- ----------------
          Depreciated cost                                                 $    244,288    $     229,221
                                                                           =============== ================
</TABLE>

          Depreciation  expenses for the years ended December 31, 2004, 2003 and
          2002 amounted to $35,001, $30,775 and $26,525, respectively.

          (1)  Net  of  investment  grants  received  (mainly  for  instruments,
               machinery and equipment) in the amounts of approximately  $29,800
               as of both December 31, 2004 and 2003.

          (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
               aggregate  amount of $69,146 and $59,318 as of December  31, 2004
               and 2003, respectively.

          (4)  As for pledges of assets - see Note 16(I).




                                       34
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

NOTE 9 -  INTANGIBLE ASSETS, NET

          A.

<TABLE>
<CAPTION>
                                                WEIGHTED AVERAGE
                                                NUMBER OF YEARS
                                                OF AMORTIZATION                  DECEMBER 31,
                                             -------------------------------------------------------------
                                                                            2004              2003
                                                                      ------------------------------------
<S>                                                                     <C>               <C>
          Original cost:
            Technology (1)                            15               $   85,413       $    82,449
            Trade marks (2)                           17                    8,000             8,000
            Goodwill (3)                                                   37,884            37,613
                                                                      ------------------------------------
                                                                          131,297           128,062
                                                                      ------------------------------------
          Accumulated amortization:
            Technology                                                     28,365            21,555
            Trade marks                                                     1,908             1,458
            Goodwill                                                        5,037             5,037
                                                                           35,310            28,050

          Amortized cost                                                $  95,987         $ 100,012
                                                                      ====================================
</TABLE>

               (1)  The  technology  acquired  consists  of four major  items as
                    follows:

                    In 2000,  the  Company  completed  a merger  with  El-Op.  A
                    portion of the purchase  price was  allocated to  technology
                    ($45,000), based on an independent appraisal. The technology
                    acquired  in  the  merger  with  El-Op   comprises   various
                    technologies relating to:

                    a.   Diode  pumped  and other  advanced  solid-state  lasers
                         incorporating add-on eye-safety options.
                    b.   Detectors for thermal  imaging  devices,  including 2-D
                         arrays for second and third generation  forward looking
                         infrared sensors.
                    c.   Line  of  sight  command,   control  and  stabilization
                         systems employing computerized digital controllers.
                    d.   Sophisticated  image and signal  processing,  utilizing
                         the modern equipment and software.
                    e.   High precision  mechanical and optical component design
                         and  manufacturing  for the  visible,  ultraviolet  and
                         infrared   spectra,   including   special   and  exotic
                         materials,  diffractive and planar optics,  space borne
                         lightweight optics and multi-layer coatings.
                    f.   Aviation  instruments such as precision  altimeters and
                         air speedometer.

                    In 2000,  EFW  acquired  from  Honeywell  Inc.,  Honeywell's
                    business  relating to head-up  displays and tracking systems
                    for pilot helmets.  An amount of $9,300 was allocated to the
                    acquired  technology  based on its  estimated  fair value as
                    prepared by the Company.



                                       35
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

NOTE 9  - INTANGIBLE ASSETS, NET (CONT.)

                    In 2001 and 2002, the Company  acquired a Brazilian  company
                    which  serves as a center for the  production  and  logistic
                    support of defense electronics programs in Brazil. An amount
                    of  $5,500  was  allocated  to  technology  related  to  the
                    maintenance and support of avionic equipment.

                    In 2002,  the Company  acquired  the business of the Defense
                    Systems  Division of Elron Telesoft as detailed in Note 1(C)
                    above in consideration  for $5,700.  An amount of $5,100 was
                    allocated  to  the  technology  related  to  the  government
                    information technology control systems software developed by
                    Elron Telesoft.

               (2)  Includes  trade  marks  acquired in the merger with El-Op in
                    2000.

               (3)  Includes  mainly  goodwill  resulting  from the merger  with
                    El-Op ($34,200) in 2000 and goodwill acquired from Honeywell
                    Inc.  ($1,800) in 2000. Until January 1, 2002,  goodwill was
                    amortized  at an  annual  rate of 5% - 10%.  The  change  in
                    goodwill  results from an acquisition of the business of CIC
                    (See Note 1(F) above).

          B.   Amortization  expenses amounted to $7,260,  $7,222 and $6,412 for
               the years ended December 31, 2004, 2003 and 2002, respectively.

          C.   The annual  amortization  expense  relating to intangible  assets
               existing as of December 31, 2004 is estimated to be approximately
               as follows:

                         2005                               $      6,900
                         2006                                      5,600
                         2007                                      5,400
                         2008                                      5,200
                         2009                                      4,900
                         Thereafter                               35,140
                                                            ---------------
                         Total                              $     63,140
                                                            ===============

NOTE 10 - SHORT-TERM BANK CREDIT AND LOANS

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                 ----------------------------------------------------------------
                                                     2004            2003            2004             2003
                                                                                ---------------- ----------------
<S>                                                  <C>           <C>                <C>              <C>
          Short-term bank loans:                         Interest Rate
                                                 -------------------------------
            In U.S. dollars                           4.2-4.6%      3.3-4.75%   $     3,967      $       533
            In Euro                                       -         3.5%                  -            1,927
                                                                                ---------------- ----------------
                                                                                      3,967            2,460
                                                                                ---------------- ----------------
          Short-term bank credit:
            In NIS unlinked                          5.7-8.1%      7.2%               2,120            4,684
            In U.S. dollars                          4.4%          2.6%               2,505            1,365
                                                                                ---------------- ----------------
                                                                                      4,625            6,049
                                                                                ---------------- ----------------
                                                                                $     8,592      $     8,509
                                                                                ================ ================
          Weighted Average Interest Rate             4.7%          5.4%

</TABLE>


                                       36
<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 EXPENSES

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                 ---------------------------------
                                                                                      2004             2003
                                                                                 ---------------- ----------------
<S>                                                                                 <C>              <C>
          Payroll and related expenses                                              $   42,491       $   33,382
          Provision for vacation pay                                                    26,936           25,280
          Provision for income taxes, net of advances paid, and VAT                     13,774            9,094
          Provisions for royalties                                                      17,845           16,149
          Provision for warranty                                                        34,033           36,653
          Cost provision for unbilled services rendered to the Company
          and others(*)                                                                 34,623           37,262
                                                                                 ---------------- ----------------
                                                                                     $ 169,702        $ 157,820
                                                                                 ================ ================
</TABLE>

            (*) The other cost  provision,  primarily  includes  provisions  for
            estimated  future costs in respect of contractual  penalties and the
            probable loss  resulting  from claims (legal or  unasserted)  in the
            ordinary course of business.

NOTE 12 - CUSTOMERS ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED ON
          CONTRACTS IN PROGRESS

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                 ---------------------------------
                                                                                      2004             2003
                                                                                 ---------------- ----------------
<S>                                                                               <C>             <C>
          Advances received                                                       $    180,738    $     199,273
          Less -
            Advances presented under long-term liabilities                              10,320            7,592
            Advances deducted from inventories                                          75,776           77,482
                                                                                 ---------------- ----------------
                                                                                        94,642          114,199
          Less -
            Costs incurred on contracts in progress                                     14,533           14,581
                                                                                 ---------------- ----------------
                                                                                 $      80,109    $      99,618
                                                                                 ================ ================

</TABLE>
          As for guarantees and liens see Note 16(F).

NOTE 13 - LONG-TERM LOANS

<TABLE>
<CAPTION>
                                                            INTEREST          YEARS OF            DECEMBER 31,
                                         CURRENCY               %             MATURITY         2004         2003
                                    ----------------   -----------------    -------------  ----------   -----------
<S>                                  <C>                       <C>                <C>        <C>            <C>
          Banks                      U.S. dollars            Libor +           mainly
                                                           0.75%-1.25%           2-3       $ 83,469     $   57,574
          Banks                      NIS-unlinked         Israeli Prime            -              -          3,599
          Office of Chief            NIS-linked to
             Scientist               the Israeli-CPI            4.4%               3          4,131          7,683
          Other                                                                                 290              -
                                                                                           --------     ----------
                                                                                             87,890         68,856
          Less-current maturities                                                             1,656          6,532
                                                                                           --------     ----------
                                                                                           $ 86,234     $   62,324
                                                                                           ========     ==========
</TABLE>


                                       37
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 13 - LONG-TERM LOANS (CONT.)

          The Libor rate as of December 31, 2004 was 2.56%.  The  maturities  of
          these loans after December 31, 2004 are as follows:


              2005 - current maturities                      $       1,656
              2006                                                  40,527
              2007                                                  42,550
              2008                                                     165
              2009                                                     170
              2010 and thereafter                                    2,822
                                                             -------------
                                                             $      87,890
                                                             =============

               See Note 16(G) for covenants.

NOTE 14 - BENEFIT PLANS

          EFW,  the  Company's  subsidiary  in the  U.S.,  has  adopted  for its
          employees in the U.S. benefits plans as follows:

          DEFINED BENEFIT RETIREMENT PLAN

          EFW has two defined benefit pension plans (the "Plans")  substantially
          covering 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.



                                       38
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

NOTE 14 - BENEFIT PLANS (CONT.)

          The following table reconciles the benefit obligations,  Plans assets,
          funded status and net asset (liability) information of the Plans:

<TABLE>
<CAPTION>
                                                                                           DECEMBER 31,
                                                                                 ---------------------------------
                                                                                      2004             2003
                                                                                 ---------------- ----------------
<S>                                                                              <C>              <C>
          Benefit obligation at beginning of year                                $        34,965  $        28,439
          Service cost                                                                     3,000            2,480
          Interest cost                                                                    2,191            1,921
          Actuarial losses                                                                 2,307            2,825
          Unrecognized transition obligation                                               1,056                -
          Benefits repaid                                                                   (822)            (700)
                                                                                 ---------------- ----------------
          Benefit obligation at end of year                                               42,697           34,965
                                                                                 ---------------- ----------------

          Plans assets at beginning of year                                               21,196           15,558
          Actual return on Plan assets                                                     1,756            2,689
          Contributions by employer                                                        2,971            3,649
          Benefits repaid                                                                   (822)            (700)
                                                                                 ---------------- ----------------
          Plans assets at end of year                                                     25,101           21,196
                                                                                 ---------------- ----------------
          Funded status of Plans (underfunded)                                           (17,595)         (13,769)
          Unrecognized prior service cost                                                   (180)            (195)
          Unrecognized transition obligation                                               1,056                -
          Unrecognized net actuarial loss                                                 11,447            9,395
                                                                                 ---------------- ----------------
          Net amount recognized                                                  $                $
                                                                                          (5,272)          (4,569)
                                                                                 ================ ================
          Net asset (liability) consists of:
          Accrued benefit liability                                              $                $
                                                                                         (13,899)         (11,011)
          Intangible asset                                                                   895               51
          Accumulated other comprehensive income                                           7,732            6,391
                                                                                 ---------------- ----------------
          Net amount recognized                                                  $                $
                                                                                          (5,272)          (4,569)
                                                                                 ================ ================
          Weighted average assumptions:
             Discount rate as of December 31,                                               6.00%            6.25%
             Expected long-term rate of return on Plan's assets                             8.50%            9.00%
             Rate of compensation increase                                                  3.00%            3.00%

</TABLE>

<TABLE>
<CAPTION>
                                                                               YEAR ENDED DECEMBER 31,
                                                                  --------------------------------------------------
                                                                      2004              2003              2002
                                                                  --------------    --------------    --------------
<S>                                                                <C>                <C>                 <C>
          Components of net periodic pension cost:
             Service cost                                          $    3,000         $   2,480           $ 2,067
             Interest cost                                              2,191             1,921             1,678
             Expected return on  Plans' assets                         (1,951)           (1,573)           (1,597)
             Amortization of prior service cost                           (15)              (15)               28
             Recognized net actuarial loss                                451               339                 -
                                                                  --------------    --------------    --------------
             Net periodic pension cost                             $    3,676         $   3,152           $ 2,176
                                                                  ==============    ==============    ==============
</TABLE>



                                       39
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

NOTE 14 - BENEFIT PLANS (CONT.)

          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. EFW's employees may
          elect to contribute a percentage of their annual gross compensation to
          the 401(k) plan. EFW may make discretionary  matching contributions as
          determined  by the  subsidiary.  Total  expense  under the 401(k) plan
          amounted  to $1,744  for the year  ended  December  31,  2004  (2003 -
          $1,629, 2002 - $1,369).

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  2(B),  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
                    differences  resulting  from  changes in exchange  rates and
                    indexing for tax purposes.

               (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   Aviation   Products  Ltd.)  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.





                                       40
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 15 - TAXES ON INCOME (CONT.)

               (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.

                    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,  2004,  the tax  benefits for
                    these  exiting  expansion  programs  will expire  within the
                    period of 2005 to 2012.

                    The  entitlement  to the above  benefits  is  subject to the
                    companies  fulfilling the conditions  specified in the above
                    referred  law,  regulations   published  hereunder  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 16(J)). As of December 31, 2004, Management
                    believes that the  companies  are meeting all  conditions of
                    the approvals.

                    As  of  December  31,  2004,   retained   earnings  included
                    approximately  $116,500 in tax-exempt  profits earned by the
                    companies'   "Approved   Enterprises".   If   the   retained
                    tax-exempt  income is distributed,  it would be taxed at the
                    corporate  tax rate  applicable  to such  profits  as if the
                    Company had not elected the  alternative  tax benefits track
                    (currently  - 25%)  and an  income  tax  liability  would be
                    incurred of approximately $29,100 as of December 31, 2004.

                    The  companies'  boards of directors have decided that their
                    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 companies'  "Approved
                    Enterprises".




                                       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

               (3)  TAX BENEFITS  UNDER  ISRAEL'S LAW FOR THE  ENCOURAGEMENT  OF
                    CAPITAL INVESTMENTS, 1969 (CONT.):

                    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 35%.

                    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 above  mentioned law and
                    is taxed at the regular tax rate of 35%, 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.).

          C.   INCOME BEFORE TAXES ON INCOME

<TABLE>
<CAPTION>
                                                                            YEAR ENDED DECEMBER 31,
                                                             --------------------------------------------------
                                                                 2004              2003              2002
                                                             --------------    --------------    --------------
<S>                                                           <C>              <C>                <C>
               Income before taxes on income:
                  Domestic                                    $     43,642     $      38,423      $   42,317
                  Foreign                                           16,985            11,090          11,977
                                                             --------------    --------------    --------------
                                                              $     60,627     $      49,513      $   54,294
                                                             ==============    ==============    ==============
</TABLE>



                                       42
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

NOTE 15 - INCOME TAXES (CONT.)

          D.   TAXES ON INCOME

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                             -------------------------------------------------------
                                                                 2004               2003                 2002
                                                             --------------    --------------    -------------------
<S>                                                          <C>               <C>                <C>
               Taxes on income:
               Current taxes:
                  Domestic                                   $       7,415     $      12,346      $     11,654
                  Foreign                                            7,651               718             6,114
                                                             --------------    --------------    -------------------
                                                                    15,066     $      13,064      $     17,768

               Deferred income taxes:
                  Domestic                                             709            (4,672)           (3,561)
                  Foreign                                             (556)            2,942            (2,059)
                                                             --------------    --------------    -------------------
                                                                       153            (1,730)           (5,620)
                                                             --------------    --------------    -------------------

               Taxes in respect of prior years                           -                 -            (2,800) (*)
                                                             --------------    --------------    -------------------
                                                              $     15,219     $      11,334      $      9,348
                                                             ==============    ==============    ===================
</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 with the
                    tax authorities.


                                       43
<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         NON-CURRENT
                                                         ----------------- ------------------------------------
<S>                                                       <C>               <C>             <C>
                As of December 31, 2004
                Deferred tax assets:
                Reserves and allowances                   $     12,797      $     13,191    $          (394)
                Inventory
                                                                 5,376             5,376                  -
                Net operating loss carryforwards                 5,395               149              5,246
                                                          -------------     ------------    ----------------
                                                                23,568            18,716              4,852
                Valuation allowance                             (3,445)                -             (3,445)
                                                          -------------     ------------    ----------------
                Net deferred tax assets                         20,123            18,716              1,407
                                                          -------------     ------------    ----------------
                Deferred tax liabilities:
                Property, plant and equipment                  (12,999)                -            (12,999)
                Intangible assets                              (10,285)            2,639            (12,924)
                Available for sale securities                     (752)             (752)                 -
                                                         -----------------------------------------------------
                                                               (24,036)            1,887            (25,923)
                                                          -------------     ------------    ----------------

                Net deferred tax assets (liabilities)     $     (3,913)     $     20,603    $       (24,516)
                                                          =============     =============   ================

                As of December 31, 2003
                Deferred tax assets:
                Reserves and allowances                   $     11,149      $     11,187    $           (38)
                Inventory                                        7,952             7,952                  -
                Net operating loss carryforwards                 6,606               439              6,167
                                                          -------------     ------------    ----------------
                                                                25,707            19,578              6,129
                Valuation allowance                             (3,879)                -             (3,879)
                                                          -------------     ------------    ----------------
                Net deferred tax assets                         21,828            19,578              2,250
                                                          =============     =============   ================

                Deferred tax liabilities:
                Property, plant and equipment                  (12,769)                -            (12,769)
                Intangible assets                              (12,067)            2,330            (14,397)
                                                          -------------     ------------    ----------------
                                                               (24,836)            2,330            (27,166)
                                                          -------------     ------------    ----------------
                Net deferred tax assets (liabilities)     $     (3,008)     $     21,908    $       (24,916)
                                                          =============     =============   ================
</TABLE>


               (1) The  current  tax  asset is  included  in other  receivables.
               Noncurrent tax liability is included as a long-term liability.



                                       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.)

          F.   As of December 31, 2004, The Group's  Israeli  subsidiaries  have
               estimated   total   available    carryforward   tax   losses   of
               approximately  $16,700, and the Group's non-Israeli  subsidiaries
               have estimated available carryforward tax losses of approximately
               $7,300. These losses can be offset against future taxable profits
               for an indefinite  period.  Deferred tax assets in respect of the
               above  carryforward  losses  amount  to  approximately  $5,400 in
               respect of which a valuation  allowance  has been recorded in the
               amount of approximately $3,400.

          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,
                                                                      ----------------------------------------------------
                                                                           2004            2003              2002
                                                                      ----------------------------------------------------
<S>                                                                   <C>             <C>                  <C>
                     Income  before taxes as reported in the
                       consolidated statements of operations          $      60,627   $   49,513           $ 54,294
                     Statutory tax rate                                         35%          36%                36%
                                                                      --------------  -----------          ---------
                     Theoretical tax expense                          $      21,219   $   17,825           $ 19,546
                                                                      ==============  ===========          =========
                     Tax benefit arising from reduced rate as an
                        "Approved Enterprise" and other tax
                        benefits                                             (7,196)      (8,391)            (9,054)
                     Tax adjustment in respect of different tax
                       rates for foreign subsidiaries                           496          279               (461)
                     Operating carryforward losses for which
                        valuation allowance was provided                       (434)         126              2,189
                     Increase (decrease) in taxes resulting
                       from nondeductible expenses                            1,095          993               (263)
                     Difference in basis of measurement for
                        financial reporting and tax return purposes            (210)         846                458
                     Taxes in respect of prior years                              -            -             (2,800)
                     Other differences, net                                     248         (344)              (267)
                                                                      --------------  -----------          ---------
                     Actual tax expenses                              $      15,219   $   11,334           $  9,348
                                                                      ==============  ===========          =========
                     Effective tax rate                                       25.1%         22.9%              17.2%
</TABLE>

          H.   AMENDMENT TO THE INCOME TAX ORDINANCE

               On  September  29,  2004,  the Israeli  Parliament  approved  the
               Amendment  to the Income Tax  Ordinance  (No.  140 and  Temporary
               Provision) (the "Amendment") which reduces the corporate tax rate
               from  36%  to  35%  in  2004  and  to  a  rate  of  30%  in  2007
               progressively.  The  Amendment  was signed and  published in July
               2004  and is  therefore  considered  enacted  in July  2004.  The
               adoption of the Amendment  did not have a  significant  effect on
               the Company's financial statements.



                                       45
<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 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 a maximum
                    amount  equaling 100% to 150% of the grants  provided by the
                    OCS,  linked to the  dollar and for  grants  received  after
                    January 1, 1999,  also  bearing  annual  interest  at a rate
                    based on LIBOR.  The  obligation  to pay these  royalties is
                    contingent  on  actual  sales  of the  products,  and in the
                    absence of such sales payment of royalties is not required.

                    In  some  cases,  the  Government  of  Israel  participation
                    (through  the  OCS) is  subject  to  export  sales  or other
                    conditions.  The maximum amount of royalties is increased in
                    the event of production outside of Israel.

                    The  Company  and  certain of its  subsidiaries  may also be
                    obligated to pay certain amounts to the Israeli  Ministry of
                    Defense  and  others  on  certain  sales   including   sales
                    resulting from the development of certain technologies.

                    Royalties expensed amounted to $5,802, $7,812 and $14,471 in
                    2004, 2003 and 2002, 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.

                    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.  This
                    expense is included cost of revenues.



                                       46
<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.)

          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, 2004  amounted to $673,000 to be
               performed  over  a  period  of up to 11  years.  This  amount  is
               typically  tied to a  percentage  (up to 100%) of the amount of a
               specific contract.

               In the opinion of the Company's 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.

          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  minimum 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, 2004
               as follows:

                             2005                          $      6,655
                             2006                                 5,939
                             2007                                 4,547
                             2008                                 3,022
                             2009 and thereafter                 13,060
                                                           ------------
                                                           $     33,223
                                                           ============

               Rent  expenses for the years ended  December  31, 2004,  2003 and
               2002 amounted to $6,842, $9,177, and $9,215, respectively.



                                       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 (CONT.)

          E.   PUT OPTION

               Three founding employees (the "Founders"),  who collectively hold
               approximately  32.3% of the  outstanding  shares of Kinetics Ltd.
               ("Kinetics"),  a 51%-owned Israeli subsidiary,  have a put option
               to jointly  sell all of their  shares in Kinetics to the Company.
               Two  private  investors  holding in the  aggregate  approximately
               16.7% of Kinetics'  outstanding shares have "tag along" rights in
               the event the Founders exercise the put option.

               The put option is exercisable from January 1, 2005 until December
               31, 2005 at a price equal to the higher of the Founder's pro-rata
               share  (corresponding to the Founder's  shareholding  percentage)
               of:

               (1) The  value of  Kinetics  as of the  option  exercise  date as
               determined by a third party appraiser mutually  acceptable to the
               Founders and to the Company. The appraiser will value Kinetics as
               if Kinetics had distributed as dividends net profits  accumulated
               up to the option exercise date; or

               (2) $12,077,  reduced by 3% per annum,  or pro-rata part thereof,
               for the period beginning on July 1, 2003 and ending on the option
               exercise date.

               As of December  31,  2004,  the fair value of the  aforementioned
               option was immaterial.

          F.   GUARANTEES

               1.   Guarantees  in the  amount of  approximately  $380,000  were
                    issued  by banks on behalf  of Group  companies  in order to
                    secure  certain  advances  from  customers  and  performance
                    bonds.

               2.   The Company has  provided,  on a  proportional  basis to its
                    ownership  interest,  guarantees for two of its investees in
                    respect of credit lines granted to them from banks amounting
                    to  $12,000  (2003-  $13,900),  of  which  $11,500  (2003  -
                    $13,400)  relates  to  a  50%-owned  foreign  investee.  The
                    guarantees  will  exist as long as the  credit  lines are in
                    effect.  The Company would be liable under the guarantee for
                    any debt for which the  investee  would be in default  under
                    the terms of the credit line.

          G.   COVENANTS

               In connection with bank credits and loans,  including performance
               guarantees issued by banks and bank guarantees in order to secure
               certain   advances  from  customers,   the  Company  and  certain
               subsidiaries are obligated to meet certain  financial  covenants.
               Such covenants  include  requirements for  shareholders'  equity,
               current  ratio,  operating  profit  margin,  tangible  net worth,
               EBITDA,  interest  coverage  ratio  and  total  leverage.  As  of
               December 31, 2004 the Company and its  subsidiaries  were in full
               compliance with all covenants.




                                       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.)

          H.   CONTRACTUAL OBLIGATIONS

               Substantially   all  of  the  purchase   commitments   relate  to
               obligations  under purchase orders and subcontracts  entered into
               by the  Company.  These  purchase  orders  and  subcontracts  are
               typically in a standard format proposed by the Company,  with the
               subcontracts and purchase orders also reflecting  provisions from
               the Company's  applicable  prime contract that are appropriate to
               flow down to  subcontractors  and  vendors.  The terms  typically
               included in these purchase orders and subcontracts are consistent
               with Uniform  Commercial Code provisions in the United States for
               sales of goods,  as well as with specific terms called for by its
               customers in  international  contracts.  These terms  include the
               Company's right to terminate the purchase order or subcontract in
               the event of the vendors' or subcontractors'  default, as well as
               the Company's right to terminate the order or subcontract for the
               Company's  convenience (or if the Company's prime  contractor has
               so  terminated  the prime  contract).  Such  purchase  orders and
               subcontracts   typically  are  not  subject  to  variable   price
               provisions.  As of  December  31,  2004  and  2003  the  purchase
               commitments were $345,000 and $348,400 respectively.

          I.   In order to secure bank loans and bank  guarantees  in the amount
               of $10,019 as of  December  31,  2004,  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.

          J.   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
               $220 (see Note 15 (A) (3) above).





                                       49
<PAGE>


                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)

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 the market price of the
               shares  at the  grant  date.  The  plan  includes  an  additional
               2,500,000  options to be issued as "phantom"  share  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, 2004,
               453,794  options of the Company were still  available  for future
               grants.

          C.   "PHANTOM" SHARE OPTIONS

               Until January 1, 2004,  the Company  applied the provision of APB
               No. 25, under which the phantom share options were  considered to
               be  part a  variable  awards  as  defined  in  APB  No.  25,  and
               accordingly the compensation  cost of the options was measured at
               the end of each reporting period and amortized by the accelerated
               method over the remaining  vesting  period.  Starting  January 1,
               2004,  the  Company  accounts  for its stock  based  compensation
               awards under the fair value based method.

          D.   A summary of the Company's  share option activity under the plans
               is as follows:

<TABLE>
<CAPTION>
                                              2004                                 2003                               2002
                                           ------------                        -------------                       -----------
                                                      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                             3,735,602       $     12.30        4,511,724        $ 12.26            5,107,634        $ 11.93
  Granted                             130,500             15.67           13,000          14.91               27,000          14.92
  Exercised                        (1,666,774)            12.12         (757,947)         12.13             (558,901)          9.45
  Forfeited                           (69,071)            12.10          (31,175)         12.29              (64,009)         11.33
                                  ------------      -----------      ------------      ------------      -------------    ----------
  Outstanding - end of the
   year                             2,130,257       $     12.60        3,735,602        $ 12.30            4,511,724        $ 12.26
                                  ============      ===========      ============      ============      =============    ==========
Options exercisable at
   the end of the year              1,950,903       $     12.36        2,547,196        $ 12.23            2,287,790        $ 12.18
                                  ============      ===========      ============      ============      =============    ==========

</TABLE>



                                       50
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)

NOTE 17 - SHAREHOLDER'S EQUITY (CONT.)

          E.   The  options  outstanding  as of  December  31,  2004,  have been
               separated into ranges of exercise prices, as follows:

<TABLE>
<CAPTION>
                                         OPTIONS OUTSTANDING                        OPTIONS EXERCISABLE
                         ---------------------------------------------------   -----------------------------
                                                WEIGHTED                                           WEIGHTED
                              NUMBER            AVERAGE         WEIGHTED          NUMBER           AVERAGE
                            OUTSTANDING        REMAINING        AVERAGE        OUTSTANDING AS      EXERCISE
                               AS OF          CONTRACTUAL       EXERCISE        OF DECEMBER       PRICE PER
    EXERCISE PRICE       DECEMBER 31, 2004   LIFE (YEARS)    PRICE PER SHARE      31, 2004          SHARE
    --------------       -----------------   ------------    ---------------   --------------  -------------

<S>                             <C>                <C>       <C>                      <C>       <C>
 $10.61-$12.16                  1,500              0.82      $     12.16              1,500     $     12.16
 $12.18-$18.99              1,050,427              2.17            12.60            960,750           12.36
 $12.18-$18.99(*)           1,078,330              2.23            12.59            988,563           12.35
                         -----------------   ------------    ---------------   --------------  -------------
                            2,130,257              2.20      $     12.60          1,950,903     $     12.36
                         =================   ============    ===============   ==============  =============
</TABLE>


          (*)  Phantom share options.

               Compensation  expense  (income)  amounted  to $3,387,  $4,741 and
               $(926) were recognized  during the years ended December 31, 2004,
               2003  and  2002,  respectively.  All  the  compensation  expenses
               (income)  in the years 2002 and 2003 were  related to the Phantom
               share options  under the stock option plan.  The expenses in 2004
               were recorded based on SFAS No. 123 and SFAS No. 148 according to
               the  modified  prospective  method.  The expenses  (income)  were
               recorded as follows:

<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                          -----------------------------------------------------
                                                               2004              2003              2002
                                                          ---------------   ---------------  ------------------
<S>                                                         <C>               <C>             <C>
                 Cost of revenues                           $     1,863       $     2,608     $        (509)
                 R&D and marketing expenses                         677               948              (185)
                 General and administration expenses                847             1,185              (232)
                                                          ---------------   ---------------  ------------------
                                                            $     3,387       $     4,741     $        (926)
                                                          ===============   ===============  ==================
</TABLE>

          F.   The  weighted  average  exercise  price and fair value of options
               granted during the years ended  December 31, 2004,  2003 and 2002
               were:

<TABLE>
<CAPTION>
                                                                         LESS THAN MARKET PRICE
                                                          ------------------------------------------------------
                                                                        YEAR ENDED DECEMBER 31,
                                                          ------------------------------------------------------
                                                               2004              2003              2002
                                                          ----------------- ------------------------------------
<S>                                                       <C>               <C>              <C>
                 Weighted average   exercise price        $       15.67     $      14.91     $    14.92
                 Weighted average fair values on
                   grant date                             $         6.62    $       4.63     $     4.31
</TABLE>


                                       51
<PAGE>



                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U. S. dollars (In thousands, except share and per share data)

NOTE 17 - SHAREHOLDER'S EQUITY (CONT.)

          G.   Computation of basic and diluted net earnings per share:

<TABLE>
<CAPTION>
                                   YEAR ENDED                            YEAR ENDED                              YEAR ENDED
                                DECEMBER 31, 2004                     DECEMBER 31, 2003                      DECEMBER 31, 2002
                                -----------------                     -----------------                      -----------------

                                   NET INCOME
                     NET INCOME TO   WEIGHTED                    TO         WEIGHTED             NET INCOME TO    WEIGHTED
                      SHAREHOLDERS   AVERAGED               SHAREHOLDERS    AVERAGED              SHAREHOLDERS    AVERAGED     PER
                      OF ORDINARY    NUMBER OF   PER SHARE  OF ORDINARY    NUMBER OF   PER SHARE  OF ORDINARY     NUMBER OF   SHARE
                         SHARES      SHARES(*)    AMOUNT       SHARES      SHARES(*)    AMOUNT       SHARES       SHARES(*)   AMOUNT
                     ---------------------------------------------------------------------------------------------------------------
<S>                  <C>               <C>           <C>   <C>               <C>            <C>                    <C>        <C>
Basic net earnings   $      52,993     39,952        $1.33 $ 45,945          39,061         $1.18    45,113        38,489     $ 1.17

Effect of dilutive
 securities:
Employee stock
options                          -      1,089                     -           1,169                       -         1,374
Diluted net earnings -------------    -------              --------        --------         ------   ------        -------

                     $      52,993     41,041        $1.29 $ 45,945          40,230         $1.14    45,113         39,863    $ 1.13
                     =============     ======        ===== ========        ========         =====    ======        =======    ======

</TABLE>
* In thousands

          H.   TREASURY SHARES

               The Company's shares held by the Company and its subsidiaries are
               presented at cost and deducted from shareholder's equity.

          I.   DIVIDEND POLICY

               Dividends  declared by the Company are paid  subject to statutory
               limitations.  The Company's board of directors has determined not
               to declare dividends out of tax exempt earnings.



                                       52
<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

          The Group applies 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:

<TABLE>
<CAPTION>
                                                                      Year ended December 31,
                                                        ------------------------------------------------------
                                                             2004              2003              2002
                                                        ----------------- ------------------------------------
<S>                                                      <C>              <C>              <C>
               Europe                                    $    124,130     $     109,409        $ 144,862
               U.S.                                           348,509           332,323          267,686
               Israel                                         241,601           255,742          225,674
               Others                                         225,685           200,506          189,234
                                                        ----------------- ------------------------------------
                                                         $    939,925     $     897,980        $ 827,456
                                                        ================= ====================================
</TABLE>

          B.   Revenues are generated by the following product lines:

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                        ------------------------------------------------------
                                                             2004              2003              2002
                                                        ----------------- ------------------------------------
<S>                                                       <C>             <C>                  <C>
               Airborne systems                           $   367,927     $     373,580        $ 372,756
               Land vehicles systems                          199,224           199,800          135,700
               Command, control, communications,
               computers, intelligence, surveillance
               and reconnaissance systems (C(4)ISR)           108,925           133,900          122,700
               Electro-optical systems                        200,322           140,500          148,200
               Others                                          63,527            50,200           48,100
                                                          -----------     -------------        ---------
                                                          $   939,925     $     897,980        $ 827,456
                                                          ===========     =============        =========
</TABLE>

          C.   Revenues  from  single  customers,  which  exceed  10%  of  total
               revenues in the reported years:

<TABLE>
<CAPTION>
                                                                       YEAR ENDED DECEMBER 31,
                                                         ------------------------------------------------------
                                                              2004              2003              2002
                                                         ----------------- ------------------------------------

<S>                                                              <C>               <C>              <C>
               IMOD                                              17%               21%              20%
               U.S. Government                                   10%                *                *

               *Less than 10%
</TABLE>



                                       53
<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:

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------------------------------------
                                                                  2004              2003              2002
                                                             ----------------- ------------------------------------
<S>                                                           <C>              <C>              <C>
                    Israel                                    $    237,887     $ 229,396        $ 211,256
                    U.S.                                            84,701        81,261           83,814
                    Others                                          17,687        18,576           13,660
                                                              ------------     ---------        ---------
                                                              $    340,275     $ 329,233        $ 308,730
                                                              ============     =========        =========
</TABLE>

NOTE 19  -    RESEARCH AND DEVELOPMENT COSTS, NET

<TABLE>
<CAPTION>
                                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------------------------------------
                                                                   2004              2003              2002
                                                              ----------------- ------------------------------------
<S>                                                           <C>               <C>                  <C>
                    Total expenses                            $      86,368     $     65,487         $ 62,560
                    Less - participations                           (19,522)         (10,568)          (5,550)
                                                              ----------------- ------------------------------------
                                                              $      66,846     $     54,919         $ 57,010
                                                              ================= ====================================
</TABLE>


NOTE 20  -    FINANCIAL EXPENSES, NET

<TABLE>
<CAPTION>
                                                                             YEAR ENDED DECEMBER 31,
                                                             ------------------------------------------------------
                                                                  2004              2003              2002
                                                             ------------------------------------------------------
<S>                                                           <C>               <C>              <C>
                    Expenses:
                    On long-term bank debt                    $   (1,544)       $   (2,215)      $   (2,765)
                    On short-term bank credit and loans           (2,309)           (2,182)          (2,435)
                    Others                                        (3,181)           (3,905)          (1,899)
                                                             ----------------- ------------------------------------
                                                                $ (7,034)           (8,302)          (7,099)
                                                             ----------------- ------------------------------------
                    Income:
                    Interest on cash, cash equivalents
                      and bank deposits                              628               309            1,547
                    Others                                         1,115             4,397            1,063
                                                             ----------------- ------------------------------------
                                                                   1,743             4,706            2,610
                                                             ----------------- ------------------------------------
                    Gain (loss) from exchange rate
                       differences                                  (561)           (1,274)           1,454
                                                             ----------------- ------------------------------------
                                                               $  (5,852)        $  (4,870)       $  (3,035)
                                                             ================= ====================================
</TABLE>



                                       54
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES


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

NOTE 21 - RELATED PARTIES TRANSACTIONS AND BALANCES

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                 ------------------------------------------------------
                                                                      2004              2003              2002
                                                                 ----------------- ------------------------------------
<S>                                           <C>                <C>               <C>              <C>
              Income -
                Sales to affiliated companies (*)                $      56,346     $ 34,674         $ 37,924
                Participation in expenses                        $       2,594     $  1,773         $    902

              Cost and expenses -
                Supplies and services from affiliated companies
                    (**)                                         $      16,338     $ 21,606         $ 10,457
                Participation in expenses                        $         627     $  1,751         $  1,498
                Financial expenses                               $           3     $     23         $    110

                                                                           DECEMBER 31,
                                                                 --------------------------------
                                                                        2004            2003
                                                                 --------------    --------------
              Trade receivables and other receivables (*)         $     13,214      $       6,668
              Trade payables (**)                                 $      5,445      $       4,975
</TABLE>

          The purchases from our related parties are made at prices and on terms
          equivalent  to  those  used in  transacting  business  with  unrelated
          parties under similar conditions.  The sales to our related parties in
          respect with  government  defense  contracts  are made on the basis of
          costs incurred.

          (*) The  significant  sales  include  sales of helmet  mounted  cueing
          systems   purchased   from  the   Company   by  VSI.   (**)   Includes
          electro-optics  components  and sensors  purchased by the Company from
          SCD and electro-optics products purchased by the Company from Opgal.

NOTE 22 - RECONCILIATION TO ISRAELI GAAP

          As described in Note 1, the Company prepares its financial  statements
          in accordance with U.S. GAAP. The effects of the  differences  between
          U.S.  GAAP and  generally  accepted  accounting  principles  in Israel
          ("Israeli  GAAP") on the Company's  financial  statements are detailed
          below.

          A building purchased from Elbit Ltd.

          According to Israeli GAAP, the Company  charged to additional  paid-in
          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.



                                       55
<PAGE>

                                         ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES

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

NOTE 22 - RECONCILIATION TO ISRAELI GAAP (CONT.)

          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 are credited to additional paid-in capital.

          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.

          Investment in marketable securities - Tadiran

          Pursuant   to   SFAS   115,    marketable    securities    which   are
          available-for-sale  are  presented  on the basis of their market value
          and  changes  in  such  value  are  charged  (or  credited)  to  other
          comprehensive   income.   According   to  Israeli   GAAP   non-current
          investments in marketable securities are presented at cost

          1.   EFFECT ON NET INCOME AND EARNINGS PER SHARE

<TABLE>
<CAPTION>
                                                                                 YEAR ENDED DECEMBER 31,
                                                                  --------------------------------------------------------
                                                                        2004               2003               2002
                                                                  ------------------ ------------------ ------------------
<S>                                                                 <C>                <C>               <C>
              Net income as reported according to
                    U.S. GAAP                                       $      52,993      $   45,945        $       45,113

              Adjustments to Israeli GAAP                                    (458)            595                (4,227)
                                                                  ------------------ ------------------ ------------------
                Net income according to Israeli GAAP                $      52,535      $   46,540        $       40,886
                                                                  ================== ================== ==================
</TABLE>

          2.   EFFECT ON SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                                                               AS PER
                                                                       AS REPORTED        ADJUSTMENTS      ISRAELI GAAP
                                                                    ----------------   ---------------   ----------------
<S>                                                                 <C>                <C>                  <C>
              AS OF DECEMBER 31, 2004
                Shareholders' equity                                $     434,700      $    (13,124)        $    421,576
                                                                    =============      =============        ============

              AS OF DECEMBER 31, 2003
                Shareholders' equity                                $     432,079      $    (10,367)        $    421,712
                                                                    =============      =============        ============

</TABLE>


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